As previously discussed here, there has been a barrage of recent cases attacking the constitutionality of the SEC's use of administrative proceedings in its enforcement efforts. Recently, respondents challenging the SEC's ability to bring these cases have had success in two such cases in federal district court. This week, the Seventh Circuit became the first appellate court to weigh in on this issue -- and found in favor of the SEC. The Seventh Circuit held that the district court properly granted the SEC’s motion to dismiss the challenge to its AP because the district court did not have jurisdiction to hear such a challenge. 

Earlier in August 2015, two other district courts had rejected the SEC's motions to dismiss similar cases--thus allowing these federal court challenges to the SEC's APs to proceed. On August 4, U.S. District Judge Leigh Martin May (N.D. Ga.) granted Gray Financial Group a preliminary injunction against an SEC administrative proceeding after finding that there was a "substantial likelihood" that Gray Financial could prove that the AP process was unconstitutional. On August 12, U.S. District Judge Richard Berman (S.D.N.Y.) similarly granted a preliminary injunction against the SEC and in favor of former Standard & Poor's executive Barbara Duka. 

In Bebo v. SEC, the Seventh Circuit case that was decided on August 24, 2015, the SEC brought an AP against Laurie Bebo, the former CEO of Assisted Living Concepts. The SEC alleged that Bebo made false representations to auditors and false disclosures to the SEC. Bebo responded by filing a lawsuit in federal district court challenging the constitutionality of the AP. The district court dismissed Bebo's challenge because it found that it had no jurisdiction to hear that type of challenge. 

On appeal, the Seventh Circuit upheld the lower court's dismissal, stating that "it is 'fairly discernible' from the statute that Congress intended plaintiffs in Bebo’s position 'to proceed exclusively through the statutory review scheme' set forth in 15 U.S.C. § 78y." If Bebo was "aggrieved by the SEC’s final decision" in the AP, the court said, she could then "raise her constitutional claims in this circuit or in the D.C. Circuit. Both courts are fully capable of addressing her claims."

The Seventh Circuit concluded that Congress did not intend for plaintiffs like Bebo, who are already respondents in an ongoing AP, "to be able to stop those proceedings by challenging the constitutionality of the enabling legislation or the structural authority of the SEC." If and when the SEC does render an adverse final decision in an AP, the Seventh Circuit held, judicial review would then be available in a federal court of appeals. 

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