A hot topic on this blog of late has been the SEC's recent focus on bringing cases as administrative proceedings, an in-house type of action in which the agency has enjoyed extraordinary success. A related, and just as hot, topic has been the efforts of numerous respondents in these APs (at least a half-dozen by Alison Frankel's) to promptly file separate lawsuits as plaintiffs in federal court claiming that the SEC's use of these APs against them is unconstitutional.
Prior to last week, only one of these constitutional challenges had been ruled on by the court--a dismissal of the case in favor of the SEC. In that case (Chau v. SEC, December 2014), U.S. Judge Lewis A. Kaplan of the SDNY ruled that the federal court did not have subject matter jurisdiction to consider the claim that the SEC’s decision to pursue the case as an AP deprived the plaintiffs of their rights to due process and equal protection of law.
Last week in Bebo v. SEC, a second constitutional challenge to the SEC's use of APs was decided--again in favor of the SEC. In that case, U.S. District Judge Rudolph T. Randa of the Eastern District of Wisconsin considered a claim by Laurie Bebo, the former CEO of Assisted Living Concepts, that Dodd Frank violates equal protection and due process rights "because it gives the SEC unfettered discretion through its choice of forum to provide (if federal) or withhold (if administrative) a citizen’s Seventh Amendment jury trial right for the same conduct and the same remedies."
Bebo further argued that (1) her procedural due process rights were violated because certain key witnesses in her case were Canadian citizens who were beyond the subpoena power of the SEC ALJ; and (2) that APs violated the Constitution because SEC ALJs are "separated from the President by multiple levels of protection from removal."
Notably, Judge Randa specifically stated in his decision that he found Bebo’s claims to be both "compelling and meritorious." However, the court found that it did not have subject matter jurisdiction to decide those claims. Under the exclusive remedial scheme set forth in the Securities Exchange Act of 1934, Judge Randa ruled, Bebo must litigate her claims before the SEC and then, if necessary, on appeal to the Court of Appeals for the Seventh Circuit. Quoting the recent Chau case, the court noted that district court jurisdiction “is not an escape hatch for litigants to delay or derail an administrative action when statutory channels of review are entirely adequate.”