Chau v. Securities & Exchange Commission , 665 F. App'x 67 ( 2016 )

15-461
Chau v. S.E.C.
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT.
CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS
PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE
PROCEDURE 32.1 AND THIS COURT=S LOCAL RULE 32.1.1. WHEN CITING A
SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST
CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH
THE NOTATION “SUMMARY ORDER”). A PARTY CITING TO A SUMMARY
ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY
COUNSEL.
At a stated term of the United States Court of Appeals for the Second Circuit, held at the
Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the
2nd day of December, two thousand sixteen.
Present:
DEBRA ANN LIVINGSTON,
RAYMOND J. LOHIER, JR.,
Circuit Judges,
CAROL BAGLEY AMON,
District Judge.*
_____________________________________
WING F. CHAU, HARDING ADVISORY LLC,
Plaintiffs-Appellants,
v. 15-461-cv
SECURITIES AND EXCHANGE COMMISSION,
Defendant-Appellee.
_____________________________________
For Plaintiffs-Appellants: ALEX LIPMAN (Ashley Baynham, Justin S. Weddle, on
the brief ), Brown Rudnick LLP, New York, N.Y.
*
Judge Carol Bagley Amon, of the United States District Court for the Eastern District of New
York, sitting by designation.
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For Defendant-Appellee: DOMINICK V. FREDA (Anne K. Small, Michael A.
Conley, Daniel Staroselsky, on the brief), Securities
and Exchange Commission, Washington, D.C.
Appeal from the judgment and order of the United States District Court for the Southern
District of New York (Kaplan, J.).
UPON DUE CONSIDERATION WHEREOF it is hereby ORDERED,
ADJUDGED, AND DECREED that the judgment of the district court is AFFIRMED.
Defendant-Appellee the Securities Exchange Commission (“SEC”) brought an
administrative proceeding against Plaintiffs-Appellants Harding Advisory LLC and its principal
owner, Wing F. Chau (collectively, “Plaintiffs”), for alleged violations of various securities laws.
During the pendency of that proceeding, Plaintiffs filed an action in district court alleging that
the SEC violated their rights under the Equal Protection Clause by not prosecuting the alleged
violations in district court. Plaintiffs now appeal from the judgment of the United States
District Court for the Southern District of New York (Kaplan, J.) denying their motion for a
preliminary injunction and granting the SEC’s motion to dismiss for lack of subject matter
jurisdiction.
I. Background
On October 18, 2013, the SEC’s Division of Enforcement brought an in-house
administrative proceeding against Plaintiffs, alleging violations of § 8A of the Securities Act of
1933 (15 U.S.C. § 77a et seq.), §§ 203(e), 203(f), and 203(k) of the Investment Advisers Act of
1940 (15 U.S.C. § 80a-1 et seq.), and § 9(b) of the Investment Company Act of 1940 (15 U.S.C.
§ 80b-1 et seq.) relating to the management and representation of certain collateralized debt
obligations. In response, aside from denying the substance of the SEC’s allegations, Plaintiffs
alleged, inter alia, that by choosing to bring an administrative action rather than file a lawsuit in
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district court, the SEC violated Plaintiffs’ rights under the Equal Protection Clause because it had
chosen to proceed in district court in other, allegedly similar cases.1
During the pendency of the proceeding, and after the SEC twice rejected Plaintiffs’ Equal
Protection claim — once by an SEC administrative law judge and once on interlocutory appeal
to the Commission — Plaintiffs filed an action in district court based on the same constitutional
claims. After initially denying Plaintiffs’ request for a preliminary injunction, the district court
granted the SEC’s motion to dismiss for lack of subject matter jurisdiction, finding, under the
Supreme Court’s decisions in Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1993), and Free
Enterprise v. Public Company Accounting Oversight Board, 561 U.S. 477 (2010), that
“permitting plaintiffs to seek pre-enforcement relief from the SEC in this case would be ‘inimical
to the structure and purposes’ of the statutory review scheme governing SEC adjudications and
would not provide an otherwise unavailable means of effective judicial review.” Special App’x
14 (quoting Thunder Basin, 510 U.S. at 212–13).
II. Discussion
Subject matter jurisdiction is a threshold matter. See Sinochem Int’l Co. v. Malay Int’l
Shipping Corp., 549 U.S. 422, 430–31 (2007). Plaintiffs must affirmatively demonstrate it by a
preponderance of the evidence, Makarova v. United States, 201 F.3d 110, 113 (2d Cir. 2000),
though we take all facts alleged in the complaint as true and draw all reasonable inferences in
Plaintiffs’ favor, Morrison v. Nat’l Austl. Bank Ltd., 547 F.3d 167, 170 (2d Cir. 2008). We
review the district court’s determination that it lacked subject matter jurisdiction de novo.
Tandon v. Captain’s Cove Marina Bridgeport, Inc., 752 F.3d 239, 243 (2d Cir. 2014). We also
1
Plaintiffs also alleged that the SEC violated their Due Process rights, but they do not pursue
that claim on appeal.
3
assume the parties’ familiarity with the underlying facts, procedural history, and issues on
appeal.
We are guided by our recent decision in Tilton v. S.E.C., 824 F.3d 276 (2d Cir. 2016), in
which we determined that the district court lacked subject matter jurisdiction over an
Appointments Clause challenge to pending administrative proceedings. Id. at 291. While the
constitutional claim here is different, our analysis in Tilton requires that we reach the same
result.
Determining whether the district court has subject matter jurisdiction is a two-step
process designed to discern congressional intent. Id. at 281. First, “we must . . . determine
whether it is ‘fairly discernible’ from the ‘text, structure and purpose’ of the securities laws that
Congress intended the SEC’s scheme of administrative and judicial review ‘to preclude district
court jurisdiction.’” Id. (quoting Elgin v. Dep’t of Treasury, 132 S. Ct. 2126, 2132–33 (2012)).
If we answer this question in the affirmative — and no party has argued otherwise — we must
then decide whether the claim at issue is “of the type Congress intended to be reviewed within
th[e] statutory structure.” Id. (quoting Free Enterprise, 561 U.S. at 489). That inquiry is
guided by three factors the Supreme Court has articulated, namely, whether (a) “a finding of
preclusion could foreclose all meaningful judicial review,” (b) the suit is “wholly collateral to
[the] statute’s review provisions,” and (c) the claims at issue are “outside the agency’s
expertise.” Thunder Basin, 510 U.S. at 212–13 (internal quotation marks omitted). Notably,
the factors are not “inputs into a strict mathematical formula,” but rather “are general guideposts
useful for channeling the inquiry into whether the particular claims at issue fall outside an
overarching congressional design.” Jarkesy v. S.E.C., 803 F.3d 9, 17 (D.C. Cir. 2015).
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1. Meaningful Judicial Review
We have recognized that the first factor — meaningful judicial review — is most
important. See Tilton, 824 F.3d at 282 (explaining that it “weighs strongly” in the overall
analysis); see also Bebo v. S.E.C., 799 F.3d 765, 774 (7th Cir. 2015) (characterizing this factor as
“the most critical thread in the case law”); accord Hill v. S.E.C., 825 F.3d 1236, 1245 (11th Cir.
2016). Plaintiffs argue that the statutory scheme does not permit meaningful judicial review of
their Equal Protection claim here because (1) as in Free Enterprise, they would have to endure
the allegedly unconstitutional proceeding before their Equal Protection claim could be heard by
this Court or the District of Columbia Circuit, and (2) the SEC’s administrative proceedings
cannot produce a record adequate to permit meaningful review of Plaintiffs’ claim. Both
contentions are without merit.
With respect to enduring the administrative proceeding, Plaintiffs are, as in Tilton and
unlike in Free Enterprise, already the subject of such a proceeding, and they have articulated no
adequate reason that their constitutional injury is “irremediable after [its] conclusion.” See
Tilton, 824 F.3d at 284; see also Bebo, 799 F.3d at 774 (distinguishing Free Enterprise because
the Bebo plaintiff did not need to “risk incurring a sanction voluntarily just to bring her
constitutional challenges before a court of competent jurisdiction”). Accordingly, because
“post-proceeding relief, although imperfect” is available — namely through review by a Court of
Appeals — it “suffices to vindicate [Plaintiffs’] constitutional claim.” Tilton, 824 F.3d at 285;
see also F.T.C. v. Standard Oil Co. of Cal., 449 U.S. 232, 244 (1980) (finding costs of
administrative proceedings to be “part of the social burden of living under government” rather
than an irreparable injury (quoting Petroleum Exploration Inc. v. Pub. Serv. Comm’n, 304 U.S.
209, 222 (1939))); Hill, 825 F.3d at 1245 (“Enduring an unwanted administrative process, even
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at great cost, does not amount to an irreparable injury on its own.”); Tilton, 824 F.3d at 285
(characterizing “financial and emotional costs” of the administrative proceeding as “simply the
price of participating in the American legal system” rather than “an irreparable injury”).
With respect to the adequacy of the record, Plaintiffs have had — and continue to have
— the opportunity to assert their Equal Protection claim and develop a record adequate to
support it. While different rules of discovery govern SEC administrative proceedings, the only
specific instance of being denied discovery that Plaintiffs identify is the administrative law
judge’s decision to preclude certain depositions and access to certain documents on privilege
grounds. As the district court properly determined, however, that ruling was not unique to the
SEC because a district court could have reached the same conclusion.
Plaintiffs’ claim that the SEC is biased and therefore has not, and will not, permit
development of an adequate record is likewise without merit. Allegations of partiality are not
properly addressed until after the SEC has taken concrete action, i.e., after the administrative
proceeding is complete. See Touche Ross & Co v. S.E.C., 609 F.2d 570, 575 (2d Cir. 1979)
(“Until the Commission has acted and actual bias has been demonstrated, the orderly
administrative procedures of the agency should not be interrupted by judicial intervention.”).
Moreover, if anything, the SEC’s perspective is valuable because it is best situated to articulate
the reasons it initiated an administrative proceeding rather than a district court action.2 Cf.
Moog Indus. v. F.T.C., 355 U.S. 411, 413 (1958) (explaining that the Federal Trade Commission
2
The question of whether the SEC is actually empowered to rule on Plaintiffs’ Equal Protection
claim is not relevant. See Jarkesy, 803 F.3d at 19 (finding that because the plaintiffs’ claims
could eventually reach an Article III court, it was “of no dispositive significance whether the
Commission ha[d] the authority to rule on them in the first instance during the agency
proceedings”); Bebo, 799 F.3d at 773 (“[J]urisdiction does not turn on whether the SEC has
authority to” rule on the constitutional issue, nor on whether that issue “fall[s] outside the
agency’s expertise.”).
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“alone is empowered to develop [the] enforcement policy best calculated to achieve the ends
contemplated by Congress and to allocate its available funds and personnel in such a way as to
execute its policy efficiently and economically,” and that the relevant factors are “peculiarly
within [its] expert understanding”).
Further, even if the record developed by the SEC were inadequate, the reviewing Court of
Appeals has two means at its disposal to supplement it. First, it can remand the case to the SEC
so that “additional evidence [may] be taken . . . in such manner and upon such terms and
conditions as the court may [d]eem proper,” which can, in turn, lead the SEC to modify its
findings. 15 U.S.C. §§ 77i(a), 80a-42(a), 80b-13(a); see also Hill, 825 F.3d at 1250; Jarkesy,
803 F.3d at 22. Second, the Court of Appeals can “take judicial notice of facts relevant to the
constitutional question.” See Elgin, 132 S. Ct. at 2138; Hill, 825 F.3d at 1250; Jarkesy, 803
F.3d at 22. Thus, viewed in the context of the full statutory scheme, even if “the ALJ’s and
SEC’s fact-finding capacities . . . [are] more limited than a federal district court’s,” they are
“sufficient for meaningful judicial review.” Bebo, 799 F.3d at 773; see also Hill, 825 F.3d at
1249–50 (“The administrative process includes adequate tools . . . to draw out the facts necessary
to mount [a] constitutional challenge” which, “although less robust than those provided by the
Federal Rules of Civil Procedure,” provide “a meaningful avenue to develop the record.”); id. at
1250 (finding that the statutory scheme, as a whole, “adequately allows for the development of a
sufficient factual record” to permit meaningful judicial review of constitutional claims).
Accordingly, the meaningful judicial review factor counsels strongly against the existence of
subject matter jurisdiction.
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2. Wholly Collateral
We recognized in Tilton that the Supreme Court has not clearly defined the meaning of
the “wholly collateral” factor. See 824 F.3d at 287. In that case, we followed the Court’s
decision in Elgin v. Department of Treasury, surmising that a claim is not wholly collateral
where “it serves as the ‘vehicle by which’ a party seeks to prevail in an administrative
proceeding.” Tilton, 824 F.3d at 287–88 (quoting Elgin, 132 S. Ct. at 2139–40). We do the
same here and assume, absent further guidance from the Supreme Court, that a constitutional
claim is not wholly collateral when it is “raised in response to, and so is procedurally intertwined
with, an administrative proceeding — regardless of the claim’s substantive connection to the
initial merits dispute in the proceeding.” Id. at 287.
Unlike in Free Enterprise, where the Supreme Court found the plaintiff’s challenge to
“not [be] moored to any proceeding that would provide for an administrative adjudication and
subsequent judicial review,” Plaintiffs’ Equal Protection claim here “targets an aspect of an
ongoing administrative proceeding.” Tilton, 824 F.3d at 288; see also Jarkesy, 803 F.3d at 23–
24 (finding that the plaintiff’s Equal Protection claim was not wholly collateral in part because it
“ar[o]se from actions the Commission took in due course” of the administrative enforcement
scheme, which the claim was an attempt to “short-circuit”). It therefore is of the same nature as
the claim in Tilton such that the wholly collateral factor does not favor the existence of subject
matter jurisdiction. See 824 F.3d at 288.
3. Agency Expertise
In Elgin, the Supreme Court adopted a broad view of the agency expertise factor. The
Court recognized that there are “many threshold questions that may accompany a constitutional
claim and to which [the agency] can apply its expertise,” and that it is possible that the agency’s
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resolution of merits questions may “obviate the need to address the constitutional challenge” at
all. Elgin, 132 S. Ct. at 2140; see also Tilton, 824 F.3d at 289–90. Here, the agency expertise
factor does not suggest the existence of subject matter jurisdiction for two reasons.
First, as in Tilton, the SEC may fully resolve Plaintiffs’ Equal Protection claim by
disposing of the case in Plaintiffs’ favor. Tilton, 824 F.3d at 290 (“A favorable Commission
order, including one on statutory grounds, would provide an acceptable resolution of the
Appointments Clause claim and obviate the need for judicial review” such that “the final
Thunder Basin factor lends minimal support to the appellants’ jurisdictional argument.”); see
also Standard Oil, 449 U.S. at 244 n.11 (“[T]he possibility that [the] challenge may be mooted in
adjudication warrants the requirement that [the plaintiff] pursue adjudication, not shortcut it.”).
While counsel for Plaintiffs maintained at oral argument that Plaintiffs would still suffer
damages even if they prevailed before the SEC, a bedrock principle of Plaintiffs’ claim is that the
SEC brought an administrative proceeding to increase its chances of success. See Appellants’
Br. at 9 (“[T]he SEC subjected Chau and Harding to its in-house proceeding because, inter alia,
they knew that the in-house proceedings, unlike federal court, would not afford Chau and
Harding a reasonable opportunity to mount a defense in a case of this magnitude and
complexity.”). We thus fail to see how, in the circumstances of this case, Plaintiffs could
maintain a viable Equal Protection claim if they were exonerated by the SEC.
Second, the SEC had, as of the date of Plaintiffs’ district court action, ruled on the merits
of Plaintiffs’ Equal Protection claim once, and subsequently ruled on it a second time. This fact
— that the SEC ultimately “prove[d] fully capable of considering” Plaintiffs’ constitutional
claim — also weighs against the existence of subject matter jurisdiction. Jarkesy, 803 F.3d at
28.
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Granted, jurisdiction does not, as noted, “hinge” on agency expertise. Bebo, 799 F.3d at
773; see also Lanier v. Bats Exch., Inc., 838 F.3d 139, 149 n.9 (2d Cir. 2016). Rather, as in
Tilton, the existence of meaningful judicial review under the statutory scheme is sufficient on its
own to suggest that the district court here appropriately found that it did not have subject matter
jurisdiction over Plaintiffs’ Equal Protection claim. See 824 F.3d at 282; see also Bebo, 799
F.3d at 767.
III. Conclusion
We have considered Plaintiffs’ remaining arguments and find them to be without merit.
Accordingly, we AFFIRM the judgment of the district court.
FOR THE COURT:
Catherine O’Hagan Wolfe, Clerk
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