Silberstein v. U.S. Securities and Exchange Commission

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
)
STEPHEN M. SILBERSTEIN, )
)
Plaintiff, )
)
v. ) Civil Action No. 15-722 (RMC)
)
U.S. SECURITIES AND EXCHANGE )
COMMISSION, )
)
Defendants. )
)
OPINION
Stephen M. Silberstein strongly believes that the Securities and Exchange
Commission (SEC) should adopt a rule requiring publicly traded corporations to disclose to
shareholders and the public their use of corporate funds for political activities. On May 8, 2014,
Mr. Silberstein and Citizens for Responsibility and Ethics in Washington (CREW) submitted a
petition for rulemaking to the SEC. 1 Since the SEC has not responded to this petition, Mr.
Silberstein sued the SEC under the Administrative Procedure Act to challenge the agency’s
inaction as arbitrary, capricious, and contrary to law, as well as to compel the SEC to act on his
petition. The SEC moves to dismiss the Complaint in its entirety. See Mot. to Dismiss [Dkt. 8]
(MTD). Mr. Silberstein filed a timely opposition to the motion, to which the SEC replied. For
the reasons that follow, the Court will grant the motion to dismiss.
1 CREW is not a party in the instant case.
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I. FACTS
Mr. Silberstein, a shareholder in Aetna, Inc., “has a longstanding interest in issues
pertaining to corporate governance and responsibility,” particularly the promotion of greater
oversight and transparency concerning the political contributions of Aetna and other publicly
traded companies. Am. Compl. [Dkt. 7] ¶ 4. Mr. Silberstein claims that without regulation to
require “greater transparency in the political contributions of Aetna and other publicly traded
companies in which [he] owns stock,” he cannot properly fulfill “his shareholder duties, as he
cannot determine whether those contributions are in the best interests of the companies.” Id. ¶ 5.
In 2013, the SEC’s Division of Corporation Finance announced that it would
consider “whether to recommend that the Commission issue a proposed rule” on this matter. Id.
¶ 4. No proposal was ever issued. Therefore, on May 8, 2014, Mr. Silberstein and CREW
submitted an amended petition for rulemaking requesting SEC to create a rule establishing a
disclosure requirement. 2 Despite the petition, “the SEC’s Agency Rule List for the Fall of 2014,
issued on November 21, 2014, continued to omit any reference to such [a] rule.” Id. ¶ 34.
On May 13, 2015, Mr. Silberstein filed a one-count complaint under the
Administrative Procedure Act (APA), 5 U.S.C. § 500 et seq., alleging that SEC’S failure to
respond to Mr. Silberstein’s petition was arbitrary, capricious, and contrary to law. First Compl.
[Dkt. 1] ¶¶ 39-41. On July 13, 2015, SEC moved to dismiss the complaint for failure to state a
claim and Mr. Silberstein, in turn, filed a two-count amended complaint on July 16, 2015. Count
2Mr. Silberstein’s petition resembles a petition filed on August 3, 2011 by the Committee on
Disclosure of Corporate Political Spending (CDCPS). This 2011 petition has garnered ample
public support. Neither Mr. Silberstein nor CREW were signatories to CDCPS’s 2011 petition.
Similarly, neither CDCPS nor any of its members joined the petition in the instant case.
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I incorporates the allegations and the single count of the First Complaint. Am. Compl. ¶ 40.
Count II alleges that the SEC’s inaction constitutes an “effective denial” of the rulemaking
petition that was arbitrary, capricious, and contrary to law. Id. ¶¶ 47-48.
Specifically, Mr. Silberstein is seeking declaratory relief that the SEC’s failure to
respond to the petition (Count I) and failure to grant the petition (Count II) violated §§ 553 and
555 of the APA. 3 He also seeks injunctive relief under § 706(1) to compel the SEC to respond
immediately to the petition (Count I) and to initiate a rulemaking proceeding (Count II). 4 Id. ¶¶
42-43, 49-50. SEC now moves to dismiss the Amended Complaint under Rules 12(b)(1) and
12(b)(6) of the Federal Rules of Civil Procedure.
II. LEGAL STANDARDS
A. Motion to Dismiss Under Rule 12(b)(1)
Pursuant to Federal Rule of Civil Procedure 12(b)(1), a defendant may move to
dismiss a complaint, or any portion thereof, for lack of subject matter jurisdiction. Fed. R. Civ.
P. 12(b)(1). No action of the parties can confer subject matter jurisdiction on a federal court
because subject matter jurisdiction is both a statutory requirement and an Article III requirement.
Akinseye v. District of Columbia, 339 F.3d 970, 971 (D.C. Cir. 2003). The party claiming
subject matter jurisdiction bears the burden of demonstrating that such jurisdiction exists. Khadr
v. United States, 529 F.3d 1112, 1115 (D.C. Cir. 2008); see Kokkonen v. Guardian Life Ins. Co.
of Am., 511 U.S. 375, 377 (1994) (noting that federal courts are courts of limited jurisdiction and
3The APA grants to all interested persons “the right to petition for the issuance . . . of a rule,” 5
U.S.C. § 555(e), and requires agencies to respond to such petitions “within a reasonable time,” 5
U.S.C. § 555(b).
4The APA authorizes reviewing courts to “compel agency action unlawfully withheld or
unreasonably delayed.” 5 U.S.C. § 706(1).
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“[i]t is to be presumed that a cause lies outside this limited jurisdiction, and the burden of
establishing the contrary rests upon the party asserting jurisdiction”) (internal citations omitted).
When reviewing a motion to dismiss for lack of jurisdiction under Rule 12(b)(1),
a court should “assume the truth of all material factual allegations in the complaint and ‘construe
the complaint liberally, granting the plaintiff the benefit of all inferences that can be derived
from the facts alleged.’” Am. Nat’l Ins. Co. v. FDIC, 642 F.3d 1137, 1139 (D.C. Cir. 2011)
(quoting Thomas v. Principi, 394 F.3d 970, 972 (D.C. Cir. 2005)). Nevertheless, “the court need
not accept factual inferences drawn by plaintiffs if those inferences are not supported by facts
alleged in the complaint, nor must the Court accept plaintiff=s legal conclusions.” Speelman v.
United States, 461 F. Supp. 2d 71, 73 (D.D.C. 2006).
B. Motion to Dismiss Under Rule 12(b)(6)
A motion to dismiss for failure to state a claim pursuant to Federal Rule of Civil
Procedure 12(b)(6) challenges the adequacy of a complaint on its face. Fed. R. Civ. P. 12(b)(6).
A complaint must be sufficient “to give a defendant fair notice of what the . . . claim is and the
grounds upon which it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (internal
citations omitted). Although a complaint does not need detailed factual allegations, a plaintiff=s
obligation to provide the grounds of his entitlement to relief “requires more than labels and
conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Id. A
court must treat the complaint=s factual allegations as true, “even if doubtful in fact,” id., but a
court need not accept as true legal conclusions set forth in a complaint, see Ashcroft v. Iqbal, 556
U.S. 662, 678 (2009). To survive a motion to dismiss, a complaint must contain sufficient
factual matter, accepted as true, to state a claim for relief that is “plausible on its face.”
Twombly, 550 U.S. at 570. A complaint must allege sufficient facts that would allow the court
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“to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal,
556 U.S. at 678-79.
III. ANALYSIS
SEC argues that the Court lacks jurisdiction to consider Count I because exclusive
jurisdiction is vested in the courts of appeals pursuant to the Securities Exchange Act of 1934
(Exchange Act), 15 U.S.C. § 78a et seq. It also argues that Count II should be dismissed because
it seeks to compel the SEC to initiate a rulemaking proceeding that falls within the SEC’s “broad
discretionary powers” under Section 14(a) of the Exchange Act, 15 U.S.C. § 78n(a). Mr.
Silberstein opposes both arguments.
A. Count I – Failure to Respond
The Supreme Court has held that “absent a firm indication that Congress intended
to locate initial APA review of agency action in the district courts, we will not presume that
Congress intended to depart from the sound policy of placing initial APA review in the courts of
appeals.” Florida Power & Light Co. Lorion, 470 U.S. 729, 745 (1985). It is also well-
established in this Circuit that “where a statute commits review of agency action to the Court of
Appeals, any suit seeking relief that might affect the Circuit Court’s future jurisdiction is subject
to the exclusive review of the Court of Appeals.” Telecomm. Research and Action Center v.
F.C.C., 750 F.2d 70, 75 (D.C. Cir. 1984) (TRAC). Moreover, “a statute which vests jurisdiction
in a particular court cuts off original jurisdiction in other courts in all cases covered by that
statute.” Id. at 77.
In the instant case, Section 25(a)(1) of the Exchange Act provides:
A person aggrieved by a final order of the [SEC] entered pursuant
to this chapter may obtain review of the order in the United States
Court of Appeals for the circuit in which he resides or has his
principal place of business, or for the District of Columbia Circuit,
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by filing in such court, within sixty days after the entry of the order,
a written petition requesting that the order be modified or set aside
in whole or in part.
15 U.S.C. § 78y(a)(1). Therefore, the Exchange Act makes clear that review of all “final
order[s]” lies in the circuit courts of appeals –– not in the district courts. See, e.g., Am.
Petroleum Institute v. SEC, 741 F.3d 1329, 1333 (D.C. Cir. 2013) (API) (“Section 25(a) gives us
jurisdiction over challenges to all final orders . . . .”); Watts v. SEC, 482 F.3d 501, 505 (D.C. Cir.
2007) (holding that Section 25(a) is a direct-review provision that “specifically gives the courts
of appeals subject-matter jurisdiction to directly review . . . SEC ‘orders.’”); Indep. Broker-
Dealers’ Trade Ass’n v. SEC, 442 F.2d 132, 142 (D.C. Cir. 1971) (noting that Section 25(a) was
“intended to provide direct review” in the courts of appeals of SEC orders).
In light of Section 25(a), neither potential response to Mr. Silberstein’s petition
for rulemaking –– a final order denying or granting the petition –– would be reviewable by this
Court. Cf. FCC v. ITT World Commc’ns, Inc., 466 U.S. 463, 468 (1984) (“Exclusive jurisdiction
for review of final FCC orders, such as the FCC’s denial of respondents’ rulemaking petition,
lies in the Court of Appeals . . . .”); Action on Smoking & Health v. Dep’t of Labor, 28 F.3d 162,
165 (D.C. Cir. 1994) (holding that issuance of a notice of proposed rulemaking is not subject to
court review because it does not “impose[] an obligation, den[y] a right, or fix[] some legal
relationship”) (citation omitted). When the discrete agency action sought –– a final SEC order
on a petition for rulemaking –– is itself reviewable exclusively by a circuit court, then an APA
unreasonable delay claim is also reviewable exclusively by a circuit. See TRAC, 750 F.2d at 76
(“Because the statutory obligation of a Court of Appeals to review on the merits may be defeated
by an agency that fails to resolve disputes, a Circuit Court may resolve claims of unreasonable
delay [pursuant to the All Writs Act] in order to protect its future jurisdiction.”) (citations
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omitted). As the D.C. Circuit stated, “It would be anomalous to hold that this grant of authority
only strips the District Court of general federal question jurisdiction under 28 U.S.C. § 1331
when the Circuit Court has present jurisdiction under a special review statute, but not when the
Circuit Court has immediate jurisdiction under the All Writs Act in aid of its future statutory
review power.” Id. at 77. Accordingly, TRAC makes clear that this Court does not have
jurisdiction to hear Mr. Silberstein’s unreasonable delay claim in Count I.
Mr. Silberstein argues that the Circuit’s exclusive jurisdiction over final agency
orders does not preclude this Court from hearing unreasonable delay claims under the APA. To
support this proposition, Mr. Silberstein points out that Section 25(b)(1) of the Exchange Act
vests exclusive jurisdiction in the courts of appeals over challenges to rules promulgated
pursuant to certain specified sections of the Exchange Act –– namely, §§ 78f, 78i(h)(2), 78k,
78k-1, 78o(c)(5) or (6), 78o-3, 78q-1, or 78s. See 15 U.S.C. § 78y(b)(1); see also API, 714 F.3d
at 1333 (holding that “section 25(b) not only expressly authorizes appellate review of agency
rules, but it limits that review to rules issued pursuant to specific provisions of the Exchange Act,
leaving all others to be challenged in the district court”). Mr. Silberstein points out that his
challenge involves a petition for the SEC to promulgate a rule under section 14(a) of the
Exchange Act, 15 U.S.C. § 78n(a) –– a provision that is not enumerated in section 25(b). Mr.
Silberstein contends that this fact alone means that his unreasonable delay claim is within the
class of claims properly heard in district court. The Court disagrees.
Mr. Silberstein’s reliance on section 25(b) is misplaced. It is true that section
25(b)’s jurisdictional grant is narrower than that conferred by section 25(a). However, section
25(b)(1) involves challenges to final rules promulgated pursuant to specific enumerated
provisions of the Exchange Act. See 15 U.S.C. § 78y(b)(1); see also API, 714 F.3d at 1333
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(noting that section 25(a) provides for direct court of appeals review of final orders and section
25(b) provides for such review of certain final rules). There is no final rule in the instant case.
Therefore, section 25(b)(1) is inapplicable.
Unlike the plaintiff in API, Mr. Silberstein is not challenging a final or completed
SEC rule. In Count I, Mr. Silberstein only challenges the SEC’s failure to respond to his
rulemaking petition. He also asks the Court to compel the SEC to respond to his petition and not
to promulgate the rule itself. Only section 25(a) is implicated here and neither section 25(b)(1)
nor API is relevant to Mr. Silberstein’s claim. 5 Therefore, as discussed above, section 25(a) and
TRAC preclude this Court from hearing Mr. Silberstein’s unreasonable delay challenge and his
claim to compel a response to his rulemaking petition. See TRAC, 750 F.2d at 75-79. For the
foregoing reasons, Count I must be dismissed without prejudice for lack of jurisdiction.
B. Count II – Failure to Grant the Petition
An APA “claim under § 706(1) can proceed only where a plaintiff asserts that an
agency failed to take a discrete agency action that it is required to take.” Norton v. S. Utah
Wilderness Alliance, 542 U.S. 55, 64 (2004) (emphasis in original). “While courts are
empowered ‘to compel agency action unlawfully withheld or unreasonable delayed,’ 5 U.S.C. §
706(1), a court may only do so . . . when the agency has failed to act in response to a clear legal
5 The rule at issue in API was required by Congress in the Dodd-Frank Act and was promulgated
under section 13(q) of the Exchange Act. See API, 714 F.3d at 1330-1331. Unlike the section
14(a) discretionary rulemaking sought in this case, a rule that is statutorily required –– such as
the one in API –– would not implicate section 25(a)’s jurisdictional grant because SEC could not
issue a final order refusing to undertake mandatory rulemaking. See Oxfam Am. v. SEC, 14-cv-
13648-DJC (D. Mass.) (asking district court to compel SEC to promulgate a revised version of
the rule at issue in API). On the other hand, since SEC could deny a petition for discretionary
rulemaking, a challenge to compel a response to such petition is not reviewable by a district
court as it would affect a circuit court’s jurisdiction under section 25(a). Accordingly, this Court
lacks jurisdiction over the relief sought in Count I because Mr. Silberstein’s action does not
involve the promulgation of a statutorily required rule.
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duty.” Citizens for Responsibility and Ethics in Washington v. SEC, 916 F. Supp. 2d 141, 148
(D.D.C. 2013) (CREW) (citing Norton, 542 U.S. at 63-64).
In the instant case, Mr. Silberstein seeks the promulgation of a rule pursuant to
SEC’s “broad discretionary powers” under section 14(a) of the Exchange Act. Am. Compl. ¶¶ 7-
8. Section 14(a) recognizes SEC’s discretion to promulgate rules and regulations governing the
disclosures that companies must make during the proxy selection process. 15 U.S.C. § 78n(a)
(providing that SEC “may prescribe” rules and regulations) (emphasis added). As the D.C.
Circuit has stated, “the [SEC] has been vested by Congress with broad discretionary powers to
promulgate (or not to promulgate) rules requiring disclosure of information beyond that
specifically required by statute.” Natural Res. Def. Council, Inc. v. SEC, 606 F.2d 1031, 1045
(D.C. Cir. 1979). Congress did not cast “disclosure rules in stone,” but rather “opted to rely on
the discretion and expertise of the SEC for a determination of what types of additional disclosure
would be desirable.” Id.
Mr. Silberstein does not dispute any of this. See Opp’n 13-15. Instead, he
characterizes SEC’s failure to act as an “effective denial” of his petition for rulemaking. Id. at
15. Mr. Silberstein claims that SEC was required to provide a sufficient explanation to support
its denial of the petition. Since SEC failed to provide such explanation, Mr. Silberstein contends
that Count II should proceed. 6
The problem is that SEC did not deny the petition; it merely failed to respond to
it. In Norton, the Supreme Court distinguished a “failure to act” from a “denial” and stated that
6 Mr. Silberstein fails to cite any cases in support of the proposition that SEC’s failure to act is
tantamount to a denial. Mr. Silberstein also fails to recognize that, even if Count II were
construed as a challenge to SEC’s denial of his rulemaking petition, the D.C. Circuit would have
exclusive jurisdiction over such challenge pursuant to TRAC and section 25(a)(1) of the
Exchange Act. See supra analysis of Count I.
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“[t]he latter is the agency’s act of saying no to a request; the former is simply the omission of an
action without formally rejecting a request –– for example, the failure to promulgate a rule or
take some decision by a statutory deadline.” Norton, 543 U.S. at 63. Since the SEC has not
denied the petition and Mr. Silberstein has not asserted that the SEC “failed to act in response to
a clear legal duty,” it follows that he failed to state a valid APA claim upon which relief can be
granted. CREW, 916 F. Supp. 2d at 148. Count II must be dismissed with prejudice.
IV. CONCLUSION
For the foregoing reasons, the Court will grant the SEC’s Motion to Dismiss, Dkt.
8, and dismiss the Amended Complaint in its entirety, Dkt. 7. Count I will be dismissed without
prejudice for lack of jurisdiction and Count II will be dismissed with prejudice for failure to state
a claim. A memorializing Order accompanies this Memorandum Opinion.
Date: January 4, 2016
/s/
ROSEMARY M. COLLYER
United States District Judge
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