15-2103-cv

United States Court of Appeals for the

Second Circuit

LYNN TILTON, PATRIARCH PARTNERS, LLC, PATRIARCH PARTNERS VIII, LLC, PATRIARCH PARTNERS XIV, LLC,

PATRIARCH PARTNERS XV, LLC,

Plaintiffs-Appellants,

– v. –

SECURITIES AND EXCHANGE COMMISSION,

Defendant-Appellee.

–––––––––––––––––––––––––––––– ON APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF NEW YORK

REPLY BRIEF FOR PLAINTIFFS-APPELLANTS

DAVID M. ZORNOW CHRISTOPHER J. GUNTHER SKADDEN, ARPS, SLATE, MEAGHER

& FLOM LLP Four Times Square New York, New York 10036 (212) 735-3000

– and –

SUSAN E. BRUNE BRUNE & RICHARD LLP One Battery Park Plaza New York, New York 10004 (212) 668-1900

Attorneys for Plaintiffs-Appellants

TABLE OF CONTENTS

Page TABLE OF CONTENTS ............................................................................................ i

TABLE OF AUTHORITIES .................................................................................... ii

PRELIMINARY STATEMENT ............................................................................... 1

I. THIS COURT HAS JURISDICTION TO ADDRESS PATRIARCH'S APPOINTMENTS CLAUSE CLAIM NOW............. 3

II. THE SEC ALJ IS AN INFERIOR OFFICER WHO WOULD PRESIDE UNCONSTITUTIONALLY AT TRIAL ON OCTOBER 13, 2015 ........................................................................... 13

CONCLUSION ........................................................................................................ 21

ii

TABLE OF AUTHORITIES

Page(s)

Cases:

Abbott Laboratories v. Gardner,

387 U.S. 136 (1967)......................................................................................... 6

Altman v. SEC,

768 F. Supp. 2d 554 (S.D.N.Y. 2011) ......................................................... 7, 8

Altman v. SEC,

687 F.3d 44 (2d Cir. 2012) .......................................................................... 7, 8

Cent. Hudson Gas & Elec. v. EPA,

587 F.2d 549 (2d Cir. 1978) .......................................................................... 10

Department of Transportation v. Association of American Railroads,

135 S. Ct. 1225 (2015) ................................................................................... 16

Duka v. SEC,

No. 15 Civ. 357 (RMB) (S.D.N.Y. Aug. 12, 2015) ........................ 1, 7, 11, 13

Edmond v. United States,

520 U.S. 651 (1997)....................................................................................... 17

Free Enterprise Fund v. Public Co. Accounting Oversight Board,

561 U.S. 477 (2010)................................................................................passim

FTC v. Standard Oil Co. of California,

449 U.S. 232 (1980)..................................................................................... 8, 9

Gray Financial Group, Inc. v. SEC,

No. 1:15-CV-0492-LMM (N.D. Ga. Aug. 4, 2015) ........................................ 1

Hamilton v. Aetna & Cas. Co., 5 F.3d 642 (2d Cir. 1993) .............................................................................. 12

Hill v. SEC,

No. 1:15-CV-1801-LMM, 2015 WL 4307088

(N.D. Ga. June 8, 2015) ......................................................................... 1, 5, 13

Hill v. SEC,

No. 15-12831-CC (11th Cir. Aug. 10, 2015) .................................................. 1

In re Al-Nashiri, 791 F.3d 71 (D.C. Cir. 2015) ........................................................................... 9

iii

In re City of N.Y.,

607 F.3d 923 (2d Cir. 2010) .......................................................................... 12

In re Clowson,

SEC Release No. 48143, 2003 WL 21539920 (July 9, 2003) ....................... 18

In re Pelosi,

Investment Advisors Act Release No. 3805, 2014 WL 1274715

(Mar. 27, 2014) .............................................................................................. 18

In re SEC ex rel. Glotzer,

374 F.3d 184 (2d Cir. 2004) .......................................................................... 12

Landry v. FDIC,

204 F.3d 1125 (D.C. Cir. 2000) ..................................................................... 16

Lebron v. Nat’l R.R. Passenger Corp., 513 U.S. 374 (1995)....................................................................................... 16

McNary v. Haitian Refugee Ctr., Inc., 498 U.S. 479 (1991)......................................................................................... 4

Ramspeck v. Fed. Trial Exam’rs Conference,

345 U.S. 128 (1953)....................................................................................... 15

Sterling Drug, Inc. v. Weinberger,

509 F.2d 1236 (2d Cir. 1975) ........................................................................ 10

Thunder Basin Coal Co. v. Reich,

510 U.S. 200 (1994)............................................................................. 4-5, 6, 8

Timbervest, LLC,

Admin. Proc. File No. 3-15519 (May 27, 2015) ............................... 10, 18-19

Timbervest, LLC,

Admin. Proc. File No. 3-15519 (June 4, 2015) ............................................. 19

Timbervest, LLC,

Admin. Proc. File No. 3-15519 (June 23, 2015) ........................................... 19

Timbervest, LLC,

Admin. Proc. File No. 3-15519 (July 2, 2015) .............................................. 10

Timbervest, LLC v. SEC,

No. 1:15-CV-2106-LMM (N.D. Ga. Aug. 4, 2015) ...................................... 18

Touche Ross & Co. v. SEC,

609 F.2d 570 (2d Cir. 1979) ...................................................................passim

iv

Wellness Int’l Network, Ltd. v. Sharif,

135 S. Ct. 1932 (2015) ................................................................................... 11

Statutes & Other Authorities:

U.S. Constitution art. III .......................................................................................... 11

5 U.S.C. § 3105 .................................................................................................. 14, 15

5 U.S.C. § 4301(2)(D) .............................................................................................. 15

5 U.S.C. § 7521 ........................................................................................................ 15

15 U.S.C. § 77u ........................................................................................................ 13

15 U.S.C. § 78bb(a)(2) ............................................................................................... 6

15 U.S.C. § 78y .................................................................................................passim

15 U.S.C. § 78y(a)(1) ................................................................................................. 3

15 U.S.C. § 78y(a)(3) ............................................................................................. 4, 5

15 U.S.C. § 78y(c)(3) ................................................................................................. 5

16 U.S.C. § 839f(e)(5) ............................................................................................... 6

20 U.S.C. § 1234(b) ................................................................................................. 14

49 U.S.C. § 24301(a)(2) ........................................................................................... 16

49 U.S.C. § 24301(a)(3) ........................................................................................... 16

17 C.F.R. § 201.411(b)(2)(ii)(A) ............................................................................. 18

Office of Inspector General, U.S. Securities and Exchange Commission,

Interim Report of Investigation, Case No. 15-ALJ-0482-I

(Aug. 7, 2015) ................................................................................................ 20

Sec’y of Educ. Review of Admin. Law Judge Decisions, 15 Op. O.L.C. 8

(1991) ............................................................................................................. 14

U.S. Dep’t of Justice, Attorney General’s Manual on the Administrative Procedure Act (1947) .............................................................................. 15, 18

U.S. Gen. Accounting Office, Administrative Law Judges: Appointment of

Women and Social Security Administration Staff Attorneys (Oct. 1988) ..................................................................................................... 15

PRELIMINARY STATEMENT

Since the filing of Patriarch's opening brief last month, the federal

courts have uniformly blocked trials before unappointed SEC ALJs. In Duka v.

SEC, No. 15 Civ. 357 (RMB), slip op. at 3-4 (S.D.N.Y. Aug. 12, 2015) (ECF No.

60), Judge Berman found jurisdiction over the Appointments Clause claim and

issued a preliminary injunction, expressly following Judge May's decision in Hill v.

SEC, No. 1:15-CV-1801-LMM, 2015 WL 4307088 (N.D. Ga. June 8, 2015) (to be

published in F. Supp. 3d). Judge May enjoined a second SEC ALJ trial in Gray

Financial Group, Inc. v. SEC, No. 1:15-CV-0492-LMM (N.D. Ga. Aug. 4, 2015)

(ECF No. 56). And three judges of the Eleventh Circuit (upon a fully-briefed

motion from the SEC) unanimously refused to lift the Hill injunction. Hill v. SEC,

No. 15-12831-CC (11th Cir. Aug. 10, 2015) (SEC's "'Motion to Stay Preliminary

Injunction Pending Appeal' is DENIED").

With the rising tide of jurisprudence against it, the SEC should be

eager for guidance from this Court, the premier circuit in federal securities matters.

Assuming this Court finds jurisdiction (as it should), the SEC acknowledges that

this Court has the power to address the Appointments Clause question now. Yet

the SEC, curiously, wants to delay resolution of this question by requesting a

remand to the district court instead – even as Ms. Tilton and Patriarch face an

imminent trial before the SEC ALJ on October 13, 2015.

2

Indeed, the SEC proposes, on jurisdictional grounds, that this issue be

excluded from judicial review altogether until after an ALJ hearing and an appeal

to the Commission, even though neither has expertise with regard to the

constitutional issue at hand. No purpose would be served by wading through this

lengthy process before returning to this Court, perhaps in 2017. The SEC does not

dispute (1) the due process bar against the ALJ ruling on her own professional fate,

and (2) the futility of an appeal to the Commission, which has already rejected the

Appointments Clause claim in this litigation and others.

As the recently decided cases cited above make clear, the securities

laws do not require that litigants chart the circuitous jurisdictional route urged by

the SEC. In Free Enterprise Fund v. Public Co. Accounting Oversight Board, 561

U.S. 477, 489 (2010), the Supreme Court upheld federal question jurisdiction over

a challenge to SEC action under the Appointments Clause, finding 15 U.S.C. § 78y

did not establish "an exclusive route to review." And in Touche Ross & Co. v.

SEC, 609 F.2d 570, 577 (2d Cir. 1979), this Court found jurisdiction over a

threshold challenge to SEC authority where, as here, the issue needed neither

development of a factual record nor the exercise of agency discretion. By its

language and structure, § 78y creates exclusive review only for final SEC orders

and rules. Other SEC actions may be challenged in district court if the claim, as

here, will not benefit from agency adjudication. Touche Ross, 609 F.2d at 577.

3

Thus, the exercise of jurisdiction by this Court comports with the

sound administration of justice. After all, it is wrong to put people on trial for their

professional lives before judges who have not been appointed as required by the

Constitution. Once that trial occurs, the "genie cannot be put back in the bottle";

the damage to the defendant in both economic and reputational terms cannot be

undone. And it is wasteful of scarce government resources to conduct needless

trials, appeals and remands as lengthy prologue to this Court's efficient resolution

of a threshold constitutional defect.

I.

THIS COURT HAS JURISDICTION TO ADDRESS PATRIARCH'S APPOINTMENTS CLAUSE CLAIM NOW

The appropriate inquiry here is whether it is "fairly discernible" from

15 U.S.C. § 78y that Congress intended Patriarch's Appointments Clause claim "to

proceed exclusively through the statutory review scheme." SEC Br. at 18.1 The

answer turns on the "'text, structure, and purpose'" of the statute. SEC Br. at 24.

While Patriarch directly addresses the features of § 78y and the case law

construing it, the SEC recounts, at length, Supreme Court cases interpreting

1 The district court correctly analyzed the review provision of the Securities

Exchange Act, 15 U.S.C. § 78y(a)(1). (A-134, 136). Although the SEC cites the review provisions of the Investment Advisers Act and Investment Company Act, as well, it concedes that the "judicial review schemes" of all these statutes are "essentially the same." SEC Br. at 5 n.2.

4

distinguishable statutes like the Mine Act of 1977 and the Civil Service Reform

Act.

1. In interpreting the text, structure, and purpose of § 78y, no case

is as authoritative as Free Enterprise, which analyzed whether that provision

displayed a "fairly discernible" congressional intent to preclude from judicial

review the same claim at issue here. The Court found no such intent, holding that

§ 78y neither explicitly nor implicitly "limit[s] the jurisdiction that other statutes

confer on district courts." 561 U.S. at 489. It is easy to see why. First, § 78y

applies only to challenges to final orders or Commission rules. Even the district

court recognized that Patriarch's "constitutional challenge . . . [did] not pertain to

'any Commission orders or rules,' but rather the constitutionality of the proceedings

generally." (A-150); see McNary v. Haitian Refugee Ctr., Inc., 498 U.S. 479, 492

(1991) (statute providing for review of "a determination" did not bar constitutional

challenge to agency "practices and policies").

Second, "jurisdiction" under § 78y "becomes exclusive on the filing of

the record" with the court of appeals. 15 U.S.C. § 78y(a)(3). In arguing against

jurisdiction, the SEC repeatedly invokes the statutory term "exclusive," see, e.g.

SEC Br. at 1, 5, without explaining how review under § 78y "becomes exclusive"

only in a circumstance (the filing of a record on appeal) that did not exist when

Patriarch brought this action. Cf. Thunder Basin Coal Co. v. Reich, 510 U.S. 200,

5

208 (1994) (statute providing circuit review of agency action "'shall be exclusive,'"

without any condition triggering exclusivity (citation omitted)).

Third, § 78y(c)(3) expressly contemplates concurrent jurisdiction in

the district and circuit courts.2 This subsection addresses the scenario where the

same Commission order or rule is the subject of both a petition in the court of

appeals and an SEC injunction action in district court. In those circumstances,

exclusive jurisdiction over the shared order/rule goes to the first filed case

addressing it. But the subsection does not create exclusive jurisdiction in either

court – i.e., it allows concurrent jurisdiction – to the extent the cases address

different Commission actions.3

2 Subsection (c)(3) provides:

When the same order or rule is the subject of one or more petitions for review filed under this section and an action for enforcement filed in a district court of the United States under section 78u(d) or (e) [authorizing the SEC to bring injunction actions] of this title, that court in which the petition or the action is first filed has jurisdiction with respect to the order or rule to the exclusion of any other court, and thereupon all such proceedings shall be transferred to that court . . . .

15 U.S.C. § 78y(c)(3). 3 Similarly, as Judge May reasoned, "because Congress created a statutory

scheme which expressly included the district court as a permissible forum for the SEC's claims, Congress did not intend to limit § 1331 and prevent Plaintiff from raising his collateral constitutional claims in the district court." Hill, 2015 WL 4307088, at *6. It is no answer to say that Congress gave the SEC the choice of forum. Congress could easily have given that choice "exclusive" jurisdictional effect, if it wished, through statutory language akin to § 78y(a)(3),

(cont'd)

6

Finally, § 78y is part of the Securities and Exchange Act of 1934,

which has a broad savings clause at 15 U.S.C. § 78bb(a)(2). When it found the

Mine Act review scheme to be exclusive in Thunder Basin, the Supreme Court

distinguished its prior decision in Abbott Laboratories v. Gardner, 387 U.S. 136

(1967), by invoking the savings clause in the Act at issue in Abbott. See Thunder

Basin, 510 U.S. at 212. The Exchange Act's savings clause is even broader than

the clause that preserved district court jurisdiction in Abbott, and provides ample

basis to distinguish Thunder Basin here.4

2. This Court's decision in Touche Ross rejected two jurisdictional

hurdles that the SEC seeks to erect here. First, the SEC argues that an appeal to a

circuit court under § 78y (following SEC adjudication) is always sufficient review.

SEC Br. at 31-34. But this Court held otherwise in Touche Ross. See 609 F.2d at

577 ("[T]o require appellants to exhaust their administrative remedies would be to

require them to submit to the very procedures which they are attacking."); see also

________________________ (cont'd from previous page)

or through other language, see, e.g., 16 U.S.C. § 839f(e)(5) ("Suits to challenge the constitutionality of this chapter [governing certain power systems], or any action thereunder . . . shall be filed in the United States court of appeals . . . .").

4 Compare 15 U.S.C. § 78bb(a)(2) ("[T]he rights and remedies provided by this chapter shall be in addition to any and all other rights and remedies that may exist at law or in equity."), with Abbott, 387 U.S. at 144 ("The remedies provided for in this subsection shall be in addition to and not in substitution for any other remedies provided by law." (citation omitted)).

7

Duka, slip op. at 2 ("[I]f the administrative proceeding is not enjoined, Plaintiff's

requested relief will be rendered moot as the Court of Appeals would be unable to

enjoin a proceeding which has already occurred."). Second, the SEC argues that

once an SEC administrative proceeding has commenced, federal court intervention

is foreclosed until review of a final order under § 78y. SEC Br. at 19-20. Again,

Touche Ross holds to the contrary: in that case, this Court upheld district court

jurisdiction over a claim that the SEC lacked statutory authority to enact attorney

disciplinary rules even though the district court action was filed after the

disciplinary proceeding had begun. 609 F.2d at 572-73.5

The SEC struggles to evade the decisive import of Touche Ross by

invoking the district court opinion in Altman v. SEC, 768 F. Supp. 2d 554

(S.D.N.Y. 2011), aff'd, 687 F.3d 44 (2d Cir. 2012). SEC Br. at 29-31. However,

Altman involved an action filed in district court only after the SEC had issued a

final order imposing a lifetime ban. 768 F. Supp. 2d at 558; see Altman, 687 F.3d

at 44-45 ("At the time his complaint was filed, the SEC had banned Altman . . . .").

5 The SEC tries to distinguish Free Enterprise on the ground that the plaintiff,

there, was not facing an administrative proceeding. SEC Br. at 11. But it would be a strange approach to jurisdiction to allow a constitutional challenge to the structure of an administrative trial only by a party not yet facing such a trial. Patriarch raised its Appointments Clause claim in the Wells process and urged that any action be filed in district court. (A-11). If Patriarch had then sued in district court before the SEC filed its administrative action, the SEC would have argued Patriarch's constitutional claim was speculative and unripe.

8

As such, both the district court and this Court held that § 78y plainly applied and

channeled Altman's challenge exclusively to the circuit court. See 768 F. Supp. 2d

at 558; 687 F.3d at 45-46. The SEC's contention – that "Altman involved a claim

not meaningfully distinguishable from those presented here" – is simply wrong.

SEC Br. at 30.6 The SEC further argues that Touche Ross was decided "before the

guidance later provided by Thunder Basin and Elgin." SEC Br. at 29-30. But it

was Free Enterprise that addressed § 78y, the very provision at issue in both

Touche Ross and this case.7 Thunder Basin and Elgin, in contrast, addressed

statutory schemes far removed from the federal securities laws.

3. The dominant assertion made by the SEC in its brief is that, in

defending against the OIP in an administrative hearing, the only harm to be

suffered by Patriarch from the ALJ's trial is the expenditure of routine legal costs

reflecting the price of ordinary citizenship. The SEC cites FTC v. Standard Oil

Co. of California, 449 U.S. 232 (1980), no fewer than six times for the proposition 6 The district judge in Altman also remarked that other district "[c]ourts have read

Touche Ross narrowly." 768 F. Supp. 2d at 562. In context, this passage meant only that Touche Ross was unavailable to a litigant already aggrieved by a final order. Even if the district judge in Altman had meant to imply more – and he did not – such dicta would not bind this Court.

7 Notably, Free Enterprise found that review under § 78y was not sufficiently "meaningful" if, as the SEC urged, the plaintiffs had "to select and challenge a [PCAOB] rule at random." 561 U.S. at 490. Challenging a selected agency rule is a far easier path to review than the prerequisite urged by the SEC here –i.e., enduring a structurally unconstitutional trial.

9

that the cost of litigating before an agency is not irreparable harm. See SEC Br. at

2, 10, 15, 33, 35 & 37. But the Standard Oil plaintiffs sought relief from having to

stand trial at all, arguing that the agency complaint originated from political bias

and was void. 449 U.S. at 235-37.8 Here, by contrast, Patriarch asks the federal

courts only to ensure a constitutionally appropriate adjudicator from the outset.

The sensible goal is to avoid facing trial twice just because the SEC stubbornly

wants to use presiding judges whom two federal courts have deemed

unconstitutional.9

After all, the burden of structurally invalid proceedings is a two-way

street for the litigating parties, with attendant drain on the courts. The 3-2 majority

of Commissioners who authorized this case may accept the fiscal, temporal and

emotional costs of a constitutionally invalid trial to Ms. Tilton and Patriarch. And

8 Under Touche Ross, jurisdiction exists for a threshold challenge to SEC action

(as here), even though a claim of agency bias (which benefits from development of the administrative record) must await circuit review under § 78y. 609 F.2d at 575.

9 Remarkably, the SEC cites In re Al-Nashiri, 791 F.3d 71 (D.C. Cir. 2015), three times for the proposition that military commission proceedings before a judge presiding in violation of the Appointments Clause did not constitute irreparable harm. SEC Br. at 14, 32 & 38. The SEC fails to mention that the military commission was subject to a statute expansively stripping district courts of jurisdiction, and that the Al-Nashiri court was weighing its mandamus power. The irreparable harm justifying extraordinary mandamus relief is more stringent than when a court exercises discretion within its ordinary federal question jurisdiction.

10

the SEC Director of Enforcement may accept the corresponding costs borne by his

agency and its personnel.10 But this Court need not endorse these costs, nor the

burdens on the judicial system arising from piecemeal district court litigation

within the Circuit. See Touche Ross, 609 F.2d at 576 ("[A]n injunction may be

issued 'if an agency [proceeding] . . . is being conducted in a manner that cannot

result in a valid order . . . .'" (quoting Sterling Drug, Inc. v. Weinberger, 509 F.2d

1236, 1239 (2d Cir. 1975)); Cent. Hudson Gas & Elec. v. EPA, 587 F.2d 549, 556

(2d Cir. 1978) (Given the cost when "courts ultimately declare [administrative]

proceedings a nullity . . . it may be desirable . . . to have some form of judicial

review . . . at an early stage.").

Moreover, the Appointments Clause claim involves loss of a

constitutional right, as to which this Court presumes irreparable harm. App. Br. at

21. The SEC asks to limit this rule to "alleged deprivations of personal

constitutional rights under the First and Eighth Amendments." SEC Br. at 37 n.5.

10 In the Timbervest matter, the Commission ordered the Division of Enforcement

to file a brief addressing the Appointments Clause issue and any remedies available to the Commission if it finds a constitutional violation. Timbervest, LLC, Admin. Proc. No. 3-15519 (May 27, 2015) (Order Requesting Additional Submissions). In response, the Director of Enforcement personally signed a brief urging the Commission not to consider any fix to any Appointments Clause defect in the ALJ program. Timbervest, LLC, Admin. Proc. File No. 3-15519 (July 2, 2015) (Division of Enforcement's Memorandum of Law in Response to the Commission's May 27, 2015 Order Requesting Supplemental Briefing).

11

But, as the Supreme Court said in Free Enterprise, "[i]f the Government's point is

that an Appointments Clause or separation-of-powers claim should be treated

differently than every other constitutional claim, it offers no reason and cites no

authority why [this] might be so." 561 U.S. at 491 n.2; see also id. at 513

(separation-of-powers violation may create "here-and-now" injury that can be

remedied in court). The structural, constitutional flaw in the approaching SEC

ALJ trial does not pose the type of harm that can be remedied ex post by the

payment of monies between private litigants. See Duka, slip op. at 2 ("Without an

injunction, Plaintiff would not only be forced into an unconstitutional proceeding,

but would be unable to recover monetary damages from this harm as the SEC

possesses sovereign immunity.").11

Additionally, the harm from the imminent ALJ trial is real and

serious, not only for Ms. Tilton and Patriarch, but also for the Zohar Funds, their

portfolio companies (with tens of thousands of employees) and their investors.

Ms. Tilton described these harms in an affidavit filed in the district court, and the

11 One who faces a prospective unconstitutional trial over her specific objection is

potentially in a different situation from one who has already endured a completed unconstitutional trial without objection. See Wellness Int'l Network, Ltd. v. Sharif, 135 S. Ct. 1932 (2015) (upholding trial of bankruptcy claim against challenge under U.S. Constit., art III in absence of objection). Ms. Tilton and Patriarch are obviously in the former category.

12

SEC did not challenge those facts. (A-37). The constitutional harm translates to

very personal risk and damage to a great many people, warranting injunctive relief.

4. Finally, the SEC cites a series of cases in which circuit courts

exercised mandamus power to prevent lower courts from interfering with exclusive

circuit court review. SEC Br. at 21-22. These cases do not urge circuit courts to

decline review, and thus do not support the SEC's arguments here. In citing these

cases, the SEC seems to be asking this Court to consider this case through the lens

of its mandamus power. But, even if this Court accepted this invitation, the Court

would issue the very same injunction against the unconstitutional ALJ trial. See,

e.g., In re City of N.Y., 607 F.3d 923, 929 (2d Cir. 2010) (exercising mandamus to

resolve a "'novel and significant question[] of law'" that "'will aid in the

administration of justice'" (citation omitted)); In re SEC ex rel. Glotzer, 374 F.3d

184 (2d Cir. 2004) (granting SEC's request for mandamus). In other words, by

invoking mandamus cases, the SEC merely provides another avenue for this Court

to resolve Patriarch's claim now.12

In the end, the district court was wrong to disclaim jurisdiction. The

decision below should be reversed. The SEC does not dispute that this Court, upon

12 When the standards for mandamus have been met, this Court has not hesitated

to construe a notice of appeal as a petition for mandamus relief. See Hamilton v. Aetna & Cas. Co., 5 F.3d 642 (2d Cir. 1993).

13

finding jurisdiction, has discretion to reach the merits of Patriarch's Appointments

Clause claim. SEC Br. at 36. Yet the SEC wants a remand to the district court for

a decision on the Appointments Clause claim and an injunction. The SEC's

preference for delay is curious indeed. It is impossible to square the delay of such

a remand with (1) the cloud of error hovering over the SEC ALJ program after Hill

and Duka; (2) the multiplying litigations requiring briefing of these issues before

multiple district courts and circuit court panels, and (3) the fact that Patriarch's trial

on October 13, 2015 is just one of many SEC ALJ trials scheduled to commence in

coming months. Guidance from this Court is needed now.

II.

THE SEC ALJ IS AN INFERIOR OFFICER WHO WOULD PRESIDE UNCONSTITUTIONALLY AT TRIAL ON OCTOBER 13, 2015

The SEC offers various arguments as to why SEC ALJs are mere

employees not subject to the Appointments Clause. Each argument is without

merit.

1. The SEC suggests deference to an alleged longstanding practice

of Congress to treat SEC ALJs as rank-and-file civil servants. But the history

lesson in the SEC's brief is wrong. Section 21 of the Securities Act of 1933 strictly

limited who might preside at an SEC hearing as follows: "All hearings shall be

public and may be held before the Commission or an officer or officers of the

Commission designated by it . . . ." 15 U.S.C. § 77u (emphasis added).

14

Unchanged for eighty-two years, § 21 is the judgment of Congress that only

"officers" can substitute for Commissioners to preside at an SEC hearing.

Congress did not impliedly repeal § 21 when it empowered each "agency" to

appoint the newly defined position of hearing examiner (later changed to

"administrative law judge[]"). Administrative Procedure Act ("APA"), 5 U.S.C. §

3105. The APA did not specify who on behalf of an agency would exercise the

power to appoint, a question left to variation among departments. Thus, when

creating the Department of Education in 1978, Congress assigned to the Secretary

of Education (a "Head of Department") the power to appoint ALJs, adding that this

choice was "in accordance with" the APA. 20 U.S.C. § 1234(b) ("The

administrative law judges . . . shall be appointed by the Secretary in accordance

with section 3105 of Title 5."); see Sec'y of Educ. Review of Admin. Law Judge

Decisions, 15 Op. O.L.C. 8, 14 (1991) (Department of Education ALJs are

appointed in the manner of inferior officers).13

13 The SEC observes that it employs only five of approximately 1,600 ALJs

serving in federal agencies. SEC Br. at 41. As the Department of Education illustrates, these agencies have various ALJ programs with unique features and frameworks potentially relevant to analysis under the Appointments Clause. For example, more than 1,200 ALJs review public benefits claims for the Social Security Administration; they do not conduct adversary hearings that are anything like an SEC ALJ trial of alleged securities violations. Patriarch's Appointments Clause claim is specific to the powers exercised by SEC ALJs.

15

The SEC is incorrect when it claims that "Congress gave no indication

that it meant to elevate ALJs' status above that of [other agency personnel]." SEC

Br. at 39. On the contrary, numerous statutory provisions treat ALJs differently

from other agency employees, including in definitional sections. See, e.g., 5

U.S.C. § 4301(2)(D) ("'[E]mployee' means an individual employed in or under an

agency, but does not include . . . an administrative law judge . . . ."); see also 5

U.S.C. § 7521 (providing for specific disciplinary procedures for ALJs compared

to other agency employees). Indeed, the 1947 Attorney General's Manual on the

Administrative Procedure Act cited by the SEC refers to ALJs as "subordinate

officers." U.S. Dep't of Justice, Attorney General's Manual on the Administrative

Procedure Act at 86 (1947).14 Congress has made ALJs a breed apart by crafting a

unique set of civil service rules for them. See Ramspeck v. Fed. Trial Exam'rs

Conference, 345 U.S. 128, 132 (1953) ("'a special class of semi-independent

subordinate hearing officers'" (citation omitted)); see also U.S Gen. Accounting

Office, Administrative Law Judges: Appointment of Women and Social Security

Administration Staff Attorneys 1 (Oct. 1988) ("Unlike most other employees in the

14 Available at http://archive.law.fsu.edu/library/admin/

attorneygeneralsmanual.pdf.

16

civil service, ALJs are not subject to a probationary period and are exempt from

agency performance appraisals.").15

Even if the SEC were correct that the statutory scheme indicated that

Congress intended for ALJs to be treated as mere employees (which it does not),

the intention of Congress is not controlling. In Department of Transportation. v.

Association of American Railroads, 135 S. Ct. 1225 (2015), the Supreme Court

recently considered whether Amtrak qualified as a government entity for purposes

of the Appointments Clause in the face of a clear statutory indication that Amtrak

was "'not a department, agency, or instrumentality of the United States

Government.'" 135 S. Ct. at 1233 (citing 49 U.S.C. §§ 24301(a)(2)-(3)).

Nonetheless, the Court held that Amtrak was a government entity for purposes of

the Appointments Clause, and that "'it [was] not for Congress to make the final

determination of Amtrak's status as a Government entity for purposes of

determining the constitutional rights of citizens affected by its actions.'" Id.

(quoting Lebron v. Nat'l R.R. Passenger Corp., 513 U.S. 374, 375 (1995)).

2. As anticipated in Patriarch's opening brief, the SEC relies

heavily on the D.C. Circuit's decision in Landry v. FDIC, 204 F.3d 1125 (D.C. Cir.

2000), for the proposition that only officers who can render a "final" decision for

15 Available at http://archive.gao.gov/d17t6/137128.pdf.

17

an agency can qualify as inferior officers under the Appointments Clause. Yet the

SEC fails to address the unequivocal Supreme Court and Second Circuit

precedents cited by Patriarch that expressly reject such a conclusion. App. Br. at

40-43. Instead, the SEC focuses on the fact that decisions of SEC ALJs at times

are subject to review by the Commission. SEC Br. at 44. However, the Supreme

Court has recognized that one key characteristic of inferior officers is that their

decisions are subject to a degree of oversight by other executive branch officials –

which is what renders them "inferior" rather than "principal" officers for purposes

of the Appointments Clause. See Edmond v. United States, 520 U.S. 651, 662-63

(1997) ("Whether one is an 'inferior' officer depends on whether he has a

superior . . . ."); see Brief for the United States at 32, Free Enter. Fund v. Pub. Co.

Accounting Bd., 561 U.S. 477 (2010) No. 08-861, 2009 WL 3290435, at *32.

("[T]he Board's inability to render a final decision on behalf of the Executive

Branch unless 'permitted to do so by other Executive Officers' is itself indicative of

inferior, not principal, officer status.") (citation omitted) (emphasis added).

While the SEC cites a handful of instances in which the Commission

has reviewed the initial decision of an SEC ALJ sua sponte over the past twenty-

five years, this in no way demonstrates that such a review is conducted in every

instance. Most initial decisions by SEC ALJs become the final decision of the

Commission following the issuance of a boilerplate notification of finality, which

18

is issued not by the Commission itself but rather by its general counsel pursuant to

delegated authority. App. Br. at 39. Under its own internal regulations, the

Commission chooses to review factual issues resolved by the SEC ALJ only when

they are "clearly erroneous." 17 C.F.R. § 201.411(b)(2)(ii)(A). And the deference

afforded to the findings of SEC ALJs has been acknowledged by the Commission

itself in multiple decisions. See, e.g., In re Clowson, SEC Release No. 48143,

2003 WL 21539920, at *2 (July 9, 2003) ("We accept a fact finder's credibility

finding, absent overwhelming evidence to the contrary . . . ."); In re Pelosi,

Investment Advisors Act Release No. 3805, 2014 WL 1274715, at *2 (Mar. 27,

2014) (considerable weight given to the determination of SEC ALJs). 16

3. Finally, certain recent public actions of the SEC relating to its

ALJ program powerfully illustrate the fundamental significance of the

Appointments Clause issue here. On May 27, 2015, the Commission directed the

Division of Enforcement to provide an affidavit explaining the hiring process for

an SEC ALJ and for the Chief SEC ALJ. Timbervest, LLC, Admin. Proc. File No.

16 In its brief, the SEC cites the 1947 Attorney General's Manual on the

Administrative Procedure Act for the proposition that SEC ALJ decisions are merely "advisory in nature." SEC Br. at 39. The SEC cited the same provision in its filings in Timbervest, but Judge May found that the SEC had "taken the Attorney General's statement out of context," and that the cited section of the report related to ALJ responsibilities that did not depend on factual issues or credibility determinations. Timbervest, LLC v. SEC, No. 1:15-CV-2106-LMM, slip op. at 26 (N.D. Ga. Aug. 4, 2015).

19

3-15519 (May 27, 2015) (Order Requesting Additional Submissions).17 The

Division submitted such an affidavit regarding the SEC ALJ but could not locate

data regarding the Chief SEC ALJ. Timbervest, LLC, Admin. Proc. File No. 3-

15519 (June 4, 2015) (Notice of Filing).18 Thereafter, the SEC ALJ issued a

correction because the Division had not accurately described the manner in which

he had come to be hired by the SEC.19 Timbervest, LLC, Admin. Proc. File No. 3-

15519 (June 23, 2015) (Notice).20 On June 4, 2015, the Commission sought to

examine an allegation of bias and institutional pressure lodged against an SEC ALJ

by requesting a voluntary affidavit from the ALJ on such matters. Timbervest,

LLC, Admin. Proc. File No. 3-15519 (June 4, 2015) (Order Concerning Additional

Submission and Protective Order).21 The SEC ALJ declined to provide the

requested affidavit. On June 30, 2015, the Commission directed its Inspector

General to conduct an investigation into whether there are pressures and bias in the

17 Available at http://www.sec.gov/litigation/opinions/2015/ia-4096.pdf. 18 Available at http://www.sec.gov/litigation/apdocuments/

3-15519-event-139.pdf. 19 This institutional uncertainty on such a basic issue of how the SEC ALJs were

hired rebuts the notion in the SEC's brief that the SEC has potential expertise to offer the courts on the SEC ALJs. SEC Br. at 35.

20 Available at https://securitiesdiary.files.wordpress.com/2015/06/sec-june-23-notice-in-timbervest-administrative-proceeding.pdf.

21 Available at http://www.sec.gov/litigation/opinions/2015/ia-4103.pdf.

20

SEC ALJ program. Office of Inspector General, U.S. Securities and Exchange

Commission, Case No. 15-ALJ-0482-I (Aug. 7, 2015) (Interim Report of

Investigation).22 The Inspector General provided the Commission with an interim

report, but his investigation is continuing. Id.

If the Commissioners had exercised their constitutional responsibility

to select and appoint the SEC ALJs, would they have needed to ask the Division of

Enforcement to find out how the ALJs came to occupy their seats as judges?

Would the Commission have needed to ask an ALJ for an affidavit on the question

of his and his colleagues' pressures and bias? Would the Commission have needed

to launch an Inspector General inquiry into its own ALJ program? These questions

reflect the structural and institutional importance of the Appointments Clause. The

purpose of the Clause is to prevent the diffusion of power and accountability. Free

Enter., 561 U.S. at 479. Ignoring the Clause risks power and accountability

slipping anonymously into agency bureaucracy.

22 Available at http://www.sec.gov/oig/reportspubs/

oig-sec-interim-report-investigation-admin-law-judges.pdf.

21

CONCLUSION

For the foregoing reasons, Patriarch respectfully requests that this

Court reverse the decision of the district court and enjoin the trial before the SEC

ALJ, which is scheduled to commence October 13, 2015.

Dated: August 14, 2015 New York, New York

Respectfully submitted, /s/ Christopher J. Gunther

David M. Zornow Christopher J. Gunther SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP Four Times Square New York, New York 10036 (212) 735-3000 Susan E. Brune MaryAnn Sung BRUNE & RICHARD LLP One Battery Park Plaza New York, New York 10004 (212) 668-1900 Attorneys for Plaintiffs-Appellants

22

CERTIFICATE OF COMPLIANCE WITH RULE 32(a)

1. This brief complies with the type-volume limitation of Fed. R. App. P.

32(a)(7)(B) because this brief contains 5,189 words, excluding the parts of

the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii).

2. This brief complies with the type face requirements of Fed. R. App. P.

32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6) because

this brief has been prepared in a proportionally spaced typeface using

Microsoft Word 2010, in 14-point font size, Times New Roman.

Dated: August 14, 2015 New York, New York

Respectfully submitted, /s/ Christopher J. Gunther

David M. Zornow Christopher J. Gunther SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP Four Times Square New York, New York 10036 (212) 735-3000 Susan E. Brune MaryAnn Sung BRUNE & RICHARD LLP One Battery Park Plaza New York, New York 10004 (212) 668-1900 Attorneys for Plaintiffs-Appellants