EASTERN DISTRICT OF WISCONSIN LAURIE A. BEBO, SECURITIES ...blogs.reuters.com/alison-frankel/files/2015/03/bebovsec-beboreply.pdf · Ms. Bebo has demonstrated a likelihood of success

31234330

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF WISCONSIN

LAURIE A. BEBO,

Plaintiff,

v. SECURITIES AND EXCHANGE COMMISSION,

Defendant.

Case No. 15-cv-00003

REPLY BRIEF IN SUPPORT OF

MOTION FOR PRELIMINARY INJUNCTION

REINHART BOERNER VAN DEUREN S.C. Mark A. Cameli WI State Bar ID No. 1012040 [email protected] Ryan S. Stippich WI State Bar ID No. 1038045 [email protected] Lisa Nester Kass WI State Bar ID No. 1045755 [email protected] 1000 North Water Street, Suite 1700 Milwaukee, WI 53202 Milwaukee, WI 53201-2965 Telephone: 414-298-1000 Attorneys for Plaintiff Laurie A. Bebo

Case 2:15-cv-00003-RTR Filed 02/18/15 Page 1 of 32 Document 21

31234330 i

TABLE OF CONTENTS

INTRODUCTION ...........................................................................................................................1

I. This Court Has Subject Matter Jurisdiction Under 28 U.S.C. § 1331 to Hear Ms. Bebo's Constitutional Challenge to an Act of Congress. .....................................2

II. Ms. Bebo Has Demonstrated a Likelihood of Success on the Merits of Her Claims. ...............................................................................................................................10

A. Section 929P(a) of Dodd-Frank is unconstitutional on its face. ............................10

1. Section 929P(a) of Dodd-Frank, which punishes a citizen for her anticipated exercise of her civil jury trial right, is unconstitutional. .........................................................................................11

2. Section 929P(a) of Dodd-Frank, which grants the SEC unbridled authority to arbitrarily determine whether a citizen receives her jury trial right, violates Fifth Amendment equal protection. ....................................................................13

3. The SEC's administrative proceedings violate Ms. Bebo's right to procedural due process. .................................................................17

B. The SEC's administrative proceedings, governed by ALJs, violate Article II of the Constitution. .................................................................................21

1. SEC ALJs are inferior officers for purposes of Article II. .........................21

2. The reasoning of Free Enterprise applies with equal force to the SEC ALJs' removal scheme. ............................................................25

III. Because Ms. Bebo Will Suffer Irreparable Harm if Her Request for a Preliminary Injunction is Denied, and That Harm Far Outweighs Any Harm the SEC Might Suffer, this Court Should Preliminarily Enjoin the SEC's Administrative Proceedings. ...................................................................................27

A. Ms. Bebo faces irreparable harm if she is denied an injunction. ...........................27

B. The balance of the equities weighs in Ms. Bebo's favor. .......................................29

CONCLUSION ..............................................................................................................................30


31234330 1

INTRODUCTION

Left with little substantive opposition to Ms. Bebo's Motion for Preliminary Injunction,

the SEC resorts to evading the inevitable by attempting to delay it—namely, it argues there is a

lack of subject matter jurisdiction for this Court to hear this matter. And it does so only by

recasting the action to shoehorn it into seemingly favorable authority for its position.

The fatal flaw of the SEC's claim that this Court lacks subject matter jurisdiction is that it

conflates the review of an administrative agency's action with that of an Act of Congress. The

SEC is asking this Court to conclude that it is the role of the Executive Branch, not the Judiciary,

to review the constitutionality of a Congressional Act in the first instance—itself an argument

antithetical to the Constitution's separation of powers. But federal district courts have original

jurisdiction of all civil actions arising under the Constitution, and the SEC points to no authority

establishing that this jurisdiction has been limited to exclude constitutional challenges to Section

929P(a) of Dodd-Frank, the federal law Ms. Bebo challenges here.

Indeed, for actions seeking the "affirmance, modification, enforcement, or setting aside"

of "Final Commission orders" and "Commission rules," Congress has taken away jurisdiction

from the federal district courts and vested it instead with the federal courts of appeal following

review in SEC administrative proceedings. 15 U.S.C. § 78y. But Ms. Bebo is not seeking

review of an order or rule of the Commission. Nor does she seek review of a federal statute she

has been charged with violating. Rather, Ms. Bebo's claims here seek review, for constitutional

defects, of the federal statute promulgated by Congress from which the SEC draws its authority

to institute enforcement actions in the first place. Ms. Bebo's claims seek review of the statute

enabling the proceedings themselves and the constitutionality of administrative proceedings

governed by ALJs. The administrative review scheme of § 78y does not encompass such

claims—meaning neither the ALJ, the Commission, nor, subsequently, the Court of Appeals can


2

or will hear these claims—and therefore the district court must exercise its original jurisdiction to

hear them. Without this Court's jurisdiction, Ms. Bebo will have no remedy at all for the

constitutionally infirm federal laws and practices she challenges here.

This Court not only has subject matter jurisdiction to hear this case, but it should grant

the requested relief by preliminarily (and permanently) enjoining the SEC from acting upon an

unconstitutional provision of law, thus violating Ms. Bebo's rights to due process and equal

protection in an unconstitutional proceeding. Having put virtually all of its eggs in the subject

matter jurisdiction basket, the SEC's attempts to support the constitutionality of Dodd-Frank

Section 929P(a) fall short, and despite the SEC's argument to the contrary, administrative

proceedings governed by ALJs protected by multiple layers of tenure do not pass constitutional

muster just because they have been doing it for a long time.

Ms. Bebo has demonstrated a likelihood of success on the merits of her claims, and

because Ms. Bebo will suffer irreparable harm if her request for a preliminary injunction is

denied, with that harm far outweighing any harm the SEC might suffer, this Court should

preliminarily enjoin the SEC's administrative proceedings.

ARGUMENT

I. This Court Has Subject Matter Jurisdiction Under 28 U.S.C. § 1331 to Hear Ms.

Bebo's Constitutional Challenge to an Act of Congress.

Federal district courts have "original jurisdiction of all civil actions arising under the

Constitution, laws, or treaties of the United States." 28 U.S.C. § 1331. Under this provision, it is

"established practice for [the U.S. Supreme Court] to sustain the jurisdiction of federal courts to

issue injunctions to protect rights safeguarded by the Constitution." Bell v. Hood, 327 U.S. 678

(1946). "In light of § 1331, the question is not whether Congress has specifically conferred

jurisdiction, but whether it has taken it away." Elgin v. Dep't of Treasury, 132 S. Ct. 2126, 2141


3

(2012) (Alito, J. dissenting) (citing Whitman v. Dep't of Trans., 547 U.S. 512, 514 (2006) (per

curiam)). The SEC points to no authority establishing that the jurisdiction of federal district

courts has been limited to exclude constitutional challenges to Section 929P(a) of Dodd-Frank,

the federal law Ms. Bebo challenges here.

In its brief, the SEC cites case law establishing that orders of the Commission or other

agency action are reviewable only in the courts of appeals. See, e.g., Def.'s Br. 9–10 (citing

Mister Disc. Stockbrokers, Inc. v. SEC, 768 F.2d 875, 876 (7th Cir. 1985) ("[F]inal orders of the

Commission are reviewable only in the . . . [c]ourts of [a]ppeals."); Allan v. SEC, 577 F.2d 388,

391-92 (7th Cir. 1978) (affirming that the district court lacked jurisdiction over a suit seeking to

"interfere in a Commission administrative proceeding" because "specific legislation (15 U.S.C. §

78y(a)(1)) cover[s] appeals from SEC actions."); Maxon Marine, Inc. v. Dir., Office of Workers’

Comp. Programs, 39 F.3d 144, 146 (7th Cir. 1994) ("When a statute specifies a procedure for

obtaining judicial review of a federal agency's actions, that procedure normally is exclusive, even

if the statute does not say" so.)). Indeed, for actions seeking the "affirmance, modification,

enforcement, or setting aside" of "Final Commission orders" and "Commission rules," Congress

has taken away jurisdiction from the district courts and vested it instead with courts of appeal

following review in SEC administrative proceedings. 15 U.S.C. § 78y.

But Ms. Bebo is not seeking review of an order or rule of the Commission. Nor does she

seek review of a federal statute she has been charged with violating. Rather, Ms. Bebo seeks

review, for constitutional defects, of the federal statute promulgated by Congress from which the

SEC draws its authority to institute enforcement actions. Ms. Bebo seeks review of the statute

enabling the proceedings themselves. Though the SEC likens this case to Elgin, in which the

Supreme Court decided that a federal district court did not have jurisdiction to hear the plaintiff's


4

constitutional challenge to a statute administered by an agency, that case is distinguishable from

the instant one. The facts of this case are much more akin to a different Supreme Court case

involving a district court's jurisdiction to consider the constitutionality of "the manner in which

the [agency's] entire program is being implemented." McNary v. Haitian Refugee Ctr., Inc., 498

U.S. 479, 488 (1991).

The McNary Court rejected an argument advanced by the Immigration and Naturalization

Service ("INS") that the judicial review provisions covering the denial of individual Special

Agricultural Worker ("SAW") applications, which prescribed exhaustion of administrative

remedies prior to review in the federal courts of appeals, barred the plaintiffs from broadly

challenging in federal district court the constitutionality of INS procedures for implementing the

SAW program. Id. at 494. The Court emphasized that the relevant statutory review provision

applied to "direct review of individual denials of SAW status," but did not preclude district court

jurisdiction over "general collateral challenges to unconstitutional practices and policies[.]" Id. at

492. The Court recognized that "the individual respondents in this action do not seek a

substantive declaration that they are entitled to SAW status. Nor would the fact that they prevail

on the merits of their purportedly procedural objections have the effect of establishing their

entitlement to SAW status." Id. at 495. Rather, if the plaintiffs were successful in their challenge

to INS procedures they would be entitled to have the merits of their SAW applications

considered under proper and fair procedures. Id.

The Court has since reaffirmed its holding in McNary, declaring in Reno v. Catholic

Social Services, Inc. that a statutory provision governing the review of single agency actions

does not apply to challenges to "a practice or procedure employed in making [numerous]

decisions." 509 U.S. 43, 56 (1993) (internal citations omitted); see also Free Enterprise Fund v.


5

Pub. Co. Accounting Oversight Bd., 561 U.S. 477, 490 (2010) ("Petitioners' general challenge to

the Board is 'collateral' to any Commission orders or rules from which review might be sought.")

(citing McNary, 498 U.S. at 491–92). Numerous courts in this and other circuits have found the

same. See, e.g., Mace v. Skinner, 34 F.3d 854, 859, n.4 (9th Cir. 1994) (vacating the district

court's decision that it did not have jurisdiction to hear a challenge to agency practices because

"Mace's claims, like those asserted in McNary, are not based on the merits of his individual

situation, but constitute a broad challenge to allegedly unconstitutional FAA practices" and "all

but one of Mace's claims . . . involve broad constitutional issues rather than specific claims

arising out of the facts of his individual case"); Reardon v. United States, 947 F.2d 1509, 1514

(1st Cir. 1991) (en banc) (in upholding district court's exercise of jurisdiction over constitutional

challenge to CERCLA statute despite statute's jurisdictional bar governing review of remedial

actions, emphasizing that the case involved a challenge to statute itself as opposed to "merits of

any particular removal or remedial action"); Am. Coal Co. v. Mine Safety & Health Admin., No.

08-CV-0814-MJR, 2010 WL 653113, at *5–6 (S.D. Ill. Feb. 19, 2010) (finding it had jurisdiction

because American Coal's "pattern and practice" claim was "outside administrative jurisdiction

and wholly collateral to the Mine Act's review provisions").1

In fact, fewer than two months ago the Sixth Circuit considered "[w]hich federal courts—

district courts or courts of appeals—may review [a litigant's] constitutional claims" challenging

the overall procedures and processes of a federal agency, and found that the litigant's proper

route to review was not appealing up to the court of appeals after first participating in agency

1 Even in the primary case on which the SEC relies, Thunder Basin Coal Co. v. Reich, the Supreme Court reaffirmed its holding in McNary that broad constitutional challenges to the program as a whole are reviewable in federal district court. 510 U.S. 200, 213 (1994). In that case, the Court held the district court did not have jurisdiction to hear the petitioner's claims because they "at root require interpretation of the parties' rights and duties under § 813(f) and 30 CFR pt. 40, and as such arise under the Mine Act and fall squarely within the Commission's expertise." Id. at 214. Such is not the case here. Ms. Bebo's claims require interpretation of Section 929P(a) of Dodd-Frank, which is not a federal law the SEC administers and is not within the SEC's expertise.


6

proceedings, but that he must bring his constitutional challenge in federal district court. Burdue

v. F.A.A., 774 F.3d 1076, 1078, 1083 (6th Cir. 2014) ("We … decline to review the merits of

Burdue's constitutional claims because they should be … brought in a district court action ….").

The court explained that "Burdue's constitutional claims are broad challenges to FAA procedures

and are not contingent on the merits of a particular FAA order. His claims allege procedural due

process violations, including a lack of 'proper notice and an opportunity to be heard, or any

meaningful due process procedural safeguards on appeal[.]'" Id. at 1084. Such claims fall

"outside the circuit-court exclusivity provision" of the statute conferring jurisdiction on the FAA

(and, following the agency proceedings, a court of appeals); therefore the court held, relying on

McNary, that Burdue must bring his case in federal district court. Id.2

Courts interpreting McNary have focused on three points the Supreme Court found

counseled in favor of jurisdiction: (1) the plaintiffs' claims did not fall within the language of the

provision of the statute that was said to preclude district court jurisdiction, (2) the plaintiffs'

challenge did not go to the merits of their applications pending in the agency, and (3) absent

jurisdiction in the district court, the plaintiffs would not have been able to obtain any meaningful

judicial review. See, e.g, Massieu v. Reno, 91 F.3d 416, 423 (3d Cir. 1996) (interpreting

McNary); Mace, 34 F.3d at 859 (same). All three of those factors counsel in favor of jurisdiction

in this case as well.

2 This position—that the court of appeals does not have jurisdiction to hear a claim that falls outside of the statutory grant of review provided in the statute enabling agency proceedings—is also supported by other Supreme Court case law in addition to McNary. In Cheng Fan Kwok, the Supreme Court considered whether the court of appeals could hear the claim of a deportee who proceeded through the agency, received a deportation order, requested a stay of the deportation order and then appealed the denial of the stay to the court of appeals. 392 U.S. 206 (1968). The deportee sought review in the court of appeals under the applicable statutory review scheme. But the Supreme Court held that the court of appeals lacked jurisdiction because the deportee "did not attack the deportation order itself but instead [sought] relief not inconsistent with it." Id. at 213. Here, similarly, if Ms. Bebo was to receive an unfavorable decision before the ALJ and the Commission on the merits of the charges that she violated the Exchange Act, she could appeal that decision to the court of appeals, but her claim regarding the constitutionality of Dodd-Frank would be wholly irrelevant to the merits of that decision.


7

First, like the plaintiffs in McNary, Ms. Bebo presents a constitutional challenge to a

federal statute that governs agency procedures, jurisdiction for which is not limited to

administrative review. The statute the SEC claims removes jurisdiction from the federal district

courts in favor of the SEC administrative proceedings, § 78y, only precludes district court

jurisdiction for claims related to "Final Commission orders" and "Commission rules." 15 U.S.C.

§ 78y(a), (b). Of course, Section 929P(a) of the Dodd-Frank Act is not a "Final Commission

order" or "Commission rule," and therefore § 78y does not preclude this Court's jurisdiction to

hear Ms. Bebo's case. In fact, the ALJ presiding over Ms. Bebo's administrative proceeding has

acknowledged, in a past proceeding, his "grave doubts" that he has jurisdiction to hear a

constitutional claim like Ms. Bebo's. In re David F. Bandimere & John O. Young, Exchange

Act Release No. 507, 2013 WL 5553898, at *72 (A.L.J. Oct. 8, 2013).3

Second, Ms. Bebo's challenge, like that of the McNary plaintiffs, does not go to the

merits of the charges pending against her in the administrative proceeding the SEC has

commenced. Ms. Bebo does not seek a finding that she has not committed violations of federal

securities laws. Instead, just like the plaintiffs in McNary, she seeks to have the merits the SEC's

charges against her considered under proper and fair procedures. McNary, 498 U.S. at 495. For

this reason, Ms. Bebo's claims are distinguishable from the claims of the petitioners in Elgin and

Altman, where the respective courts decided the petitioners' claims must be brought in agency

proceedings, not federal district court. The Elgin Court noted that "[a]s evidenced by their

district court complaint, petitioners' constitutional claims are the vehicle by which they seek to

reverse the removal decisions, to return to federal employment, and to receive the compensation

3 Further, numerous courts have held that "an administrative agency is generally considered powerless to adjudicate the constitutionality of its governing statute." Squillacote ex. rel. N.L.R.B. v. Int'l Bhd. of Teamsters, Local 344, 561 F.2d 31, 38 (7th Cir. 1977) (citing Weinberger v. Salfi, 422 U.S. 749, 764, 765 (1975); Oestereich v. Selective Serv.

Bd., 393 U.S. 233, 242 (1968) (Harlan, J., concurring); Public Utils. Comm'n v. United States, 355 U.S. 534, 539 (1958)).


8

they would have earned but for the adverse employment action." Elgin, 132 S. Ct. at 2139-40.

Similarly, the Second Circuit in Altman held (in a very short opinion) that the petitioner was

seeking an order "compelling the SEC to vacate its decision sanctioning him with a lifetime ban

from practicing before the Commission." Altman v. S.E.C., 687 F.3d 44, 45 (2d Cir. 2012).

Conversely, Ms. Bebo's complaint does not contest (or even mention) the merits of the

enforcement action against her; she seeks only to have that enforcement action tried in a fair

forum. The Commission misses the mark completely when it argues that "here, only the

Commission can issue the agency's final determination of whether [Ms. Bebo] violated the

Exchange Act." Def.'s Br. 12. Simply, Ms. Bebo is not challenging in this lawsuit the merits of

the Commission's charge that she violated the Exchange Act.

Third, absent jurisdiction in a federal district court, Ms. Bebo will not be able to obtain

any meaningful judicial review of her constitutional challenge to Section 929P(a) of Dodd-

Frank. Though the courts of appeals eventually would be available to Ms. Bebo after proceeding

before the SEC ALJ and then the Commission, a court of appeals will not "be in a position to

provide meaningful review of the type of claims raised in this litigation." McNary, 498 U.S. at

497. The McNary Court explained that administrative proceedings regarding individual claims

are not conducive to the collection of evidence necessary for a constitutional attack of the

administrative process as a whole. Id. "Not only would a court of appeals reviewing an

individual [case] therefore most likely not have an adequate record as to the pattern of [the

agency's] allegedly unconstitutional practices, but it also would lack the factfinding and record-

developing capabilities of a federal district court." Id. Indeed it "seem[ed] plain to" the McNary

Court "that restricting judicial review to the courts of appeals as a component of the review of an

individual [case pending before the agency] is the practical equivalent of a total denial of judicial


9

review of generic constitutional and statutory claims." Id.; see also Am. Coal Co., 2010 WL

653113, at *5 ("Evidence in [an agency proceeding] is limited to that which is relevant to the

individual citation in question. American Coal could not fully present its [constitutional] claim in

a citation contest, as evidence irrelevant to a particular citation could easily be relevant in

proving the issues raised here. For example, the existence of a quota would not be relevant to

proving whether a particular safety hazard existed. The limited jurisdiction and rules of

administrative review preclude meaningful review of American Coal's claims.").

Ms. Bebo cannot press her constitutional claims in the SEC administrative proceeding

that has been initiated against her—there are no procedures available to file counterclaims,

depose witnesses, fashion equitable remedies, or otherwise create a record to establish these

claims. Though Ms. Bebo has raised constitutional challenges in the administrative proceeding

as "affirmative defenses"—because that is the only procedural mechanism available for such an

argument and she must at least attempt to preserve a record—her constitutional challenges to

Dodd Frank and the SEC's operations pursuant to it are separate claims that do not go to the

merits of the Commission's charge that she violated the Exchange Act. Cf. United States v.

Armstrong, 517 U.S. 456, 463 (1996) ("A selective-prosecution claim is not a defense on the

merits to the criminal charge itself, but an independent assertion that the prosecutor has brought

the charge for reasons forbidden by the Constitution."). The administrative review scheme of

§ 78y does not entail such claims—meaning neither the ALJ, the Commission, nor, subsequently,

the court of appeals can or will hear these claims—and therefore the district court must exercise

its original jurisdiction to hear Ms. Bebo's claims. Without this court's jurisdiction, Ms. Bebo

will have no recourse to enjoin constitutionally infirm federal laws and practices.4

4 Even if this Court construes Ms. Bebo's claims (or any one of them) as a challenge to agency action, the administrative review scheme outlined in § 78y will not preclude this Court's jurisdiction. The Administrative


10

II. Ms. Bebo Has Demonstrated a Likelihood of Success on the Merits of Her Claims.

A. Section 929P(a) of Dodd-Frank is unconstitutional on its face.

The provision of Dodd-Frank that allows the SEC to choose whether to prosecute its

enforcement actions in federal district court, where the defendant is entitled to a jury trial and

application of the federal rules of evidence, or an administrative proceeding, where she has

neither of those things, violates the Fifth Amendment's guarantees of due process and equal

protection. Such violation "inheres in the terms of the statute," which is therefore

unconstitutional in all of its applications. Ezell v. City of Chi., 651 F.3d 684, 698 (7th Cir. 2011).

As applicable to Ms. Bebo's facial challenge to Section 929P(a) of Dodd-Frank on both

due process and equal protection grounds, the SEC's response concedes, as it must, a number of

critical points. First, the SEC does not dispute that pursuant to this provision of Dodd-Frank the

remedies it may seek are equivalent whether they are pursued in federal district court or an

administrative proceeding. Second, the SEC does not dispute Dodd-Frank grants the SEC the

sole, arbitrary, and unbridled discretion to choose the forum in which it seeks the same remedy

for the same conduct. Third, the SEC does not dispute that this arbitrary and wholesale transfer

Procedures Act, at § 702, provides a right of action in federal district court for persons aggrieved by agency action and waives the government's sovereign immunity for the same. 5 U.S.C. § 702. Section 702 does not waive sovereign immunity, though, "where a matter is statutorily committed to agency discretion or where another statute provides a form of relief which is expressly or impliedly exclusive." Sprecher v. Graber, 716 F.2d 968, 974 (2d Cir. 1983) (internal citations omitted). Under these circumstances, the test is whether "the 'statutory scheme' displays a 'fairly discernible' intent to limit jurisdiction and the claims at issue 'are of the type Congress intended to be reviewed within th[e] statutory structure.'" Free Enter. Fund, 561 U.S. at 489 (quoting Thunder Basin Coal Co., 510 U.S. at 207, 212). Applying that test, several other district courts have affirmed their jurisdiction to hear constitutional claims regarding ongoing SEC enforcement actions, ruling that because such evidence-based claims cannot be meaningfully litigated through the administrative process—or litigated at all—the APA does not preclude district court intervention. See, e.g., Arjent LLC v. SEC, 7 F. Supp. 3d 378, 383 (S.D.N.Y. 2014); Gupta v. SEC, 796 F. Supp. 2d 503, 513-14 (S.D.N.Y. 2011). Both Arjent and Gupta held that the Free Enterprise guidelines are no impediment to subject matter jurisdiction to entertain even "as applied" claims alleging equal protection violations in the conduct of ongoing SEC administrative proceedings, because these are "evidence-based" constitutional claims and "the SEC has no administrative procedure for raising such a claim." Arjent, 7 F. Supp. 3d at 384; accord Gupta, 796 F. Supp. 2d at 513-14 (the "SEC's administrative machinery does not provide a reasonable mechanism for raising or pursuing such a claim," as "no administrative record bearing on this claim will be developed for any federal appellate court to review").


11

of a citizen's jury trial right to the government is unique and unheard of within the administrative

state. In light of these concessions, it is not surprising that the SEC's response brief on the merits

of Ms. Bebo's constitutional claims relies on straw-man arguments.

1. Section 929P(a) of Dodd-Frank, which punishes a citizen for her

anticipated exercise of her civil jury trial right, is unconstitutional.

As set forth in Ms. Bebo's opening brief, Section 929P(a) establishes a process in every

charging decision where there is the potential for the government to retaliate for a citizen's

exercise, or anticipated exercise, of her Seventh Amendment right to a jury trial. Pl.'s Opening

Br. 17-22. As it is undisputed that the government may pursue the same remedies for the same

conduct in either forum, Dodd-Frank punishes the exercise of the jury trial right by granting

government prosecutors the sole power to withhold the citizen's right to a jury trial when the

SEC concludes the citizen would be advantaged by a jury trial or to grant the citizen a jury trial

when the SEC concludes a jury would view the citizen unfavorably. This process, which not

only discourages but disallows a person's assertion of her constitutional right to a jury, violates

due process. Id.

In response, the SEC makes the correct but irrelevant assertion that the Seventh

Amendment right to a jury is not available in administrative proceedings, and that Congress

could have committed all securities law enforcement actions to an administrative tribunal. This

is uncontroversial because Ms. Bebo recognized in her opening brief that the Atlas Roofing Court

concluded that there was no jury trial right in an administrative proceeding. Pl.'s Opening Br.

15. And of course, there is no dispute that Congress has not committed all enforcement actions

to the administrative tribunal, but instead granted the government prosecutor the unbridled

discretion to choose the forum.


12

More importantly, the SEC's entire argument is irrelevant because the logical jump that

"Congress properly could give the SEC the discretion to resolve some such matters in an

administrative tribunal and others in district court," see Def.'s Br. 16, is unsupported by any

authority, and is rather contradicted by the reasoning of the cases cited by Ms. Bebo in her

opening brief. In fact, the SEC cites no cases or other authority establishing that this type of

statutory regime has ever been approved by any court of law, or even exists anywhere else in the

administrative state.5

The unsupported argument put forth by the SEC is foreclosed by the Supreme Court's

decision in Blackledge v. Perry, 417 U.S. 21 (1974). In Perry, the Court found North Carolina's

law violated due process despite the fact that the state was not constitutionally required to

provide a jury at all in the circumstances presented. Id. at 26 n.4. The Court explained that even

though states are not "constitutionally required to establish avenues of appellate review of

criminal convictions . . . . it is now fundamental that, once established, these avenues must be

kept free of unreasoned distinctions that can only impede open and equal access to the courts."

Id. (internal quotation omitted).

The distinctions the SEC makes in choosing whether to bring its enforcement actions in

federal court or in administrative proceedings are at best "unreasoned," 6 and at worst based on

the improper decision to retaliate against a citizen for the anticipated exercise of her right to a

jury trial (or other arbitrary and capricious basis). In reality, the SEC will choose to bring an

enforcement action in an administrative proceeding when it views the defendant's case as

5 Thus it is unsurprising that no cases specifically reject this improper grant of authority on due process grounds.

6 For example, in a hearing related to injunctive relief requested in a similar (though not identical) matter, the SEC's counsel explained that Congress provided no standards governing the SEC's selection of an administrative forum to seek penalties and sanctions instead of proceeding with a traditional enforcement action in federal court. See discussion infra at 16–17.


13

presenting well in front of a jury and will only bring a case in federal district court where it

believes the jury will view the defendant unsympathetically.

The SEC does not dispute that, under Dodd-Frank, this type of analysis takes place at the

agency in every case. Indeed, the SEC seems entirely comfortable assessing the value of a

citizen's jury trial right in connection with plotting its litigation strategy. Def.'s Br. 17. The SEC

states a "respondent simply does not have a right to a jury" if it chooses to bring a case

administratively. Id. But this proves Ms. Bebo's point, and presumes the SEC's decision to strip

her right to a jury trial as a litigation tactic is appropriate in the first place. In the end, like a

government prosecutor hungry for a speedy conviction, the SEC off-handedly dismisses Ms.

Bebo's constitutional arguments and authority as a mere complaint "that the SEC will select the

venue that, in its estimation, will allow it to most effectively enforce the securities laws" and that

"effective enforcement of the law by the executive is a public good." Def.'s Br. 17. The Courts,

applying the Constitution, have set limits to "effective enforcement" and government over-reach

for over 200 years in appropriate cases. This is one of those cases.

2. Section 929P(a) of Dodd-Frank, which grants the SEC unbridled

authority to arbitrarily determine whether a citizen receives her jury

trial right, violates Fifth Amendment equal protection.

With its passage of Section 929P(a) of Dodd-Frank, Congress provided SEC prosecutors

absolutely no guidance in terms of which enforcement targets should be tried in administrative

proceedings and which should be tried in federal court. On the SEC's whim, any two

enforcement targets could be afforded vastly different procedural protections7 in their defense

7 The procedural protections available to enforcement targets prosecuted in federal court that are not available in administrative proceedings include, for example, the Federal Rules of Civil Procedure, the Federal Rules of Evidence, discovery, and, of course, the right to a jury. See In re John A. Carley, et al., Release No. 50954, 84 S.E.C. Docket 2165, 2005 WL 17992, at *2 (Jan. 3, 2005) ("[W]e have held repeatedly that our proceedings are not governed by the Federal Rules of Civil Procedure."); In the Matter of Laurie Jones Canady, Release No. 477, 59 S.E.C. Docket 1896, 1995 WL 408764, at *1 (July 6, 1995) ("[T]his agency is not bound by the Federal Rules of Evidence."); In re Narragansett Capital Corp. et al., Release No. 264, 52 S.E.C. Docket 417, 1985 WL 151506, at


14

against charges for the same securities violations, based on the same conduct, for which they

face the same penalties. As the Supreme Court cases described in Ms. Bebo's opening brief

establish, this arbitrary distinction is facially unconstitutional under the Fifth Amendment's equal

protection guarantee.

Those cases, which evaluated discriminatory statutes under the rational basis standard,

confirm that the SEC may not, consistent with the constitutional guarantee of equal protection,

"arbitrarily withhold … from some" the procedural safeguard of a jury trial that it makes

available to other citizens against whom it brings enforcement actions seeking civil penalties.

Cf. Baxstrom v. Herold, 383 U.S. 107, 111 (1966). Rational basis scrutiny requires some basis

for distinguishing between those who are differently treated, not merely, as the SEC supplies in

its brief, some basis for a statutory addition of SEC enforcement tools. See id. at 111–12 (equal

protection was violated because there was "no conceivable basis for distinguishing the

commitment of a person who is nearing the end of a penal term from all other civil

commitments.").

In its response, the SEC fails even to attempt to distinguish the cases cited in Ms. Bebo's

opening brief. Instead, the SEC makes several arguments that are not germane to Ms. Bebo's

equal protection claim under the applicable legal standard. First, the SEC asserts that Ms. Bebo's

claim has no merit because she did not allege Dodd-Frank makes distinctions based on a suspect

or quasi-suspect class. But, as noted, courts review claims like Ms. Bebo's under rational basis

scrutiny, and the government cannot demonstrate any rational basis for allowing certain persons

the procedural protections (including a jury trial) attendant to a federal district court proceeding

*4 (Oct. 4, 1985) (describing the "significant differences between federal practice, where wholesale discovery is available to the parties under the federal rules of civil procedure, and the Commission's Rules of Practice, where only limited 'discovery', discretionary with the presiding officer, is available").


15

while stripping those same rights from identically situated persons selected for the administrative

process.

The SEC's second irrelevant argument is that there are "several plausible policy reasons

undergird[ing] § 929P(a)" that the SEC speculates Congress "could" have considered in granting

the SEC this unprecedented authority.8 Def.'s Br. 18. But none of these post hoc policy

justifications—the SEC cites no evidence to conclude Congress actually considered any of

them—even relate to, let alone support, the arbitrary distinction the law allows prosecutors to

make between those who will receive the procedural benefits of a federal court case and those

who will not.

Like its other arguments in opposition to the equal protection claim, the SEC's policy

justifications are irrelevant under the applicable legal standard established by the cases relied

upon by Ms. Bebo in her opening brief. To pass muster under even the lowest level of

constitutional scrutiny, the "plausible policy reasons" for the statute must be relevant to the

distinctions the statute makes. Marshall v. United States, 414 U.S. 417, 422 (1974) ("[T]he

concept of equal protection as embodied in the Due Process Clause of the Fifth Amendment does

not require that all persons be dealt with identically, but rather that there be some rational basis

for the statutory distinctions made . . . .") (citations omitted); Baxstrom v. Herold, 383 U.S. 107,

111 (1966) (Equal protection requires "that a distinction made have some relevance to the

purpose for which the classification is made."); see also Hill v. Burke, 422 F.2d 1195, 1196 (7th

Cir. 1970) (calling the Baxtrom rule "well established"). The policy reasons the SEC posits in its

8 The three "plausible public policy reasons" the SEC says support Section 929P(a) are that Congress "could" "reasonably have believed," the SEC argues, that Section 929P(a) would "eliminate inefficiencies," "give the SEC an additional enforcement tool in order to speed resolution of suspected violations of the federal securities laws," or "utilize the agency's expertise and knowledge of the securities laws and industry practices." Def.'s Br. 18-19 (i.e. a thinly veiled argument that the government should be entitled to strip the rights of an accused to increase conviction rates—an extraordinary and frightening position).


16

brief have no relation to the authority Section 929P(a) provides to SEC prosecutors arbitrarily to

decide which enforcement targets will receive the procedural benefits of a federal court

prosecution.

The SEC's third irrelevant argument is that "numerous factors" go into the SEC's

enforcement decisions (though the SEC articulates none), and SEC prosecutors, like all

prosecutors, have broad discretion in making charging decisions. Def.'s Br. 18. Equal protection

is not violated, the SEC argues, when a prosecutor has the discretion to choose between various

statutes under which to charge the same conduct, even if one provides a substantially greater

sentence than the others. Id.

That is, of course, true, but those are not the facts here. Here, the SEC can choose

(without Congressional guidance) to charge the same conduct and seek the same remedy in either

federal district court, where the defendant can exercise her constitutional right to a jury, or in

administrative proceedings, where she cannot. As noted, the SEC concedes this scheme is

unprecedented among administrative agencies. Typically, more severe and punitive remedies are

only available in federal court where the citizen being prosecuted has greater procedural

protections. See Pl.'s Opening Br. 14 n.4 (describing the enforcement authority of the

Environmental Protection Agency and the Federal Trade Commission).

Moreover, the SEC has not set forth any of the supposed "numerous factors" that govern

its decisions. The only factor identified in the record (set forth in Ms. Bebo's opening brief) is

whether, in the estimation of the Commission in consultation with Division of Enforcement

attorneys, it would be advantageous to the government as a litigation tactic to file one forum as


17

opposed to the other.9 The SEC has never provided any other justification, admitting in another

case that it exercises unlimited discretion to determine the entitlement to a jury and the level of

due process to which identically-situated individuals will be subject: "To start with, Congress

gave the SEC two distinct paths that it can follow in pursuing a civil action: You can go into

Federal District Court; you can bring it in an administrative proceeding. It did not provide any

criteria as to when the Commission would or should do one versus the other. It's entirely left to

the Commission's discretion." Transcript of Motion for TRO at 66, Jarkesy v. SEC, No. 1:14-cv-

00114 (D.D.C. June 11, 2014), ECF No. 22 (SEC Attorney Samuel Forstein arguing).

Put simply, the Commission has set forth no legally permissible "rational basis for the

statutory distinctions made," as required by Fifth Amendment equal protection, because

Congress has not provided or implied any. Because the SEC cannot point to any rational basis

under Section 929P(a) for distinguishing between those who will be subject to administrative

proceedings and those who will be pursued, instead, in federal court, Section 929P(a) does not

provide equal protection under the law and is unconstitutional on its face.

3. The SEC's administrative proceedings violate Ms. Bebo's right to

procedural due process.

As demonstrated in Ms. Bebo's opening brief, this case presents a prime example of why

government enforcement agencies should not be entrusted with the unfettered discretion

provided to the SEC by Dodd-Frank. This case involves a public company where virtually every

member of the board of directors is a Canadian citizen, and the SEC concedes in its response

brief that none of these witnesses can be subpoenaed by Ms. Bebo to obtain evidence or

testimony.

9 See Pl.'s Opening Br. 16 (citing SEC Enforcement Director Andrew Ceresney, Remarks to the American Bar Association's Business Law Section Fall Meeting (Nov. 21, 2014), available at http://www.sec.gov/News/Speech/Detail/Speech/1370543515297#.VJ25mV4AA).


18

More troubling, it now seems clear that this is another deliberate litigation tactic by the

government to deprive Ms. Bebo of her constitutional rights. Last summer, in the final months

of the SEC's two-year investigation, the SEC's enforcement staff memorialized their desired

direct testimony from these Canadian witnesses. Even a cursory review of the witnesses'

transcripts demonstrates these sessions were conducted for this purpose, and not for investigative

fact-finding. Indeed, the SEC enforcement staff met with the witnesses the morning of their

testimony, presumably to rehearse the direct examination that would take place in the afternoon.

By this time in the investigation—most took place after Ms. Bebo received her Wells notice—

the SEC no doubt had planned to bring this case in its own administrative forum, where it will

seek to admit the direct examination of these witnesses.10

The primary purpose of the April hearing in front of an SEC ALJ is to determine the

validity of the allegations set forth in the OIP. That OIP is replete with allegations regarding

what Ms. Bebo did or did not report to this Canadian board of directors. In its response, the SEC

asserts that there is no "per se" right to subpoena witnesses in an administrative proceeding, but

rather a court must evaluate the process, which must be "adapted to the nature and circumstances

of the dispute." Def.'s Br. 22. As set forth above and in Ms. Bebo's opening brief and complaint,

based on the circumstances present here the process afforded to Ms. Bebo runs afoul of the

Constitution under the standard set forth in Mathews v. Eldridge, 424 U.S. 319, 335 (1976).

Instead of responding to Ms. Bebo's analysis of the three Eldridge factors in this case, the

SEC argues instead that Ms. Bebo's procedural due process claim is not itself procedurally

"ripe." Def.'s Br. 19-22. The ripeness doctrine and the related doctrine of exhaustion of

administrative remedies are not inflexible, but must be applied in a "practical" manner in light of

10 The SEC has already moved to admit certain declarations into evidence, also procured after Ms. Bebo received her Wells notice, and those were preliminarily admitted into evidence over Ms. Bebo's objections.


19

the doctrine's purpose, and also "construed so as not to cause crucial collateral claims to be lost

and potentially irreparable injuries to be suffered."11 Eldridge, 424 U.S. at 331 n.11. As the

Seventh Circuit recognized in Frey (which the SEC incorrectly contends "controls," see Def.'s

Br. 21), the ripeness doctrine will in "exceptional circumstances" warrant judicial intervention

prior to a final agency decision even in matters dealing with discovery or evidentiary issues.

Frey v. Commodity Exch. Auth., 547 F.2d 46, 50 (7th Cir. 1976).12

One of the exceptional circumstances where the ripeness/exhaustion doctrine will permit

preliminary judicial review is where requiring exhaustion would be futile. See, e.g., Lester H. by

Octavia P. v. Gilhool, 916 F.2d 865, 869 (3d Cir. 1990) (exhaustion not required where legal

issues are presented that would not be cured by administrative process); Rafeedie v. I.N.S., 880

F.2d 506, 514 (D.C. Cir. 1989). In Rafeedie, the petitioner sought to preliminarily enjoin agency

proceedings on the basis that those proceedings would not afford him adequate procedural due

process. Id. The agency opposed the injunction on ripeness and exhaustion grounds, arguing

that "the court cannot decide whether Rafeedie's due process claims are valid until it knows what

process, above the statutory minimum" the agency would afford him. Id. The court did not

agree, finding there was "no doubt about the [agency's] interpretation of the statute [prescribing

agency procedures]. The statute is explicit in stating what process it requires. . . ." Id. Because

requiring Rafeedie to endure the process before challenging its adequacy would be futile, the

court dismissed the exhaustion requirement.13 Then-Judge Ginsburg, in a concurring opinion,

11 See Standard Oil Co. v. F.T.C., 475 F. Supp. 1261, 1266 (N.D. Ind. 1979) (while considering challenge to various aspects of an ongoing agency proceeding, explaining that "ripeness" and "exhaustion of remedies" are concepts that "address the same issue: reviewability of agency action").

12 Frey also does not dictate the outcome in this case because it involved a discretionary decision by an ALJ to deny certain discovery requested by a respondent, a decision that could be cured by subsequent appeal to the agency secretary or in the court of appeals. Here, there is no ability for the agency to cure the procedural defect.

13 The court also was not persuaded by the agency's argument that "permitting the agency's process to take its course will result in the development of a factual record that will facilitate later judicial review" of the petitioner's


20

summed up her understanding of the reasons for the decision: "[R]afeedie's constitutional claim

would, in all likelihood, remain unchanged after the administrative process had run its course.

This is therefore not a case in which the agency should be permitted to apply its expertise to the

litigant's claim or to correct its own mistakes prior to judicial review." Id. at 529.

The Rafeedie court also rejected the same argument the SEC makes here: that Rafeedie's

claim was not ripe because he could theoretically prevail in the administrative proceeding. The

court reasoned that the possibility of prevailing was slim, such that it did not require the

application of the ripeness doctrine in the collateral case raising due process claims. Id. at 516.

This case presents the exceptional circumstances of a due process violation that cannot be

remedied by any decision by the ALJ or the SEC. Here, as in Rafeedie, there is "no doubt" about

the scope of the administrative procedures Ms. Bebo argues deprive her of due process. The

SEC does not contest that its subpoena power does not extend over Canadian citizens, and

therefore Ms. Bebo has no power to compel evidence from key witnesses who reside there. It is

also undisputed that these unreachable witnesses are material—what they knew or did not know

is the subject of several allegations of the OIP. Finally, just as in Rafeedie, the SEC's assertion

that Ms. Bebo's claims are unripe because she may prevail is insufficient to foreclose her claims.

She has established that the whole purpose of the SEC's practice of bringing these claims before

its own ALJs is because they are always or nearly always successful on the "home court," a stark

contrast to the SEC's 61% success rate in federal district court.14 And it appears the ALJ

presiding over Ms. Bebo's hearing has never ruled in favor of a person defending SEC charges.15

constitutional claim. Rafeedie, 880 F.2d at 516. The "obvious flaw" in that position is that "there is no factual dispute relevant to [the district court's] resolution of the constitutional issue." Id.

14 Ms. Bebo's opening brief, see Pl.'s Opening Br. 4-5, n.1, cites an article from the Wall Street Journal noting that the SEC "is increasingly steering cases to hearings in front of the agency's appointed administrative judges, who found in its favor in every verdict for the 12 months through September, rather than taking them to federal court." Jean Eaglesham, SEC Is Steering More Trials to Judges It Appoints, Wall Street Journal (Oct. 21, 2014), available


21

B. The SEC's administrative proceedings, governed by ALJs, violate Article II

of the Constitution.

1. SEC ALJs are inferior officers for purposes of Article II.

Five of the current Supreme Court justices have suggested that ALJs are "officers." See

Freytag v. Comm'r of Internal Revenue, 501 U.S. 868, 910 (1991) (Scalia, J., concurring, joined

by Kennedy, J.) (emphasis omitted) ("Today, the Federal Government has a corps of

administrative law judges numbering more than 1,000, whose principal statutory function is the

conduct of adjudication under the Administrative Procedure Act (APA), see 5 U.S.C. §§ 554,

3105. They are all executive officers."); Free Enter., 561 U.S. at 542 (Breyer, J., dissenting,

joined by Ginsburg, and Sotomayor, JJ.) ("The potential list of those whom today’s decision

affects is yet larger. As Justice Scalia has observed, administrative law judges (ALJs) 'are all

executive officers.'")

But the SEC claims that its ALJs are rank-and-file civil servants. Def.'s Br. 7. That a

rank-and-file civil servant could preside over the trial of a non-regulated individual charged with

securities fraud, and at risk of being fined over $1 million, is unsettling. It makes more sense to

call them what they are—executive officers who exercise broad discretion and authority, receive

career appointments, are not subject to probationary period requirements, and whose position,

duties, salary, and means of appointment for and removal from office are specified by statutes

and regulations. See Freytag, 501 U.S. at 881-82 ("a special trial judge is an 'inferior Office[r]'";

"The office of special trial judge is 'established by Law,' and the duties, salary, and means of

appointment for that office are specified by statute. . . . They take testimony, conduct trials, rule

on the admissibility of evidence, and have the power to enforce compliance with discovery

at http://www.wsj.com/articles/sec-is-steering-more-trials-to-judges-it-appoints-1413849590. In district court, the SEC won only 61% of the time in cases proceeding to a verdict. Id. 15 See Pl.'s Opening Br. 4-5, n.2 (citing Sarah N. Lynch, SEC judge who took on the "Big Four" known for bold moves, Reuters (Feb. 2, 2014), available at http://www.reuters.com/article/2014/02/02/us-sec-china-elliotidUSBREA1107P20140202).


22

orders. In the course of carrying out these important functions, the special trial judges exercise

significant discretion.")

As set forth in detail in Ms. Bebo's opening brief, SEC ALJs—like the special trial judges

in Freyag—exercise significant discretion and authority as executive officers, and Landry does

not require a different conclusion. The court in Landry misread the holding of Freytag when it

concluded that "the STJs' power of final decision in certain classes of cases was critical to the

Court's decision." Landry v. F.D.I.C., 204 F.3d 1125, 1134 (D.C. Cir. 2000). Freytag was not

decided on the basis that special trial judges could issue final decisions; instead, that was part of

an alternative ruling. See Freytag, 501 U.S. at 882. As explained by Judge Randolph in Landry:

It is true that the Supreme Court relied on this consideration …. What the majority neglects to mention is that the Court clearly designated this as an alternative holding. The Court introduced its alternative holding thus: 'Even if the duties of special trial judges [just described] were not as significant as we and the two courts found them to be, our conclusion would be unchanged.' What 'conclusion' did the Court have in mind? The conclusion it had reached in the preceding paragraphs—namely, that although special trial judges may not render final decisions, they are nevertheless inferior officers of the United States within the meaning of Article II, § 2, cl. 2.

204 F.3d at 1142 (Randolph, J., concurring) (citation omitted).

But even so, like the special trial judges, SEC ALJs can issue final decisions. The

Commission's "order" deeming an ALJ's initial decision "final" is a formality. It is the initial

decision of the ALJ that becomes the final decision of the Commission. 15 U.S.C. § 78d-1(c);

17 C.F.R. § 201.360(d)(2) ("If a party or aggrieved person entitled to review fails to file timely a

petition for review … and if the Commission does not order review of a decision on its own

initiative, the Commission will issue an order that the decision has become final as to that party.

The decision becomes final upon issuance of the order.") Under those circumstances, the "final"


23

order is a one-page document stating just that: "[N]otice is hereby given, pursuant to Rule 360(d)

of the Commission's Rules of Practice, that the initial decision of the administrative law judge

has become the final decision of the Commission with respect to [Respondent]. The order

contained in that decision is hereby declared effective." See, e.g., In re Daniel J. Gallagher,

Exchange Act Release No. 73249, 2014 WL 4887794 (Sept. 29, 2014).

The SEC's arguments based upon the method of appointment of ALJs fare no better. The

SEC's circular assertion that ALJs are not officers because Congress specified that ALJs are to be

appointed by the "agency" (i.e., the Commission), "not the President, the Department head, or the

judiciary," also falls short here; because in reality, SEC ALJs are appointed by the heads of a

Department.16 In Free Enterprise, the Supreme Court explained the Commission is a

"Department" of the Executive Branch, 561 U.S. at 511, and "[t]he Commission’s powers . . . are

generally vested in the Commissioners jointly …." 561 U.S. at 512. In turn, the Commissioners

constitute a "multimember body" that is the "'Hea[d]' of a 'Department'." Id. at 512-13. Indeed,

the Supreme Court further held that "[p]ractice has also sanctioned the appointment of inferior

officers by multimember agencies." Id. at 513. SEC ALJs, appointed by the Commission (i.e.,

acting through the Commissioners), are officers under the SEC's own logic. See Def.'s Br. 28.17

In any event, the SEC cites no authority suggesting that they are "'appointed in the civil service

by … an individual who is an employee ….'" Def.'s Br. 28 (citing 5 U.S.C. § 2105). And

further, the members of the PCAOB—held to be inferior officers in Free Enterprise—are also

appointed by the Commission pursuant to similar statutory language. See 15 U.S.C. §

16 Even so, as the SEC concedes, any "'intention'" of Congress that the SEC's argues is "reflected in the chosen mode of appointment" "'is not dispositive of the constitutional issue.'" See Def.'s Br. 27 (citing In re Sealed Case, 838 F.2d 476, 532 (D.C. Cir. 1988) (Ginsburg, J., dissenting)).

17 It is unclear who the SEC claims appoints the SEC ALJs when it asserts that no law provides for the Commissioners to appoint the ALJs. See Def.'s Br. 28 n.16. Nonetheless, the definition of "officer," in 5 U.S.C. § 2104, as cited by the SEC, "has no relevance to 'officer' status under the Appointments Clause." Com. of Pa., Dep't

of Pub. Welfare v. U.S. Dep't of Health & Human Servs., 80 F.3d 796, 806 (3d Cir. 1996).


24

7211(e)(4)(A) ("[T]he Commission … shall appoint the chairperson and other initial members of

the Board ...").18

Further, the placement of ALJs within the competitive service is also not a determinative

factor here. The Supreme Court did not categorically exclude the competitive service from its

ruling in Free Enterprise, nor did it consider placement within the competitive service a factor in

determining whether "inferior officer" status has been met. See 561 U.S. at 506-507 & n.10.

Indeed, as noted by Justice Breyer in his dissent in Free Enterprise, the "'competitive service' …

'includes a vast majority of all the civil officers' in the United States." Id. at 538 (Breyer, J.,

dissenting).

For purposes of determining whether administrative proceedings governed by ALJs are

unconstitutional given the violation of Article II, it also does not matter that the Commission

does not have to use ALJs and can choose whether to use an ALJ in any given proceeding. See

Def.'s Br. 24. The Chief Judge of the Tax Court is likewise not required to use special trial

judges, see 26 U.S.C. 7443A(a), yet the Supreme Court still found them to be inferior officers.

Freytag, 501 U.S. at 871, 881.

In the SEC's eyes, the ALJs are "mere aids" to the SEC. See Def.'s Br. 23. It is hard to

imagine a "mere aid" exercising the level of discretion and authority bestowed upon the ALJs.

Nonetheless, the Supreme Court rejected a similar argument in Freytag. 501 U.S. at 880-81

("The Commissioner … argues that a special trial judge … acts only as an aide to the Tax Court

judge responsible for deciding the case … [and special trial judges] are employees rather than

'Officers of the United States.'"; the Court held otherwise). This Court should do the same here.

18 The SEC also attempts to use circular logic to argue that ALJs are not officers based upon their removal—the SEC asserts that because they can only be removed for good cause, they must not be inferior officers, because other inferior officers can be removed without cause. See Def.'s. Br. 31. It defies logic to argue that because the removal scheme protecting ALJs would violate Article II it must mean that Article II does not apply (i.e., because ALJs are not officers).


25

SEC ALJs exercise broad authority and discretion in the trials of individuals accused by the SEC

of violating securities laws. Like the special trial judges, "the degree of authority exercised by

the [ALJs is] so 'significant' that it [is] inconsistent with the classifications of 'lesser

functionaries' or employees." Id. at 881.

2. The reasoning of Free Enterprise applies with equal force to the SEC

ALJs' removal scheme.

Despite the SEC's attempts to distinguish the PCAOB from SEC ALJs, the reasoning in

Free Enterprise applies with equal force to the multi-layer protection enjoyed by the ALJs. The

Supreme Court did not specifically include or exempt any other categories of executive officers

from its ruling when it held that multilevel protection from removal enjoyed by inferior officers

"is contrary to Article II's vesting of the executive power in the President." 561 U.S. at 484.

And the SEC does not dispute that ALJs are protected by multiple layers of protection from

removal. Nonetheless, the SEC attempts to differentiate the PCAOB from the SEC ALJs to

argue that Free Enterprise should not apply here.

The SEC argues that it is the Commission (not Congress) who has chosen whether to use

the ALJs at all or in any given case, and that the Commission could also disempower the SEC

ALJs. But the PCAOB can likewise be disempowered by the SEC, as noted by Free Enterprise.

See 561 U.S. at 504 ("The Commission may … relieve the Board of authority, § 7217(d)(1)").

This "power" held by the Commission over the ALJs is no reason to apply the ruling of Free

Enterprise differently here.

The SEC also asserts that, unlike the PCAOB, the ALJs' adjudicatory functions do not

rise to the level of the exercise of core executive authority. But ALJs operate within the

Executive Branch, and in adjudicating cases, they—like the members of the PCAOB—exercise

executive power. That ALJs—as executive officers—exercise mainly adjudicatory powers


26

within the SEC—an Executive Department—does not make them different from the members of

PCAOB in any meaningful way. Both ALJs and members of the PCAOB are executive officers,

who exercise executive power, unconstitutionally protected by multiple layers of tenure.19

The SEC also argues that it has ultimate authority over administrative proceedings

regardless of the limitations on the removal of ALJs. But as the Supreme Court held: "Broad

power over Board functions is not equivalent to the power to remove Board members." Id. at

504. And the SEC can amend Board sanctions just as, for example, it can reverse the initial

decision of an ALJ. See id. at 504 ("The Commission may … amend Board sanctions…").

The allegedly "weaker" tenure enjoyed by the ALJs also does not give the President any

more control over the removal of ALJs. They are still protected by at least two layers of tenure,

and the President still has no power to determine whether "good cause" exists to remove them.

That decision is still "vested instead in other tenured officers[.]" See id. at 495 ("[The Act] not

only protects Board members from removal except for good cause, but withdraws from the

President any decision on whether that good cause exists. That decision is vested instead in

other tenured officers—the Commissioners—none of whom is subject to the President's direct

control.")20

Finally, the SEC points to the long history of use of ALJs, and the eleven Administrations

that have used them, to argue that there is no constitutional problem here. But as Free

Enterprise notes: "Perhaps an individual President might find advantages in tying his own

19 The cases cited by the SEC for the proposition that the Supreme Court "has historically been solicitous of tenure protections for executive-branch officials who exercise adjudicatory power" involved single, not multiple, levels of tenure protection. See Def.'s Br. 33-34.

20 Notwithstanding the extraordinary control the SEC claims to have over the ALJs, the SEC questions Ms. Bebo's assertion that the Commission would initiate the removal of an ALJ. It does not suggest who instead might be responsible for initiating the proceedings. The statute cited by the SEC provides: "[a]n action may be taken against an [ALJ] … by the agency in which the [ALJ] is employed only for good cause established and determined by the Merit Systems Protection Board." 5 U.S.C. §§ 7521(a), (b) (actions covered include removal) (emphasis added).


27

hands. But the separation of powers does not depend on the views of individual Presidents, nor

on whether 'the encroached-upon branch approves the encroachment[.]'" 561 U.S. at 497

(citations omitted). Indeed the "gloss" of historical practice does not make an unconstitutional

action—even a long-standing one—otherwise. See INS v. Chadha, 462 U.S. 919 (1983). The

Chadha Court held that a "legislative veto" provision enacted by Congress was unconstitutional

because it violated the bicameralism and presentment process specified in Article I. Id. at 954-

55. The Court reached this conclusion even though, as Justice White noted in dissent, Congress

had enacted hundreds of legislative veto provisions since the 1930s. Id. at 968-69 (White, J.,

dissenting). The Court dismissed the historical practice, noting that "[c]onvenience and

efficiency are not the primary objectives—or the hallmarks—of democratic government and our

inquiry is sharpened rather than blunted by the fact that congressional veto provisions are

appearing with increasing frequency in statutes which delegate authority to executive and

independent agencies." Id. at 944.

III. Because Ms. Bebo Will Suffer Irreparable Harm if Her Request for a Preliminary

Injunction is Denied, and That Harm Far Outweighs Any Harm the SEC Might

Suffer, this Court Should Preliminarily Enjoin the SEC's Administrative

Proceedings.

A. Ms. Bebo faces irreparable harm if she is denied an injunction.

Absent injunctive relief, Ms. Bebo will be compelled to submit to an unconstitutional

administrative proceeding that she cannot challenge in that proceeding, because there is no

procedure for doing so, and that she cannot challenge adequately in federal court, because she

will not have been able to create a record or assert a claim that the an appellate court could then

review. She will also face irreparable harm to her professional reputation and goodwill.

The SEC argues principally that Ms. Bebo's constitutional injury does not constitute

irreparable harm per se. See Def.'s Br. 40–41. While the SEC is correct that courts in this circuit


28

have recognized that the strong presumption of harm from constitutional violations depends on

the facts and interests at stake, see Ezell, 651 F.3d 684, the SEC does not explain why Ms.

Bebo's constitutional harm (even if not per se irreparable) is not sufficiently irreparable in this

case.21 The facts of this case are unique in that Ms. Bebo, if denied an injunction, will lose any

ability to challenge the constitutional injury she will suffer. As discussed earlier, the

administrative process Ms. Bebo seeks to enjoin does not provide any procedure for her to assert

a counterclaim (the only way she could lodge her constitutional challenge), meaning that her

challenge could not be addressed in a "Final Commission order" or "Commission rule" that a

court of appeals would then have jurisdiction to consider. 15 U.S.C. § 78y. Irreparable harm

exists where, as here, "there is no adequate means of restoring that right once the loss is

suffered." Jessen v. Vill. of Lyndon Station, 519 F. Supp. 1183, 1189 (W.D. Wis. 1981) (finding

irreparable harm and granting injunction based on claim of deprivation of due process); see also

Cooper v. Bombela, 34 F. Supp. 2d 693, 700 (N.D. Ill. 1999) aff'd sub nom. Cooper v. Salazar,

196 F.3d 809 (7th Cir. 1999) ("Here the action is one in which the ultimate as well as the

preliminary relief sought is injunctive in nature, so that the inadequacy of a remedy at law is at

the lawsuit's core."). Further, even if the violation of Ms. Bebo's constitutional claims do not

present per se irreparable harm, "the difficulty of calculating money damages suggests that

plaintiff[] could not be made whole by an award of money damages and thus that the injury to

[her] would be irreparable if the injunction does not issue." Milwaukee Cnty. Pavers Ass'n v.

Fiedler, 707 F. Supp. 1016, 1032 (W.D. Wis. 1989).

21 The SEC implies that the reasoning in Preston v. Thompson, 589 F.2d 300, 303 n.3 (7th Cir. 1978) (ongoing

constitutional harms are irreparable) has been entirely abandoned in this circuit or limited to only First and Second Amendment violations, see Def.'s Br. 41, but that is not the case. See, e.g., Walters v. Thompson, 615 F. Supp. 330, 341 (N.D. Ill. 1985) ("A continuing violation of constitutional rights constitutes irreparable injury."); Jessen v. Vill. of Lyndon Station, 519 F. Supp. 1183, 1189 n.3 (W.D. Wis. 1981) ("[I]t does not follow from the fact that First Amendment values are often given special status that other fundamental constitutional rights must necessarily receive less protection in all instances.").


29

In addition to substantial constitutional harm, Ms. Bebo also faces the professional harms

of a marred reputation and a possible ban on her employment as an officer or director in another

public company. In cases involving the loss of a company's "goodwill and reputation," courts

have found the harm sufficient for entry of an injunction. See, e.g, Stuller, Inc. v. Steak N Shake

Enters., Inc., 695 F.3d 676, 680 (7th Cir. 2012). As a business professional employable in the

highest ranks of a publicly traded company, Ms. Bebo's reputation is her business. The

professional harm she will sustain while being forced to defend herself in an unconstitutional

proceeding will irreparably tarnish her business prospects and future employability. See

Bordelon v. Chi. Sch. Reform Bd. of Trs., 8 F. Supp. 2d 779, 789 (N.D. Ill. 1998) (in finding

irreparable injury, noting that "[t]he losses occasioned by the Defendant's constitutional violation

are intangible and nebulous, for they are bound up with such benefits as job satisfaction,

professional growth and development, service to the community and professional advancement.

For every day that Plaintiff remains assigned to his administrative position, Plaintiff is denied the

opportunity to perform his chosen profession.").

B. The balance of the equities weighs in Ms. Bebo's favor.

In response to Ms. Bebo's arguments that the SEC will not suffer harm if an injunction is

granted and that the public interest is served by vindication of constitutional rights, the SEC

argues that an injunction will "impede the SEC's ability to discharge its duty" because it would

"delay resolution of the question of whether [Ms. Bebo] engaged in fraudulent conduct while

chief executive at a publicly-traded company." Def.'s Br. 43.

First, enjoining the administrative proceedings will not delay the resolution of the

securities case pending against Ms. Bebo because the SEC can immediately bring its claims in

federal district court instead. Cooper, 196 F.3d at 817 (returning to the use of previous

procedures does not cause substantial harm). Next, because the SEC has already spent more than


30

two years investigating Ms. Bebo and her former company for securities violations, any small

delay caused by the dismissal of the administrative proceeding in favor of prosecution in federal

court would be, comparatively, negligible.

This is not, as the SEC argues, an attempt to "end-run around" the remedial scheme

Congress established with § 78y. Def.'s Br. 43-44. As fully explained above, § 78y does not

grant jurisdiction to the SEC to pass on the constitutionality of Dodd-Frank. Ms. Bebo's appeal

to this Court is her only avenue for relief.

CONCLUSION

The statutory scheme Ms. Bebo challenges is facially unconstitutional, and the SEC's

arguments to the contrary disregard the fundamental protections afforded citizens accused of

wrongdoing by the government. This Court has the power to enjoin these unconstitutional

proceedings. Accordingly, we respectfully request that the Court grant the preliminary relief Ms.

Bebo seeks.

Dated this 17th day of February, 2015.

Mailing Address: P.O. Box 2965 Milwaukee, WI 53201-2965 Telephone: 414-298-1000 Facsimile: 414-298-8097

s/Mark A. Cameli Mark A. Cameli WI State Bar ID No. 1012040 [email protected] Ryan S. Stippich WI State Bar ID No. 1038045 [email protected] Lisa Nester Kass WI State Bar ID No. 1045755 [email protected] Attorneys for Plaintiff Laurie Bebo Reinhart Boerner Van Deuren s.c. 1000 North Water Street, Suite 1700 Milwaukee, WI 53202


Documents

EASTERN DISTRICT OF WISCONSIN LAURIE A. BEBO, SECURITIES ...blogs.reuters.com/alison-frankel/files/2015/03/bebovsec-beboreply.pdf · Ms. Bebo has demonstrated a likelihood of success