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SEC Asks for High Court Look at Latest In-House Judge Dispute

March 16, 2022, 4:06 PM

The SEC wants the U.S. Supreme Court to take a look at a decision allowing a challenge to the constitutionality of the regulator’s in-house judges to move forward in federal court before the agency proceeding concludes.

The Supreme Court recently agreed to weigh in on whether federal district courts have jurisdiction to hear similar cases involving administrative law judges at another federal agency. The high court should hold the Securities and Exchange Commission’s petition for review until it resolves the other case, then decide this suit “as appropriate in light of that decision,” the regulator said.

The SEC started an administrative proceeding against Michelle Cochran, a CPA, after she allegedly failed to comply with auditing standards under federal securities law. She appealed after an ALJ imposed a $22,500 penalty and a five-year bar on practicing before the agency, but was reassigned to a different ALJ for a new proceeding following the Supreme Court’s 2018 Lucia v. SEC opinion. The high court in that case held that the SEC’s in-house judges had been unconstitutionally appointed.

Cochran then sued to block the new ALJ proceeding and twice lost for failing to appeal within the agency before turning to federal courts. The full U.S. Court of Appeals for the Fifth Circuit last year gave Cochran a new shot at stopping the administrative proceeding against her after a majority determined federal securities laws don’t actually strip lower courts of jurisdiction to hear constitutional challenges like this one.

The “removal power claim is wholly collateral to the Exchange Act’s statutory-review scheme, is outside the SEC’s expertise, and might never receive judicial review if district court jurisdiction were precluded,” Judge Catharina Haynes said in December.

Before the 9-7 en banc decision, “every court of appeals to consider the issue had held that parties in respondent’s position may not bypass the statutory review scheme for challenging the final decision in an SEC adjudication by suing in district court to enjoin an ongoing ALJ proceeding,” according to the SEC petition. The agency pointed to decisions in its favor in the Second, Fourth, Seventh, Eleventh, and D.C. Circuits.

The high court in January “granted a writ of certiorari to decide the same question with respect to Federal Trade Commission” proceedings, the SEC said. “As the federal government has previously explained, the SEC statutory review scheme is materially identical to the FTC statutory review scheme.”

The petitioner behind the other case—Axon Enterprise Inc. v. Federal Trade Commission—even argued in a supplemental brief that the Fifth Circuit opinion siding with Cochran created a circuit split with the Ninth Circuit decision it was appealing, the SEC said.

The New Civil Liberties Alliance and Dallas-based Karen Cook represented Cochran below.

The case is SEC v. Cochran, U.S., No. 21-1239, petition for review filed 3/11/22.

To contact the reporter on this story: Jennifer Bennett in Washington at jbennett@bloomberglaw.com

To contact the editors responsible for this story: Rob Tricchinelli at rtricchinelli@bloomberglaw.com; Nicholas Datlowe at ndatlowe@bloomberglaw.com