CHICAGO (CN) – The SEC defended its process for investigating executives for fraud and other misconduct Thursday before the Seventh Circuit in answer to one target’s challenge.
Laurie Bebo, the former head of Assisted Living Concepts, a lawsuit against the agency based on its charge that she falsified occupancy rates for the company, which manages assisted-living facilities for seniors.
In particular, Bebo took issue with the portion of the Dodd-Frank Wall Street Reform and Consumer Protection Act that lets the SEC hold administrative proceedings on charges that would have previously been tried in federal court.
U.S. District Judge Rudolph Randa dismissed the suit this past March, finding that Bebo should not be allowed to short-circuit the normal administrative process.
“Bebo can raise her arguments before the SEC ALJ and on appeal to the commission,” he added. “Then, if the commission rules against her, Bebo can obtain judicial review in the court of appeals.”
Oral arguments today began with the always-good-humored Judge Ilana Rovner acknowledging: “One of my career law clerks is the sister of one of the attorneys sitting at plaintiff’s table. If either of you has any problem, I will go and read the newspaper!” Neither side did.
Speaking for Bebo in a packed courtroom, Kate Maternowski said: “Our equal protection and due process challenge to Dodd-Frank says that the law that allows the SEC to choose its forum is unconstitutional.”
“This means that the SEC would have to return to its old procedures,” the attorney continued. “This wouldn’t mean Bebo didn’t violate securities law.”
Judge David Hamilton found it salient, however, that “the Supreme Court has rejected drawing lines between facial and as-applied [constitutional] challenges for purposes of short-circuiting the administrative process.”
But Maternowski emphasized that her client “asked the court to consider the constitutionality of a law.”
“The administrative law judges who preside over this process cannot consider that.” as it would violate Article II, she added.
Rovner questioned what harm Bebo faces if denied relief.
“Even if the SEC doesn’t have expertise in these claims, given the availability of appellate review later, she’s not at risk of being left without a remedy,” the judge said.
Maternowski conceded that “claims challenging the overall structure of an agency are rare.”
“But this is a case where she doesn’t have recourse,” the attorney said. “By the time she reaches the court of appeals, she won’t receive the relief she seeks, which is an injunction against the process.”
Maternowski also noted the oddity that Bebo cannot receive such relief if she prevails on the merits during the administrative process since any appeal would be moot.
Hamilton added: “There are many cases where people have to defend themselves in a procedure they reject, such as being criminally prosecuted without probable cause.”
The lawyer replied: “Bebo doesn’t have to show irreparable harm to get into district court. Nowhere has the Supreme Court said this is required. If we are successful, we ask the court to declare that Dodd-Frank is unconstitutional.”
SEC attorney Mark Stern said that there was no reason to resolve the constitutional question. “Ms. Bebo is not a closely regulated party like a broker or dealer,” Stern said. “Past suits have challenged the SEC’s regulation of their day-to-day business, but this is a challenge to an individual executive. The remedy, if any, would be a mandamus action.”
Rovner took a different tack: “These seem like constitutional claims beyond the expertise of an administrative agency.”
Stern noted that “the Supreme Court has said it doesn’t matter whether the agency can rule on the issue.”
Rovner continued: “Assuming Bebo’s constitutional claims are meritorious, she’ll have to bring them before an administrative law judge who lacks Article II authority to hear the matter.”
Stern shrugged: “That’s not a reason to say we want to resolve the constitutional question.”
A bevy of securities lawyers showed up for the case, and the elevator bank was particularly lively afterward.
“It’s not just every day that you see a challenge to the existence of your agency, is it?” one laughed.
“Yeah, I’m glad we came – I enjoyed the ‘oh, no big deal, it’s just Dodd-Frank!'” another said.
Maternowski had noted in closing that Bebo’s administrative case is scheduled to resume June 15 and asked for an expedited decision if possible.
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