United States Court of Appeals. for the Second Circuit

Transcription

1 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, v. SECURITIES AND EXCHANGE COMMISSION, Plaintiffs-Appellants, 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 (212) and SUSAN E. BRUNE BRUNE & RICHARD LLP One Battery Park Plaza New York, New York (212) Attorneys for Plaintiffs-Appellants

2 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, CONCLUSION... 21

3 Cases: TABLE OF AUTHORITIES ii Page(s) 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) Department of Transportation v. Association of American Railroads, 135 S. Ct (2015) 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) 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) Hill v. SEC, No. 1:15-CV-1801-LMM, 2015 WL (N.D. Ga. June 8, 2015)... 1, 5, 13 Hill v. SEC, No CC (11th Cir. Aug. 10, 2015)... 1 In re Al-Nashiri, 791 F.3d 71 (D.C. Cir. 2015)... 9

4 In re City of N.Y., 607 F.3d 923 (2d Cir. 2010) In re Clowson, SEC Release No , 2003 WL (July 9, 2003) In re Pelosi, Investment Advisors Act Release No. 3805, 2014 WL (Mar. 27, 2014) In re SEC ex rel. Glotzer, 374 F.3d 184 (2d Cir. 2004) Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000) Lebron v. Nat l R.R. Passenger Corp., 513 U.S. 374 (1995) McNary v. Haitian Refugee Ctr., Inc., 498 U.S. 479 (1991)... 4 Ramspeck v. Fed. Trial Exam rs Conference, 345 U.S. 128 (1953) Sterling Drug, Inc. v. Weinberger, 509 F.2d 1236 (2d Cir. 1975) Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994) , 6, 8 Timbervest, LLC, Admin. Proc. File No (May 27, 2015)... 10, Timbervest, LLC, Admin. Proc. File No (June 4, 2015) Timbervest, LLC, Admin. Proc. File No (June 23, 2015) Timbervest, LLC, Admin. Proc. File No (July 2, 2015) Timbervest, LLC v. SEC, No. 1:15-CV-2106-LMM (N.D. Ga. Aug. 4, 2015) Touche Ross & Co. v. SEC, 609 F.2d 570 (2d Cir. 1979)...passim iii

5 Wellness Int l Network, Ltd. v. Sharif, 135 S. Ct (2015) Statutes & Other Authorities: U.S. Constitution art. III U.S.C , 15 5 U.S.C. 4301(2)(D) U.S.C U.S.C. 77u U.S.C. 78bb(a)(2) U.S.C. 78y...passim 15 U.S.C. 78y(a)(1) U.S.C. 78y(a)(3)... 4, 5 15 U.S.C. 78y(c)(3) U.S.C. 839f(e)(5) U.S.C. 1234(b) U.S.C (a)(2) U.S.C (a)(3) C.F.R (b)(2)(ii)(A) Office of Inspector General, U.S. Securities and Exchange Commission, Interim Report of Investigation, Case No. 15-ALJ-0482-I (Aug. 7, 2015) Sec y of Educ. Review of Admin. Law Judge Decisions, 15 Op. O.L.C. 8 (1991) 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) iv

6 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 (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 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.

7 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 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

8 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 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. 3

9 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, 4

10 208 (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 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 , 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) 5

11 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 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 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)). 6

12 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 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 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 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 ("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. 7

13 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 The SEC's contention that "Altman involved a claim not meaningfully distinguishable from those presented here" is simply wrong. SEC Br. at The SEC further argues that Touche Ross was decided "before the guidance later provided by Thunder Basin and Elgin." SEC Br. at 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. 8

14 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 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 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. 9

15 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 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 (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 (July 2, 2015) (Division of Enforcement's Memorandum of Law in Response to the Commission's May 27, 2015 Order Requesting Supplemental Briefing). 10

16 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 (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. 11

17 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 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). 12

18 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). 13

19 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 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) 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. 14

20 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 (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 attorneygeneralsmanual.pdf. 15

21 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 (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 (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 16

22 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 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, (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 , 2009 WL , 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 twentyfive 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 17

23 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 (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 , 2003 WL , 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 , at *2 (Mar. 27, 2014) (considerable weight given to the determination of SEC ALJs) 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). 18

24 (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 (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 (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 (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 18 Available at 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 Available at notice-in-timbervest-administrative-proceeding.pdf. 21 Available at 19

25 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 oig-sec-interim-report-investigation-admin-law-judges.pdf. 20

26 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, 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 (212) Susan E. Brune MaryAnn Sung BRUNE & RICHARD LLP One Battery Park Plaza New York, New York (212) Attorneys for Plaintiffs- Appellants 21

27 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 (212) Susan E. Brune MaryAnn Sung BRUNE & RICHARD LLP One Battery Park Plaza New York, New York (212) Attorneys for Plaintiffs- Appellants 22