Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca2-15-02103/USCOURTS-ca2-15-02103-0/pdf.json

Nature of Suit Code: 440
Nature of Suit: Other Civil Rights
Cause of Action: 

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15‐2103

Tilton v. SEC

1 UNITED STATES COURT OF APPEALS

2 FOR THE SECOND CIRCUIT

3 August Term, 2015

4 (Argued:  September 16, 2015 Decided:  June 1, 2016)

5 Docket No. 15‐2103

6

7 Lynn Tilton, Patriarch Partners, LLC, Patriarch Partners VIII, LLC,

8 Patriarch Partners XIV, LLC, and Patriarch Partners XV, LLC,

9 Plaintiffs‐Appellants,

10 v.

11 Securities and Exchange Commission,

12 Defendant‐Appellee.

13

14 Before: NEWMAN, SACK, and DRONEY, Circuit Judges.

15 The appellants, Lynn Tilton and several of her investment firms, are

16 respondents in an ongoing administrative proceeding initiated by the Securities

17 and Exchange Commission and conducted by an administrative law judge.  They

18 brought suit in the United States District Court for the Southern District of New

19 York to enjoin the Commissionʹs proceeding before its completion, on the theory

20 that the administrative law judgeʹs appointment violated the Appointments

21 Clause of Article II of the United States Constitution.  The district court (Ronnie

22 Abrams, Judge) dismissed the suit for lack of subject matter jurisdiction.  The

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1 appellants now ask us to overturn that dismissal and reach the merits of their

2 constitutional argument.  We agree with the district court, however, that

3 Congress implicitly precluded federal jurisdiction over the appellantsʹ 

4 Appointments Clause claim while the Commissionʹs proceeding remains

5 pending.  The judgment of the district court is therefore

6 AFFIRMED.

7 Judge NEWMAN concurs in a separate opinion.   

8 Judge DRONEY dissents in a separate opinion.

9 DAVID M. ZORNOW, Skadden, Arps,

10 Slate, Meagher & Flom LLP, New York, NY

11 (Christopher J. Gunther, on the brief), for

12 Plaintiffs‐Appellants.

13 Susan E. Brune (on the brief), Brune &

14 Richard LLP, New York, NY, for Plaintiffs‐

15 Appellants.

16 MARK B. STERN, Appellate Staff Attorney

17 (Mark R. Freeman and Megan Barbero,

18 Appellate Staff Attorneys, on the brief), for

19 Benjamin C. Mizer, Principal Deputy  

20 Assistant Attorney General, and Beth S.

21 Brinkmann, Deputy Assistant Attorney

22 General, United States Department of

23 Justice, Washington, DC, for Defendant‐

24 Appellee.

25 Jeannette A. Vargas (on the brief), for Preet

26 Bharara, United States Attorney for the

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1 Southern District of New York, for

2 Defendant‐Appellee.

3

4 SACK, Circuit Judge:

5 The Securities and Exchange Commission (the ʺSECʺ or the ʺCommissionʺ)

6 enforces the federal securities laws by, among other things, filing actions seeking

7 monetary penalties against alleged transgressors.  Under the 2010 Dodd‐Frank

8 Wall Street Reform and Consumer Protection Act (the ʺDodd‐Frank Actʺ), Pub. L.

9 No. 111‐203, 124 Stat. 1376, the SECʹs enforcement actions generally may take

10 either of two forms: a civil lawsuit in federal district court, or an administrative

11 proceeding conducted by the Commission or an administrative law judge

12 (ʺALJʺ).  Where both of those alternatives are available, the choice between them

13 belongs to the SEC without express statutory constraint.

14 In this case, the SEC chose to seek penalties against the appellants, Lynn

15 Tilton and several of her investment firms, by commencing an administrative

16 proceeding conducted by an ALJ.  That proceeding is subject to two layers of

17 review:  A party that loses before the ALJ may petition for de novo review by the

18 Commission, and a party that loses before the Commission may petition for

19 review by a federal court of appeals.  Not unlike a lawsuit in district court,

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1 therefore, the administrative proceeding ultimately offers the losing party a route

2 to federal appellate review.

3 The appellants contend that the SECʹs administrative proceeding is

4 unconstitutional because the presiding ALJʹs appointment violated Article IIʹs

5 Appointments Clause.  They have raised that claim as an affirmative defense

6 within the proceeding and will be able to argue the issue in a federal court of

7 appeals if they lose before the Commission.  The appellants nevertheless sought

8 more immediate access to federal court:  Two days after the administrative

9 proceeding against them began, they filed a separate lawsuit in the United States

10 District Court for the Southern District of New York asserting their

11 Appointments Clause claim and seeking an injunction against the ALJʹs

12 adjudication based on its alleged unconstitutionality.

13 The district court (Ronnie Abrams, Judge) dismissed the suit for lack of

14 subject matter jurisdiction.  Relying in part on the Supreme Courtʹs decisions in

15 Elgin v. Department of Treasury, ‐‐‐ U.S. ‐‐‐, 132 S. Ct. 2126 (2012), Free Enterprise

16 Fund v. Public Co. Accounting Oversight Board, 561 U.S. 477 (2010), and Thunder

17 Basin Coal Co. v. Reich, 510 U.S. 200 (1994), the court concluded that the

18 appellantsʹ Appointments Clause challenge fell within the exclusive scope of the

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1 SECʹs administrative review scheme and could reach a federal court only on

2 petition for review of a final decision by the Commission.

3 We agree.  By enacting the SECʹs comprehensive scheme of administrative

4 and judicial review, Congress implicitly precluded federal district court

5 jurisdiction over the appellantsʹ constitutional challenge.

6 BACKGROUND

7 Until 2010, the SECʹs authority to impose monetary penalties through

8 administrative proceedings was relatively limited.  The agency could not, for

9 example, penalize a non‐regulated person such as Tilton through administrative

10 channels.  The Dodd‐Frank Act dramatically expanded the SECʹs authority to

11 impose penalties administratively, making it essentially “coextensive with [the

12 SEC’s] authority to seek penalties in Federal court.”  H.R. Rep. No. 111–687, at 78

13 (2010).  Since then, the SEC has reportedly prosecuted an increasing number of

14 cases through administrative proceedings, with a rate of success notably higher

15 than it has achieved in federal district courts.  See Jean Eaglesham, In‐House

16 Judges Help SEC Rack Up Wins, Wall St. J., May 7, 2015, at A1.

17 When the Commission chooses to seek penalties administratively, it must

18 either preside over the proceeding itself or designate a hearing officer — usually

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1 an ALJ — to do so.  See 17 C.F.R. § 201.110.  A presiding ALJ has authority to

2 issue an initial decision, which may become final only by order of the

3 Commission.  See id. § 201.360.  If a party petitions for review of the ALJʹs initial

4 decision, the Commission ordinarily reviews the decision de novo before issuing a

5 final order.  See id. § 201.411.  And a final order issued under the securities laws,

6 including the Investment Advisers Act of 1940, 15 U.S.C. § 80b‐1 et seq., is in turn

7 subject to judicial review by a federal court of appeals, see id. § 80b–13(a)

8 (providing that ʺ[a]ny person or party aggrieved by an order issued by the

9 Commission under [the Investment Advisers Act] may obtain a review of such

10 order in the United States court of appeals within any circuit wherein such

11 person resides or has his principal office or place of business, or in the United

12 States Court of Appeals for the District of Columbiaʺ).

13 During the past year or so, several respondents in ongoing SEC

14 administrative proceedings have asserted that Article II of the United States

15 Constitution bars the agencyʹs ALJs from acting as hearing officers.  These

16 respondents have made two distinct constitutional arguments: that the ALJs are

17 impermissibly insulated from presidential removal, and that they were not

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appointed in accordance with the Appointments Clause.1 1   Respondents may

2 raise those arguments as affirmative defenses during the course of their

3 administrative proceedings, subject to potential judicial review in the event of an

4 adverse decision by the Commission.  Seeking more immediate judicial scrutiny,

5 however, some respondents — the appellants among them — attempted to raise

6 their Article II claims in parallel actions brought in federal district courts before

7 their administrative proceedings concluded.  See Spring Hill Capital Partners, LLC

8 v. SEC, No. 15‐CV‐4542 (S.D.N.Y. 2015) (challenging ALJʹs appointment); Hill v.

9 SEC, No. 1:15‐CV‐1801 (N.D. Ga. 2015) (challenging ALJʹs appointment and

10 insulation from removal); Duka v. SEC, No. 15‐CV‐357 (S.D.N.Y. 2015)

11 (challenging ALJʹs appointment and insulation from removal); Bebo v. SEC, No.

12 15‐C‐3 (E.D. Wis. 2015) (challenging ALJʹs insulation from removal).

                                                            

1 The Appointments Clause reads in pertinent part:   

[The President] shall nominate, and by and with the Advice and Consent

of the Senate, shall appoint Ambassadors, other public Ministers and

Consuls, Judges of the supreme Court, and all other Officers of the United

States, whose Appointments are not herein otherwise provided for, and

which shall be established by Law: but the Congress may by Law vest the

Appointment of such inferior Officers, as they think proper, in the

President alone, in the Courts of Law, or in the Heads of Departments.

U.S. Const. Art. II, § 2, cl. 2.

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1 In the case at bar, the SEC initiated an administrative proceeding before an

2 ALJ in March 2015, alleging that the appellants had violated the Investment

3 Advisers Act.  Two days later, the appellants filed this lawsuit in the United

4 States District Court for the Southern District of New York.  They sought to

5 enjoin the SECʹs administrative proceeding on the ground that, among other

things, the presiding ALJʹs appointment violated the Appointments Clause.2 6   The

7 SEC moved to dismiss the suit, arguing in part — as it has in cases brought by

8 similarly situated respondents — that the district court lacked subject matter

9 jurisdiction over the lawsuit.  In the Commissionʹs view, the administrative

10 proceeding at issue, once begun, precluded the appellantsʹ collateral

11 Appointments Clause challenge.

12 While the district court heard argument and deliberated, several other

13 federal judges reached conflicting decisions on the same jurisdictional issue,

14 creating a split both within and outside the Southern District.  Compare Spring

15 Hill, No. 15‐CV‐4542 (S.D.N.Y. June 26, 2015) (bench ruling) (Ramos, J.)

16 (concluding that the court lacked jurisdiction over a respondentʹs Article II

                                                            

2 The appellants also argued before the district court that their presiding ALJ was

impermissibly insulated from presidential removal.  They have not pressed that

argument on appeal, although they purport to have ʺpreserve[d]ʺ it.  Appellantsʹ Br. at

31 n.10.

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1 challenge to the ALJ conducting an ongoing administrative proceeding), with Hill

2 v. SEC, 114 F. Supp. 3d 1297 (N.D. Ga. 2015) (concluding that there was such

3 jurisdiction), and Duka v. SEC, 103 F. Supp. 3d 382, 392 (S.D.N.Y. 2015) (same); see

4 also Bebo v. SEC, 2015 WL 905349, at *4, 2015 U.S. Dist. LEXIS 25660, at *10 (E.D.

5 Wis. Mar. 3, 2015) (concluding, before the case at bar was filed, that the court

6 lacked jurisdiction over a respondentʹs Article II challenge to the ALJ conducting

7 an ongoing administrative proceeding), affʹd, 799 F.3d 765 (7th Cir. 2015). On

8 June 30, 2015, after weighing the merits of those intervening decisions, the

9 district court decided in favor of the SEC, dismissing the appellantsʹ suit as

10 implicitly precluded by the Commissionʹs statutory scheme of administrative

11 and judicial review.  Tilton v. SEC, No. 15‐CV‐2472, 2015 WL 4006165, at *1, 2015

12 U.S. Dist. LEXIS 85015, at *2‐3 (S.D.N.Y. June 30, 2015).

13 The appellants now ask us to reverse the district courtʹs jurisdictional

14 dismissal of their Appointments Clause claim and rule, on the merits, that the

15 ALJ presiding over their administrative proceeding was unconstitutionally

16 appointed.  At the appellantsʹ request, we have stayed the SECʹs proceeding

17 pending our decision in this appeal.  We review the district courtʹs determination

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1 of subject matter jurisdiction de novo.  Scelsa v. City Univ. of N.Y., 76 F.3d 37, 40

2 (2d Cir. 1996).

3 DISCUSSION

4 The statutes that establish the SECʹs scheme of administrative and judicial

5 review, including the Dodd‐Frank Act and the Investment Advisers Act, do not

6 expressly preclude federal district court jurisdiction over the appellantsʹ 

7 Appointments Clause claim.  The crucial jurisdictional issue in this case,

8 therefore, is whether the statutes do so implicitly.   

9 To resolve that issue, we must first determine whether it is ʺfairly

10 discernibleʺ from the ʺtext, structure, and purposeʺ of the securities laws that

11 Congress intended the SECʹs scheme of administrative and judicial review ʺto

12 preclude district court jurisdiction.ʺ  Elgin, 132 S. Ct. at 2132‐33.  That initial

13 inquiry is guided by the proposition that ʺ[g]enerally, when Congress creates

14 procedures designed to permit agency expertise to be brought to bear on

15 particular problems, those procedures are to be exclusive.ʺ  Free Enterprise, 561

16 U.S. at 489 (internal quotation marks omitted).   

17 If we conclude that the SECʹs scheme precludes district court jurisdiction,

18 we must then decide whether the appellantsʹ Appointments Clause claim is ʺof

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1 the type Congress intended to be reviewed within th[e] statutory structure.ʺ  Id.

2 (alteration in original) (quoting Thunder Basin, 510 U.S. at 207).  This second

3 inquiry is guided by the Supreme Courtʹs decisions in Thunder Basin, Free

4 Enterprise and Elgin, which instruct us to ʺpresumeʺ that a claim is not confined

5 to administrative channels ʺif ʹa finding of preclusion could foreclose all

6 meaningful judicial reviewʹ; if the suit is ʹwholly collateral to a statuteʹs review

7 provisionsʹ; and if the claims are ʹoutside the agencyʹs expertise.ʹʺ  Id. (quoting

8 Thunder Basin, 510 U.S. at 212‐13).  We refer to those considerations as the

9 Thunder Basin factors.

10 Our resolution of these two inquiries — whether Congress intended the

11 SECʹs administrative scheme to preclude district court jurisdiction, and whether

12 the scheme encompasses a respondentʹs Appointments Clause challenge to a

13 presiding ALJ — leads us to conclude that the appellantsʹ lawsuit must be

14 dismissed.  Two of our sister circuits recently reached similar conclusions.  See

15 Jarkesy v. SEC, 803 F.3d 9 (D.C. Cir. 2015); Bebo v. SEC, 799 F.3d 765 (7th Cir.

16 2015), cert. denied, 136 S. Ct. 1500 (2016).  We agree in large part with their

17 reasoning.

18

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1 I

2 As an initial matter, the text, structure, and purpose of the securities laws

3 make clear that Congress intended the SECʹs scheme of administrative review to

4 permit the Commission to bring its expertise to bear in enforcing the securities

5 laws.  The scheme enables the SECʹs Division of Enforcement to bring statutory

6 charges before an administrative tribunal and affords respondents the

7 opportunity to gather evidence, present a defense, and appeal any adverse

8 rulings in federal court.  In Thunder Basin, the Supreme Court held that a similar

9 scheme precluded federal district court jurisdiction over challenges to an

10 agencyʹs application of a statute to particular facts.  510 U.S. at 208‐09, 216.  We

11 reach the same conclusion here.  Generally, therefore, persons responding to SEC

12 enforcement actions are precluded from initiating lawsuits in federal courts as a

13 means to defend against them.  See Jarkesy, 803 F.3d at 16‐17 (analogizing the

14 SECʹs statutory review scheme to the scheme at issue in Thunder Basin and

15 concluding that Congress intended ʺto preclude suits [in federal courts] by

respondents in SEC administrative proceedings in the mine‐run of casesʺ).3 16

                                                            

3 The Hill decision concluded that “[t]here can be no ʹfairly discernibleʹ Congressional

intent to limit jurisdiction away from district courts when the text of the statuteʺ 

permits the SEC to initiate enforcement actions in either ʺdistrict court [or]

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1 II

2 The appellants do not contest that conclusion.  They implicitly

3 acknowledge that an SEC administrative proceeding, once initiated, is the

4 exclusive initial forum for claims ʺrequiring the development of a factual record,

5 the exercise of agency discretion, or the application of a statute to particular

6 facts.ʺ  Appellantsʹ Br. at 4.  They argue, however, that their Appointments

7 Clause challenge is a distinct type of claim: ʺa threshold constitutional challenge

8 to agency practice.ʺ  Id. at 12.  They assert that this type of claim satisfies all three

9 of the Thunder Basin factors and so falls outside the exclusive purview of the

10 SECʹs administrative review scheme.

11 The district court held that the appellantsʹ Appointments Clause claim

12 failed to satisfy at least two of the Thunder Basin factors:  It would be subject to

13 meaningful judicial review within the SECʹs administrative scheme, and it was

14 not ʺwholly collateralʺ to the scheme.  Tilton, 2015 WL 4006165, at *4‐12, 2015 U.S.

                                                                                                                                                                                               

administrative proceedings.ʺ  Hill, 114 F. Supp. 3d at 1306.  We disagree.  Congressʹs

decision to vest the SEC with a choice between forums does not imply that the chosen

forum should not be exclusive of the other.  To the contrary — without such exclusivity,

the SECʹs statutory power to choose would be illusory.  See Jarkesy, 803 F.3d at 17

(ʺCongress granted the choice of forum to the Commission, and that authority could be

for naught if respondents . . . could countermand the Commissionʹs choice by filing a

court action.ʺ).

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1 Dist. LEXIS 85015, at *9‐34.  The district court also suggested, but did not decide,

2 that the Appointments Clause claim failed to satisfy the remaining Thunder Basin

3 factor because it did not fall outside the SECʹs expertise.  See id. at 2015 WL

4 4006165, at *12‐13, 2015 U.S. Dist. LEXIS 85015, at *34‐36.  Despite leaving a

5 decision as to that factor open, the court concluded that Congress intended the

6 SECʹs administrative review scheme to encompass the appellantsʹ Appointments

7 Clause claim, to the exclusion of federal district court jurisdiction.  

8 We agree with that conclusion.  The appellantsʹ Appointments Clause

9 claim will be subject to meaningful judicial review through administrative

10 channels, a fact that weighs strongly against district court jurisdiction.  See Bebo,

11 799 F.3d at 774‐75 (characterizing the availability of meaningful judicial review as

12 the ʺmost importantʺ Thunder Basin factor).   And although the other two Thunder

13 Basin factors present closer questions in this case, they do not persuasively

14 demonstrate that the Appointments Clause claim falls outside the scope of the

15 SECʹs overarching scheme.

16 A. The Availability of Meaningful Judicial Review

17 Turning in more detail to the application of the Thunder Basin factors, we

18 first consider whether the SECʹs administrative scheme assures that the

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1 appellants have an opportunity for meaningful judicial review of their

2 Appointments Clause claim.  The appellants do not dispute that the scheme

3 offers some judicial review: an appeal to a federal circuit court from an adverse

4 ruling by the Commission.  They argue, however, that such review would not be

5 ʺmeaningfulʺ because it could not provide an adequate remedy for the SECʹs

6 alleged violation of the Appointments Clause.  That is so, in the appellantsʹ view,

7 because their exposure to the ongoing proceeding — as distinct from any adverse

8 ruling that might result — would itself constitute a grave constitutional injury

9 that could not be redressed after the fact.  As precedential support for their

10 position, the appellants cite the Supreme Courtʹs decision in Free Enterprise and

11 our decades‐old decision in Touche Ross & Co. v. SEC, 609 F.2d 570 (2d Cir. 1979).

12 The appellantsʹ argument is not without force, as demonstrated by its

13 success in several district courts.  See Hill, 2015 WL 4307088, at *6‐8, 2015 U.S.

14 Dist. LEXIS 74822, at *17‐19; Duka, 103 F. Supp. 3d 382, 390‐91.  Ultimately,

15 however, we are not convinced.  In our view, the appellantsʹ argument

16 misconstrues both Free Enterprise and Touche Ross and is at odds with the

17 established approach to analogous jurisdictional disputes in federal courts.

18

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1 i. Free Enterprise

2 Free Enterprise dealt with the Public Company Accounting Oversight Board

3 (the ʺPCAOBʺ), an entity created under the Sarbanes‐Oxley Act of 2002, Pub. L.

4 No. 107‐204, 116 Stat. 745, to supervise the practices of accounting firms.  The

5 PCAOBʹs five members were to be appointed by the SEC, and some — but not

6 all — of the PCAOBʹs regulatory actions required SEC approval in the form of a

7 final Commission order.  The Sarbanes‐Oxley Act, like the Investment Advisers

8 Act before it, permitted losing parties to appeal from an adverse final order to a

9 federal court of appeals.  The statute made no provision, however, for federal

10 review of Board actions that did not require SEC approval.  See Free Enterprise,

11 561 U.S. at 489‐90.

12 In the Free Enterprise case, the PCAOB had, in the course of its supervisory

13 work, ʺinspected [a particular accounting] firm, released a report critical of its

14 auditing procedures, and [begun] a formal investigation.ʺ  Id. at 487.  Those

15 actions were not subject to review by the SEC or approval by final Commission

16 order, and so did not give rise to an administrative route to federal review.  Id. at

17 489‐90.  The accounting firm then filed a lawsuit in federal district court that

18 sought to void the PCAOBʹs actions on Article II grounds.  The firm argued, as

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1 the appellants do here, that the SEC had violated the Appointments Clause when

2 it selected the members of the PCAOB, rendering their appointments

3 constitutionally infirm.  Id. at 487‐88.

4 The Supreme Court held that the district court could exercise jurisdiction

5 over the accounting firmʹs lawsuit, despite the availability of administrative

6 review regarding some other PCAOB actions.  Id. at 490‐91.  The Court reasoned,

7 in part, that the administrative review scheme failed to make any form of judicial

8 review meaningfully accessible to the firm.  Because the PCAOBʹs regulatory

9 actions had not produced a reviewable Commission order, the accounting firm

10 could have raised its constitutional objection in federal court through

11 administrative channels only by manufacturing a new, tangential dispute that

12 would require a Commission order, and then using that dispute as a vehicle for

13 its Article II claims.  The Court deemed that circuitous option inadequate, and so

14 concluded that meaningful judicial review was not otherwise available to the

15 accounting firm.  Id. at 490.

16 The appellants read Free Enterprise to suggest that judicial review of an

17 Article II challenge to an administrative tribunal is not meaningful if conducted

18 after the tribunalʹs proceeding concludes, because of the inherent remedial

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1 limitations of post‐proceeding review.  See Appellantsʹ Br. at 13, 17‐18.  We

2 disagree.  The Free Enterprise Courtʹs analysis turned on the accessibility of post‐

3 proceeding review by a federal court of appeals — not on whether such review,

4 if accessible, could adequately remedy the PCAOBʹs alleged violation of Article

5 II.  Free Enterprise therefore lends no support to the appellantsʹ characterization of

6 their prospective constitutional injury as irremediable after the conclusion of

7 their administrative proceeding.

8 ii. Touche Ross

9 The appellantsʹ reliance on Touche Ross is similarly unavailing.  There, the

10 SEC took steps to institute an administrative proceeding against an accounting

11 firm and several of its partners (collectively, ʺTouche Rossʺ) under Rule 2(e) of

12 the Commissionʹs Rules of Practice, which related to the suspension and

13 disbarment of persons practicing before the Commissioner.  Touche Ross

14 immediately filed a lawsuit in federal court seeking to enjoin the proceeding on

15 the ground that Rule 2(e) was not authorized by statute.   

16 The district court declined to exercise jurisdiction.  It reasoned, in part, that

17 the planned administrative proceeding would not irreparably harm Touche Ross,

18 which meant that Touche Ross was required to exhaust the administrative

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1 review process before raising its claims in federal court.  See Touche, Ross & Co. v.

2 SEC, No. 76‐CV‐4489, 1978 WL 1084, at *4‐5, 7‐9, 1978 U.S. Dist. LEXIS 17974, *9‐

3 12, 18‐19, 23 (S.D.N.Y. Apr. 24, 1978), affʹd sub nom. Touche Ross & Co. v. SEC, 609

4 F.2d 570 (2d Cir. 1979).

5 On appeal, this Court recognized district court jurisdiction over Touche

6 Rossʹs lawsuit.  The panel acknowledged that federal challenges to

7 administrative proceedings at ʺintermediate stagesʺ are generally disfavored,

8 particularly where — as in the case before it — the agency had not acted ʺplainly

9 beyond its jurisdiction.ʺ  Touche Ross, 609 F.2d at 576.  Nonetheless, the Court

10 permitted Touche Rossʹs lawsuit to proceed on the ground that its constitutional

11 claim would not benefit from the SECʹs ʺexpertise,ʺ ʺdiscretionʺ or factfinding,

12 and was thus already ripe for federal adjudication.  Id. at 577.

13 The Courtʹs decision did not suggest that a federal court would be unable

14 to vindicate Touche Rossʹs challenge to Rule 2(e) after the SECʹs proceeding

concluded.4 15   It held only that there was no compelling reason for Touche Ross to

16 wait for post‐proceeding review because the administrative tribunal would not

                                                            

4 Indeed, in a concurring opinion, two members of the panel expressed their

confidence in the capacity of post‐proceeding judicial review to ʺcorrect the occasional

excesses and errors that are an inevitable part of the administrative process.ʺ  Touche

Ross, 609 F.2d at 583 (Kaufman, C.J., concurring).

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1 bring its expertise to bear in a way that would aid a federal courtʹs eventual

2 adjudication.  That proposition does not support the appellantsʹ contention here

3 that post‐proceeding judicial review of their Appointments Clause challenge will

4 not be meaningful.  Rather, Touche Ross resonates with a different Thunder Basin

5 factor:  whether a claim falls outside an agencyʹs expertise.  And its reasoning on

6 that issue is no longer considered sound, as we explain below.

7 iii. Conflict with Established Practice Regarding Analogous

8 Challenges to a Tribunalʹs Constitutional Legitimacy

9

10 The appellantsʹ argument that post‐proceeding judicial review of their

11 Appointments Clause claim will be meaningless is not merely unsupported by

12 Free Enterprise and Touche Ross; it is also at odds with established practice in

13 federal court regarding analogous challenges to a tribunalʹs constitutional

14 legitimacy.  As the district court explained, litigants who unsuccessfully

15 challenge the authority of a presiding judge or jury to decide a case often must

16 wait to appeal the issue until after the court renders a final judgment.  See, e.g.,

17 Germain v. Connecticut Natʹl Bank, 930 F.2d 1038, 1040 (2d Cir. 1991) (concluding

18 that a defendant who unsuccessfully challenged the plaintiffʹs right to jury trial

19 must await the juryʹs verdict before appealing); DʹIppolito v. Am. Oil Co., 401 F.2d

20 764, 764‐65 (2d Cir. 1968) (per curiam) (deciding that a defendant who

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1 unsuccessfully challenged the transfer of his case to another district must await

2 the other district courtʹs ʺfinal judgmentʺ before appealing); see also In re al‐

3 Nashiri, 791 F.3d 71, 75, 80 (D.C. Cir. 2015) (concluding, in denying a petition for

4 writ of mandamus, that a defendant who unsuccessfully raised an Appointments

5 Clause challenge to two of the United States Court of Military Commission

6 Reviewʹs presiding judges must await the judgesʹ ruling before appealing in

7 federal court).  Like the appellants here, a litigant in this kind of case must

8 expend financial and emotional resources to complete a proceeding that may

ultimately prove constitutionally infirm.5 9   Subsequent judicial review cannot

10 restore those resources, but it can vacate the resulting judgment and remand for

11 a new proceeding.  That post‐proceeding relief, although imperfect, suffices to

12 vindicate the litigantʹs constitutional claim.  See Germain, 930 F.2d at 1040

13 (explaining that if a jury trial were in fact improper, an appellate court could

14 ʺremand for a nonjury trial, thus vindicating the [objecting defendantʹs] rightʺ);

15 see also In re al‐Nashiri, 791 F.3d at 80 (ʺVacatur [premised on the defendantʹs

16 Appointment Clause claim], even at the appeal‐from‐final‐judgment stage,

                                                            

5   Cf. Learned Hand, The Deficiencies of Trials To Reach the Heart of the Matter,

3 Association of the Bar of the City of New York, Lectures on Legal Topics 89, 105 (1926)

(musing that becoming a party to a lawsuit should be ʺdread[ed] . . . beyond almost

anything else short of sickness and deathʺ).

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22

1 would fully vindicate [the defendantʹs] rights and the Presidentʹs and the

2 Senateʹs constitutional powers.ʺ (internal quotation marks and alterations

3 omitted)).  The litigantʹs financial and emotional costs in litigating the initial

4 proceeding are simply the price of participating in the American legal system,

5 and not an irreparable injury that necessitates interlocutory review of the initial

6 courtʹs jurisdiction.

7 The Supreme Court applied this principle to facts similar to those

8 presented to us here in FTC v. Standard Oil Co. of California, 449 U.S. 232 (1980).  

9 There, an oil company brought suit in federal district court to enjoin an ongoing

10 administrative proceeding conducted by the Federal Trade Commission (ʺFTCʺ),

11 contending that the proceeding as a whole was unlawful because the FTC had

12 initiated it without the requisite evidentiary basis.  Id. at 235.  As a general

13 matter, a respondent in this type of proceeding must exhaust its administrative

14 remedies before filing a related action in federal court, unless the respondent

15 would suffer irreparable injury from the delay.  See Renegotiation Bd. v.

16 Bannercraft Clothing Co., 415 U.S. 1, 24 (1974).  The oil company argued that it had

17 exhausted all relevant remedies before filing its federal lawsuit.  Standard Oil, 449

18 U.S. at 243.  In the alternative, however, the company contended that any failure

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23

1 to exhaust should be excused because the company would suffer irreparable

2 injury in the form of ʺexpense and disruptionʺ if it were compelled to complete

3 the administrative proceeding before reaching federal court.  Id. at 244.  That

4 argument closely resembles the appellantsʹ claim here that post‐proceeding

5 judicial review will be powerless to remedy the injury they will suffer by

6 enduring the SECʹs administrative adjudication.

7 The Supreme Court concluded that a federal court would be able to

8 meaningfully review the oil companyʹs claim after the administrative proceeding

9 ended, and therefore ordered the companyʹs lawsuit dismissed on jurisdictional

10 grounds.  The Court acknowledged that the company would endure

11 ʺsubstantialʺ expense and disruption before the administrative proceeding

12 concluded.  Id.  But it deemed that hardship to be ʺpart of the social burden of

13 living under government,ʺ rather than a form of irreparable injury justifying

14 immediate judicial review.  Id. at 244‐45.  As the D.C. Circuit subsequently

15 explained, where ʺthe ʹinjuryʹ inflicted on the party seeking review is the burden

16 of going through an agency proceeding,ʺ the Supreme Courtʹs decision in

17 Standard Oil ʺteaches that the party must patiently await the denouement of

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24

1 proceedings within the Article II branch.ʺ  USAA Fed. Sav. Bank v. McLaughlin,

2 849 F.2d 1505, 1510 (D.C. Cir. 1988).

3 In other decisions, the Supreme Court has concluded that post‐proceeding

4 judicial review would not be meaningful because the proceeding itself posed a

5 risk of some additional and irremediable harm beyond the burdens associated

6 with the dispute resolution process.  See, e.g., McNary v. Haitian Refugee Ctr., Inc.,

7 498 U.S. 479, 496‐97, 499 (1991) (permitting a class of undocumented aliens to

8 raise a due‐process challenge to INS proceedings in district court, rather than

9 pursue eventual review in a federal court of appeals through administrative

10 channels, partly because most of the aliens could ʺensure themselves review in

11 courts of appeals only if they voluntarily surrender[ed] themselves for

12 deportation,ʺ a ʺprice . . . tantamount to a complete denial of judicial review for

13 most undocumented aliensʺ).  But the appellants have identified no such

14 additional, irremediable harm here.  The only prospective injury that they

15 describe is ʺbeing subjected to an unconstitutional adjudicative procedure,ʺ with

16 the attendant ʺembarrassment, expense,  . . . ordeal . . . [and] state of anxiety and

17 insecurity.ʺ  Appellantsʹ Br. at 19, 21 (alterations in original and internal

18 quotation marks omitted).  As Standard Oil and other decisions discussed above

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25

1 indicate, the prospect of such harm alone does not render post‐proceeding

2 judicial review less than meaningful.  Cf. In re al‐Nashiri, 791 F.3d at 79‐80

3 (explaining that the defendantʹs ʺabstract concernʺ that his presiding judges

4 violated ʺthe separation of powersʺ because they had been improperly appointed

5 did not establish a prospective irreparable injury that justified immediate federal

6 intervention in ongoing administrative proceedings).

7 We therefore conclude that the appellants will have access to meaningful

8 judicial review of their Appointments Clause claim through administrative

9 channels.  See Bebo, 799 F.3d at 774 (concluding that a respondent in an ongoing

10 SEC administrative proceeding could obtain meaningful judicial review ʺ[a]fter

11 the pending enforcement action has run its courseʺ by ʺrais[ing] her objections,ʺ 

12 including an Article II challenge to the presiding ALJ, ʺin a circuit court of

13 appeals established under Article IIIʺ); see also Jarkesy, 803 F.3d at 27 (ʺEven

14 assuming [the respondent] is right that Congress has unconstitutionally

15 delegated power to the SEC to decide whether to place him in an administrative

16 proceeding rather than in a court action, [the respondent] has no inherent right to

17 avoid an administrative proceeding at all.  Thus, his rights can be vindicated by a

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26

1 reversal of the Commissionʹs final order if the court of appeals grants his petition

2 for review.ʺ (internal quotation marks omitted)).

3 B. Wholly Collateral

4 We next consider whether the appellantsʹ Appointments Clause claim is

5 ʺwholly collateralʺ to the SECʹs administrative scheme.  The Supreme Court has

6 not explained precisely how to make this determination, although Elgin suggests

7 that a claim is not wholly collateral if it serves as the ʺvehicle by whichʺ a party

8 seeks to prevail in an administrative proceeding.  See 132 S. Ct. at 2139‐40.  In the

9 absence of more extensive guidance, lower courts have adopted two competing

10 approaches.  Some decisions have suggested that a claim is not wholly collateral

11 to an administrative proceeding only if it is substantively intertwined with the

12 merits dispute that the proceeding was commenced to resolve.  See Hill, 114 F.

13 Supp. 3d at 1309 (concluding that the respondentʹs Article II challenge was

14 ʺwholly collateralʺ to the ongoing administrative proceeding because ʺ[w]hat

15 occurs at the . . . proceeding and the SECʹs conduct there is irrelevant toʺ the

16 constitutional challenge); Duka, 103 F. Supp. 3d at 391 (concluding that the

17 respondentʹs Article II challenge was ʺwholly collateralʺ to the ongoing

18 administrative proceeding because the challenge did not ʺattack any order that

Case 15-2103, Document 111-1, 06/01/2016, 1783264, Page26 of 37
27

1 may be issued . . . relating to the outcome of the SEC actionʺ (internal quotation

2 marks omitted)).  Other decisions have suggested that a claim is not wholly

3 collateral if it has been raised in response to, and so is procedurally intertwined

4 with, an administrative proceeding — regardless of the claimʹs substantive

5 connection to the initial merits dispute in the proceeding.  See Jarkesy, 803 F.3d at

6 23 (concluding that claims arising ʺfrom actions the Commission took in the

7 course of [its administrative] schemeʺ were not ʺwholly collateralʺ); Bebo, 2015

8 WL 905349, at *2‐4, 2015 U.S. Dist. LEXIS 25660, at *4‐10 (implicitly concluding

9 that the respondentʹs Article II challenge did not qualify as wholly collateral to

10 the ongoing administrative proceeding because it was raised there as an

11 affirmative defense).  See generally Bebo, 799 F.3d at 773‐74 (comparing these two

12 lines of decisions).

13 The district court here adopted the latter approach.  It began its analysis by

14 noting that the appellantsʹ Appointments Clause claim is substantively

15 ʺunrelated to the securities violations underlying the administrative proceeding,ʺ 

16 such that resolving the challenge ʺcannot reasonably be characterized as the

17 ʹregularʹ or ʹroutineʹ business of SEC administrative proceedings.ʺ  Tilton, 2015

18 WL 4006165, at *11, 2015 U.S. Dist. LEXIS 85015, at *31‐32 (quoting, with minor

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28

1 alterations, Elgin, 132 S. Ct. at 2140).  Nevertheless, the court decided that the

2 claim did not qualify as ʺwholly collateralʺ because it was procedurally

3 intertwined with the SECʹs ongoing proceeding, where it functioned as an

4 affirmative defense.  Id. at 2015 WL 4006165, at *12, 2015 U.S. Dist. LEXIS 85015,

5 at *32‐34.

6 Absent further guidance from the Supreme Court, we are inclined to agree

7 with the district courtʹs assessment.  The SEC chose to enforce the Investment

8 Advisers Act against the appellants by initiating an administrative proceeding

9 and appointing an ALJ to act as the hearing officer.  The appellantsʹ 

10 Appointments Clause claim arose directly from that enforcement action and

11 serves as an affirmative defense within the proceeding.  To be sure, the claim

12 could be narrowly categorized as collateral to the statutory merits of the

13 Investment Advisers Act charges against the appellants.  But we cannot conclude

14 that the claim is wholly collateral to the SECʹs administrative scheme more

15 broadly.  As the district court recognized, it is ʺdifficult to see how [the

16 Appointments Clause claim] can still be considered ʹcollateral to any

17 Commission orders or rules from which review might be sought,ʹ since the ALJ

18 and the Commission will, one way or another, rule on those claims and it will be

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29

1 the Commissionʹs order that [the appellants] will appeal.ʺ  Tilton, 2015 WL

2 4006165, at *12, 2015 U.S. Dist. LEXIS 85015, at *32 (citation and some internal

3 quotation marks omitted) (quoting Free Enterprise, 561 U.S. at 490); see also Jarkesy,

4 803 F.3d at 23 (reaching a similar conclusion).  Put another way, the

5 Appointments Clause claim, like accompanying defenses to the merits of the

6 Investment Advisers Act charges, is a ʺvehicle by whichʺ the appellants seek to

7 prevail in the proceeding.  Elgin, 132 S. Ct. at 2139.  The claim identifies a

8 purported error in the way the Commission has sought to enforce the securities

9 laws, albeit one that sounds in administrative procedure rather than statutory

10 construction.

11 The dissent argues that the appellantsʹ Appointments Clause claim is as

12 collateral to the SECʹs administrative scheme as the accounting firmʹs

13 Appointments Clause claim was in Free Enterprise.  See ante at 16‐17.  We are not

14 persuaded by the analogy.  The Supreme Courtʹs jurisdictional conclusion in Free

15 Enterprise was, in our view, shaped principally by the absence of the type of

16 procedural link between constitutional claim and administrative proceeding that

17 exists here.  The accounting firm objected to actions that the PCAOB had taken

18 entirely outside the scope of the SECʹs scheme of administrative and judicial

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30

1 review — actions that could not be the subject of ʺany Commission orders . . .

2 from which review might be sought.ʺ  Free Enterprise, 561 U.S. at 490.  The firm

3 filed suit in federal district court, and the Supreme Court allowed the suit to

4 proceed, because the Appointments Clause claim was not moored to any

5 proceeding that would provide for an administrative adjudication and

subsequent judicial review.6 6   Here, by contrast, the appellantsʹ Appointments

7 Clause claim targets an aspect of an ongoing administrative proceeding.  We

8 think that distinction significantly alters the ʺwholly collateralʺ analysis, such

9 that the second Thunder Basin factor does not favor district court jurisdiction in

10 this case.  See Jarkesy, 803 F.3d at 23 (noting that a constitutional challenge might

11 qualify as collateral if it ʺwere filed in court before the initiation of any

12 administrative proceeding,ʺ as in Free Enterprise, but concluding that

                                                            

6 In explaining why the accounting firmʹs Appointments Clause claim qualified as

wholly collateral, the Free Enterprise decision at one point characterized the claim as an

ʺobject[ion] to the [PCAOBʹs] existence.ʺ  561 U.S. at 490.  Like the D.C. Circuit, we do

not read that language ʺto define a new category of collateral claims that fall outside an

otherwise exclusive administrative scheme.ʺ  Jarkesy, 803 F.3d at 24.  In our view, the

Supreme Court classified the accounting firmʹs claim as wholly collateral because the

PCAOBʹs disputed actions could not be reviewed by the Commission, which meant that

the firmʹs Appointments Clause challenge to those actions fell entirely outside the scope

of the administrative scheme and could not be resolved by a Commission ʺorder[] . . .

from which [judicial] review might be sought.ʺ  Free Enterprise, 561 U.S. at 490.

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31

1 constitutional challenges were not collateral when raised in response to ʺmultiple

2 aspects of [an] ongoing proceedingʺ).

3 C. Agency Expertise

4 The final consideration within the Thunder Basin framework is whether the

5 appellantsʹ Appointments Clause claim falls outside the SECʹs expertise.  This is a

6 close question.  As an initial matter, the Supreme Courtʹs decision in Free

7 Enterprise suggests that the SEC does not possess unique legal expertise in

8 analyzing the constitutional sufficiency of its appointments.  There, the Court

9 concluded that the merits of an Appointments Clause challenge to the PCAOB

10 fell ʺoutside the Commissionʹs competence and expertiseʺ because the claim

11 raised only ʺstandard questions of administrative law,ʺ which were unrelated to

12 any ʺstatutoryʺ or ʺfact‐bound inquiriesʺ that the SEC might be singularly

13 qualified to perform.  561 U.S. at 491.

14 Under Touche Ross, that conclusion might end our analysis of agency

15 expertise.  As noted, the panel there permitted respondents to challenge an

16 ongoing SEC administrative proceeding in federal district court solely because

17 the legal substance of the challenge fell outside the administrative tribunalʹs

18 expertise and could not be usefully developed through its factfinding.  609 F.2d

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32

1 at 577.  But the Supreme Court has since adopted a broader conception of agency

2 expertise in the jurisdictional context.  Elgin, in particular, emphasizes that an

3 agency may bring its expertise to bear on a constitutional claim indirectly, by

4 resolving accompanying, potentially dispositive issues in the same proceeding.  

5 See Jarkesy, 803 F.3d at 28‐29 (noting that ʺElgin . . . clarified . . . that an agencyʹs

6 relative[ly low] level of insight into the merits of a constitutional question is not

7 determinativeʺ of whether the agency can bring its expertise to bear).

8 In Elgin, federal employees who allegedly had been discharged for

9 violating a statutory command sought reinstatement by challenging the

10 constitutionality of the statute.  Congress had previously created an

11 administrative process to adjudicate specified personnel decisions regarding

12 federal employees, which was conducted initially by the Merit Systems

13 Protection Board (ʺMSPBʺ) and subject to review in the Federal Circuit.  Before

14 completing that administrative process, the employees attempted to raise their

15 constitutional challenge to the statute in federal district court.  In an effort to

16 establish federal jurisdiction, they contended that the claim fell outside the

17 MSPBʹs expertise because the MSPB disclaimed authority to determine the

18 constitutionality of a federal statute.  Elgin, 132 S. Ct. at 2130‐31, 2140.

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1 The Supreme Court disagreed.  Although the MSPB had indeed disclaimed

2 authority to resolve constitutional challenges to statutes, the Court identified

3 several ways in which the agency might ʺotherwiseʺ bring its expertise ʺto bearʺ 

4 in proceedings that raised those challenges.  First, the MSPB could resolve

5 ʺpreliminary questions unique to the employment contextʺ that might ʺobviate

6 the need to address the constitutional challenge.ʺ  Id. at 2140.  Second, ʺthe

7 challenged statute [could] be one that the MSPB regularly construes, and its

8 statutory interpretation could alleviate constitutional concerns.ʺ  Id.  And third,

9 ʺan employeeʹs appeal [could] involve other statutory or constitutional claims

10 that the MSPB routinely considers, in addition to a constitutional challenge to a

11 federal statute,ʺ whose resolution ʺin the employeeʹs favor might fully dispose of

12 the case.ʺ  Id.  In light of those potential applications of agency expertise to other

13 dimensions of the administrative proceeding, the Court concluded that there was

14 ʺno reason to conclude that Congress intended to exemptʺ the employeesʹ 

15 constitutional challenge ʺfrom exclusive review before the MSPB and the Federal

16 Circuit.ʺ  Id.

17 Applying Elginʹs approach here, we think that the SEC might bring its

18 expertise to bear on the appellantsʹ proceeding by resolving accompanying

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34

1 statutory claims that it ʺroutinely considers,ʺ and which ʺmight fully dispose of

2 the caseʺ in the appellantsʹ favor.  132 S. Ct. at 2140.  In particular, the

3 Commission could rule that the appellants did not violate the Investment

4 Advisers Act, in which case the constitutional question would become moot.   

5 It may be argued that the application of agency expertise to the statutory

6 issues in the appellantsʹ proceeding would improperly skip over their

7 Appointments Clause claim, which raises a ʺthresholdʺ issue that logically

8 precedes a merits adjudication.  Although we are mindful of that concern, the

9 Supreme Court appears to have rejected an analogous argument in Standard Oil.  

10 There, the respondent oil company, like the appellants here, sought to raise a

11 ʺthresholdʺ challenge to its administrative proceeding as a whole soon after the

12 proceeding began.  The Ninth Circuit permitted the district court to exercise

13 jurisdiction over that challenge, in part because it feared that the oil companyʹs

14 victory on other grounds in the administrative proceeding would evade, and

15 improperly ʺmoot,ʺ the threshold issue.  Standard Oil Co. of Cal. v. FTC, 596 F.2d

16 1381, 1387 (9th Cir. 1979), revʹd, 449 U.S. 232 (1980).  The Supreme Court

17 expressly rejected that rationale and reversed, explaining:

18 [O]ne of the principal reasons to await the termination of agency

19 proceedings is to obviate all occasion for judicial review.  Thus, the

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35

1 possibility that [the oil companyʹs] challenge may be mooted in

2 adjudication warrants the requirement that [the company] pursue

3 adjudication, not shortcut it.

4

5 Standard Oil, 449 U.S. at 244 n.11 (internal quotation marks and citations

6 omitted).  In light of that passage, we are inclined to read Elginʹs mention of

7 ʺother statutory or constitutional claimsʺ that might ʺfully dispose of the case,ʺ 

8 132 S. Ct. at 2140, to include the Investment Advisers Act charges here.

9 Such a reading of Elgin dovetails with our analysis of the availability of

10 meaningful judicial review.  We have already concluded, in keeping with

11 established federal practice regarding analogous disputes, that the appellants

12 may adequately vindicate their Appointments Clause claim by first awaiting a

13 final Commission order and then petitioning for judicial review on constitutional

14 grounds only if the order is adverse.  By the same logic, a favorable Commission

15 order, including one on statutory grounds, would provide an acceptable

16 resolution of the Appointments Clause claim and obviate any need for judicial

17 review.  It follows, we think, that the Commission may bring its expertise to bear

18 in a manner potentially relevant to the constitutional issue by resolving the

19 statutory charges against the appellants.  For that reason, the final Thunder Basin

20 factor lends minimal support to the appellantsʹ jurisdictional argument.  See

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1 Jarkesy, 803 F.3d at 29 (concluding that ʺthe Commissionʹs expertise can otherwise

2 be brought to bear on the issues in [the respondentʹs] proceedingʺ because ʺthe

3 agency could moot the need to resolveʺ the respondentʹs constitutional claims,

4 including several threshold challenges to the proceeding as a whole, ʺby finding

5 that he did not commit the securities‐law violations of which he stands accusedʺ 

6 (internal quotation marks omitted)); Bebo, 799 F.3d at 773 (ʺElgin explained that

7 the possibility that [the respondent] might prevail in the administrative

8 proceeding (and thereby avoid the need to raise her constitutional claims in an

9 Article III court) does not render the statutory review scheme inadequate.ʺ).

10 CONCLUSION

11 After considering each of the Thunder Basin factors, we conclude that

12 Congress intended the appellantsʹ Appointments Clause claim ʺto be reviewed

13 withinʺ the SECʹs exclusive ʺstatutory structure.ʺ  Free Enterprise, 561 U.S. at 489

14 (quoting Thunder Basin, 510 U.S. at 207).  The ʺthresholdʺ nature of the claim does

15 not defeat the presumption that it, like other procedural and substantive

16 defenses to an enforcement action, must be resolved in the first instance through

17 agency proceedings.  To the contrary:  ʺMany respondents in SEC proceedings

18 join substantive defenses to their securities charges together with challenges to

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37

1 the Commissionʹs actions or authority.  It makes good sense to consolidate all of

2 each respondentʹs issues before one court for review, and only after an adverse

3 Commission order makes that review necessary.ʺ  Jarkesy, 803 F.3d at 29‐30.  We

4 therefore conclude, in keeping with the decisions of the Seventh and D.C.

5 Circuits in Bebo and Jarkesy, that the appellants must await a final Commission

6 order before raising their Appointments Clause claim in federal court.  The

7 judgment of the district court is AFFIRMED, and our stay on further proceedings

8 by the SEC is VACATED.

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