Court Opinion

ID: 9918505
Source: CourtListenerOpinion
Date Created: 2024-01-13 21:00:48.432086+00
Date Added: 2024-06-11T08:01:00.384458
License: Public Domain

United States Court of Appeals
                           FOR THE DISTRICT OF COLUMBIA CIRCUIT
                                    ____________
No. 23-5129                                               September Term, 2022
                                                                    1:23-cv-01506-BAH
                                                     Filed On: July 5, 2023
Alpine Securities Corporation,

             Appellant

Scottsdale Capital Advisors Corporation,

             Appellee

      v.

Financial Industry Regulatory Authority and
United States of America,

             Appellees

      BEFORE:       Henderson, Walker*, and Garcia**, Circuit Judges

                                       ORDER

      Upon consideration of the emergency motion for injunction pending appeal, the
oppositions thereto, and the reply; and the administrative stay entered on June 8, 2023,
it is

      ORDERED that the administrative stay be dissolved. It is

       FURTHER ORDERED that the emergency motion for injunction pending appeal
be granted and the Financial Industry Regulatory Authority be enjoined from continuing
the expedited enforcement proceeding against Alpine Securities Corporation pending
further order of the court. Appellant has satisfied the stringent requirements for an

* A statement by Circuit Judge Walker, concurring in this order, is attached.
** Judge Garcia would deny the emergency motion for injunction pending appeal.
                United States Court of Appeals
                           FOR THE DISTRICT OF COLUMBIA CIRCUIT
                                    ____________
No. 23-5129                                               September Term, 2022

injunction pending appeal. See Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7,
20 (2008); D.C. Circuit Handbook of Practice and Internal Procedures 33 (2021).

                                      Per Curiam

                                                        FOR THE COURT:
                                                        Mark J. Langer, Clerk

                                                BY:     /s/
                                                        Michael C. McGrail
                                                        Deputy Clerk

                                         Page 2
                 United States Court of Appeals
                             FOR THE DISTRICT OF COLUMBIA CIRCUIT
                                      ____________
No. 23-5129                                                 September Term, 2022

W ALKER, Circuit Judge, concurring:

“Because the entire ‘executive Power’ belongs to the President alone, it can only be
exercised by the President and those acting under him.”*

      To buy and sell securities, brokers must register with a self-regulatory
organization. 15 U.S.C. § 78o(a)(1), (b)(1)(B). Self-regulatory organizations are
responsible for “enforc[ing] compliance” with the “provisions” of the Securities and
Exchange Act, and the “rules and regulations thereunder.” Id. § 78s(g)(1); see also id.
§ 78o-3(b)(7).

         Alpine Securities Corporation is a securities broker. Earlier this year, it found
itself in trouble with its self-regulatory organization, the Financial Industry Regulatory
Authority. Believing that Alpine violated a preexisting cease-and-desist order, FINRA
brought an expedited enforcement action seeking to stop Alpine from selling securities.
In response, Alpine filed this suit, collaterally attacking FINRA’s authority to conduct its
enforcement proceeding.

       All that might sound like a run-of-the-mill encounter with the government. But
here’s the twist: Self-regulatory organizations are not government agencies. They are
private corporations responsible for regulating securities brokers. Id. § 78s(g)(1).

       Alpine says FINRA’s enforcement action violates the Constitution because
FINRA’s hearing officers impermissibly wield executive power that may be exercised
only by the President and officers under his supervision. And it seeks an injunction
pending appeal to block its expulsion from FINRA—the so-called “corporate death
penalty”—while it argues its case. App. 48.

      By granting Alpine’s request, the Court preserves the status quo and allows full
consideration of Alpine’s constitutional argument.

                                              I

       We will enjoin agency action pending appeal when the party seeking the
injunction is likely to win on the merits, it will suffer irreparable harm without an
injunction, and the equities and public interest favor our intervention. Nken v. Holder,

       *
       United States ex rel. Polansky v. Executive Health Resources, Inc., 143 S. Ct.
1720, 1741 (2023) (Thomas, J., concurring) (cleaned up).

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                 United States Court of Appeals
                             FOR THE DISTRICT OF COLUMBIA CIRCUIT
                                       ____________
No. 23-5129                                                 September Term, 2022

556 U.S. 418, 426, 435 (2009); see also John Doe Co. v. CFPB, 849 F.3d 1129, 1131
(D.C. Cir. 2017).

       If Alpine is likely to succeed on the merits, the other boxes are easily checked.
Alpine would suffer an irreparable harm without an injunction because the ongoing
FINRA enforcement proceedings would put it out of business. Plus, the resolution of
claims by an unconstitutionally structured adjudicator is a “here-and-now injury” that
cannot later be remedied. Axon Enterprise, Inc. v. FTC, 598 U.S. 175, 191 (2023)
(cleaned up).

        An injunction would also be equitable and in the public interest. The public
interest favors preventing the deprivation of individual rights and abuses of government
power. See Nken, 556 U.S. at 436. If Alpine’s constitutional challenge has merit, that
is the case here: It will be “subject[] to an illegitimate proceeding, led by an illegitimate
decisionmaker.” Axon, 598 U.S. at 191.

        The interests cutting the other way are not as strong. The public has an interest
in timely enforcement against those who violate the law. Nken, 556 U.S. at 436. But
here the only evidence that Alpine has violated the law is FINRA’s say so. And if Alpine
is correct on the merits, then FINRA is an illegitimate decisionmaker.

        That leaves Alpine’s likelihood of success on the merits. At this early stage,
Alpine has raised a serious argument that FINRA impermissibly exercises significant
executive power. So the Court is correct to grant an injunction preserving Alpine’s
business while it litigates its constitutional challenge. To be clear, “I do not rule out the
possibility that further briefing and argument might convince me that my current view is
unfounded.” Ritter v. Migliori, 142 S. Ct. 1824, 1824 (2022) (Alito, J., dissenting); see
also Merrill v. Milligan, 142 S. Ct. 879, 879 (2022) (Kavanaugh, J., concurring) (“[t]o
reiterate,” a vote to stay is “not a decision on the merits”).

                                              II

      In our system of government, the President alone is “vested” with the “executive
Power.” U.S. Const. art. II, § 1.

        To ensure that the executive power remains with the President, the Constitution
puts limits on those who exercise it on the President’s behalf. Anyone who “wield[s]
significant executive power” must be an Officer of the United States. See Buckley v.
Valeo, 424 U.S. 1, 126 (1976). Those officers must generally be removable by the
President or an officer subordinate to the President. See Seila Law LLC v. CFPB,
140 S. Ct. 2183, 2211 (2020) (principal officers must be removeable by the President).

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                 United States Court of Appeals
                            FOR THE DISTRICT OF COLUMBIA CIRCUIT
                                     ____________
No. 23-5129                                                September Term, 2022

And they must be appointed by an appropriate government body under the
Appointments Clause. U.S. Const. art. II, § 2, cl. 2; Lucia v. SEC, 138 S. Ct. 2044,
2051 (2018).

        Applying those principles, the Supreme Court held that Administrative Law
Judges within the SEC were Officers of the United States who must be appointed in
accordance with the Appointments Clause. Lucia, 138 S. Ct. at 2049. The ALJs, the
Court reasoned, “exercised significant authority” because they had “discretion” to
exercise an “important” government function—“enforc[ing] the nation’s securities laws.”
Id. at 2049, 2051, 2053 (cleaned up). The ALJs could, among other things, demand
testimony, rule on motions, regulate the course of a hearing, decide the admissibility of
evidence, and enforce compliance with discovery orders by punishing contempt. Id. at
2053.

       FINRA’s hearing officers are near carbon copies of those ALJs. They are tasked
by statute with enforcing the nation’s securities laws. 15 U.S.C § 78s(g)(1). They can
“levy sanctions that carry the force of federal law.” Turbeville v. FINRA, 874 F.3d 1268,
1270 (11th Cir. 2017) (citing 15 U.S.C. § 78o-3(b)(7)). And like Lucia’s ALJs, hearing
officers demand testimony, rule on motions, regulate the course of a hearing, decide
the admissibility of evidence, and enforce compliance with discovery orders by
punishing contempt. See FINRA Rules 8210 (Provision of Information and Testimony),
9252 (Requests for Information), 9235 (Hearing Officer Authority), 9263 (Evidence
Admissibility), 9280 (Contemptuous Conduct).1

       True, the SEC can review FINRA’s decisions “on its own motion, or upon
application by any person aggrieved . . . filed within thirty days.” 15 U.S.C. § 78s(d)(2).
But that doesn’t differentiate the hearing officers from Lucia’s ALJs. The SEC could
review the ALJs’ decisions too. Yet that “ma[d]e no difference” to whether they
exercised significant executive power. Lucia, 138 S. Ct. at 2054. The Court
emphasized that the SEC “adopts [ALJs’] credibility findings absent overwhelming
evidence to the contrary.” Id. (cleaned up). The standard of review is similar here. See
Daniel D. Manoff, 55 S.E.C. 1155, n.6 (2002) (credibility determinations made by
NASD—FINRA’s predecessor—“can be overcome only when there is ‘substantial
evidence’ for doing so”) (cleaned up).

      1
         To be sure, there are some minor differences between the FINRA hearing
officers and Lucia’s ALJs. For example, the ALJs “administer Oaths.” Lucia, 138 S. Ct.
at 2053. In FINRA hearings, that job is left to “a court reporter or notary public.” FINRA
Rule 9262 (Testimony).

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                 United States Court of Appeals
                            FOR THE DISTRICT OF COLUMBIA CIRCUIT
                                     ____________
No. 23-5129                                                September Term, 2022

     In other words, if the ALJs in Lucia exercised “significant” executive power, then
FINRA hearing officers probably do too. Lucia, 138 S. Ct. at 2051.

        Does it make a difference that FINRA hearing officers are employees of a
nominally private corporation? Probably not. Though FINRA is private, its enforcement
activities are controlled by the government. The Securities Exchange Act requires
FINRA to enforce government standards, including statutory provisions and SEC
regulations. 15 U.S.C. § 78s(g)(1). And FINRA’s own rules are generally vetted by the
SEC before taking effect. Id. § 78s(b)(1). And the SEC can modify them at any time.
Id. § 78s(c). And FINRA does not enjoy prosecutorial discretion—indeed, the SEC may
remove FINRA’s directors and officers if they do not enforce government standards. Id.
§§ 78s(h)(4), 78o-3(b)(7). And even FINRA’s code of procedure is approved by the
SEC. See Regulatory Notice 08-57, FINRA (2008), https://www.finra.org/rules-
guidance/notices/08-57 (FINRA announces SEC approval of its code of procedure,
among other things).

       From start to finish, FINRA hearing officers execute government laws subject to
a government plan, with little to no room for private control. Cf. Manhattan Community
Access Corp. v. Halleck, 139 S. Ct. 1921, 1928 (2019) (“a private entity can qualify as a
state actor . . . when the government compels the private entity to take a particular
action”).

        Despite seeming to exercise the executive authority of the United States, FINRA
hearing officers remain private employees. That presents two constitutional issues that
will benefit from “full briefing, oral argument, and our usual extensive internal
deliberations.” Merrill v. Milligan, 142 S. Ct. 879, 879 (2022) (Kavanaugh, J.,
concurring). First, FINRA hearing officers are not appointed by a government body
pursuant to the Appointments Clause. See Lucia, 138 S. Ct. at 2051. Second, they are
shielded from removal by the SEC except for cause. 15 U.S.C. § 78s(h)(4). And the
Supreme Court has assumed that the President may not remove SEC Commissioners
at will. Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S.
477, 487 (2010). That means that there are two layers of removal protection—one for
the Commissioners and one for the hearing officers. That may well infringe on the
President’s “ability to execute the laws . . . by holding his subordinates accountable for
their conduct.” Id. at 496.

       FINRA might prevail on those issues, but on the briefing before us, that seems
unlikely. It would be odd if the Constitution prohibits Congress from vesting significant
executive power in an unappointed and unremovable government administrator but
allows Congress to vest such power in an unappointed and unremovable private
hearing officer. See Lucia, 138 S. Ct. at 2051; see also Department of Transportation

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                  United States Court of Appeals
                              FOR THE DISTRICT OF COLUMBIA CIRCUIT
                                       ____________
No. 23-5129                                                  September Term, 2022

v. Association of American Railroads, 575 U.S. 43, 57 (2015) (Alito, J., concurring)
(“There is good reason to think that those who have not sworn an oath cannot exercise
significant authority of the United States.”).

       To so hold could create a constitutional loophole. It would suggest that
Congress was free to fix the constitutional infirmity with the ALJs in Lucia simply by
moving them outside of the Executive Branch. But that wouldn’t cure the basic defect
motivating the Supreme Court: Only the President and properly appointed Officers of
the United States may exercise significant executive power. See Lucia, 138 S. Ct. at
2051 (citing Buckley, 424 U.S. at 126). “What cannot be done directly cannot be done
indirectly. The Constitution deals with substance, not shadows.” Students for Fair
Admissions, Inc. v. President and Fellows of Harvard College, No. 20-1199, slip op. 39
(U.S. June 29, 2023) (cleaned up).

        To be sure, Congress may authorize private organizations to work with
government regulators. For example, it does not violate the Constitution to let private
entities make recommendations that the government later approves. See Sunshine
Anthracite Coal Co. v. Adkins, 310 U.S. 381, 399 (1940). But the hearing officers here
do not just make recommendations—they enforce securities laws and decide parties’
rights. And unless the losing party appeals to the SEC or the SEC steps in
unprompted, the hearing officers’ decisions are final.

                                              ***

      There is a serious argument that FINRA hearing officers exercise significant
executive power. And it is undisputed that they do not act under the President. That
may be a constitutional problem. See U.S. Const. art. II, § 1, cl. 1; id. art. II, § 2, cl. 2.

       The Court is right to grant an injunction pending appeal to let Alpine litigate its
case against FINRA, without the agency first sentencing it to the corporate death
penalty.

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