Carnahan v. Securities and Exchange Commission

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF FLORIDA

CASE NO. 20-60386-CIV-ALTMAN/Brannon

TIMOTHY CARNAHAN and

CYIOS CORPORATION,

Plaintiffs,

v.

SECURITIES AND EXCHANGE COMMISSION,

Defendant.

_____________________________/

ORDER

A “federal court not only has the power but also the obligation at any time to inquire into

jurisdiction whenever the possibility that jurisdiction does not exist arises.” Fitzgerald v. Seaboard

Sys. R.R., Inc., 760 F.2d 1249, 1251 (11th Cir. 1985) (citations omitted). It is the Court’s

responsibility, therefore, to “zealously insure that jurisdiction exists over a case, and should itself

raise the question of subject matter jurisdiction at any point in the litigation where a doubt about

jurisdiction arises.” Smith v. GTE Corp., 236 F.3d 1292, 1299 (11th Cir. 2001). Indeed, “[i]f the

court determines at any time that it lacks subject-matter jurisdiction, the court must dismiss the

action.” FED. R. CIV. P. 12(h)(3) (emphasis added); see also Boone v. Sec’y, Dep’t Of Corr., 377

F.3d 1315, 1316 (11th Cir. 2004) (affirming district court’s sua sponte dismissal for lack of

subject-matter jurisdiction).

THE FACTS

The Plaintiff, Timothy Carnahan, owns CYIOS Corporation (“CYIOS”), which is also a

Plaintiff. Compl. ¶ 11. CYIOS sells a computer program called CTIPRO, which “provides a virtual

workspace for collaboration . . . [that] captures all financials of all transactions.” Id. ¶ 12.

Carnahan began using CYIPRO to meet “SEC ICFR requirements” in 1999. Id. ¶ 13. “While using

the software . . . every SEC 10k CYIOS filed with the sec.gov was audited and paid by an external

audit company . . . [and] CYIOS NEVER received any deficiencies or material weaknesses from

an audit.” Id.

In June of 2014, the Defendant, the Securities and Exchange Commission (the “SEC”),

“started an investigation and stated that plaintiff’s use of computer software ‘CYIPRO’ for

ICFR . . . is false on the all filed 10K CYIOS reports.” Id. ¶ 14. In response, Carnahan contacted

the SEC and, within just a few days, submitted proof that the software is, in fact, ISO complaint.

See id. ¶¶ 15–16.

The parties were still discussing the matter when, on February 13, 2015, the SEC filed an

Order Instituting Administrative and Cease-and-Desist Proceedings. See id. ¶ 17. Then, on

December 21, 2015, the SEC released its Initial Decision and, in part, dismissed the violations.

See id. ¶ 18. Carnahan appealed on February 2, 2016. See id.

On November 29, 2017, the SEC vacated its Initial Decision and, on December 7, 2017,

remanded the case to the Administrative Law Judge (“the “ALJ”) for a new hearing. See id. ¶¶ 21-

22. The ALJ issued its Second Initial Decision on January 10, 2020. See id. ¶ 23.

The Plaintiffs “have the right to petition the SEC Commission for a review of this ID.” Id.

But, rather than pursue that administrative remedy, they chose to file this lawsuit.

THE LAW

The SEC has statutory authority to enforce the nation’s securities laws. One way it

can do so is by instituting an administrative proceeding against an alleged

wrongdoer. By law, the Commission may itself preside over such a proceeding. See

17 C.F.R. § 201.110 (2017). But the Commission also may, and typically does,

delegate that task to an ALJ. See ibid.; 15 U.S.C. § 78d–1(a). The SEC currently

has five ALJs. Other staff members, rather than the Commission proper, selected

them all. See App. to Pet. for Cert. 295a–297a.

An ALJ assigned to hear an SEC enforcement action has extensive powers—the

“authority to do all things necessary and appropriate to discharge his or her duties”

and ensure a “fair and orderly” adversarial proceeding. §§ 201.111, 200.14(a).

Those powers “include, but are not limited to,” supervising discovery; issuing,

revoking, or modifying subpoenas; deciding motions; ruling on the admissibility of

evidence; administering oaths; hearing and examining witnesses; generally

“[r]egulating the course of” the proceeding and the “conduct of the parties and their

counsel”; and imposing sanctions for “[c]ontemptuous conduct” or violations of

procedural requirements. §§ 201.111, 201.180; see §§ 200.14(a), 201.230. As that

list suggests, an SEC ALJ exercises authority “comparable to” that of a federal

district judge conducting a bench trial. Butz v. Economou, 438 U.S. 478, 513, 98

S.Ct. 2894, 57 L.Ed.2d 895 (1978).

After a hearing ends, the ALJ issues an “initial decision.” § 201.360(a)(1). That

decision must set out “findings and conclusions” about all “material issues of fact

[and] law”; it also must include the “appropriate order, sanction, relief, or denial

thereof.” § 201.360(b).

Lucia v. S.E.C., 138 S. Ct. 2044, 2049 (2018).

After the ALJ issues its initial decision,

[e]ither party may appeal the initial decision to the Commission, id. § 201.410, or

the Commission may review it on its own initiative. Id. § 201.411(c). The

Commission’s review authority is broad. “[It] may affirm, reverse, modify, set aside

or remand for further proceedings, in whole or in part, an initial decision by a

hearing officer and may make any findings or conclusions that in its judgment are

proper and on the basis of the record.” Id. § 201.411(a). Conversely, if there is no

appeal to the Commission, and the Commission declines to exercise its right to

review sua sponte, the ALJ’s initial decision becomes the final decision of the

Commission for all purposes. 15 U.S.C. § 78d-1(c). Regardless of whether the

initial decision is appealed, the administrative process culminates in a final order

of the Commission.

The aggrieved party may then seek review in the United States Court of Appeals

either for the circuit in which she resides or has her principal place of business or

for the District of Columbia Circuit. 15 U.S.C. § 78y(a)(1). The aggrieved party

may request that the Commission stay enforcement of its order pending judicial

review. 17 C.F.R. § 201.401. Section 78y then provides a detailed scheme for

appellate court review of final Commission orders.

The process of obtaining judicial review begins with the filing of a petition in the

court of appeals that triggers the court’s jurisdiction. 15 U.S.C. § 78y(a)(1), (3).

Upon the filing of the record in the court of appeals, the court’s jurisdiction

becomes exclusive. Id. § 78y(a)(3). Although other provisions of the Exchange Act

provide limited district court jurisdiction over some types of securities-related

claims, the Act contains no express authorization for district court review of a final

Commission order.

Section 78y then details how the court of appeals reviews a final order of the

Commission. The statute grants the reviewing court broad authority “to affirm or

modify and enforce or to set aside the [final Commission] order in whole or in part.”

Id. § 78y(a)(3). The reviewing court must accept the Commission’s factual findings

that are supported by substantial evidence, but, if appropriate, the court may remand

to the Commission for additional fact finding. Id. § 78y(a)(4)–(5). The statute

prohibits the reviewing court from considering a newly-raised objection to a final

Commission order unless there was “reasonable ground” for failing to raise the

objection first before the Commission. Id. § 78y(c)(1). The statute generally

authorizes the reviewing court to stay enforcement of the Commission’s order

pending judicial review “to the extent necessary to prevent irreparable injury.” Id.

§ 78y(c)(2).

Hill v. S.E.C., 825 F.3d 1236, 1238–39 (11th Cir. 2016) (footnotes omitted).

When, as here, plaintiffs fail to follow these procedures, federal courts are powerless to

hear their claims. “Pursuant to Section 704 of the Administrative Procedure Act, 5 U.S.C. § 704,

a petition to the Commission for review of an initial decision is a prerequisite to the seeking of

judicial review of a final order entered pursuant to such decision.” 17 C.F.R. § 201.410. Moreover,

“Section 78y provides only for judicial review of Commission action, and not every Board action

is encapsulated in a final Commission order or rule.” Free Enter. Fund v. Pub. Co. Accounting

Oversight Bd., 561 U.S. 477, 490 (2010) (emphasis in original). And, even if a plaintiff does

challenge the (i) final action of (ii) the Commission, he must proceed directly to the Court of

Appeals. On this point, 15 U.S.C. § 78y is unambiguous:

A person aggrieved by a final order of the Commission entered pursuant to this

chapter may obtain review of the order in the United States Court of Appeals for

the circuit in which he resides or has his principal place of business, or for the

District of Columbia Circuit, by filing in such court, within sixty days after the

entry of the order, a written petition requesting that the order be modified or set

aside in whole or in part.

With these principles in mind, the Court now turns to the facts of this case.

ANALYSIS

In their Complaint, the Plaintiffs assert three claims against the SEC. See generally Compl.

[ECF No. 1]. First, they allege that they have been denied due process of law because the SEC

took more than seven months to process their claims. See id. at 7. Second, they ask for a permanent

injunction that would prevent the SEC—or, for that matter, the ALJ—from enforcing the Second

Initial Decision against them. See id. at 7–10. Third, they ask the Court to dismiss the SEC

enforcement action because it has taken too long. See id. at 8–9. But the Court can do none of these

things because, for the following three reasons, it lacks subject-matter jurisdiction over this case.

First, the Plaintiffs have not yet appealed the Second Initial Decision to the Commission.

And “a petition to the Commission for review of an initial decision is a prerequisite to the seeking

of judicial review of a final order entered pursuant to such decision.” 17 C.F.R. § 201.410.

Second, the Plaintiffs do not challenge any SEC “final order.” As the Eleventh Circuit has

explained, once an ALJ enters its initial decision, a plaintiff must appeal that decision to the SEC

Commission. See Hill, 825 F.3d at 1238. But, “[r]egardless of whether the initial decision is

appealed, the administrative process culminates in a final order of the Commission.” Id. Only that

“final order” is reviewable in federal court. See 15 U.S.C. § 78y.

Third, this Court is not the Eleventh Circuit Court of Appeals. “A person aggrieved by a

final order of the Commission entered pursuant to this chapter may obtain review of the order in

the United States Court of Appeals for the circuit in which he resides or has his principal place of

business.” 15 U.S.C. § 78y.

Ultimately, the Plaintiffs “have the right to appeal the [Second Initial Decision].” Compl.

at 11; see also id. at 6. But, before they may enter a federal courthouse, they must exhaust their

administrative remedies. And, once they do, they must file their claim in the Court of Appeals.

For all these reasons, the Court hereby

ORDERS and ADJUDGES that the Plaintiffs’ Complaint [ECF No. 1] is DISMISSED

WITHOUT PREJUDICE for lack of subject-matter jurisdiction. The Clerk of Court is directed

to CLOSE this case. Any pending motions are DENIED as moot.

DONE AND ORDERED in Fort Lauderdale, Florida, this 11th March 2020.

ROY K. ALTMAN

UNITED STATES DISTRICT JUDGE

cc: counsel of record