Dembski v. Securities and Exhange Commission

Or Filed

S EX

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF NEW YORK tec Loeuencartti □□

ee RN DisTRICLS

TIMOTHY S. DEMBSKI,

Plaintiff, DECISION AND ORDER

V. 1:19-CV-00358 EAW

SECURITIES AND EXCHANGE

COMMISION,

Defendants.

INTRODUCTION

Plaintiff Timothy M. Dembski (“Plaintiff”) filed this action against the Securities

and Exchange Commission (“SEC” or “Defendant”) seeking a declaration that Defendant’s

decision regarding Plaintiff violated the Appointments Clause of the Constitution and an

order reinstating Plaintiffs ability to participate in the securities industry. (Dkt. 2).

Presently before the Court is Defendant’s motion to dismiss for failure to state a claim

pursuant to Federal Rule of Civil Procedure 12(b)(6). (Dkt 10). Because the Court lacks

subject matter jurisdiction over Plaintiff's claims—an issue not raised by either party—the

Complaint is dismissed. However, even if the Court possessed subject matter jurisdiction,

Defendant’s motion to dismiss (Dkt. 10) would be granted.

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BACKGROUND

The following facts are taken from Plaintiffs Complaint (Dkt. 2) and the documents

submitted from the underlying SEC proceeding (Dkt. 12).! As is required at this stage of

the proceedings, the Court has treated Plaintiffs factual allegations as true.

Plaintiff was the owner and managing partner of Reliance Financial Advisors, LLC

(“Reliance”), an investment advisor business located in Buffalo, New York. (Dkt. 2 at

41). In September 2014, SEC staff members hired Jason S. Patil (“Patil”) as an

administrative law judge (“ALJ”) at the SEC. (Ud. at ¢ 26). On December 10, 2014, the

SEC initiated proceedings against Plaintiff, Reliance, and a co-owner of Reliance under

SEC Administrative Proceeding File No. 3-16311 (the “SEC Proceeding”). (Ud. at 19).

The SEC also issued a consent order on the same day against a Reliance employee in a

separate proceeding. (/d. at § 20). On January 9, 2015, ALJ Patil consolidated the two

proceedings, and a hearing on the proceedings was held before ALJ Patil in May 2015. (Ud.

at 28-29). Reliance and Reliance’s co-owner later settled with the SEC. (/d. at { 30).

On January 11, 2016, ALJ Patil found that Plaintiff violated federal securities laws and

permanently disbarred Plaintiff from the securities industry. (/d. at J] 36-37). Plaintiff

appealed the ALJ’s decision to the Commission, which affirmed the ALJ’s decision on

March 24, 2017. (dd. at FJ 39-40).

1 The Court takes judicial notice of the SEC documents. See Vale v. Great Water

Pollution Control Dist., 80 F. Supp. 3d 426, 433 (E.D.N.Y. 2015) (“[I]n adjudicating [a

Rule 12(b)(6)] motion, [courts] may take judicial notice of documents in the public record,

which includes records and reports of administrative bodies[.]” (first alteration added)

(quoting Volpe v. Nassau County, 915 F. Supp. 2d 284, 291 (E.D.N.Y. 2013)).

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Plaintiff filed a petition for review with the Second Circuit Court of Appeals seeking

reversal of the SEC Opinion. (/d. at 441). Plaintiff's petition for review did not raise any

constitutional issues related to ALJ Patil presiding over the initial hearing. (/d. at { 42).

On February 27, 2018, the Second Circuit denied Plaintiff's petition for review. (Jd. at

4 43).

Several months later, on June 21, 2018, the Supreme Court issued a decision in

Lucia v. Securities and Exchange Commission, 138 S. Ct. 2044 (2018), holding that SEC

ALJs are “Officers of the United States,” and as such they must be appointed by the

procedures prescribed in Article II’s Appointments Clause. Jd. at 2051, 2053. In other

words, an SEC ALJ must be appointed by either the president, a court of law, or a head of

department. See U.S. Const. Art. II, § 2, cl. 2. The Supreme Court found that the SEC

ALJs were not appropriately appointed because SEC staff had hired them, and that the

Lucia plaintiff had made a timely challenge to the validity of the ALJ’s appointment.

Lucia, 138 S. Ct. at 2055. Accordingly, the Court found the plaintiff was entitled to a new

hearing before a different ALJ. Jd.

On July 6, 2018, Plaintiff filed a motion to recall the mandate and vacate the

judgment with the Second Circuit. Motion to Recall, Dembski v. SEC, No. 17-1553, Dkt.

84 (2d. Cir. July 6, 2018). Plaintiff requested that, in light of Lucia, the Circuit revoke its

denial of review of Defendant’s decision, issue a mandate nullifying Defendant’s decision,

and preclude Defendant from taking any steps to enforce any portion of the sanctions the

SEC imposed on Plaintiff. Jd. at 9. Defendant responded, arguing that Plaintiff had

forfeited his Appointments Clause challenge by failing to raise it at any point prior to the

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Second Circuit’s February 2018 order denying Plaintiff's petition for review. Response to

Motion to Recall, Dembski v. SEC, No. 17-1553, Dkt. 87 (2d Cir. July 12, 2018). On July

20, 2018, the Second Circuit issued an order denying Plaintiffs motion to recall and motion

to vacate. Dembski v. SEC, No. 17-1553, Dkt. 91 (2d Cir. July 20, 2018).

Almost eight months later, on March 15, 2019, Plaintiff brought the present

proceeding in district court. (Dkt. 1; Dkt. 2). After being granted an extension of time

within which to respond to the Complaint (Dkt. 9), Defendant timely filed a motion to

dismiss on July 12, 2019 (Dkt. 10). Plaintiff filed his response on August 16, 2019 (Dkt.

16), and Defendant replied on August 30, 2019 (Dkt. 17). Oral argument was heard before

the undersigned on November 12, 2019, at which time the Court reserved decision. (Dkt.

21).

DISCUSSION

I. Subject Matter Jurisdiction

“When a requirement goes to subject-matter jurisdiction, courts are obligated to

consider sua sponte issues that the parties have disclaimed or have not presented.”

Gonzalez v. Thaler, 565 U.S. 134, 141 (2012). “A plaintiff asserting subject matter

jurisdiction has the burden of proving by a preponderance of the evidence that it exists.”

Makarova v. United States, 201 F.3d 110, 113 (2d Cir. 2000). Subject matter jurisdiction

is a threshold issue that a court must consider before addressing the merits of any particular

case. Rhulen Agency, Inc. v. Ala. Ins. Guar. Ass’n, 896 F.2d 674, 678 (2d Cir. 1990).

Pursuant to the Securities Act, when bringing an enforcement action, the SEC may

elect to do so by either initiating an administrative action or an injunctive action in a federal

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district court. 15 U.S.C. §§ 77h-1, 78u-2, 78u-3. For administrative actions, the SEC has

implemented a framework wherein it delegates its adjudicative functions to an ALJ while

“retain[ing] a discretionary right to review the action of any such” ALJ on “its own

initiative” or at a party’s request. Jd. § 78d-1(a)-(b); 17 C.F.R. § 201.110. When the SEC

initially assigns enforcement proceedings to an ALJ, the ALJ holds a hearing and issues a

decision, which can be appealed for review before the Commission. 17 C.F.R.

§§ 201.360(a)(1), 201.410(a). Only the Commission has the authority to issue a final

agency decision in the proceeding. Jd. § 201.360(d)(2). After the Commission issues a

final decision, the aggrieved person may file a petition for review of that decision with a

court of appeals. 15 U.S.C. § 78y(a)(1). Once the petition for review is filed, the court of

appeals “has jurisdiction, which becomes exclusive on the filing of the record, to affirm or

modify and enforce or to set aside the order in whole or in part.” Id. § 78y(a)(3).

This Court lacks subject matter jurisdiction over Plaintiff's claims under the

statutory scheme outlined above pursuant to binding Second Circuit precedent. In Tilton

v. Securities and Exchange Commission, 824 F.3d 276 (2d Cir. 2016), the Second Circuit

affirmed a district court’s holding that it did not have jurisdiction to hear the plaintiff's

Appointments Clause claim, finding that “Congress intended the SEC’s administrative

review scheme to encompass the appellants’ Appointments Clause claim, to the exclusion

of federal district court jurisdiction.” Jd. at 281-82. The Tilton court held that under the

test outlined by the Supreme Court in Thunder Basin Coal Co. v. Reich, 510 U.S. 200

(1994), an Appointments Clause challenge to an SEC ALJ falls “within the exclusive scope

of the SEC’s administrative review scheme and [can] reach a federal court only on petition

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for review of a final decision by the Commission.” 824 F.3d at 279. In other words, federal

district court jurisdiction does not exist for an Appointments Clause challenge to an SEC

ALJ, according to Tilton. Here, Plaintiff brings a collateral attack of a final order issued

by the SEC, raising an Appointments Clause claim. Accordingly, under Tilton, the Court

is bound to dismiss Plaintiff's claims for lack of subject matter jurisdiction.

Plaintiff argues that Tilton is not dispositive because Tilton “addresses an aggrieved

party’s standing to collaterally attack an ongoing administrative proceeding in which the

Commission had not yet made an order, and thus, the claimant had not yet suffered a grave

constitutional injury.” (Dkt. 16 at 9 (quotations omitted)). However, the Second Circuit

did not rule on standing grounds in 7i/ton, nor is the concept of standing even mentioned

in the decision. To the contrary, when put in context, the passage Plaintiff references

undercuts his argument. The 7i/ton plaintiffs argued that the SEC’s administrative scheme

did not offer them meaningful judicial review for an Appointments Clause claim because

it only provides judicial review for an adverse ruling by the Commission, whereas

Appointments Clause claims address a “grave constitutional injury” suffered just by being

exposed to the SEC proceedings before an ALJ. 824 F.3d at 283. However, the Second

Circuit was “not convinced” by the plaintiffs’ argument, and ultimately found that the

Appointments Clause claim did not fall outside the scope of the SEC’s statutory scheme.

Id, at 282-83.

Moreover, the overwhelming majority of courts have ruled that the statutory scheme

established by Congress in the Securities Act entirely deprives federal district courts of

jurisdiction over requests for review of final SEC orders. See New York v. U.S. Sec. &

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Exch. Comm’n, No. 19 CIV. 8365 (VM), 2019 WL 5203751, at *1 (S.D.N.Y. Sept. 27,

2019) (“[T]he relevant statute does ‘bestow’ judicial review: it provides that an adversely-

affected person ‘may obtain review’ in the court of appeals for the circuit of residence, or

in the United States Court of Appeals for the District of Columbia Circuit. 15 U.S.C.

§ 78y(b)(1). Although Congress’s use of the permissive ‘may’ might seem on its face to

imply a non-exclusive grant of jurisdiction in the court of appeals, it is well-established

that clauses containing ‘a specific statutory grant of jurisdiction to the court of appeals . . .

should be construed in favor of review by the court of appeals.” (alteration in original)

(quoting NRDC v. Abraham, 355 F.3d 179, 193 (2d Cir. 2004))); Altman v. U.S. S.E.C.,

768 F. Supp. 2d 554, 558 (S.D.N.Y. 2011) (“[D]istrict courts lack jurisdiction to hear post-

enforcement challenges seeking declaratory and injunctive relief related to disciplinary

proceedings—such challenges must proceed in accordance with the statutory scheme.”),

aff'd, 687 F.3d 44 (2d Cir. 2012); see also Hill v. Sec. & Exch. Comm’n, 825 F.3d 1236,

1242 (11th Cir. 2016) (“We discern from the text of the statute that Congress sought to

foreclose district court review of administrative proceedings.”); Bennett v. U.S. Sec. &

Exch. Comm’n, 844 F.3d 174, 182 (4th Cir. 2016) (“Congressional intent to deny collateral

district-court challenges is ‘fairly discernible’ from the text and structure of the Exchange

Act.”); Jarkesy v. U. S. Sec. & Exch. Comm’n, 48 F. Supp. 3d 32, 40 (D.D.C. 2014) (“[T]o

the extent that the plaintiffs believe their cause has been prejudged by the SEC’s

Commissioners, they may seek review, if necessary, before the Court of Appeals, but the

statute leaves no room for this Court to provide them the relief they seek.”), aff’d sub nom.

Jarkesy v. S.E.C., 803 F.3d 9 (D.C. Cir. 2015).

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Nor does the fact that Tilton was decided prior to Lucia have any import—Lucia

holds only that SEC ALJs are “Officers of the United States” that must be appointed by the

procedures prescribed in Article II’s Appointments Clause, 138 S. Ct. at 2051, 2053; it

does not address whether federal district courts have jurisdiction over collateral attacks of

SEC proceedings. See Raymond J. Lucia Cos. v. U.S. Sec. & Exch. Comm’n, No. 18-CV-

2692 DMS (JLB), 2019 WL 3997332, at *3 (S.D. Cal. Aug. 21, 2019) (holding court lacked

subject matter jurisdiction and that Lucia did not impact Tilton), appeal filed, No. 19-56101

(9th Cir. Sept. 18, 2019); Cochran v. U.S. Sec. and Exch. Comm’n, No. 4:19-CV-066-A,

2019 WL 1359252, at *2 (N.D. Tex. Mar. 25, 2019) (dismissing Appointments Clause

claim for lack of subject matter jurisdiction, finding Lucia “has no impact on the

jurisdictional issue at hand”), appeal filed, No. 19-10396 (Sth Cir. Apr. 9, 2019); Morris

& Dickson Co. v. Whitaker, 360 F. Supp. 3d 434, 444 n.6, 447 (W.D. La. Dec. 28, 2018)

(“[T]here is no reason to conclude that any strength of [plaintiff]’s Appointment Clause

challenge [on the basis of Lucia] alters the question of jurisdiction.”), appeal dismissed,

2019 WL 3230978 (Sth Cir. Apr. 1, 2019); see also Music Choice v. Clagget, 385 F. Supp.

3d 245, 250 (S.D.N.Y. 2019) (relying on Tilton to hold that Congress intended to preclude

APA review of ruling by the Acting Register of Copyrights). Accordingly, the Court finds

it lacks subject matter jurisdiction over Plaintiffs claims.

II. Defendant’s Motion to Dismiss

For the sake of completeness, the Court nonetheless addresses Defendant’s motion

to dismiss for failure to state a claim, assuming that the Court has subject matter jurisdiction

(which, for the reasons explained above, it does not).

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A. Legal Standard

“In considering a motion to dismiss for failure to state a claim pursuant to Rule

12(b)(6), a district court may consider the facts alleged in the complaint, documents

attached to the complaint as exhibits, and documents incorporated by reference in the

complaint.” DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d Cir. 2010). To

withstand dismissal, a complaint must set forth “enough facts to state a claim to relief that

is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A claim

has facial plausibility when the plaintiff pleads factual content that allows the court to draw

the reasonable inference that the defendant is liable for the misconduct alleged.” Turkmen

v. Ashcroft, 589 F.3d 542, 546 (2d Cir. 2009) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678

(2009)).

“While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need

detailed factual allegations, a plaintiffs obligation to provide the grounds of his

entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation

of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555 (internal

quotations and citations omitted). “To state a plausible claim, the complaint’s ‘[flactual

allegations must be enough to raise a right to relief above the speculative level.’” Nielsen

v. AECOM Tech. Corp., 762 F.3d 214, 218 (2d Cir. 2014) (quoting Twombly, 550 U.S. at

555).

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B. Failure to Timely Raise Appointments Clause Challenge

Defendant argues the Court should dismiss the Appointments Clause challenge

because Plaintiff failed to present it to the ALJ or the Commission during his administrative

proceedings, or to the Second Circuit. (Dkt. 11 at 8-11). The Court agrees.

“The Appointments Clause prescribes the exclusive means of appointing ‘Officers.’

Only the President, a court of law, or a head of department can do so.” Lucia, 138 S. Ct.

at 2051. “[O]ne who makes a timely challenge to the constitutional validity of the

appointment of an officer who adjudicates his case is entitled to relief.” Jd. at 2055

(emphasis added) (quotation omitted). Although the Second Circuit has not expressly

addressed the issue, the vast majority of courts both in and out of this Circuit have found

that the “timely” language in Lucia means that Appointments Clause claims are non-

jurisdictional—in other words, a party can forfeit the claim by failing to raise it. See

Kabani & Co., Inc. v. U.S. Sec. & Exch. Comm’n, 733 F. App’x 918, 919 (9th Cir. 2018)

(“[P]etitioners forfeited their Appointments Clause claim by failing to raise it in their briefs

or before the agency.”), cert. denied sub nom. Kabani & Co. v. S.E.C., 139 S. Ct. 2013

(2019); Turner Bros., Inc. v. Conley, 757 F. App’x 697, 700 (10th Cir. 2018) (“[W]e hold

that [the plaintiffs] failure to raise this argument with the Board constitutes failure to

exhaust administrative remedies and deprives the Court of Appeals of jurisdiction to hear

the matter.” (quotation omitted)); Bonilla-Bukhari v. Berryhill, 357 F. Supp. 3d 341,

350-51 (S.D.N.Y. 2019) (agreeing “with the vast majority of courts that have considered

this issue following Lucia” and holding that Appointments Clause claims must be

exhausted at the administrative level for a federal court to consider them); Cummins v.

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Comm r of Soc. Sec., No. 3:18 CV 1892, 2019 WL 2465300, at *2 (N.D. Ohio Mar. 18,

2019) (“[T]he overwhelming majority of courts within the Sixth Circuit to consider this

issue post-Lucia agree that to challenge the validity of the ALJ’s appointment under the

Appointments Clause, a claimant must raise the issue at the administrative level or the

claim is forfeited.” (footnote omitted)); see also Freytag v. C..R., 501 U.S. 868, 893-94

(1991) (Scalia, J., concurring in part and concurring in the judgment) (“Appointments

Clause claims, and other structural constitutional claims, have no special entitlement to

review. A party forfeits the right to advance on appeal a nonjurisdictional claim, structural

or otherwise, that he fails to raise at trial.”); cf Nat’l Labor Relations Bd. v. Pier Sixty,

LLC, 855 F.3d 115, 120-21 (2d Cir. 2017) (holding defendant forfeited the issue of

improper appointment of an agency official in violation of a statute “by not raising it in the

proceedings before the [administrative agency]’”). But see Fortin v. Comm’r of Soc. Sec.,

Civil Action No. 18-10187, 2019 WL 421071, at *4 (E.D. Mich. Feb. 1, 2019) (finding

exhaustion of Appointments Clause claim does not act as a waiver because hearing before

Social Security Administration ALJ is non-adversarial, and ALJ cannot resolve

constitutional challenges), report and recommendation rejected in relevant part, 372 F.

Supp. 3d 558 (E.D. Mich. Mar. 29, 2019), appeal filed, No. 19-1581 (6th Cir. May 24,

2019). This Court agrees with the majority of courts in holding that a party can forfeit an

Appointments Clause claim by not raising it at the administrative level.

Plaintiff argues that Lucia did not define the scope of what constitutes a timely

challenge, and that “nothing in Lucia indicates that an aggrieved party must pursue its

Appointments Clause claim exclusively in the agency proceeding before the very ALJ it

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challenges.” (Dkt. 16 at 8). The Court is not persuaded by Plaintiff's argument. The

SEC’s governing statutes authorize direct judicial review of the SEC’s final orders by

federal appellate courts and explicitly provide that courts of appeals may not consider

claims never raised before the SEC. See 15 U.S.C. § 80b-13(a) (“No objection to the order

of the Commission shall be considered by the court unless such objection shall have been

urged before the Commission or unless there were reasonable grounds for failure so to

do.”); id. § 80a-42(a) (same). Additionally, the plaintiff in Lucia raised the Appointments

Clause issue when he appealed the ALJ’s decision to the Commission. Lucia, 138 S. Ct.

at 2050. The Supreme Court explicitly made reference to that fact in assessing whether the

plaintiffs Appointments Clause claim was timely. See id. at 2055 (“Lucia made just such

a timely challenge: He contested the validity of Judge Elliot’s appointment before the

Commission, and continued pressing that claim in the Court of Appeals and this Court.”).

In the instant matter, Plaintiff also appealed the ALJ’s decision to the Commission, but

seemingly failed to raise the Appointments Clause issue at that time. While Plaintiff's

failure to raise an Appointments Clause challenge before the ALJ may not be dispositive,

Lucia plainly supports the conclusion that the SEC’s governing statutes required Plaintiff

to at least make the argument at some point in the SEC’s administrative proceedings, such

as in his appeal of the ALJ’s decision to the Commission.

Plaintiff contends it would be inappropriate for the Court to find he failed to raise

his Appointments Clause claim during the administrative proceedings at this stage of the

litigation. (Dkt. 16 at 12-13). He argues that “a determination of whether [Plaintiff] did in

fact raise such an objection would require a full examination of the SEC Proceeding

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record,” and as such discovery is required. (/d. at 13). However, Plaintiff should know

what arguments he himself raised before the ALJ and the Commission. Furthermore, the

SEC proceedings, including hearing transcripts, are part of the public record, see Appendix,

Dembski v. U.S. Sec. & Exch. Comm’n, No. 17-1553, Dkts. 40-43 (2d Cir. Aug. 14, 2017),

making discovery superfluous, see Detroit Screwmatic Co. v. United States, 49 F.R.D. 77,

79 (S.D.N.Y. 1970) (finding the plaintiff had not demonstrated good cause for production

of documents where “plaintiff is in possession of its own books, files and records, upon

which its contentions must rest” and “has not shown that it does not have access to the

books... upon which the government relies... nor is there any indication that the

government relied upon any records to which plaintiff does not have access”); see also

Gedid v. Huntington Nat’l Bank, No. 11-1000, 2012 WL 691614, at *2 (W.D. Pa. Mar. 2,

2012) (finding discovery unnecessary where the facts were in the plaintiff's control, and

“he needs no discovery to gather them—he has them already”); Ward v. Dickens, No.

3:11CV-362-H, 2012 WL 1038184, at *4 (W.D. Ky. Mar. 27, 2012) (“The Court finds that

discovery was not necessary for Plaintiff to proffer evidence that he paid his rent, which is

information that he would have in his own possession.”). The SEC documents submitted

by Defendant of which the Court takes judicial notice indicate that the Appointments

Clause argument was never raised before the SEC. Neither the ALJ’s decision nor the

SEC’s decision on appeal make any mention of an Appointments Clause challenge.”

2 At oral argument, Plaintiff's attorney represented that Plaintiff believes the

Appointments Clause issue was discussed at some point during the SEC proceedings.

However, the Court’s review of the record before the Second Circuit does not find that the

issue was raised.

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In any event, even if the record was unclear as to whether the Appointments Clause

challenge was raised before the SEC, Plaintiff concedes in his Complaint, and his attorney

conceded at oral argument, that he did not raise the Appointments Clause issue during his

direct appeal to the Second Circuit (Dkt. 2 at § 42), meaning that regardless of whether

Plaintiff did raise the Appointments Clause argument at some point during the SEC

proceedings, he still failed to raise the argument before the Second Circuit. See Levine v.

Greece Cent. Sch. Dist., 353 F. App’x 461, 463 (2d Cir. 2009) (“[W]hen the complaint on

its face shows that there is no possibility that it could be amended to allege facts that, if

true, would demonstrate that the plaintiff satisfied the exhaustion requirement, failure to

exhaust is a proper ground for a motion to dismiss.”). Plaintiff argues that Lucia

contemplates a timely challenge could be made either in the SEC proceeding or during the

judicial appeal. (Dkt. 16 at 12). However, the Lucia court indicated that a timely challenge

should be made both in the SEC proceeding and during the judicial appeal. Lucia, 138 S.

Ct. at 2055 (“[The plaintiff] made . . . a timely challenge: He contested the validity of [the

ALJ]’s appointment before the Commission, and continued pressing that claim in the Court

of Appeals and this Court.”). Additionally, the Second Circuit considers arguments not

raised in an appellant’s opening brief to be forfeited. See McCarthy v. S.E.C., 406 F.3d

179, 186 (2d Cir. 2005) (“[A]rguments not raised in an appellant’s opening brief, but only

in his reply brief, are not properly before an appellate court even when the same arguments

were raised in the trial court.”’); see also Island Creek Coal Co. v. Wilkerson, 910 F.3d 254,

256 (6th Cir. 2018) (holding plaintiff forfeited an Appointments Clause challenge by

waiting until the reply brief to present the challenge).

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Plaintiff also argues that the type of claim at issue, a constitutional Appointments

Clause claim, should not be subject to the SEC’s administrative review scheme. (Dkt. 16

at 8). However, as addressed in the subject matter jurisdiction section of this Decision and

Order, Plaintiff's argument is foreclosed by Tilton—the Tilton court explicitly addressed

the fact that an Appointments Clause claim is “a threshold constitutional challenge to

agency practice,” and nevertheless found administrative exhaustion was required. 824 F.3d

at 282.

Plaintiff further requests that the Court exercise its discretion to grant him relief

despite the untimeliness of his claim. He relies on Freytag v. C_.R., 501 U.S. 868 (1991),

where the Supreme Court held the Appointments Clause claim at issue was “one of those

rare cases in which we should exercise our discretion to hear petitioners’ challenge” even

though the claim had been raised for the first time in the appeal to the Fifth Circuit. Id. at

878-79. The Court finds Freytag and the cases that followed it do not compel the Court to

exercise its discretion in the instant matter.

In Freytag, the Supreme Court held it could hear the petitioner’s challenge because

in the past the Supreme Court had “exercised its discretion to consider nonjurisdictional

claims that had not been raised below.” Jd. at 878. The Freytag court reasoned it was

“faced with a constitutional challenge that is neither frivolous nor disingenuous,” because

“(t]he alleged defect in the appointment of the Special Trial Judge goes to the validity of

the Tax Court proceeding that is the basis for this litigation.” Jd. at 879. However,

“Tcjourts ... have not read Freytag’s exception broadly and have regularly declined to

consider unexhausted Appointments Clause challenges[.]” Island Creek Coal Co. v.

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Bryan, 937 F.3d 738, 754 (6th Cir. 2019). This point is emphasized by Supreme Court

cases subsequent to Freytag:

[O]ne who makes a timely challenge to the constitutional validity of the

appointment of an officer who adjudicates his case is entitled to a decision

on the merits of the question and whatever relief may be appropriate if a

violation indeed occurred. Any other rule would create a disincentive to raise

Appointments Clause challenges with respect to questionable judicial

appointments.

Ryder v. United States, 515 U.S. 177, 182-83 (1995) (emphasis added); see Lucia, 138 S.

Ct. at 2055 (“[O]ne who makes a timely challenge to the constitutional validity of the

appointment of an officer who adjudicates his case is entitled to relief.” (emphasis added)

(quotation omitted)).

A recent decision from the Federal Circuit describes the circumstances where it is

appropriate for a court to exercise its discretion to hear a claim over a waiver challenge. In

Arthrex, Inc. v. Smith & Nephew, Inc., 941 F.3d 1320 (Fed. Cir. 2019), the court exercised

its discretion to hear an Appointments Clause challenge even though the claim had not

been raised before the Patent Trial and Appeal Board. Jd. at 1327. The court noted that it

had not yet addressed an Appointments Clause challenge in the context of Administrative

Patent Judges (“APJs”), and that the outcome of the claim would have “a wide-ranging

effect on property rights and the nation’s economy.” Jd. at 1326-27. The Federal Circuit

also distinguished the matter before it from cases where the underlying administrative

process “could have corrected the Constitutional infirmity” and where the agency “had

already been implementing those remedies limiting the impact,” finding that “[n]o such

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remedial action has been taken in this case and the Board could not have corrected the

problem.” /d. at 1327.

Here, by comparison, the Court’s decision would not have a wide-ranging impact;

Lucia has already accomplished that end. Instead, this Decision will only impact the rights

of Plaintiff. Additionally, the SEC took steps to address the potential Appointments Clause

issue even while Lucia was pending before the Supreme Court. Lucia, 138 S. Ct. at 2055

n.6. Moreover the Second Circuit held in Ti/ton that the SEC’s underlying administrative

process could adequately address the plaintiffs claims, 824 F.3d at 279, 281-82—a holding

that was borne out by Lucia, where the plaintiff “contested the validity of Judge Elliot’s

appointment before the Commission, and continued pressing that claim in the Court of

Appeals and [the Supreme] Court,” 138 S. Ct. at 2055.

Plaintiff cites several cases to support his argument that the Court should exercise

its discretion here, none of which are persuasive. The cases Plaintiff cites address

Appointments Clause claims regarding ALJs from agencies other than the SEC, and where

a binding or persuasive authority had yet to address whether the ALJs from those particular

agencies were “Officers of the United States” in light of Lucia. See Jones Bros., Inc. v.

Sec’y of Labor, 898 F.3d 669, 679 (6th Cir. 2018) (excusing forfeiture of Appointments

Clause claim regarding ALJ from Department of Labor Federal Mine Safety and Health

Review Commission (“FMSHRC”), noting “[t]he building blocks of today’s opinion are

established and weathered, but we know of no Supreme Court or court of appeals case that

brings them together”); Associated Mortg. Bankers, Inc. v. Carson, Civil Action No. 17-

0075 (ESH), 2019 WL 108882, at *4-7 (D.D.C. Jan. 4, 2019) (first, and to date only, case

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to address Appointments Clause claim post-Lucia as to order by ALJ from U.S. Department

of Housing and Urban Development (“HUD”)), modification denied, 2019 WL 2996992

(D.D.C. July 9, 2019).? Like Arthrex, the decisions of these courts have “a wide-ranging

effect” as decisions of first impression regarding the constitutionality of ALJs for

FMSHRC and HUD, making them unlike the instant matter where the Court’s decision

will only impact Plaintiffs rights. Accordingly, even if it had subject matter jurisdiction,

the Court would decline to exercise its discretion to hear Plaintiff's Appointments Clause

claim.

Cc. Res Judicata

Defendant also argues that Plaintiff's claims are barred by the doctrine of res

judicata. The Court agrees for the reasons that follow.

“(T]he doctrine of res judicata, or claim preclusion, provides that [a] final judgment

on the merits of an action precludes the parties ... from relitigating issues that were or

could have been raised in that action.” Duane Reade, Inc. v. St. Paul Fire and Marine Ins.

Co., 600 F.3d 190, 195 (2d Cir. 2010) (alterations in original) (quotation omitted). “To

3 During oral argument, Plaintiff's counsel also cited to Duka v. U.S. Securities and

Exchange Commission, 103 F. Supp. 3d 382 (2015), abrogated by Tilton, 824 F.3d 276, to

support the proposition that exhaustion of administrative remedies is not always necessary.

The Duka court found that because it had subject matter jurisdiction over the plaintiff's

Appointments Clause claim, it need not wait for the administrative proceedings to conclude

to hear the plaintiff's case. Jd. at 392 n.12. However, Duka’s finding that the court had

subject matter jurisdiction over the Appointments Clause claim was expressly abrogated

by Tilton. See Tilton, 824 F.3d at 283 (“The appellants’ argument is not without force, as

demonstrated by its success in several district courts. See ... Duka, 103 F. Supp. 3d 382,

390-91. Ultimately, however, we are not convinced.”). Accordingly, Duka’s finding that

exhaustion is not necessary does not apply to the instant matter.

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determine whether the doctrine of res judicata bars a subsequent action, we consider

whether 1) the prior decision was a final judgment on the merits, 2) the litigants were the

same parties, 3) the prior court was of competent jurisdiction, and 4) the causes of action

were the same.” Brown Media Corp. v. K&L Gates, LLP, 854 F.3d 150, 157 (2d Cir. 2017).

A final judgment on the merits was entered by the Second Circuit on February 17,

2018, and that decision became “unreviewable upon the expiration of the 90-day deadline

under 28 U.S.C. § 2101(c) for filing a petition for certiorari.” Salazar v. Buono, 559 U.S.

700, 711 (2010). It is undisputed that the litigants were the same and that the Second

Circuit is a court of competent jurisdiction. Additionally, Plaintiff's Appointments Clause

claim arises “directly from [the SEC’s] enforcement action and serves as an affirmative

defense within the proceeding.” Tilton, 824 F.3d at 288. In other words, “the

Appointments Clause claim, like accompanying defenses to the merits of the . . . charges,

is a vehicle by which the appellants seek to prevail in the proceeding.” Jd. (quotation

omitted). Because the Appointments Clause claim “could have been raised and decided in

a previous suit,” Harborside Refrigerated Servs. v. Vogel, 959 F.2d 368, 372 (2d Cir.

1992), the principles of res judicata bar Plaintiff from raising it before this Court.

Plaintiff contends that res judicata does not apply here because Plaintiff would have

been challenging the ALJ’s authority to the ALJ himself, and as a result the Appointments

Clause claim could not have been fully and fairly litigated before the ALJ. (Dkt. 16 at 16).

Plaintiff's argument once again ignores the fact that he also failed to raise the

Appointments Clause issue when he appealed the ALJ’s decision to the Commission or

when he filed a petition for review with the Second Circuit. Additionally, at the time of

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Plaintiff's proceedings before the SEC, many other litigants were arguing that SEC ALJs

were unconstitutionally appointed. See Alison Frankel, “Unlike SEC, FTC Makes Quick

Fix to Ward Off ALJ Constitutional Challenges,” Reuters (Sept. 16, 2015), available at

https://www.reuters.com/article/idUS57450196020150916; Peter J. Henning, “S.E.C.

Finds Itself in a Constitutional Conundrum,” N.Y. Times (June 15, 2015), available at

https://www.nytimes.com/2015/06/16/business/dealbook/sec-finds-itself-in-a-constitution

al-conundrum.html. In other words, Plaintiff has failed to cite any legitimate reason as to

why his Appointments Clause claim could not have been fully and fairly litigated in the

underlying administrative proceedings or in front of the Second Circuit.

Moreover, the Second Circuit’s decision issued on July 20, 2018, denying Plaintiff s

motion to recall and motion to vacate, further supports the conclusion that Plaintiff's claim

is barred. See Dembski v. SEC, No. 17-1553, Dkt. 91 (2d Cir. July 20, 2018). After the

Supreme Court issued its decision in Lucia, Plaintiff requested that the Circuit revoke its

denial of review of Defendant’s decision, issue a mandate nullifying Defendant’s decision,

and preclude Defendant from taking any steps to enforce any portion of the sanctions the

SEC imposed on Plaintiff. Motion to Recall, Dembski v. SEC, No. 17-1553, Dkt. 84 at 9

(2d Cir. July 6, 2018). Defendant responded, arguing that Plaintiff had forfeited his

Appointments Clause challenge by failing to raise it at any point before the Second

Circuit’s February 2018 order. Response to Motion to Recall, Dembski v. SEC, No. 17-

1553, Dkt. 87 (2d Cir. July 12, 2018). The Second Circuit’s denial of Plaintiff's request

not only further supports the conclusion that Plaintiff's Appointments Clause claim is

barred by res judicata, but also that Plaintiff failed to timely raise the issue before the SEC.

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CONCLUSION

For the foregoing reasons, the Court dismisses Plaintiff's claims for lack of subject

matter jurisdiction, but alternatively clarifies that even if it had subject matter jurisdiction,

the Court would grant Defendant’s motion to dismiss for failure to state a claim. (Dkt. 10).

The Clerk of Court is directed to enter judgment in favor of Defendant and close this case.

SO ORDERED.

United States District Judge

Dated: February 4, 2020

Rochester, New York

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