While serving as General Counsel to California’s Business, Transportation & Housing Agency, I was from time to time asked to respond to ersatz summons and other documents issued by “Our One Supreme Court”.  Given that these “courts” existed only in the minds of their creators, these summons were ignored.  But if you were hailed before an unconstitutional tribunal with the ostensible authority to fine you and bar you from working, would you want a “real” court to step in and consider the constitutionality of the proceedings?

The former CEO of Assisted Living Concepts, Inc., Laurie A. Bebo, recently found herself in this situation when the SEC recently charged her with securities fraud.  Here’s what I would be thinking if I found myself in Ms. Bebo’s unfortunate position.

The stakes are very high.  I’m facing hundreds of thousands (or even millions) of dollars in civil monetary penalties.  The SEC may also obtain a permanent ban on my serving as an officer or director of a publicly traded company.  This could dramatically reduce my future earnings potential.  To make matters worse, the SEC has chosen its home court, a court in which it almost invariably wins.  See Jean Eaglesham, SEC Is Steering More Trials to Judges It Appoints, Wall Street Journal (Oct. 21, 2014) (reporting that in the 12 months through September 2014, the SEC had won all of its cases before its own administrative law judges.)  Even if I am vindicated, any defense will be very costly in time, treasure and tension.

My lawyer, however, gives me one piece of good news.  Under recent U.S. Supreme Court precedent (Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477 (2010)), the SEC’s home court may also be an unconstitutional court.  See SEC ALJs Face Free Enterprise Challenge.  If the SEC’s administrative court is unconstitutional, why should I be forced to litigate in that court?  Shouldn’t a “real” court step in and put an end to those unconstitutional proceedings?

That is just what Ms. Bebo asked U.S. District Court Judge Rudolph T. Randa to do in Bebo v. SEC, 2015 U.S. Dist. LEXIS 25660 (E.D. Wis. Mar. 3, 2015).  Although Judge Randa found Ms. Bebo’s claims to be “compelling and meritorious”, he concluded that she must litigate her claims before the SEC and then, if necessary, appeal to the Court of Appeals.

Judge Randa based his decision on Section 25(a)(1) of the Securities Exchange Act of 1934 which provides that “a person aggrieved by a final order of the Commission . . . 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 . . .”.  I would argue that Ms. Bebo isn’t aggrieved of a final order but aggrieved by the process.  Even if she should prevail on the merits in the SEC’s proceedings, she will have been forced to undergo a considerable personal trial.  And yet, there may be no appeal from that trial should Ms. Bebo prevail on the merits.  Moreover, it’s difficult to understand the point of subjecting Ms. Bebo to a trial.  Any evidence of her alleged securities fraud will have no bearing on the constitutionality of the SEC’s administrative trials.

If Ms. Bebo’s “compelling and meritorious” arguments about the constitutionality of the SEC’s administrative proceedings are correct, those proceedings are no more lawful than “Our One Supreme Court”.  Nonetheless, Judge Randa ruled that Ms. Bebo must “patiently await the denouement of proceedings within the Article II branch”.  (quoting USAA Fed. Sav. Bank v. McLaughlin, 849 F.2d 1505 (D.C. Circ. 1988).   Patience is something that I would have in short supply if forced to undergo the extreme stress and expense of having the full weight of the SEC brought against me before its home court.