327 F. Supp. 3d 287
D.D.C.2018Background
- F-Squared Investments sold AlphaSector ETF sector-rotation indices (2008–2013) and, in SEC marketing, misrepresented back-testing and timing of signals; approximately $28.5 billion was invested under AlphaSector indices.
- In December 2014 F-Squared entered an SEC administrative settlement: it admitted violations, consented to an SEC order finding willful violations, paid $35 million (including $30M disgorgement and $5M penalty), and expressly waived judicial review of the order.
- F-Squared later filed bankruptcy and a trustee (plaintiff) brought this action on behalf of a class of disgorgement payors challenging the SEC disgorgement as unlawful after Kokesh (filed Oct. 26, 2017).
- The trustee asserts two APA claims: (1) SEC exceeded statutory authority by obtaining disgorgement; (2) SEC failed to obtain an accounting before ordering disgorgement.
- The SEC moved to dismiss for lack of subject-matter jurisdiction and failure to state a claim, invoking the statutory exclusive-review scheme for SEC administrative orders and the settlement waiver.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Kokesh invalidates administrative disgorgement authority | Kokesh shows disgorgement is punitive; thus SEC lacked authority to impose punitive disgorgement even in admin proceedings | Statute (post-1990) expressly authorizes disgorgement in administrative proceedings; Kokesh addressed civil court disgorgement and reserved on admin orders | Court: Kokesh does not invalidate statutory administrative disgorgement; statutory authority remained and trustee waived this challenge |
| Whether the settlement waiver of judicial review is enforceable | Waiver was a mistake of law after Kokesh and cannot bar collateral APA challenge to jurisdictional/constitutional claims | Waiver plainly and unambiguously surrendered judicial review; ultra vires or jurisdictional claims are waivable after City of Arlington | Court: Waiver is valid; ultra vires arguments can be waived and F‑Squared waived review |
| Whether the district court has jurisdiction given the exclusive court-of-appeals review provision | APA allows district-court collateral attack; trustee's claims can proceed in district court | Securities statutes channel review exclusively to courts of appeals; statutory scheme forecloses district-court review under Thunder Basin factors | Court: Statutory scheme provides exclusive appellate review; trustee should have petitioned court of appeals and district court lacks subject-matter jurisdiction |
| Whether the trustee’s claims are "wholly collateral" or outside SEC expertise | Claims are structural/constitutional and thus removable to district court for meaningful review | Claims were raised in response to the administrative proceeding, not wholly collateral, and the SEC has expertise to address statutory interpretation | Court: Claims are not wholly collateral, agency expertise applies, and meaningful review was available via the court-of-appeals route |
Key Cases Cited
- Kokesh v. SEC, 137 S. Ct. 1635 (2017) (held disgorgement in civil enforcement is a penalty for purposes of §2462 statute of limitations)
- City of Arlington v. FCC, 569 U.S. 290 (2013) (agency-action/jurisdictional errors are not categorically unwaivable)
- Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994) (framework for when statutes preclude district-court review in favor of exclusive administrative appellate scheme)
- Free Enterprise Fund v. PCAOB, 561 U.S. 477 (2010) (limited circumstances where district court may hear constitutional challenges despite statutory review scheme)
- Elgin v. Dep't of Treasury, 567 U.S. 1 (2012) (agency processes can adjudicate threshold questions accompanying constitutional claims)
- Tilton v. SEC, 824 F.3d 276 (2d Cir. 2016) (applies Thunder Basin to SEC review channeling; claims arising from SEC proceedings belong in courts of appeals)
- Jarkesy v. SEC, 803 F.3d 9 (D.C. Cir. 2015) (same conclusion on exclusive appellate review for SEC orders)
- Bebo v. SEC, 799 F.3d 765 (7th Cir. 2015) (exclusive channeling of review for SEC orders forecloses district-court jurisdiction)