CRAIG R. JALBERT, in his capacity as Trustee of the F2 Liquidating Trust, on behalf of himself and all others similarly situated v. U.S. SECURITIES AND EXCHANGE COMMISSION
No. 18-2043
United States Court of Appeals For the First Circuit
December 20, 2019
Torruella, Thompson, and Kayatta, Circuit Judges.
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. F. Dennis Saylor IV, U.S. District Judge]
John B. Capehart, Senior Counsel, Securities and Exchange Commission, with whom Robert B. Stebbins, General Counsel, Michael A. Conley, Solicitor, and Daniel
TORRUELLA, Circuit Judge. Plaintiff-appellant Craig R. Jalbert (Jalbert), in his capacity as trustee for the F2 Liquidating Trust, appeals the district court‘s order granting the Securities and Exchange Commission‘s (SEC) motion to dismiss his complaint for lack of subject matter jurisdiction and failure to state a claim. The district court determined that the right to judicial review of the SEC order at issue had been waived as part of a settlement between the SEC and former investment advisory firm F-Squared Investments, Inc. (F-Squared). The district court also held that, in any event, Jalbert‘s claims were only reviewable within the SEC‘s exclusive statutory review structure, which does not involve the federal district courts. After careful consideration, we affirm on the ground that F-Squared failed to state a claim upon which relief could be granted inasmuch as it waived judicial review by any court.
I. Background
A. Factual Background
F-Squared was an SEC-registered investment adviser firm headquartered in Wellesley, Massachusetts. It served clients in the advisor, institutional, retail, and retirement markets. At some unspecified point, the SEC began investigating F-Squared for violations of federal securities laws.
On December 4, 2014, with the threat of administrative and cease-and-desist proceedings looming, F-Squared executed an Offer of Settlement pursuant to
The SEC accepted the Offer and settled with F-Squared on December 22, 2014, through the entry of an Order Instituting Administrative and Cease-and-Desist Proceedings (the Order), to which F-Squared consented. Under the terms of the Order, F-Squared admitted that, between April 2001 and September 2008, advertising materials for one of its investment strategies included statements based on the inaccurate compilation of performance and historical data which improved and inflated the strategy‘s historical performance. That conduct, F-Squared accepted, violated federal securities laws. F-Squared agreed to cease and desist from committing further securities-laws violations and to undertake certain compliance measures. The Order also required F-Squared to pay $30 million in disgorgement and a $5 million civil money penalty to the United States Treasury. As agreed, F-Squared transferred $35 million directly into the Treasury.
In July 2015, F-Squared filed for bankruptcy. The F2 Liquidating Trust was established during the bankruptcy proceedings to recover on behalf of F-Squared as its successor-in-interest. The bankruptcy court appointed Jalbert as the trustee.
B. Procedural History
On October 26, 2017, Jalbert filed a complaint in the U.S. District Court for the
On April 4, 2018, the SEC filed a motion to dismiss the complaint pursuant to
II. Discussion
We review a district court‘s dismissal for lack of subject matter jurisdiction and for failure to state a claim de novo, construing the complaint liberally and treating all well-pleaded facts as true. Aurelius Capital Master, Ltd. v. Commonwealth of P.R. (In re Fin. Oversight & Mgmt. Bd. for P.R.), 919 F.3d 638, 644 (1st Cir. 2019) (quoting Town of Barnstable v. O‘Connor, 786 F.3d 130, 138 (1st Cir. 2015), and citing Newman v. Lehman Bros. Holdings Inc., 901 F.3d 19, 24 (1st Cir. 2018)). We accord Jalbert the benefit of all reasonable inferences. Townof Barnstable, 786 F.3d at 138 (quoting Murphy v. United States, 45 F.3d 520, 522 (1st Cir. 1995)). Nevertheless, the complaint must allege a plausible entitlement to relief. Decotiis v. Whittemore, 635 F.3d 22, 29 (1st Cir. 2011) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 559 (2007)).
Jalbert‘s big-ticket argument is that in light of the Supreme Court‘s decision in Kokesh -- which holds that disgorgement ordered in civil enforcement proceedings constitutes a penalty subject to the five-year statute of limitations set forth in
The SEC‘s Rules of Practice allow [a]ny person who is notified that a proceeding may or will be instituted against him or her, or any party to a proceeding already instituted [to] propose in writing an offer of settlement.
F-Squared voluntarily executed such an offer to settle with the SEC. In compliance with
First, Jalbert argues that the SEC‘s longstanding practice of obtaining additional, extra-statutory penalties disguised as disgorgement constitutes a structural separation-of-powers violation that cannot be waived. Relying on Kokesh, Jalbert‘s argument assumes that the SEC exceeded its statutory authority in ordering disgorgement that is, according to Jalbert, punitive and unauthorized, which alone is enough to implicate separation-of-powers principles. But the Kokesh Court explicitly stated that [n]othing in this opinion
Jalbert does not challenge the statutes granting that authority. Rather, Jalbert‘s structural separation-of-powers argument is based on his contention that the SEC‘s disgorgement practices exceed the bounds of the SEC‘s statutory authority. But this argument does not implicate a structural separation-of-powers issue. We have held that the doctrine of separated powers serves to eliminate arrangements that threaten to permit one branch either to aggrandize its power or to encroach on functions reserved for another branch. United States v. Hilario, 218 F.3d 19, 26 (1st Cir. 2000) (citing Mistretta v. United States, 488 U.S. 361, 381-82 (1989)). Separation-of-powers principles are intended, in part, to protect each branch of government from incursion by the others. Bond v. United States, 564 U.S. 211, 222 (2011). Even if Jalbert were correct that the SEC acted beyond its statutory powers in interpreting the accounting and disgorgement provision and seeking disgorgement in a punitive fashion, this is not a case in which the usurp[ation of] the prerogatives of another branch of government would be implicated. Hilario, 218 F.3d at 27. Further, there is no accret[ion] to a single [b]ranch [of] powers more appropriately diffused among separate [b]ranches, nor has the authority and independence of the other branches been undermined. Mistretta, 488 U.S. at 382; see also Hilario, 218 F.3d at 26.3
As the district court noted, Jalbert‘s claim that the SEC was acting outside the scope of its statutory authority is, at best, viewed as an assertion that the
See Jalbert, 327 F. Supp. 3d at 296. But even if this were true, that claim was waivable. We agree with the district court‘s reliance on City of Arlington v. FCC, 569 U.S. 290 (2013), to support its conclusion that ultra vires claims of error can be waived. See Jalbert, 327 F. Supp. 3d at 296. In City of Arlington, the Supreme Court rejected as merely illusory the distinction, for Chevron purposes, between jurisdictional and nonjurisdictional agency interpretations and errors. 569 U.S. at 298. The Supreme Court also defined any improper agency action as ultra vires. Id. at 297-98. In doing so, it reasoned that
A court‘s power to decide a case is independent of whether its decision is correct . . . . Put differently, a jurisdictionally proper but substantively incorrect judicial decision is not ultra vires. That is not so for agencies charged with administering congressional statutes. Both their power to act and how they are to act is authoritatively prescribed by Congress, so that when they act improperly, no less than when they act beyond their jurisdiction, what they do is ultra vires. Because the question -- whether framed as an incorrect application of agency authority or an assertion of authority not conferred -- is always whether the agency has gone beyond what Congress has permitted it to do, there is no principled basis for carving out some arbitrary subset of such claims as jurisdictional.
Id. Therefore, if the SEC was acting unlawfully in seeking the $30 million disgorgement from F-Squared, its actions were no more ultra vires than if the SEC had misinterpreted its statutes. And statutory construction claims are largely subject to waiver. See Boston Redevelopment Auth. v. Nat‘l Park Serv., 838 F.3d 42, 47-50 (1st Cir. 2016) (finding waiver of challenge to the National Park Service‘s construction of the Land and Water Conservation Fund Act); see also Nat. Res. Def. Council, Inc. v. EPA, 25 F.3d 1063, 1073-74 (D.C. Cir. 1994) (finding waiver of statutory and regulatory construction challenge). Moreover, generally, while jurisdictional issues can be raised at any time during the case and are never waived, non-jurisdictional issues are waivable. See Gonzalez v. Thaler, 565 U.S. 134, 141 (2012); see also Wolf v. Reliance Standard Life Ins. Co., 71 F.3d 444, 446, 449 (1st Cir. 1995).
The Supreme Court‘s analysis in City of Arlington leads us to conclude that challenges to ultra vires agency action are waivable. Our conclusion comports with other circuits’ decisions. See PGS Geophysical AS v. Iancu, 891 F.3d 1354, 1362 (Fed. Cir. 2018) (Even if the [Patent Trial and Appeal Board of the U.S. Patent and Trademark Office] could be said to have acted ‘ultra vires’ in refusing to institute reviews of some claims and grounds -- and then proceeding to merits decisions concerning the claims and grounds included in the instituted reviews -- the Board‘s error is waivable . . . .); Metro-North Commuter R.R. Co. v. U.S. Dep‘t of Labor, 886 F.3d 97, 108 (2d Cir. 2018) (relying on the Supreme Court‘s decision in City of Arlington to find that challenges to an agency‘s jurisdiction over certain claims can be waived); 1621 Route 22 W. Operating Co. v. NLRB, 825 F.3d 128, 139-42 (3d Cir. 2016) (finding the challenge to an agency‘s jurisdiction was waived); CBS Broad., Inc. v. EchoStar Commc‘ns Corp., 450 F.3d 505, 520 n.27 (11th Cir. 2006) (finding the argument that the FCC acted beyond the scope of its authority and, thus, that its action was ultra vires, to be waived); see also Boston Redevelopment Auth., 838 F.3d at 47 (finding the argument waived that because agency action was ultra vires
Faced with, at most, a claim alleging that the SEC exceeded its jurisdictional authority and acted ultra vires in seeking disgorgement, the district court correctly concluded that the claim was waivable and that F-Squared had undeniably waived the right to assert the claim by settling with the SEC.
Next, Jalbert avers that the waiver does not reach his APA claims because he is not seeking review of the Order and does not intend to disturb the merits of the SEC‘s substantive decision regarding F-Squared‘s securities laws violations and the amount of the civil penalty. Instead, he contends that he is simply seeking a declaration that the SEC lacks the power to enter disgorgement orders, and consequently, the disgorgement against F-Squared is void.
Contrary to Jalbert‘s contention, by challenging the validity of the disgorgement, he is challenging the Order itself because it was through that Order (to which F-Squared consented) that the SEC directed F-Squared to pay a disgorgement of $30 million into the Treasury. Furthermore, the plain text of the waiver states that it applies to [j]udicial review by any court. See
Relatedly, Jalbert posits that his challenge to the SEC‘s disgorgement practices is not limited to F-Squared‘s disgorgement order but includes a challenge to the SEC‘s longstanding practice and procedure of obtaining disgorgement in an unauthorized punitive fashion in a host of cases on behalf of a putative class of similarly situated parties. This argument, too, is unavailing.
We have noted that in most respects, the class members other than the named plaintiffs are merely potential parties until subject matter jurisdiction for the named plaintiffs is established and the district court has decided to certify a class. Pruell v. Caritas Christi, 645 F.3d 81, 84 (1st Cir. 2011). When a class action is filed, it includes only the claims of the named plaintiff or plaintiffs. The claims of unnamed class members are added to the action later, when the action is certified as a class under [
Next, Jalbert takes aim at the SEC‘s use of
To begin, nothing in the record suggests that the purpose or aim of
Moreover, the APA itself requires an agency to give parties opportunity for the submission and consideration of offers of settlement.
In his final attempt to dodge the waiver, Jalbert invokes contract principles to allege that the waiver is unenforceable because the agreement was infected with a mutual mistake of law. Specifically, Jalbert avers that both the SEC and F-Squared believed the SEC had the authority to obtain the $30 million disgorgement from
In any event, under Massachusetts law, a party cannot avoid a contract merely because the parties are mistaken as to an assumption, even though significant, on which the contract was made. Shawmut-Canton LLC v. Great Spring Waters of Am., Inc., 816 N.E.2d 545, 550-51 (Mass. App. Ct. 2004) (citing Restatement (Second) of Contracts § 152 cmt. c (1981)). Relief is only appropriate in situations where a mistake of both parties has such a material effect on the agreed exchange of performances as to upset the very basis for the contract. Id. at 551 (quoting Restatement (Second) of Contracts § 152 cmt. a). Moreover, the mistake must be based on a fact capable of ascertainment at the time the parties entered the contract.4 LaFleur v. C.C. Pierce Co., 496 N.E.2d 827, 830 (Mass. 1986); Cook v. Kelley, 227 N.E.2d 330, 333 (Mass. 1967). Here, the purported change in law was not capable of ascertainment when F-Squared and the SEC entered into the settlement. By Jalbert‘s own concession, the law was so well established at the time of the settlement, that the parties were not settling because of any uncertainty about the SEC‘s statutory authority to obtain disgorgement. Instead, the parties settled
over the issue of whether there had been a violation of the securities laws. Thus, Jalbert cannot escape the final settlement that F-Squared willingly entered into in 2014 for reasons completely collateral to a then-unforeseeable Supreme Court decision that was handed down nearly three years later to have a second bite of the apple in an attempt to obtain a refund of $30 million.5
Unconvinced by Jalbert‘s arguments that the voluntary, express waiver of judicial review in the Order is void or ineffective, we conclude that the district court correctly decided that the complaint failed to state a claim upon which relief could be granted inasmuch as F-Squared waived judicial review by any court. Having decided that Jalbert‘s claims are not entitled to judicial review, it is unnecessary to address Jalbert‘s remaining arguments, and
III. Conclusion
For the foregoing reasons, we affirm the district court‘s order.
Affirmed.