Antitrust Law Daily Wrap Up, ANTITRUST—D.C. Cir.: Alpine case on hold per en banc appeals order, (Aug 25, 2023)

By Mark S. Nelson, J.D.

The D.C. Circuit paused FINRA’s enforcement action against Alpine Securities, while another FINRA respondent seeks to obtain a similar halt, yet many of the same legal issues are already before the Supreme Court in its upcoming term.

Respondents in enforcement actions brought by regulators like the PCAOB and the self-regulatory organization (SRO) FINRA have increasingly brought challenges to the constitutionality of those entities’ proceedings as the current Supreme Court continues to re-write much of administrative law as it applies to enforcement following significant defeats suffered by the SEC and the CFPB in recent years. In FINRA’s case against Alpine Securities Corporation, the D.C. Circuit recently upheld a circuit court panel decision to pause the case pending appeal. Another recently filed complaint by FIRNA respondent Eugene H. Kim seeks a similar pause. However, some of the issues in both cases are similar to those that will be heard by the Supreme Court this coming term in a case in which the SEC is appealing a decision by the Fifth Circuit that would limit its enforcement authorities regarding in-house proceedings (Alpine Securities Corporation v. FINRA, August 22, 2023).

The Alpine case. In the Alpine case, the broker raised questions about separation of powers, whether FINRA board members are officers of the U.S. (See e.g., Lucia v. SEC in which SEC administrative law judges are officers of the U.S. for purposes of the Appointments Clause), that the Exchange Act unconstitutionally delegates legislative power to FINRA, that FINRA’s membership requirement for broker-dealers violates First Amendment associational rights, and that FINRA proceedings violate the right to a jury trial guaranteed by the Seventh Amendment.

The district court denied Alpine's motion to reconsider a minute order that had denied Alpine's motion for an emergency preliminary injunction as well as Alpine's renewed motion for a preliminary injunction and temporary restraining order. The district court reasoned that Alpine was unlikely to be a state actor and, although the Supreme Court’s opinion in Axon Enterprises v. FTC (combined with SEC v. Cochran), holding that structural constitutional claims about federal agency authority (“here-and-now injur[ies]”) can be heard in district courts ab initio without awaiting an unfavorable agency ruling and then filing a petition for review in the federal appeals courts, other factors in the framework for evaluating injunctive relief weighed against Alpine.

A majority of a three-judge D.C. Circuit panel granted Alpine's emergency motion for an injunction pending appeal and further enjoined FINRA from pursuing its enforcement matter against Alpine. The majority said only that Alpine had satisfied the court's criteria for such relief without providing additional insight into the panel majority’s reasoning. One judge dissented but, like the panel majority, offered no specific views of the matter.

However, one judge filed a concurring opinion strongly suggesting the case ultimately was likely to go in favor of Alpine. That judge said Alpine could be forced out of business absent an injunction and that would constitute irreparable harm. The public interest also weighed against government depriving individual rights. Timely enforcement is a somewhat less strong interest. But Alpine, said the judge, has a “serious argument” about FINRA’s alleged unconstitutional exercise of executive power.

Although the concurring judge suggested he could later change his view based on briefing and oral argument, he went on to say, referencing Lucia, that “FINRA’s hearing officers are near carbon copies of those [the SEC's] ALJs.” The judge then looked in more detail at some of the issues Alpine raised and asked rhetorically: “Does it make a difference that FINRA hearing officers are employees of a nominally private corporation? Probably not. Though FINRA is private, its enforcement activities are controlled by the government.”

The en banc D.C. Circuit Court, consisting of elven of the court’s judges, has since declined to reconsider the panel order halting FINRA’s enforcement matter against Alpine.

New FINRA case. The Kim complaint brought against FINRA, filed about a week ago in the D.C. District Court, seeks a temporary restraining order and alleges violations of separation of powers and Article II, along with violations of Article III and the First Amendment (associational rights), Fifth Amendment (Due Process claims), and the Seventh Amendment (right to jury trial). In this regard, the complaint is different in some of its details, but legally and constitutionally looks a lot like the Alpine case.

Where the Kim complaint perhaps differs from other similar cases, is in its claim that FINRA violates Section 2 of the Sherman Antitrust Act. That provision prohibits monopolization, attempts to monopolize, and conspiracy to monopolize. Generally, a market participant’s substantial market power and conduct (i.e., willful acquisition or maintenance of market power) are the key issues in such cases. But the antitrust laws typically do not subject a person to monopolization claims if a business’s market power was the result of superior product, business acumen, or historical accident.

According to the complaint, FINRA has monopolized the broker-dealer SRO market despite the legislative intent behind the securities laws that allowed the creation of FINRA, which anticipated the possibility of multiple SROs, not a single SRO. “It is the height of irony that an entity purportedly deriving its power from a Congressional mandate to ensure orderly markets is, itself, an abusive monopolist,” said the complaint.

The Supreme Court case. The Supreme Court granted certiorari in SEC v. Jarkesy at the end of the Court’s most recent term. The questions presented, as phrased by the Solicitor General on behalf of the SEC, are:

• Whether statutory provisions that empower the Securities and Exchange Commission (SEC) to initiate and adjudicate administrative enforcement proceedings seeking civil penalties violate the Seventh Amendment.

• Whether statutory provisions that authorize the SEC to choose to enforce the securities laws through an agency adjudication instead of filing a district court action violate the nondelegation doctrine.

• Whether Congress violated Article II by granting for-cause removal protection to administrative law judges in agencies whose heads enjoy for-cause removal protection.

The SEC brought an enforcement action against Jarkesy alleging that Jarkesy made numerous misrepresentations about two hedge funds he founded and the investment adviser he selected for the funds. The litigation was ongoing for years and eventually landed in the Fifth Circuit, which held in favor of Jarkesy on a variety of constitutional grounds. The SEC appealed to the Supreme Court where merits briefing is in progress and an oral argument date has not yet been set.

When the justices decide the Jarkesy case, they may resolve some of the issues raised by the two cases discussed above that were brought against FINRA. If either of the FINRA cases makes their way to the Supreme Court, it would be likely that those petitions would be held in abeyance pending the outcome in Jarkesy and then, potentially, to orders disposing of the cases consistent with a decision in Jarkesy.

The case is No. 23-5129.

Companies: Alpine Securities Corporation

Cases: Antitrust DistrictofColumbiaNews