Securities Regulation Daily Wrap Up, ENFORCEMENT—D.D.C.: SEC can pursue industry bar against Lemelson despite administrative law upheaval, said district court in nation’s capital, (May 28, 2025)

By Mark S. Nelson, J.D.

In the SEC’s underlying court action elsewhere, the First Circuit said Lemelson’s request for costs and fees under the EAJA must go back to the district court.

The SEC’s multijurisdictional case against Gregory Lemelson (aka Rev. Fr. Emmanuel Lemelson) and Lemelson Capital Management, LLC took somewhat divergent paths yesterday when the U.S. District Court for the District of Columbia and the U.S. Court of Appeals for the First Circuit held that the SEC may pursue an industry bar against Lemelson but that Lemelson’s claim for an award of costs and fees under the Equal Access to Justice Act (EAJA) must go back to the district court for further consideration, respectively. The entirety of the SEC’s overarching case against Lemelson has evolved against the backdrop of the U.S. Supreme Court’s ongoing rewrite of federal administrative law. The opinion in the D.C. District Court, in particular, raises the question of whether the SEC now may have a narrow path forward for some types of in-house cases or whether this remaining avenue may eventually be closed by the federal appeals courts (Lemelson v. SEC, No. 24-cv-02415 (D.D.C. May 27, 2025); SEC v. Lemelson, No. 24-1754 (1st Cir. May 27, 2025)).

Underlying enforcement action. The SEC initially brought a fraud case against Lemelson for allegedly having made untrue statements of material fact as part of a fraudulent scheme that generated $1.3 million in profits. The SEC had charged violations of Exchange Act Section 10(b) and Investment Advisers Act Section 206(4).

The underlying fraud case was litigated more than three years ago in the U.S. District Court for the District of Massachusetts, which held for the SEC and imposed a five-year injunction against Lemelson and Lemelson Capital Management. That court also imposed a civil money penalty against only Lemelson. The SEC then brought an in-house administrative case against Lemelson for the purpose of seeking an industry bar.

The several SEC actions against Lemelson currently focus on different issues. The District of Columbia District Court has now decided that the SEC may move forward with its in-house case. Lemelson had filed a complaint in the district court challenging the constitutionality of the SEC’s follow-on administrative case. The First Circuit, meanwhile, sent questions about the application of the EAJA back to the district court.

Industry bar. Of the two opinions regarding the SEC’s case against Lemelson, it is the District of Columbia District Court’s opinion that most directly brings into play the Supreme Court’s ongoing administrative law revolution.

Two of Lemelson’s claims were rejected because the court lacked subject matter jurisdiction. In each instance, the court relied extensively on a set of factors the Supreme Court used to more frequently apply to determine whether an appeal of an agency action can go directly to a district court or must await the end of the administrative process and then be appealed to the federal appeals courts. This line of cases holds that courts must ask if funneling a matter through the agency first would deprive the respondent of meaningful judicial review, whether the matter is collateral in nature, and whether the matter is within or outside of the agency’s expertise (although all three factors must be addressed, many courts have historically found the presence or absence of meaningful judicial review to be first among equals, if not determinative).

In recent years, the Supreme Court has held that, in cases where a respondent challenges the constitutionality of a federal agency’s structure, the respondent may file a complaint directly in a federal district court without having to await the end of the administrative process. The District of Columbia District Court found that with respect to Lemelson the expedited constitutional challenge allowed by the latest Supreme Court opinions did not apply and that Lemelson could obtain meaningful judicial review at the end of the administrative process.

Lemelson had argued that he had a right to a jury trial. This argument is based on a recent Supreme Court opinion granting SEC respondents a federal district court trial in cases brought by the SEC that allege civil securities fraud violations. The district court also rejected Lemelson’s related supplemental jurisdiction claim. Lemelson also had argued that the doctrine of res judicata (i.e., the thing is decided) barred the SEC from either splitting its claims against him or relitigating claims that had already been decided. Specifically, Lemelson had asserted that the SEC could have, but did not, ask the district court in Massachusetts in the underlying enforcement action for a bar or suspension.

Moreover, three of Lemelson’s claims were dismissed because the court found that they failed to state a claim. First, Lemelson argued that the SEC’s administrative case violated principles of due process because the SEC could decide its own claim regarding the severity of the penalty. The district court concluded that circuit precedent barred Lemelson’s claim, something Lemelson conceded. However, Lemelson argued further that that precedent would likely be stripped away by federal appeals courts in light of the Supreme Court’s recent administrative law opinions. But the district court reiterated that it is bound to follow precedent until a higher federal court has either altered or removed that precedent.

The second of the two claims for which the court lacked subject matter jurisdiction turned on whether the SEC’s in-house proceeding amounted to an attempt by an executive agency to unconstitutionally exercise judicial power in violation of Article III of the U.S. Constitution. The district court followed a line of Supreme Court cases that distinguishes between public and private rights (application of that line of cases was recently narrowed by the Supreme Court).

Here, the district court concluded that the case involved public rights and claims that were unknown to the common law, so the claims had to be dismissed. The court essentially reasoned that Lemelson’s claims were premature because the Supreme Court’s latest administrative law opinions did not definitively resolve the constitutional issues involved.

Lastly, Lemelson argued that the SEC’s administrative law judges enjoyed too many layers of tenure protection. The SEC eventually gave up on arguing the constitutionality of its ALJs (a footnote to the opinion noted that the then-acting Solicitor General had decided not to defend multiple layers of tenure protection). However, the SEC continued to argue that even if the ALJs are unconstitutional, Lemelson failed to allege any harm.

The court reasoned that the SEC was correct that Lemelson did not plead any harm from an SEC ALJ imposing a sanction against him. According to the court, Lemelson’s argument confused the need to prove his claim and the need to plead or allege harm.

EAJA award. The First Circuit addressed Lemelson’s EAJA claims. The EAJA is a federal statute that created a limited waiver of sovereign immunity that seeks to achieve a degree of balance between small businesses and individuals and government enforcers when these smaller entities and individuals are the subject of government enforcement actions. Sometimes these entities and individuals can obtain awards of attorney’s fees and costs related to defending against government enforcement actions.

Lemelson had asked the district court in Massachusetts for nearly $1.8 million in fees and costs for defending against the SEC. The key question before the court was whether the SEC’s complaint made a “demand” that exceeded the amount of the judgment or whether the SEC’s complaint merely recited the statutory text. Lemelson argued that the SEC’s complaint made a demand, and the SEC demurred that it had merely restated the statutory text.

The First Circuit reasoned that the district court mistakenly compared the alleged “demand” with the SEC’s initial claims. The court explained that, under the EAJA, the correct comparators are the “demand” and the “the judgment finally obtained by the United States.” As a result, the EAJA questions were remanded to the district court for further proceedings. The First Circuit also spoke at length about additional issues (which the appeals court did not expressly decide) in order to suggest further areas of inquiry for the district court.

The case is Nos. 24-cv-02415 (D.D.C.) and 24-1754 (1st Circuit).

Judges: Sooknanan, S. (D.D.C.) and Lynch, S. (1st Circuit).

Attorneys: Russell G. Ryan, New Civil Liberties Alliance, and Douglas S. Brooks (Brooks & Mulvey, P.C.), for Gregory Lemelson [aka Rev. Fr. Emmanuel Lemelson] and Lemelson Capital Management, LLC [First Circuit case]. Paul G. Álvarez for the SEC [First Circuit case]. Russell Ryan New Civil Liberties Alliance, for Reverend Father Emmanuel Lemelson [D.D.C. case]. Christian Daniel, U.S. Department of Justice, for the SEC [D.D.C. case].

Companies: Lemelson Capital Management, LLC

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