[00:00:00] Speaker 03:
Case number 20-1092, Kimberly Springsteen Abbott, petitioner, versus Securities and Exchange Commission.

[00:00:08] Speaker 03:
Mr. Dre for the petitioner, Mr. Starzelski for the respondent.

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Mr. Dre, you can start.

[00:00:16] Speaker 01:
Good morning and may it please the court.

[00:00:18] Speaker 01:
I'm Dominic Dre and I represent the petitioner, Kimberly Springsteen Abbott.

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This case is about three due process violations and two unlawful sanctions.

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The former,

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include sanctions imposed for unproven charges, inadequate notice of allegations, and unconstitutionally appointed regulators.

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The result is a lifetime ban, which this court has described as the securities industry equivalent of capital punishment for a woman who consistently under reimbursed herself 10%, donated over $2 million to the funds that are in question,

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acknowledged misallocations when presented with evidence, adopted a new accounting procedure that FINRA and the SEC have inspected since without any objections, and who has reallocated all of the money that was in question.

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In fact, once you peel away the continuing education expenses, which were legitimate business expenses under the operating agreements,

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All that remains in this case that's actually been proven are 26 random and inadvertent personal expenses, which gets us to the first of the due process violations here.

[00:01:36] Speaker 04:
Where did you raise those due process arguments before the SEC?

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You agree that you did not raise them there?

[00:01:44] Speaker 01:
No, ma'am.

[00:01:45] Speaker 01:
So a couple of things on that.

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I was surprised to see the waiver argument.

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As we point out in our reply brief at page five, there are numerous points where we raised due process arguments throughout this litigation.

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The SEC itself, by the way... Where did you raise... Can you tell me the page number of your brief to SEC where you raised these specific arguments that you just articulated to us?

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I believe it's actually cited on page five.

[00:02:14] Speaker 04:
No, no, I'm sorry, of your brief to the SEC.

[00:02:18] Speaker 01:
Yes.

[00:02:18] Speaker 01:
Yes, Your Honor.

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J.A.

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7380 and 82.

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I might add that the SEC knew that this is what it was reviewing because at page nine of the order that we're talking about.

[00:02:31] Speaker 04:
Slow down here for a second.

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Sorry, I want to make sure I'm on the same page as you.

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Sorry.

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What pages did you say this you're talking about?

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Because I don't have the right numbers on my appendix to go up as high as you're going.

[00:02:43] Speaker 01:
Well, 73, 80, and 82.

[00:02:48] Speaker 04:
OK.

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I thought you were saying 73, 80 was the number.

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That's my fault.

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I don't have a 7,000.

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Yeah, no.

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That would be a surprise to all of us.

[00:02:56] Speaker 04:
Thank you.

[00:02:58] Speaker 01:
And at those points, I can just read you the quote, Judge Miller.

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Perhaps that would be helpful.

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At those pages, we point out that FINRA violated the norms for assessing credibility, applied a double standard with respect to accounting.

[00:03:13] Speaker 03:
So, Mr. Dre, though, can you point to where you've raised the constitutional due process claims rather than claims about due process under FINRA's, you know, various statutory requirements?

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Isn't the language of the statute fair process fair?

[00:03:31] Speaker 02:
I seem to recall though, now that may be somewhat different from constitutional due process.

[00:03:39] Speaker 01:
Yeah, so as explained in the brief, the statute calls for fair process, that's in H2.

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And throughout we asked for due process.

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I mean, for example, again, I'm just reading these off of page five of the reply brief.

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At 2.47, she says that Finner hearing panel deprived her of due process rights.

[00:03:59] Speaker 04:
Sorry, JA 247.

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I just want to pin this down because when I looked, I did not see the constitutional arguments you're voicing now.

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You say on 247, which one are you pointing to?

[00:04:18] Speaker 01:
247, the quote is- Okay.

[00:04:21] Speaker 04:
Well, that's just, is this your notice?

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What is this?

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Is this a notice of appeal?

[00:04:25] Speaker 04:
Yeah, this is a notice of appeal.

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This isn't a brief.

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You have a lot of things on this notice of appeal you never briefed to the SEC.

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So I'd like if you could point me to the brief to the SEC where you raised that it was unconstitutional, your first argument to us to treat a schedule of expenses listing allegedly wrongful expenses as evidence.

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Where is that one in your SEC brief?

[00:04:49] Speaker 01:
Perhaps 203 JA 203 would be more satisfactory in which she insists upon the protection of due process rights.

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That's the appellants memorandum.

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Let's see.

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Sorry, where are you talking?

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203 JA 203.

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I'm on that page.

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Sorry, which paragraph?

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Just to make it go faster.

[00:05:10] Speaker 01:
I'm sorry, I don't know the exact paragraph, Your Honor, but I think in the meantime, I can respond to Judge Silverman's question, which is the SEC itself argues that this is sort of beside the point because under cases like Cody, which is the First Circuit decision, they treat the due process guarantee under the Constitution and under the statute as comparable.

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And so, even if, even if the court construed this only as raising statutory procedural rights.

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They should be treated in prior material with the due process rights under the Constitution and moreover all of this is still arbitrary and I'm still on page two or three of the right.

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I also want to make sure you answer Judge Rao's earlier question.

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I don't see on page, I see a general sentence that says the SD rules, I don't know what SD stands for, insist upon the protection of due process rights and do not provide for SD of someone who has not had their day in court beyond a reasonable doubt standard.

[00:06:08] Speaker 04:
But that's not what you've argued to us.

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So am I missing, is there something here where you're actually making the arguments you've made to us?

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So the argument there encompasses due process rights.

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But that's not enough to raise.

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You're making arguments to us that we have to make sure, as a matter of jurisdiction, that you actually raised.

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And just saying to the SEC due process is way too vague.

[00:06:34] Speaker 01:
Of course.

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And so then we have, and this is the original string site that I gave your honor, where it's 73, 80, and 82.

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She explains in greater detail.

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greater detail that FINRA violated the norms for assessing credibility applied to double standard with respect to errors and treated proof of one item as establishing the impropriety of every item on the list.

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And that's what gets us to the pattern.

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The SEC did that or you had FINRA did that?

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FINRA did that, and the SEC did the same thing.

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But then there was a remand to FINRA, and it had to then actually narrow down that list.

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But before we go on, Judge Redd, did you get your question answered about these pages?

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Yeah.

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I mean, I guess I don't see anything that you're pointing to in the record that mentions the constitutional claims.

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So I guess if we assume that those constitutional claims were not exhausted,

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Have you presented reasonable grounds for us to consider them here on appeal, assuming that they were not exhausted?

[00:07:34] Speaker 01:
Yes, Your Honor.

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As we explain, it is a very lax standard for reasonable grounds.

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This court's opinion in Action for Children's Television says that it is unnecessary to present arguments when an agency's general views are known.

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When it comes to most of these issues, that's

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more than satisfied.

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And I might add that even here- Well, before you add that, you said the statute already requires fair procedure.

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And to the extent the SEC treats that as equivalent, or certainly including the constitutional minimum of due process,

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We, before he could even decide the constitutional issue, as a matter of constitutional avoidance, would have to decide if the statute was violated.

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So we're back to looking again for where you made the same arguments you're making to us now as statutory arguments, which the SEC of course is qualified to decide.

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So where did you?

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Your honor, I'm going to endeavor to reserve the balance of my time, I'm afraid.

[00:08:41] Speaker 04:
Don't worry about that.

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Don't worry about that.

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We'll give you some time for rebuttal.

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But we're going to try and at least, I think, to understand where this was actually preserved.

[00:08:50] Speaker 01:
Of course.

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And I'm trying to situate it within this case as a whole.

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So I have given you the best citations that I have for that.

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They're on page five.

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Council, isn't your point really that the statutory

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Demand for fair process is not substantially different than due process.

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So let's assume you didn't raise a constitutional due process.

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As the First Circuit had pointed out, fair process is virtually the same.

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But in any event, why is there not fair process?

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You could clearly raise that.

[00:09:30] Speaker 01:
Yes, Your Honor, and that is why I cited the Cody opinion.

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So I'll be as quick as possible with these points.

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There are, as I said, three due process violations at issue here.

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The first are the- Why don't you use the term fair process so that we don't- Fair process it is.

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There are three fair process violations here.

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One is the change between, as Judge Miller pointed out, this case was before the SEC in 2017.

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They found that there was not enough evidence or no evidence for almost all of the 1,840 allegations.

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So they remanded it.

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They found at that time, in 2017, that there had not been a showing of a pattern or practice.

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On remand, and without a new hearing, FINRA simply declared that there was a pattern or practice.

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But if you look at the actual evidence in this case, and we've done our very best to make this as easy as possible, they don't identify the pattern that would be at issue.

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So there are examples of patterns and practices in this case.

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For example, the 10% under reimbursement that Ms.

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Springsteen Abbott always made for herself.

[00:10:36] Speaker 04:
This sounds like a sufficiency of evidence argument.

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This doesn't sound like a due process argument.

[00:10:42] Speaker 01:
No, because what we needed was the reopening.

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I'm pointing out the arbitrary and capriciousness of finding a pattern of practice where there is not even- No, that sounds like a sufficiency of evidence argument.

[00:10:51] Speaker 04:
That's not a due process argument.

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Why couldn't they rely on the record in the first instance?

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They didn't have to open up again as a matter of fair process if the prior record was adequate?

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If it was, and it is not.

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And that's the whole point, is that the SEC, this is not correct.

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The SEC says in 2017, you haven't shown a pattern or practice.

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They send it back.

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there's no new evidence about a pattern or practice.

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And they just declare a pattern or practice.

[00:11:29] Speaker 04:
That's- They went through and proved, I forget, 80 or something, particular things, okay?

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80 different times over the course of three different years.

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And then they concluded that 80 something times over the course of three different years is a pattern or practice.

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That's not one incident.

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I don't understand why you say the record didn't change.

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They proved exactly as you wanted,

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specific claims, not throwing in the other 1,000.

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And they did it over three years.

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I don't know how.

[00:11:59] Speaker 01:
So the first thing in that is to subtract the 58 continuing education and other businesses.

[00:12:06] Speaker 04:
No, we don't have to subtract those.

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That's a separate argument.

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You may have a sufficiency argument.

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I'm trying to find your due process argument.

[00:12:13] Speaker 01:
So the process point is that these allegations, she gets punished for 1,840 allegations that were not proven or 1,700 some odd.

[00:12:26] Speaker 04:
Well, she doesn't.

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The SEC remanded and said, you can't do that, Finra.

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And so then Finra came back and said, here's 80 something.

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And they court occurred over the course of three different years.

[00:12:36] Speaker 04:
What's the problem with that?

[00:12:37] Speaker 01:
The problem with that is that they got it half right.

[00:12:41] Speaker 01:
They reduced the fine and the disgorgement to match that reduced showing, but they didn't reduce the lifetime bar.

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That is an unfair process for her, and it departs from all the evidence.

[00:12:53] Speaker 04:
Whenever you don't get what you want, it's an unfair process?

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Whenever you don't get the outcome you want?

[00:12:57] Speaker 01:
Of course not.

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The failure here, though, is on remand,

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they, the numerical components, they adjusted by reducing the disgorgement and reducing the fine, but they never adjusted the lifetime ban.

[00:13:11] Speaker 04:
Because they thought it was still appropriate for 80 something instances over the course of three years, combined with, combined with lying to investigators and engaging in what they found was bad faith.

[00:13:30] Speaker 01:
So again, that is the fruit of the unfair process as well.

[00:13:35] Speaker 01:
The credibility determination was born of a process in which only at the hearing, it's JA 1033, Ms.

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Springsteen Abbott objected to the inaccuracies in the expense schedule that she was given.

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At 1034, FINRA says, the Department of Enforcement says they'll have a new corrected schedule within a day or two.

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They didn't present it until after the hearing and upon demand in a letter, this is J501 through 02, in which Ms.

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Springsteen Abbott insisted on correct allegations against her.

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And even when that arrived, Finra refused to reopen the record so that she could respond to the corrected schedule.

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So if you look at these things, and in fact, take the example of the children's meal that the commission cites in its brief.

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This is that page.

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I want to say it's 908, 907, 907 rather, where Ms.

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Springsteen Abbott has an expense for a children's meal.

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And she has a bunch of expenses from the same restaurant.

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We know that.

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And they point out at the hearing that this was a children's meal.

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And she admits that she was on a diet and so forth after a somewhat embarrassing line of questioning.

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And then they give her evidence that this children's meal was actually not her, but rather her grandchildren.

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And then she immediately says on page 907,

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Oh, then this was a mistake.

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And we'll reallocate it as soon as I get back to the office.

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That is the kind of opportunity she should have had to respond to the allegations against her instead of that exact opportunity.

[00:15:07] Speaker 04:
And she did respond in the hearing.

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And then she got caught when she said, Oh, no, repeatedly.

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That was my diet meal.

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She didn't say, I'm not sure, I don't remember.

[00:15:18] Speaker 04:
She said, no, I was on a diet at that time and that's what I ate.

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And it was only when she got confronted with the email that she admitted that in fact it was for her grandchildren.

[00:15:29] Speaker 04:
So I don't understand what's the process problem.

[00:15:33] Speaker 04:
Mayor, she had every opportunity to respond during questioning and she did, she just got caught.

[00:15:38] Speaker 01:
The problem is that all of these things were extremely dubious because many of them were riddled with errors.

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And so she was doing her best to recreate the expenses after the fact.

[00:15:54] Speaker 02:
Council, it seems to me you are fighting over the evidence in the case.

[00:15:58] Speaker 02:
I'm listening carefully and I don't hear a real

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process question, whether fair process or due process.

[00:16:07] Speaker 01:
Well, then let me give you the third one, Your Honor, which is the unconstitutionally appointed adjudicators.

[00:16:13] Speaker 01:
This one concerns, and all three of them, again, are correct as under the APA's arbitrary capricious standard, as well as, of course, the appointment clause.

[00:16:27] Speaker 02:
Go ahead, Naomi.

[00:16:28] Speaker 03:
Oh, I was going to say it.

[00:16:30] Speaker 03:
My question to you about the Appointments Clause questions was, where did you exhaust those in the proceedings below?

[00:16:37] Speaker 01:
So that one is not exhausted in the proceedings below.

[00:16:41] Speaker 01:
And as we explained based on Frytag and this court's opinion in Koretsky, that does not have to be presented below.

[00:16:48] Speaker 03:
So Frytag involved a non-jurisdictional exhaustion requirement.

[00:16:55] Speaker 03:
But here we have a jurisdictional exhaustion requirement.

[00:16:59] Speaker 03:
Doesn't that distinguish Freytag from this case?

[00:17:02] Speaker 01:
No, it doesn't.

[00:17:03] Speaker 01:
Because Freytag explains that the animating decision there is the judiciary's interest in protecting the separation of powers.

[00:17:12] Speaker 01:
It's not tethered to whether or not it was jurisdictional or mandatory or any of these other threshold issues.

[00:17:19] Speaker 01:
And in fact, I have an update on that because the two cases, the two appointments clause cases that the SEC cites in response, Gunnella and Maloof, we mentioned in the reply brief that those are the subject of a pending cert petition in CAR.

[00:17:35] Speaker 01:
The Supreme Court granted that a couple of weeks ago to take up the question of exhaustion in the ALJ context.

[00:17:44] Speaker 01:
Again, this is cited in our reply brief.

[00:17:46] Speaker 01:
It's the Carr case.

[00:17:47] Speaker 01:
It was granted on 11-9-2020, in which the court will take up this Appointments Clause preservation issue.

[00:17:55] Speaker 04:
That's F-A-C-A-L-J, right?

[00:17:58] Speaker 01:
Yes, ma'am.

[00:17:59] Speaker 04:
Yeah, which is clearly a state actor, but you have to, the question is whether you exhausted the state actor argument when you're talking about FINRA, right?

[00:18:10] Speaker 04:
And that is not something that the SEC has said.

[00:18:13] Speaker 04:
It's said that SROs can be treated as state actors sometimes, and so it wouldn't have been futile to raise that issue before the SEC.

[00:18:22] Speaker 04:
And you may have even been able to wrap it into a fair procedure argument.

[00:18:26] Speaker 01:
So again, Your Honor, I think that would be relevant, or that is a conversation we can have around some of the other claims.

[00:18:32] Speaker 01:
But that is not relevant for the Appointments Clause conversation.

[00:18:36] Speaker 01:
Because Freytag, Koretsky, and the PCAOB case, which explains that the probability of success, whether it's a non-frivolous claim or not,

[00:18:47] Speaker 01:
is relevant to the decision about whether ordinary preservation rules apply, and they do not.

[00:18:52] Speaker 01:
And PCAOB, if this court reaches the merits, disposes of this entirely, because that is- Wait a minute, counsel.

[00:19:00] Speaker 02:
Elgin backed off the PCOB case, didn't it?

[00:19:05] Speaker 01:
Not in relevant part, Your Honor.

[00:19:08] Speaker 01:
The holding here is

[00:19:11] Speaker 01:
It's principally a page 44 and 47 of that case where it explains the similarities in the double good cause removal, which applies to this entity.

[00:19:21] Speaker 02:
Was your firm counseled before the commission?

[00:19:26] Speaker 01:
We were at various times.

[00:19:27] Speaker 01:
There were other counsel as well.

[00:19:29] Speaker 02:
So why wasn't the appointment clause issue raised before the commission?

[00:19:36] Speaker 02:
Why in Lord's name would anybody representing

[00:19:41] Speaker 02:
who you represent, not raise the Appointments Clause issue, knowing that if you don't raise it before the commission, you're going to at least have a major problem in the Court of Appeals.

[00:19:54] Speaker 02:
I'm mystified as to why these cases come up all over the country in which counsel hasn't raised the constitutional question before their agency.

[00:20:07] Speaker 01:
They do come up all over the country.

[00:20:09] Speaker 01:
And I take your honor's practice tip.

[00:20:11] Speaker 01:
I was not personally involved at that time.

[00:20:13] Speaker 01:
It's worth noting that Lucia versus SEC, which is also relevant to this case, was decided during the pendency of our case.

[00:20:22] Speaker 01:
I think that may contribute to the explanation.

[00:20:25] Speaker 04:
It didn't stop Lucia from raising it.

[00:20:28] Speaker 01:
Well, Lucia didn't raise it in the first instance, and that case is somewhat unhelpful in its timing.

[00:20:34] Speaker 01:
Otherwise, I would rely on it much more in terms of preservation, because Lucia, the court just says timely and doesn't give many guidelines, which is part of why I think they took the car decision, took the car case just earlier last month.

[00:20:48] Speaker 03:
So Mr. Gray, is your position that for these types of structural constitutional claims that the exhaustion provision in the statute doesn't apply or that raising of a structural constitutional question is reasonable grounds for us to reach the issue?

[00:21:06] Speaker 01:
Well, I think that the Friday case would frame it more in the latter structure that it is the statute doesn't apply because

[00:21:18] Speaker 01:
That wasn't construing this reasonable grounds accepted in 78 see why one I believe it is, but I, you know, it's about suspenders in this case we also have a statute that's very forgiving in terms of preservation so reasonable

[00:21:34] Speaker 03:
read the statute to be forgiving?

[00:21:36] Speaker 03:
I mean, we have precedent saying that it is a jurisdictional exhaustion statute.

[00:21:40] Speaker 03:
If we just read reasonable grounds to be almost anything, anything, any question that we want to reach, then aren't we undermining the jurisdictional nature of the exhaustion requirement?

[00:21:53] Speaker 01:
No.

[00:21:54] Speaker 01:
So this court also has precedent in the KPMG case insisting on nothing more than a reasonable explanation.

[00:22:02] Speaker 01:
And I believe it's also that case that distinguishes other examples like the extraordinary circumstances threshold that's required

[00:22:11] Speaker 01:
in different statutes, which I can't quote chapter and verse right now, but they're in our reply brief.

[00:22:19] Speaker 01:
This court has appropriately given credit to the way that Congress structured this preservation requirement.

[00:22:26] Speaker 01:
So no, it is a laxer standard than is written elsewhere.

[00:22:30] Speaker 01:
That's consistent with KPMG in other cases.

[00:22:34] Speaker 01:
And again, here, I point the court to the general views from Action for Children's Television.

[00:22:41] Speaker 01:
This agency's general views are already known, as we detailed in the reply brief.

[00:22:46] Speaker 04:
Can I ask another thing?

[00:22:50] Speaker 04:
You've argued that the FINRA hearing folks are state actors.

[00:22:59] Speaker 04:
Where have you argued that they are officers of the United, not just state actors, but officers of the United States, which is what you have to argue to make them subject to the appointments clause?

[00:23:13] Speaker 01:
Well, we certainly argue that now, Your Honor, and that's the point.

[00:23:18] Speaker 04:
Where have you argued that they're officers of the United States?

[00:23:22] Speaker 04:
That's going to require a complicated inquiry into the nature of this whole SEC.

[00:23:26] Speaker 04:
Oh, I understand the question.

[00:23:29] Speaker 04:
These Finra hearing officers can't just be government officials.

[00:23:33] Speaker 04:
That's all a state actor would mean.

[00:23:35] Speaker 04:
They have to be officers within the meaning of the Constitution.

[00:23:41] Speaker 01:
I understand the question.

[00:23:42] Speaker 01:
And that answer is already provided by the Supreme Court and PCAOB.

[00:23:46] Speaker 01:
That's the whole point of that decision.

[00:23:48] Speaker 01:
They describe the similar removal process.

[00:23:51] Speaker 01:
Remember, it's the removal.

[00:23:52] Speaker 04:
It's not the removal process here.

[00:23:53] Speaker 04:
I'm asking about the nature of their decision-making role to be an officer of the United States.

[00:23:59] Speaker 04:
You have de novo review by the SEC in these cases.

[00:24:03] Speaker 04:
And so I did not see an argument in your brief that these are officers of the United States.

[00:24:09] Speaker 01:
So too in PCAOB.

[00:24:11] Speaker 01:
I mean, our argument on the merits of that is basically apply PCAOB.

[00:24:17] Speaker 04:
Where are you arguing that they're officers of the United States as opposed to state actors?

[00:24:22] Speaker 01:
Your Honor, the argument is that PCAOB is on all fours with this case.

[00:24:28] Speaker 04:
And as the court explains... That's a different scheme.

[00:24:33] Speaker 04:
This is a different statutory scheme that has de novo review by the SEC.

[00:24:38] Speaker 04:
And so you might be right, but normally we would expect someone to say,

[00:24:43] Speaker 04:
They are officers of the United States.

[00:24:45] Speaker 04:
Here's the test for an officer of the United States and apply the peekaboo case that way.

[00:24:51] Speaker 04:
But I didn't see that argument.

[00:24:52] Speaker 04:
I just saw a leap from state actor to the assumption that the Appointments Clause applies.

[00:24:57] Speaker 04:
But if I missed it.

[00:25:00] Speaker 01:
So I think we argue it.

[00:25:04] Speaker 01:
I think we point out that the Supreme Court's holding in that case explains at page 44 that PCAOB is modeled on the SROs and at 47 they talk about 78SH4 and explain that this is the exact same, these are birds of a feather in terms of how these two agencies are structured.

[00:25:27] Speaker 01:
So when the court reaches the merits of the Appointments Clause case,

[00:25:30] Speaker 01:
there's no room for doubt that PCAOB applies in this instance.

[00:25:36] Speaker 03:
In the Peek-A-Boo case, there was a stipulation that the members of the PCAOB were officers.

[00:25:46] Speaker 01:
I would have to look at that, but it's... I mean, if the court wants further briefing on whether or not they're officers, I'm happy to provide it.

[00:25:53] Speaker 04:
I'm trying to figure out if there's any, but go ahead.

[00:25:56] Speaker 01:
Yes, but that's...

[00:25:59] Speaker 01:
I think it's stipulated because it's impossible to argue, to tell you the truth.

[00:26:04] Speaker 01:
I think the reason that PCAOB comes out that way is that given their decision-making capacity and the fact that these folks are double good cause removal away from the president is sufficient.

[00:26:16] Speaker 01:
And then of course, that's just to get to the board members.

[00:26:19] Speaker 01:
When we're talking about the hearing officers, it's yet one further step removed, which leads to that great line about the matryoshka doll of tenure protections

[00:26:29] Speaker 01:
And that's where Lucia and others come into play.

[00:26:33] Speaker 03:
Mr. Dre, assume, say we were to agree that you have preserved these issues and would we need to remand to the SEC to consider them in the first instance?

[00:26:46] Speaker 01:
It would be with, I mean, the court certainly could.

[00:26:48] Speaker 01:
I think the better outcome would be to vacate the lifetime ban and the portion of the disgorgement that's attributable to continuing education and other business expenses, set aside the 26 personal expenses, which, you know, Ms.

[00:27:05] Speaker 01:
Springsteen Abbott has accepted responsibility for those from day one, in fact, during the hearing.

[00:27:12] Speaker 01:
But the court could, I think, adjust the discouragement by I think it's about $30,000.

[00:27:16] Speaker 01:
And then what really matters is vacate the lifetime ban and remand for consideration of that because under the guidelines.

[00:27:25] Speaker 01:
The SEC is to consider a bar for a number of years.

[00:27:30] Speaker 01:
I think it's up to two years for misuse of funds.

[00:27:35] Speaker 01:
This isn't even a conversion case like in SAD.

[00:27:39] Speaker 01:
I'm happy to talk about SAD if the court is interested, but this isn't even a conversion case, which is a more stiff allegation.

[00:27:48] Speaker 01:
This is a misuse of funds case and it involves no more than 26 items.

[00:27:54] Speaker 01:
What I think would be the correct remedy, Judge Brown, would be to vacate the lifetime bar.

[00:27:59] Speaker 01:
And then we'll have to sort out whether some version of time served and expunging the bad actor scarlet letter that attaches under rule 506D would be appropriate.

[00:28:12] Speaker 01:
But that's something that the commission could work out.

[00:28:16] Speaker 04:
Thank you.

[00:28:17] Speaker 04:
Do my colleagues have more questions?

[00:28:19] Speaker 04:
No.

[00:28:19] Speaker ?:
No.

[00:28:20] Speaker 04:
I think you're from the SEC now, but we'll give you a couple of minutes on rebuttal.

[00:28:25] Speaker 04:
Thank you.

[00:28:25] Speaker 04:
We chewed up your time and more.

[00:28:30] Speaker 00:
Good morning.

[00:28:31] Speaker 00:
May it please the court, Daniel Staroselski for the Securities and Exchange Commission.

[00:28:36] Speaker 00:
I would just like to make two points at the outset, one about the due process argument and the second about the appointments clause.

[00:28:44] Speaker 00:
With respect to due process, I think the court, Judge Solerman, Judge Mallette, you have it exactly right.

[00:28:49] Speaker 00:
It doesn't matter what you call it.

[00:28:52] Speaker 00:
But everybody agrees that the proceeding has to be fair.

[00:28:56] Speaker 00:
And the commission addressed each and every argument that petitioner made before it to the effect that the proceeding was unfair.

[00:29:04] Speaker 00:
And that's why there was a remand to FINRA, both with respect to liability and the remedy.

[00:29:12] Speaker 00:
And so the order on review now is the commission's most recent order.

[00:29:19] Speaker 00:
It's not the FINRA's orders.

[00:29:22] Speaker 00:
With respect to

[00:29:23] Speaker 00:
with respect to the Appointments Clause.

[00:29:26] Speaker 04:
Before we get to that, so they argue about the fact that the record was not reopened in the second round.

[00:29:37] Speaker 04:
Can you address that, what constraints there were on Ms.

[00:29:41] Speaker 04:
Springsteen Abbott's ability to prove her case or not on the second round before Finra?

[00:29:47] Speaker 00:
Right.

[00:29:48] Speaker 00:
And I, you know, first of all, I didn't understand them to be making this argument at all, either in their opening or reply brief.

[00:29:54] Speaker 00:
This is something that popped up for the first time at oral argument today.

[00:29:57] Speaker 00:
But the commission addressed this issue at J.A.

[00:30:01] Speaker 00:
12 to 13.

[00:30:02] Speaker 00:
And it said first against Judge Silberman's point, you know, the remand order from FINRA to the commission the first time around, it didn't require

[00:30:12] Speaker 00:
FINRA to reopen the record that they could have left open to consider the issues on the record that had been used so far.

[00:30:22] Speaker 00:
And with respect to reopening the record, I think the commission's point is that just petitioner didn't do enough to bring to FINRA's attention whatever issues that they wanted FINRA to consider.

[00:30:39] Speaker 00:
But that is all spelled out at JA 12 to 13.

[00:30:42] Speaker 00:
With respect to the Appointments Clause, just a couple of points.

[00:30:48] Speaker 00:
First of all, I think my friend might have misspoken, it's not the SEC's statutory scheme that's on review there.

[00:30:57] Speaker 00:
It's the Social Security Administration.

[00:30:59] Speaker 00:
And Judge Rao, to your point, that's an entirely different statutory scheme, because as in FRATAC, there's no statutory exhaustion requirement.

[00:31:09] Speaker 00:
And it involves judicially developed exhaustion.

[00:31:13] Speaker 00:
And in that circumstance, if the courts develop an exhaustion requirement, they kind of have more leeway in determining whether it ought to be excused.

[00:31:22] Speaker 00:
But here we have a statutory exhaustion requirement, whether you call it jurisdictional, whether you call it claim processing, it's mandatory.

[00:31:30] Speaker 00:
We've raised the forfeiture point.

[00:31:33] Speaker 03:
What do you think about the reasonable grounds argument, right?

[00:31:37] Speaker 03:
Is it reasonable for Springsteen Abbott not to raise these questions, the constitutional questions before the commission, either because the commission lacks the power to decide them or has previously declined to reach those questions?

[00:31:56] Speaker 00:
Well, under

[00:31:57] Speaker 00:
I think the courts have uniformly helped.

[00:31:59] Speaker 00:
That's not a reasonable ground.

[00:32:01] Speaker 00:
I mean, I do want to take issue a little bit with the premise that the Commission has a set policy on this issue.

[00:32:08] Speaker 00:
We cited the Quetrone and Thicken cases in our brief.

[00:32:13] Speaker 00:
those involved a little bit different set of due process claims.

[00:32:17] Speaker 00:
The argument there, or sorry, state actor claims, the argument there was that the way that FINRA and the commission had investigated certain conduct, they were acting too jointly.

[00:32:32] Speaker 00:
And so that raised the due process concern.

[00:32:34] Speaker 00:
And in Quattrone, the commission actually dismissed the proceeding on that ground.

[00:32:39] Speaker 00:
You know, more fundamentally, I think the point is the reason you raise these arguments is that putting aside the label, you give the commission an opportunity to consider the arguments on the other side, and that informs this court's review.

[00:32:55] Speaker 03:
Could the SEC decide the appointments clause issue?

[00:32:59] Speaker 00:
I mean, I think the commission certainly could decide it.

[00:33:06] Speaker 00:
You know, there's a question about

[00:33:07] Speaker 00:
remedy and so forth.

[00:33:09] Speaker 00:
But I think this court talked to that issue in the Jarkissi case that we cite in the brief.

[00:33:16] Speaker 00:
And the point is, especially with the appointments clause, Judge Mallott talked about this, these issues get into the real minutia of how the agency or the body on review works.

[00:33:31] Speaker 00:
And regardless whether the commission ultimately has authority to

[00:33:36] Speaker 00:
its authority to remedy the decision.

[00:33:40] Speaker 00:
At a bare minimum, what it says will inform this court's review.

[00:33:44] Speaker 00:
And there's no shortage of these FINRA cases coming up through the pipeline.

[00:33:51] Speaker 00:
By my count, this is the third FINRA case just this term that this court is considering.

[00:33:56] Speaker 00:
And look, the positioner's opening brief talks at length about how these issues have been written about for a very long time now.

[00:34:06] Speaker 00:
no obstacle whatsoever to them raising these arguments before the commission.

[00:34:11] Speaker 00:
They just chose not to.

[00:34:12] Speaker 00:
And I think there might be some close cases on what constitutes a reasonable ground, but this is not one of them.

[00:34:22] Speaker 02:
What would be your case where you thought there would be reasonable grounds?

[00:34:28] Speaker 00:
Yeah, so one reasonable ground case that comes to mind, I think,

[00:34:36] Speaker 00:
If there's a intervening change in law, I think that that might be a reasonable ground case.

[00:34:42] Speaker 00:
But there's nothing like that here.

[00:34:43] Speaker 00:
Lucia was decided.

[00:34:45] Speaker 00:
While these proceedings were pending, petitioners had no problem raising co-cash when that came up and brought it to the commission's attention.

[00:34:55] Speaker 00:
Lucia was out there.

[00:34:56] Speaker 00:
They didn't say a word about Lucia.

[00:34:58] Speaker 00:
This is just something that they came up with for the first time on appeal.

[00:35:01] Speaker 00:
And I don't think this court should encourage that type of practice.

[00:35:06] Speaker 03:
So do you think the fray tag, I mean, I guess you spoke about this a little bit earlier, but you, so you think fray tag is simply not applicable in a context where you have a mandatory or jurisdictional exhaustion statute?

[00:35:21] Speaker 00:
Yeah, I just think it's a very different set of considerations there because we have a statutory exhaustion requirement.

[00:35:29] Speaker 00:
I mean, I will say that

[00:35:31] Speaker 00:
you know, the way that we read the case law, it seems like the court has backed away from what it did in freight tag a little bit.

[00:35:40] Speaker 00:
So in Lucia, it talked about appointments clauses, challenges being raised timely, and that cited Rider, the Supreme Court's decision in Rider.

[00:35:49] Speaker 00:
But it's just it's a different set of considerations.

[00:35:53] Speaker 02:
Here's a hypothetical for you.

[00:35:55] Speaker 02:
Suppose the SEC were to issue a rule that related to

[00:36:02] Speaker 02:
uh, FINRA procedure, there wouldn't be any question in those circumstances that anybody affected by the rule, any organization affected by the rule could bring an action in the court of appeals, challenging the appointment process.

[00:36:25] Speaker 02:
In other words, on distinguishing a challenge to a rule,

[00:36:31] Speaker 02:
from an adjudication?

[00:36:36] Speaker 00:
You know, Your Honor, I don't know how to answer that, frankly.

[00:36:41] Speaker 00:
I think that's possible, and maybe the court would have to confront that in that circumstance.

[00:36:47] Speaker 00:
But in this adjudication, we do have very clear guidance from Congress.

[00:36:54] Speaker 00:
Congress wanted objections to be urged before the commission, and they were not.

[00:36:59] Speaker 02:
Well, you see, if it was a rule,

[00:37:01] Speaker 02:
You wouldn't have the same problem.

[00:37:05] Speaker 02:
But anyway, you don't have a rule.

[00:37:07] Speaker 02:
So that's just a hypothetical.

[00:37:12] Speaker 02:
Why?

[00:37:13] Speaker 02:
Well, I'll reserve a question for council on the bottle.

[00:37:21] Speaker 02:
Go ahead, I'm sorry.

[00:37:23] Speaker 04:
Did you have a question?

[00:37:24] Speaker 04:
No.

[00:37:28] Speaker 04:
Go ahead.

[00:37:31] Speaker 04:
Council.

[00:37:32] Speaker 00:
Oh, pardon me.

[00:37:33] Speaker 00:
I thought that I thought the court might have had a question.

[00:37:36] Speaker 00:
Well, I mean, unless there are any further questions, we'd ask the court to deny the petition for review and affirm the commission's order.

[00:37:44] Speaker 04:
The argument about how to treat the continuing education expenses wasn't a valid exercise of business judgment.

[00:37:58] Speaker 00:
Or and so

[00:37:59] Speaker 00:
Again, so this argument, their only legal argument about liability on this was raised for the first time in the reply brief.

[00:38:06] Speaker 00:
The only thing they said about this in the opening brief was about disgorgement.

[00:38:10] Speaker 00:
But, you know, I do want to give the court comfort on this issue.

[00:38:12] Speaker 00:
And this is addressed in the commission's opinion at J.A.

[00:38:17] Speaker 00:
11.

[00:38:18] Speaker 00:
And, you know, the bottom line is that their argument just doesn't jive with the contractual language or with the evidence.

[00:38:26] Speaker 00:
So the language in the offering documents is it authorizes the funds to be charged for such other related administrative expenses as are necessary for the prudent operation of the funds.

[00:38:40] Speaker 00:
So it's not just anything that petitioner considers prudent.

[00:38:43] Speaker 00:
It has to be necessary for the prudent operation of the funds.

[00:38:47] Speaker 00:
And the briefing on the other side just completely omits that necessary language.

[00:38:52] Speaker 00:
And then on the facts,

[00:38:54] Speaker 00:
You know, recall what we're talking about here.

[00:38:56] Speaker 00:
These are FINRA continuing education expenses put on by Commonwealth securities, which is the broker dealer.

[00:39:05] Speaker 00:
But petitioner wants to, you know, she wants to charge investors for the cost of putting on that continuing education for employees of Commonwealth capital, which is not the broker dealer.

[00:39:19] Speaker 00:
And there's just nothing in the record to explain why that's necessary for the prudent operation of the funds.

[00:39:27] Speaker 04:
The closest they come is- The education was for Commonwealth capital, not Commonwealth securities employees.

[00:39:34] Speaker 00:
Correct.

[00:39:35] Speaker 00:
I mean, that's the whole dispute.

[00:39:36] Speaker 00:
Yeah.

[00:39:37] Speaker 00:
And so, you know, the closest that they come to is they cite petitioners testimony at JA 676 that she used her business judgment

[00:39:48] Speaker 00:
But there's just nothing to give content to with that to explain why she thought it was necessary for the Commonwealth capital to get continuing education on thinner requirements when Commonwealth capital isn't the broker dealer.

[00:40:02] Speaker 00:
They can't perform broker dealer functions.

[00:40:06] Speaker 04:
My colleagues have any more questions?

[00:40:09] Speaker 04:
No, ma'am.

[00:40:10] Speaker 04:
All right.

[00:40:11] Speaker 04:
Thank you very much.

[00:40:12] Speaker 04:
Thank you, Your Honors.

[00:40:13] Speaker 04:
And we will give Mr. Dre two minutes for rebuttal.

[00:40:16] Speaker 01:
Excellent.

[00:40:18] Speaker 02:
Before you start, counsel, let me ask this question.

[00:40:23] Speaker 02:
You can see at best, at very best for your point of view on the appointments clause, including the officer of the United States question, your very best, you could say at the time you're litigating this case and before the commission is,

[00:40:45] Speaker 02:
There's some confusion on this issue coming from the Supreme Court.

[00:40:51] Speaker 02:
Arguably PCOB is inconsistent with Elgin.

[00:40:55] Speaker 02:
Three justices thought so.

[00:41:00] Speaker 02:
So isn't it unreasonable not to raise this issue before the SEC?

[00:41:10] Speaker 01:
No, and actually I'm glad to get back to the reasonable grounds argument because it occurred to me while my friend on the other side was speaking that Judge Rao was asked about the mandatory statutory requirement here and whether that distinguishes the other cases.

[00:41:31] Speaker 01:
It does not because as this court has explained and we cited at page six in our reply brief.

[00:41:36] Speaker 02:
You're not answering my question.

[00:41:40] Speaker 02:
given the best you could make out of an argument is there's some confusion.

[00:41:45] Speaker 02:
I think Jarkazie is very much against you.

[00:41:49] Speaker 02:
But the very best you could make as an argument is there's some confusion in the courts.

[00:41:54] Speaker 02:
And therefore, why isn't it unreasonable not to raise this issue before the Securities and Exchange Commission, given the fact that it is arguably a jurisdictional point?

[00:42:06] Speaker 01:
So I disagree with your honor's premise about whether there's confusion on the relevant part of PCAOB for this case.

[00:42:13] Speaker 01:
And then as to the reasonable grounds, I call the court's attention to its precedent

[00:42:18] Speaker 01:
the Washington Association for Television and Children case, which explains that 78 CY1 merely codifies the traditional common law exhaustion requirement.

[00:42:29] Speaker 02:
So in light of that... Isn't that a case before KPM?

[00:42:34] Speaker 02:
You're not answering my question.

[00:42:35] Speaker 02:
Why isn't it unreasonable not to raise this issue before the Securities and Exchange Commission?

[00:42:41] Speaker 01:
It's not unreasonable because I don't agree with the premise that there is confusion about the meaning of PCAOB.

[00:42:50] Speaker 02:
Moreover, we're not obliged.

[00:42:53] Speaker 02:
I'm not Elgin Baxloff PCOB, isn't it clear?

[00:42:57] Speaker 01:
No, Your Honor.

[00:42:59] Speaker 01:
But moreover, and more importantly, I think, a litigant is not obliged to raise these issues in front of the unconstitutionally comprised adjudicators.

[00:43:09] Speaker 01:
it can wait until it's in court.

[00:43:11] Speaker 01:
That's what happened in Friday.

[00:43:13] Speaker 01:
Even after stipulating to appear before the special judge in that case, they waited until they were in the Fifth Circuit to raise the Appointments Clause issue.

[00:43:22] Speaker 01:
And the court at some length explains why that was the appropriate thing to do and why the court could still take it up.

[00:43:28] Speaker 04:
So I submit that- Pedro, I thought you were trying to ask a question a minute ago about the television case.

[00:43:35] Speaker 03:
Well, I mean, well, I mean, again, I mean, for one thing, Freytag, again, there was no jurisdictional statute in the case that you keep citing about interpreting 78YC1 is before, I believe, our decision in KPMG, which said that that statute was jurisdictional.

[00:43:53] Speaker 03:
So you can't really rely on that earlier case.

[00:43:56] Speaker 01:
Well, so KPMG doesn't reverse on whether or not the purpose is mere codification of the common law preservation requirements.

[00:44:07] Speaker 03:
A common law preservation is different from a jurisdictional requirement.

[00:44:12] Speaker 03:
I mean, it may not say it's reversing, but I mean, those are two very different things.

[00:44:16] Speaker 03:
To say Congress created a jurisdictional exhaustion bar is different from judge-made exhaustion doctrines.

[00:44:24] Speaker 01:
And perhaps the way to cut the knot, Your Honor, is to think about what exactly Congress made here.

[00:44:29] Speaker 01:
And that's where the reasonable ground does some of the work.

[00:44:32] Speaker 01:
And KPMG is actually very helpful for that because, as they explain, it's just a quote, reasonable explanation, which I think is more than satisfied in this case.

[00:44:44] Speaker 01:
The one other thing that I would like to respond to briefly is about the continuing education expenses.

[00:44:51] Speaker 01:
The reason that those are appropriate and we cite, you know, it's a stipulated exhibit at JA 544 through 545.

[00:45:02] Speaker 01:
that lists the allowances for charging expenses to the funds.

[00:45:08] Speaker 01:
And I encourage the court to read it entirely because I think it's clear that it incorporates a business judgment rule.

[00:45:15] Speaker 04:
And the reason... Well, the problem, the difficulty for us, of course, is that you didn't raise this argument at all until your reply brief.

[00:45:22] Speaker 04:
So we have no briefing from the SEC.

[00:45:25] Speaker 04:
I mean, he just gave us some response to your oral argument.

[00:45:29] Speaker 04:
So why isn't that argument forfeited by failure to raise in your opening brief?

[00:45:34] Speaker 04:
Unless you can point to me where your opening brief raised this argument.

[00:45:38] Speaker 01:
I will look for that.

[00:45:40] Speaker 01:
But it's everywhere that we talk about the loon decision around disgorgement.

[00:45:45] Speaker 01:
And we explain in the opening brief that the Commonwealth Capitol has no employees, excuse me,

[00:45:50] Speaker 04:
The funds have no employees of their own Commonwealth capital has I've got that we got that I was talking about the argument you're making now about this judgment rule, which I did not see that phrase in your.

[00:46:01] Speaker 01:
That is the argument that applies here is that because the funds don't have any employees of their own.

[00:46:11] Speaker 04:
That doesn't establish a business judgment rule or necessity, like you said.

[00:46:15] Speaker 04:
But it's a whole, I'm asking you a separate question.

[00:46:19] Speaker 04:
I'm not asking you to rehearse your argument on that front, which we have from your reply brief.

[00:46:23] Speaker 04:
What I'm asking you to do is say why we would even entertain it since it wasn't raised in the opening.

[00:46:28] Speaker 01:
So here it is, in the opening brief, page 11, we explain the operating agreements between Commonwealth capital and the funds did not require any contribution to the salaries, but it did allow reimbursement for expenses that were in Ms.

[00:46:43] Speaker 01:
Springsteen Abbott's business judgment, quote, related to the operation and administration of the funds.

[00:46:50] Speaker 01:
And it goes on.

[00:46:50] Speaker 04:
That's not even the argument section of your brief, page 11.

[00:46:54] Speaker 01:
At some length.

[00:46:56] Speaker 04:
That's your background description.

[00:46:58] Speaker 04:
of what you argued maybe below.

[00:47:01] Speaker 04:
Can you tell me where in your argument section?

[00:47:03] Speaker 01:
No, that's background facts for the argument that appears, let me see, at page.

[00:47:15] Speaker 01:
OK, so then at page five, you get the commonwealth capital operating arrangement explanation.

[00:47:31] Speaker 01:
pages seven, 10, 11, 16.

[00:47:41] Speaker 01:
And here's the Lue citation is that page 53.

[00:47:48] Speaker 01:
This was absolutely raised in our brief and the factual.

[00:47:53] Speaker 04:
All right, that's fine.

[00:47:55] Speaker 04:
I'll look again and see if you've raised this argument.

[00:47:58] Speaker 04:
Do my colleagues have any further questions?

[00:48:01] Speaker 04:
We've had a lot of time at this point.

[00:48:04] Speaker 01:
Unless there is anything further, I'm happy to leave everything else on the papers.

[00:48:11] Speaker 04:
Thank you.

[00:48:11] Speaker 04:
Thank you both, Council.

[00:48:12] Speaker 04:
The case is submitted.