Michelle Cochran v. U.S. Securities and Exchange Commission

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CASE STATUS:
On Appeal

CASE START DATE:
January 18, 2019

DECIDING COURT:
U.S. District Court for the Northern District of Texas

JUDICIAL COURT IN WHICH NCLA BROUGHT SUIT:
U.S. Court of Appeals for the Fifth Circuit

 

CASE SUMMARY

James Madison once said that the concentration of all government powers in one branch is “the very definition of tyranny.” Yet, today, administrative agencies regularly exercise all three of those powers. They issue rules with the force of law. They enforce laws. And they prosecute people through a system of administrative proceedings before administrative law judges or ALJs, who are hired by the agency prosecuting you.

NCLA client Michelle Cochran fell prey to this system in 2016, when the U.S. Securities and Exchange Commission (SEC) accused her of violating federal accounting standards. Ms. Cochran, a Texas CPA, had worked as an auditor with a small accounting firm until 2013. A single mother, Ms. Cochran started as a part-time employee to make ends meet. Three years after she left the firm, the SEC brought an enforcement action against the firm and named her as a defendant, claiming that she aided and abetted the firm’s alleged rule violations.

Representing herself pro se, Ms. Cochran fought the allegations against her in a proceeding before an ALJ hired by the SEC to hear the case. At the time, SEC ALJs were not appointed by the president like normal judges. They were hired by the prosecuting agency like any other civil servant. Not surprisingly, ALJs rule for the SEC in most cases. In fact, the ALJ assigned to Ms. Cochran’s case often warned defendants that he never ruled against the SEC in enforcement proceedings.

In 2017, Ms. Cochran’s ALJ ruled against her, imposing a $22,000 fine and banning her from practicing as an accountant before the SEC for five years.

Then something surprising happened June, 2018. In Lucia v. SEC, the U.S. Supreme Court ruled that SEC ALJs were not properly appointed under the Constitution. ALJ’s, the Court held, are “officers of the United States” under the Appointments Clause of Article II and must be appointed by the president rather than hired by the agency. The Court held that Raymond Lucia, the petitioner in the case (whom NCLA also now represents) had been denied a hearing by a properly appointed ALJ. The SEC then concluded that everyone with pending enforcement proceedings against them had to be retried before new ALJs. Ms. Cochran was one of those people.

In 2018, the SEC assigned her case to a new ALJ for a do-over. She would now have to go through the entire enforcement process for a second time.

But there remains another constitutional problem with the SEC’s ALJs. In order to “faithfully execute the laws,” which is his duty under the Constitution, the president must not only be able to appoint all federal officers, he must be able to remove them as well. But SEC ALJs, like most civil servants, are protected by what amounts to life tenure. If the president cannot remove “officers” such as ALJs, then he can’t control the administrative agencies he’s charged with overseeing.

The consequence, for Ms. Cochran, is that her second enforcement proceeding is just as unconstitutional as her first—which means that after being prosecuted yet a second time, she will ultimately have to run the SEC enforcement gauntlet all over again. NCLA represents Ms. Cochran to prevent that unjust result. The SEC knows its ALJs remain in violation of the Constitution, because the government admitted in Lucia v. SEC that even if they were properly appointed, SEC ALJs would still violate the president’s power to remove them.

The SEC should not be allowed to wage an unconstitutional war of attrition against Michelle Cochran or anyone else. It is bad enough that administrative agencies are permitted to force individuals like her to defend themselves before administrative law judges—who aren’t even real judges. But that injustice is compounded when an agency can try someone repeatedly in a process it knows is constitutionally flawed.

CASE DOCUMENTS

Sept 24, 2019 | Fifth Circuit Court of Appeals Per Curiam Order Granting Injunction Pending Appeal

IT IS ORDERED that Appellant’s motion for an injunction pending appeal under Federal Rule of Appellate Procedure 8 is GRANTED…

Click here to read the full legal document. 

Aug 30, 2019 | Appellant's Reply Brief

The U.S. Supreme Court reviewed the identical statutory scheme in Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477 (2010) and emphatically concluded that Article III courts are not stripped of jurisdiction and therefore must decide structural questions of constitutional administrative law…

Click here to read the full legal document. 

Aug 16, 2019 | Appellant's Opposed Motion For Injunction Pending Appeal

This case arises out of the SEC’s effort to subject Ms. Cochran to a second unconstitutional enforcement proceeding after the Supreme Court concluded in Lucia v. SEC, 138 S. Ct. 2044 (2018), that the administrative law judge (ALJ) who presided over her first proceeding was appointed in violation of Article II. She filed this lawsuit in the United States District Court for the Northern District of Texas on January 18, 2019 and a motion for preliminary injunction soon thereafter. She contends that the second enforcement proceeding against her is also void
because her new ALJ is unconstitutionally insulated from removal by the President in violation of Article II. After Lucia, that conclusion follows as a matter of course under the Supreme Court’s previous decision in Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 561 U.S. 477 (2010) (“FEF”)—a point asserted by the
U.S. Solicitor General in Lucia.

Click here to read the full legal document. 

Jun 17, 2019 | Brief of Phillip Goldstein, Mark Cuban, and Nelson Obus as Amici Curiae in Support of Appellant and Reversal of the District Court's Order

Michelle Cochran’s (“Cochran” or “Ms. Cochran”) appeal challenges the United States Securities and Exchange Commission’s (the “SEC” or “Commission”) use of administrative law judges (“ALJs”) in enforcement proceedings. See generally Lucia v. SEC, 138 S. Ct. 2044 (2018) (finding that SEC ALJs were unconstitutionally appointed). Unlike defendants in federal court proceedings, respondents in SEC administrative proceedings are not afforded the right to a jury trial or the benefits and protections of the federal rules of evidence and procedure. Instead, when the SEC elects to use an administrative proceeding, whether before an ALJ or the Commissioners of the SEC (the “Commissioners”), the SEC determines a respondent’s liability and punishment without the involvement of a jury. Such proceedings disregard the protections guaranteed to litigants by the United States Constitution, and lead to unequal and unjust results.

Click to read the full Amicus Curiae

Jun 17, 2019 |Brief Of Texas Public Policy Foundation As Amicus Curiae In Support Of Plaintiff-appellant

The undersigned counsel of record certifies that the following listed persons or entities as described in the fourth sentence of Rule 28.2.1 have an interest in the outcome of this case. These representations are made so that the judges of this Court may evaluate possible disqualification or recusal.

Click here to read complete document.

Jun 17, 2019 |Amicus Brief For The Cato Institute, Cause Of Action Institute, And The Competitive Enterprise Institute In Support Of Plaintiff-appellant

The undersigned counsel of record for amici certifies that the following listed persons and entities as described in the fourth sentence of Fifth Circuit Rule 28.2.1, in addition to those listed in the Plaintiff-Appellants’ Certificate of Interested Persons, have an interest in the outcome of this case. These representations are made in order that the judges of this Court may evaluate possible disqualification or recusal. Amici: The Cato Institute, Cause of Action Institute, and the Competitive Enterprise Institute are all not-for-profit corporations exempt from income tax under section 501(c)(3) of the Internal Revenue Code, 26 U.S.C. § 501(c)(3). None has a parent corporation and no publicly-held company has a 10% or greater ownership interest in any of them.

Click here to read complete document.

Jun 11, 2019 | Appellant’s Opening Brief, Cochran v. SEC

This case arises out of the SEC’s effort to subject Michelle Cochran to a second unconstitutional enforcement proceeding after the Supreme Court concluded in Lucia v. SEC, 138 S. Ct. 2044 (2018), that the administrative law judge (ALJ) who presided over her first proceeding was unconstitutionally appointed in violation of Article II…

…While Ms. Cochran’s proceeding was pending, the Supreme Court decided Lucia v. SEC, voiding the enforcement proceeding against the petitioner and holding that he was entitled to a hearing before a new, properly appointed ALJ or before the Commission itself. 138 S. Ct. at 2054–55. Recognizing that the same problem existed with all of its ALJs, the SEC attempted to “ratify” the ALJs’ previous appointments, and then it reassigned all pending enforcement matters, including Ms. Cochran’s, to new ALJs.

The reinstituted proceeding against Ms. Cochran is just as unconstitutional as the original proceeding, however—and the SEC knows it…

Click to read the full Brief

Mar 25, 2019 | Memorandum Opinion and Order

MEMORANDUM OPINION and ORDER

Came on for consideration the above-captioned action wherein Michelle Cochran is plaintiff and the U.S. Securities and Exchange Commission (“SEC”), Jay Clayton in his official capacity as SEC Chairman, and William Barr1 in his official capacity as U.S. Attorney General, are defendants. The court, having considered the complaint, plaintiff’s motion for preliminary injunction, the response, the reply, and the applicable authorities, finds that this action should be dismissed for lack of subject matter jurisdiction.

Click to read the full Brief

Jan 18, 2019 | Cochran v. SEC Complaint for Declaratory and Injunctive Relief

PRELIMINARY STATEMENT

“1. This action arises from the SEC’s attempt to subject plaintiff Michelle Cochran to an administrative proceeding that violates Article II of the United States Constitution and the due process clause of the Fifth Amendment.

2. On June 21, 2018, the U.S. Supreme Court held in Lucia v. SEC, 138 S. Ct. 2044 (2018), that the SEC had been appointing its administrative law judges in violation of the Appointments Clause of Article II. The Supreme Court not only nullified the proceeding against the petitioner, Raymond Lucia, it ordered the SEC to reassign his matter to a new, properly appointed ALJ. In an effort to cure the constitutional defect, the SEC attempted to “ratify” the Case 4:19-cv-00066-A Document 1 Filed 01/18/19 Page 1 of 23 PageID 1 2 appointment of all of its ALJs on August 22, 2018 and followed with an order reassigning all pending enforcement proceedings to new ALJs…”

Click here to read complete case.

Dec 31, 2018 | Helterbran Cochran Motion for Ruling on the Pleadings

“In response to the October 2, 2018 Order issued by Administrative Law Judge Carol Fox Foelak, Respondent Michelle L. Helterbran Cochran objects to the reinstituted proceeding in this case. Ms. Helterbran moves for an order dismissing this matter, pursuant to Rule 250(a) of the Commission’s Rules of Practice, 17 C.F.R. § 201.250(a), because the statutory deadline within which this case had to be tried has passed. See also 5 U.S.C. § 556(c)(9), (10) (powers of ALJs); 17 C.F.R. § 201.360(b) (initial decisions by ALJs). In the alternative, Ms. Helterbran moves for an order referring this matter for trial before the Securities and Exchange Commission, as this ALJ is barred from adjudicating this matter under Article II of the United States Constitution because she enjoys multiple layers of unconstitutional removal protections. Finally, and also in the alternative, Ms. Helterbran moves for an order staying this matter pending adjudication of constitutional objections raised in the United States District Court.”

Click here to read complete document.

PRESS RELEASES

Sept 25, 2019 | NCLA Wins Stay Pending Appeal from Fifth Circuit in Post-Lucia SEC Case

Washington, D.C. – It took barely a couple of hours after oral argument on the motion in New Orleans, for a panel of the U.S. Court of Appeals for the Fifth Circuit to issue an order staying the SEC’s enforcement proceedings against NCLA client Michelle Cochran. The order in Cochran v. Securities and Exchange Commission stays the SEC’s in-house administrative hearing against her until the Fifth Circuit resolves the merits of the appeal now pending before them in Ms. Cochran’s case.

The order from JJ. Edith Jones, Stephen Higginson, and Andrew Oldham reads: “IT IS ORDERED that Appellant’s motion for an injunction pending appeal under Federal Rule of Appellate Procedure 8 is GRANTED.”

The issue due up for appeal on the merits to the Fifth Circuit is whether the SEC may force Ms. Cochran to proceed in front of an SEC administrative law judge (ALJ) who enjoys multiple layers of unconstitutional protection from removal. NCLA and Michelle Cochran are delighted with the decision of the Fifth Circuit panel to stay her constitutionally defective administrative proceeding. Both are also pleased that the court appears willing to consider correcting a path appellate law in other circuits has taken that has been permitting the SEC to impose hearings on defendants that are predestined to be vacated.

The Fifth Circuit’s stay recognizes the enormous human cost and prejudicial delay that senseless, serial prosecutions impose on Americans like Ms. Cochran. Cochran’s case was one of dozens slated for reconsideration after the U.S. Supreme Court’s ruling last June in Lucia v. SEC—which determined the SEC had been using unconstitutionally appointed ALJs. NCLA also represents Mr. Lucia in his post-Supreme Court litigation. 

Further details about Michelle’s case are available here.

NCLA released the following statements:

I am so proud to be represented by NCLA!! Thank you so much for all you are doing for me and for all of the others like me out there!!”—Michelle Cochran, NCLA Client

NCLA looks forward to a robust challenge to the SEC’s power to deny Americans a hearing before a constitutional tribunal.”—Peggy Little, NCLA Senior Litigation Counsel

The SEC brazenly violated Michelle Cochran’s civil rights, and the injunction stopping the SEC proceedings against her is an important first step in holding the SEC to account.”—Philip Hamburger, NCLA President

This victory ensures that Michelle will get a decision from a real judge before she has to endure any further SEC hearings. It should also awaken other courts to the rights at stake here—and the need to protect such rights before administrative hearings ever proceed.”—Mark Chenoweth, NCLA General Counsel

The court’s ruling will have consequences across the country. The court rebuked the SEC’s attempt to keep federal courts from even questioning what happens at in-house administrative proceedings.
Caleb Kruckenberg, NCLA Litigation Counsel

 

ABOUT NCLA 

NCLA is a nonprofit civil rights organization founded by legal scholar Philip Hamburger to protect constitutional freedoms from violations by the Administrative State. NCLA’s public-interest litigation and other pro bono advocacy strive to tame the unlawful power of state and federal agencies and to foster a new civil liberties movement that will help restore Americans’ fundamental rights.

For more information, visit us online: NCLAlegal.org.

Jun 11, 2019 | NCLA Asks Fifth Circuit Court of Appeals to Put an End to Unconstitutional SEC Hearings

Washington, DC, June 11, 2019—The New Civil Liberties Alliance today filed a brief with the U.S. Court of Appeals for the Fifth Circuit asking to reverse the district court’s decision to dismiss the case of NCLA’s client, Michelle Cochran, for lack of subject-matter jurisdiction.

The U.S. Securities & Exchange Commission is trying to force Ms. Cochran, a single mom living in Texas, to submit to yet another unconstitutional enforcement proceeding before an administrative law judge (ALJ)—and she is not alone. Today, Americans are 10 times more likely to be tried by an unelected bureaucrat than by a federal judge. Ms. Cochran’s case is one of more than 100 invalid SEC hearings nullified following the U.S. Supreme Court’s decision last June in Lucia v. SEC.

In March the lower court expressed “deep concern” with the SEC’s proceedings against her—and the fact she now faces the prospect of prolonged proceedings in a second unconstitutional hearing. Nevertheless, the Court held that precedent compelled its conclusion that Congress gave exclusive jurisdiction over cases such as this to the SEC’s administrative process. But Congress never gave SEC the power to force defendants into hearings in front of unconstitutional ALJs whose decisions cannot stand.

The district court erred in concluding it lacked jurisdiction to hear Ms. Cochran’s objections to the SEC’s unconstitutional hearing. As NCLA’s brief shows, the decision in Lucia held that SEC’s ALJs are “officers” of the United States, thereby changing the legal landscape. Under an earlier precedent called Free Enterprise Fund v. Public Co. Accounting Oversight Board, the Supreme Court made clear that officers of the U.S. may not be insulated from removal by multiple layers of tenure protection without running afoul of the clause in Article II of the Constitution. The clause requires the President to “take Care that the Laws be faithfully executed.” In other words, the President cannot fulfill that obligation if he cannot remove ALJs who are failing to discharge their duties adequately. That case also demonstrated that courts do have jurisdiction to hear removal-based challenges.

Congress created a scheme designed to allow the SEC to resolve certain types of statutory claims, but that scheme does not permit the SEC to feign ignorance of its ALJs’ constitutional defects and thereby subject individuals like Ms. Cochran to serial enforcement proceedings that will be void. By trying to force Ms. Cochran into a hearing before one of its unconstitutional ALJs, the SEC is trying to take advantage of the courts’ reluctance to hear issues before the administrative process is exhausted. 

NCLA expects the Fifth Circuit to put an end to this series of void enforcement hearings whose only purpose can be to make the process the punishment.

 “The SEC knows that its ALJs violate Article II. It could have brought an enforcement proceeding against Michelle Cochran in federal court, or the Commission could have presided over her proceeding. Instead, the SEC chose to force her into an unconstitutional hearing before an ALJ who lacks the authority to hear her case. The federal courts should not stand by idly and allow SEC to ignore the Constitution.” 
Steve Simpson, Senior Litigation Counsel

“Due process requires governments to bring only valid cases in a timely fashion before lawful courts. Neither the ALJ nor the SEC is empowered to decide whether the ALJ is properly in office. If this appeal fails, it will take years before Ms. Cochran can get back to a federal court empowered to vindicate her rights. Worse, even if she wins, which she will, she then will have to endure a third hearing. No rational—or constitutional—justice system would require such endless appeals and futile proceedings.” —Peggy Little, Senior Litigation Counsel

Mar 28, 2019 | Texas Federal Judge Expresses ‘Deep Concern’ with Potentially Unconstitutional ALJ Proceedings for NCLA Client

Washington, DC, March 26, 2019 — Today, the U.S. District Court for the Northern District of Texas recognized the inherent injustice in the administrative enforcement process the Securities and Exchange Commission (SEC) has issued against Michelle Cochran, a client of the New Civil Liberties Alliance (NCLA). The SEC’s administrative law judges (ALJs) lack the constitutional authority to hear cases, yet the agency has been forcing individuals to appear before them anyway.

Ms. Cochran has been subjected to one unconstitutional hearing already. On the heels of the Supreme Court’s decision in Lucia v. SEC, she is now being put through a second unconstitutional proceeding but is fighting the SEC’s effort in federal court.

Concluding that the court lacked subject matter jurisdiction, Judge John McBryde dismissed Ms. Cochran’s complaint against the SEC, but not before expressing deep concern for the pointless litigation journey that lies before her.

In his Opinion, Judge McBryde wrote, “The court is deeply concerned with the fact that plaintiff has been subjected to extensive proceedings before an ALJ who was not constitutionally appointed and contends that the one she must now face for further, undoubtedly extended, proceedings likewise is unconstitutionally appointed. She should not have been put to the stress of the first proceedings, and, if she is correct in her contentions, she again will be put to further proceedings, undoubtedly at considerable expense and stress, before another unconstitutionally appointed administrative law judge.”

Unfortunately, the judge concluded that precedent requires that the case be dismissed for lack of jurisdiction. Even so, Judge McBryde added that were it not for the precedent that creates a jurisdictional issue, “the court would give serious consideration to [a] grant of plaintiff’s request for a preliminary injunction.”

Cochran’s case was one of dozens slated for reconsideration after the U.S. Supreme Court’s ruling last June in the case, Lucia v. SEC – which determined the SEC has been using unconstitutionally appointed ALJs. NCLA also represents Mr. Lucia in his post-Supreme Court litigation. Cochran and Lucia filed for injunctions in federal district court seeking the logical, commonsense relief that the question of the constitutionality of their ALJs be decided before those ALJs may try their cases.

“While we respectfully disagree with the Court that it lacks jurisdiction, we appreciate the Court’s deep concern for the possibility that the SEC is forcing individuals like Michelle Cochran to litigate before ALJs who lack constitutional authority to hear their cases.”—Steve Simpson, NCLA Senior Litigation Counsel

“Judge McBryde’s opinion recognizes that forcing Americans to undergo unconstitutional proceedings—and two levels of appeal—before they can vindicate their right to be tried before a lawful judge causes them to suffer the very constitutional injury they are suing to prevent. No rational system of justice would operate in this fashion.‎” —Peggy Little, NCLA Senior Litigation Counsel

NCLA will now appeal Cochran’s case to the Fifth Circuit Court of Appeals.