By Jake Chervinsky and Marisa Coppel
INTRODUCTION
The U.S. Securities and Exchange Commission (“SEC”) was originally created by Congress’s enactment of the Securities Exchange Act of 1934 (“Exchange Act”) with a mission to protect investors, facilitate capital formation, and maintain fair, orderly, and efficient markets. The SEC consists of several divisions, including Corporation Finance, Investment Management, and Trading and Markets, which promulgate rules and issue guidance pursuant to authority granted by Congress. The SEC also has a Division of Enforcement, which conducts investigations and prosecutes alleged violations of the securities laws.
In the digital asset space, the SEC has all but abandoned its role as a rulemaking body. Key issues of existential importance to the digital asset industry remain unresolved, chief among them the question of whether and when a digital asset represents a “security” subject to registration under the Securities Act of 1933 (“Securities Act”). Despite continued requests from the industry for regulatory clarity, the SEC has refused to adopt any rules or issue any guidance on this issue, among many others, for over four years. Instead, the SEC has chosen to regulate digital assets solely through enforcement actions.
For decades, federal courts have made clear that determining whether a particular transaction falls within the scope of the securities laws requires careful analysis of the “facts and circumstances” surrounding that transaction. Yet, since his appointment, SEC Chair Gary Gensler has made clear that he takes a different view: in his mind, all digital assets other than bitcoin constitute securities, end of story.
Consistent with the absolutism of Chair Gensler’s view, the SEC has brought enforcement actions alleging that a variety of digital assets are unregistered securities in violation of the Securities Act, and that a variety of digital asset trading platforms are consequently operating as unregistered national securities exchanges in violation of the Exchange Act. The SEC apparently intends to continue its pattern of regulation by enforcement, as several companies within the industry have reported receiving notices from SEC staff alerting them to the possibility of more enforcement actions premised on the same theory.
Every SEC enforcement action follows a procedure known as the “Wells process.” That process begins with SEC staff sending a “Wells notice” to the target of the enforcement action telling them what violation they allegedly committed and giving them the opportunity to present evidence and arguments in their defense. SEC staff may decide that a Wells response is convincing enough that they should refrain from moving forward in the Wells process. If the staff favors bringing an enforcement action, however, they must present their case to the SEC Commissioners themselves, who must then vote on whether to proceed.
The purpose of the Wells process is to provide the Commissioners with both sides of every case, enabling them to impartially evaluate the adversarial positions of SEC staff and the enforcement target, and make an unbiased determination as to whether the SEC will bring an action or not. The Wells process is also designed to afford targets of enforcement actions some right to due process before entering into a publicly-filed proceeding that may cause long-lasting damage, even if the target ultimately defeats the SEC in court. To achieve those goals, the Commissioners must approach their decisionmaking process in a fair-minded and dispassionate way, akin to that of a neutral arbiter.
When it comes to digital assets, the Wells process is broken. During his tenure at the SEC, Chair Gensler has repeatedly and forcefully communicated that he has already prejudged each and every case that may come before him, asserting that all digital assets except for bitcoin are securities. As a result, Chair Gensler’s vote is tainted: his refusal to engage with the facts and circumstances of each case undermines the Wells process and deprives enforcement targets of the due process rights to which they are entitled. For the SEC to proceed with any semblance of legitimacy — and in compliance with federal law — Chair Gensler must recuse himself from enforcement decisions involving digital assets.
BACKGROUND
Blockchain Association is a nonprofit membership organization dedicated to promoting a pro-innovation policy environment for the digital asset economy. We endeavor to achieve regulatory clarity and to educate policymakers, regulators, courts, and the public about how blockchain technology can pave the way for a more secure, competitive, and consumer-friendly digital marketplace. We represent over 100 member companies reflecting the wide range of the dynamic blockchain industry, including software developers, infrastructure providers, exchanges, custodians, investors, and others supporting the public blockchain ecosystem.
Our goal in writing this paper is to outline the basis of an argument that an appropriate party may consider bringing before a court: that Chair Gensler is required by law to recuse himself from enforcement decisions related to digital assets. Our intent in outlining this argument is to create greater fairness and equity in a regulatory system that is currently marred by the improper and unlawful targeting of an entire industry. This paper is not and should not be considered legal advice, but rather provides context for an argument that an enforcement target may wish to discuss with their counsel.
One of the most complex legal questions facing companies in the digital asset industry is how the U.S. securities laws apply to the tokens, protocols, and businesses that they seek to build. In 2018 and 2019, the SEC gave the industry some helpful guidance in the form of a speech presented by William Hinman, Former Director of the Division of Corporation Finance, and a framework published by the SEC’s Strategic Hub for Innovation and Financial Technology. Both pieces of guidance acknowledged that, under the right facts and circumstances, digital assets other than bitcoin should not be considered investment contracts regulated by the SEC. Since then, the SEC has published no official guidance and conducted no rulemaking to clarify this issue.
Chair Gensler assumed office at the SEC on April 17, 2021. He entered the position with knowledge and experience related to digital assets: he taught a course on blockchain technology at MIT and regularly spoke on the topic, including giving testimony in Congress on Facebook’s Libra project in July 2019. Chair Gensler also had a strong background in financial regulation, having served as Chair of the U.S. Commodity Futures Trading Commission and in several other roles in federal government.
Given Chair Gensler’s background, many expected him to show a nuanced understanding of the highly fact-intensive inquiry necessary to determine whether a given digital asset falls under the SEC’s purview. Yet, during his tenure, Chair Gensler has clearly stated his view that all digital assets other than bitcoin are unregistered securities:
- “I’m not going to go token by token, you can imagine why I wouldn’t do that. But my predecessor . . . said it best . . . that he really hadn’t seen many tokens that didn’t meet that securities test.” (August 2021).
- “I think former SEC Chairman Jay Clayton said it well when he [said] ‘To the extent that digital assets like [initial coin offerings] are securities — and I believe every ICO I have seen is a security — we have jurisdiction, and our federal securities laws apply.’ I find myself agreeing with Chairman Clayton . . . . Make no mistake: It doesn’t matter whether it’s a stock token, a stable value token backed by securities, or any other virtual product . . . . These products are subject to securities laws and must work within our securities regime.” (August 2021).
- “Only a ‘small number’ of cryptocurrencies currently trading in crypto markets are not securities. ‘Very many are.’” (September 2021).
- “Everything other than bitcoin, you can find a website, you can find a group of entrepreneurs, they might set up their legal entities in a tax haven offshore, they might have a foundation, they might lawyer it up to try to arbitrage and make it hard jurisdictionally or so forth . . . . But at the core, these tokens are securities because there’s a group in the middle and the public is anticipating profits based on that group.” (February 2023).
- “Crypto tokens — without prejudging any one of them — you could look at nearly most of them, and you could find a group of entrepreneurs with a Twitter site, with a website, with individuals, and I can bet that most of you are not visited by decentralized, non-existent management.” (March 2023).
- “The vast majority of crypto tokens are securities.” (April 2023).
- “The vast majority of crypto tokens meet the investment contract test . . . . Thus, crypto security issuers need to register the offer and sale of their investment contracts with the SEC or meet the requirements for an exemption.” (June 2023).
Along the same lines, Chair Gensler has insisted that all digital asset trading platforms are unregistered national securities exchanges:
- “A typical trading platform has more than 50 tokens on it . . . . While each token’s legal status depends on its own facts and circumstances, the probability is quite remote that, with 50 or 100 tokens, any given platform has zero securities.” (August 2021).
- “[Existing securities laws] cover most of the activity that’s happening in the crypto markets.” (March 2023).
- “I think there is one agency — the Securities and Exchange Commission, overseen by two committees — the House Financial Services Committee and Senate Banking, and the courts that define what a security is and not individual crypto exchanges selecting that . . . . I think many of the legislative vehicles [proposed] would, if adopted, would undermine the securities remit.” (March 2023).
- “If you’re touching U.S. investors, selling these tokens to U.S. investors then you come under . . . the securities laws.” (March 2023).
- “These platforms match orders of multiple buyers and sellers of crypto securities using established, non-discretionary methods. That’s the definition of an exchange — and today, most crypto trading platforms meet it. That’s the case regardless of whether they call themselves centralized or decentralized.” (April 2023).
- “Given that most crypto tokens are subject to the securities laws, it follows that most crypto intermediaries have to comply with securities laws as well[.]” (June 2023).
- “The similarity [between Coinbase and the New York Stock Exchange] is the law still applies and it applies because the underlying tokens are securities.” (June 2023).
Chair Gensler’s statements firmly illustrate his definitive view that all digital assets other than bitcoin are securities, irrespective of the facts and circumstances surrounding their creation, function, valuation, and myriad other criteria relevant to a proper securities analysis. His statements have seemingly crystallized into official policy through the SEC’s decisions in recent enforcement actions. Without a doubt, Chair Gensler has made up his mind.
As a matter of substance, Chair Gensler is wrong. It is black letter law that determining whether a given instrument or transaction constitutes an “investment contract” requires a fact-intensive inquiry of the sort that Chair Gensler refuses to conduct. Applied properly, that inquiry reveals many digital assets that do not constitute securities.
Before Chair Gensler’s appointment, the SEC itself recognized several fact patterns in which a digital asset would not be regulated as a security. For example, in its 2017 DAO Report, the SEC recognized that assets affording meaningful voting rights to holders would not constitute securities. In its 2018 guidance, Director Hinman explained that “sufficient decentralization” of third-party efforts related to a digital asset will render it a non-security and gave the example of ether, the native asset of the Ethereum blockchain, as one such asset. In its 2019 framework, the SEC identified dozens of factors to consider in evaluating a given asset, and endorsed the view that assets should be reevaluated at the time of later sales.
Chair Gensler’s refusal to engage with the facts and circumstances surrounding each digital asset contradicts the SEC’s own guidance and ignores decades of controlling precedent. His view also fails to recognize the growing body of literature drawing the distinction between digital assets on the one hand and investment contracts on the other: while investment contracts may properly be treated as securities transactions, digital assets sold under those contracts do not “embody” those transactions for regulatory purposes.
Moreover, as a matter of process, Chair Gensler is required by law to recuse himself from enforcement decisions related to digital assets. As a neutral arbiter in the SEC’s Wells process, Chair Gensler has a responsibility to approach each proceeding with a fair, unbiased, and impartial mind. His prejudgment that all digital assets except bitcoin are securities renders him incapable of fulfilling that responsibility. As a result, by participating in enforcement decisions related to digital assets, Chair Gensler violates the due process rights of individuals and companies who deserve a just and equitable hearing. He must recuse himself.
ARGUMENT
Chair Gensler’s repeated assertions that all digital assets other than bitcoin are securities create the unmistakable impression that he has “in some measure” already decided the central issue in digital asset-related enforcement actions. Cinderella Career & Finishing Schs., Inc. v. FTC, 425 F.2d 583, 591 (D.C. Cir. 1970). Thus, to comport with due process and avoid tainting the SEC’s enforcement proceedings, Chair Gensler must recuse himself from any decisions about the initiation or continuation of an enforcement action that depends on whether a digital asset is a security.
I. Chair Gensler’s Prejudgment Requires His Recusal.
Administrative action must comply with principles of due process. See Cinderella, 425 F.2d at 591. Due process requires not only that agency decisionmakers act without bias, but also that they avoid even the appearance of bias — due process requires “not only . . . every element of fairness” but also the “appearance of complete fairness.” Id. at 591 (citing Amos Treat & Co. v. SEC, 306 F.2d 260, 267 (D.C. Cir. 1962)); see also Antoniu v. SEC, 877 F.2d 721, 724 (8th Cir. 1989) (due process requires “an absence of actual bias” and “the appearance of justice”) (citing In re Murchison, 349 U.S. 133, 136 (1955)); Young v. United States ex rel. Vuitton et Fils S.A., 481 U.S. 787, 811 (1987) (due process requires prosecutors to avoid both “actual prejudice” and the “appearance of impropriety”).
Here, due process requires Chair Gensler to recuse himself from SEC enforcement decisions in matters that raise the issue of whether a given digital asset is a “security” under the Securities Act. His prejudgment that “everything other than bitcoin” is a security creates the appearance that he would not approach this issue with an open mind. As the D.C. Circuit has instructed, the only remedy is disqualification.
A. Chair Gensler’s prior statements require recusal because they indicate to a disinterested observer that he has “in some measure” prejudged the case.
Disqualification in the adjudicatory context is required when “a disinterested observer may conclude that [the agency] has in some measure adjudged the facts as well as the law of a particular case in advance of hearing it.” Cinderella, 425 F.2d at 591 (quoting Gilligan, Will & Co. v. SEC, 267 F.2d 461, 469 (2d Cir. 1959)). In other words, “[w]herever there may be reasonable suspicion of unfairness, it is best to disqualify.” American Cyanamid Co. v. FTC, 363 F.2d 757, 767 (6th Cir. 1966).
Chair Gensler’s prior statements about digital assets raise far more than a “reasonable suspicion” of bias. Indeed, observers completely disconnected from the digital assets industry would “hardly fail to conclude that he ha[s] in some measure decided in advance” the view that digital assets are securities. Cinderella, 425 F.2d at 591. By repeatedly declaring his decision that all digital assets other than bitcoin are securities and that the SEC has jurisdiction over all digital asset trading platforms, Chair Gensler has not only fostered a “reasonable suspicion” of prejudgment, but has also made clear that he holds this view without regard to the facts and circumstances that a potential enforcement target might present during the Wells process.
Chair Gensler’s statements go far beyond those condemned by the D.C. Circuit in Cinderella. There, the Federal Trade Commission (“FTC”) investigated a trade school for engaging in deceptive practices, including by representing “that its courses will qualify students to be airline stewardesses.” In re Sch. Servs., Inc., 74 F.T.C. 920 (1968), rev’d sub nom. Cinderella, 425 F.2d 583. While proceedings were ongoing, the FTC Chair remarked in a speech that it was unethical for a hypothetical newspaper to carry “ads that offer . . . becoming an airline’s hostess by attending a charm school.” Id. at 589-90. In the eyes of the court, that minor reference alone sufficed to require disqualification because it raised too grave a risk of an “appearance that the case has been prejudged.” Id. at 590.
Also compare Chair Gensler’s statements to those requiring disqualification in American Cyanamid Co. v. FTC, 363 F.2d 757 (6th Cir. 1966). There, the same FTC Chair had previously played an “active role” in a Senate investigation covering many of the same facts, issues, and parties as were involved in a pending FTC proceeding. Id. at 763-67. The Court held that this overlap required disqualification, emphasizing that the FTC was “a fact-finding body” and that its Chair had “investigated and developed many of these same facts.” Id. at 767.
Chair Gensler is far more than just a decisionmaker who made a prior statement on a different topic that hints at bias, see Cinderella, 425 F.2d at 591, or who found “many of the same” facts in a prior proceeding as in a pending proceeding, American Cyanamid, 363 F.2d at 763. Here, we have an agency Chair who has repeatedly stated his position on a particular adjudicative matter — whether a digital asset is a “security” — that plays a central role in any digital asset-related enforcement proceeding. Chair Gensler’s statements “can only be interpreted as a prejudgment of the issue” requiring recusal. Antoniu, 877 F.2d at 723.
B. Chair Gensler’s recusal is not governed by the more deferential standard applied to prosecutorial decisions because the SEC’s Wells process places Chair Gensler in an adjudicatory role.
Depending on the nature of the agency function at issue, courts may apply a more deferential standard for recusal. For agency officials’ prosecutorial decisions, a laxer standard applies, since the official performs different functions in a prosecutorial context than a judge in an adjudicatory role. See Marshall v. Jerrico, Inc., 446 U.S. 238, 249 (1980) (prosecutorial); Ass’n of Nat’l Advertisers, Inc. v. FTC, 627 F.2d 1151, 1170 (D.C. Cir. 1979) (policymaking).
However, the unique posture of a Wells proceeding, which aims to provide due process protections for the person under investigation, requires an SEC Commissioner to act as a neutral arbiter rather than as a prosecutor. In a Wells proceeding, the role of the prosecutor is played by SEC staff, who must present their case to the Commissioners for consideration alongside the defense offered by the enforcement target. The SEC Commissioners must neutrally and impartially take into account both parties’ positions before deciding whether to permit SEC staff to initiate an enforcement action in court. In this way, a Commissioner’s decision to vote for or against an enforcement action is an adjudicatory decision, not a prosecutorial one.
When it comes to “prosecutorial function[s],” agency prosecutors are not held to the same “strict requirements of neutrality” as agency adjudicators. Marshall, 446 U.S. at 250. Thus, courts typically require a “stronger showing” before requiring recusal in the prosecutorial context. See FTC v. Facebook, 581 F. Supp. 3d 34, 63-64 (D.D.C. 2022) (“The standards of neutrality for prosecutors are not necessarily as stringent as those applied to judicial or quasi-judicial officers”). In Facebook, for example, the court was confronted with an FTC Chair who had made statements about Facebook’s monopoly power before voting to authorize the filing of a complaint against Facebook in federal district court. Id. at 61-62. There, the court concluded that the decision to sue was analogous to a prosecutorial decision. See id. at 63.
Yet, the analogy to prosecution is inapplicable here. The FTC has nothing like the Wells process, which includes procedural protections that restrain the SEC’s enforcement decisions. This process serves two important purposes. First, it ensures that the SEC has “before it the position of persons under investigation at the time it is asked to consider enforcement action.” SEC Enforcement Manual § 2.4, at 19 (2017). Second, it protects “prospective defendants” who — out of “fairness” — should have the “opportunity to present [their] case” before the SEC decides whether to initiate an enforcement action. Sec. & Exch. Comm’n, Report of the Advisory Committee on Enforcement Policies and Practices, at 31-32 (June 1, 1972) (“Wells Committee Report”). In fact, when designing the Wells process, the SEC explicitly “approached the question of due process” by aiming to “assure maximum fairness to private parties.” Id. at 3. That concern was especially salient for the “[c]ommencement of a formal enforcement proceeding,” which the SEC recognized was “likely to be of great consequence to the person or entity named in the proceeding.” Id. at 29.
Accordingly, pursuant to regulation, SEC enforcement proceedings “generally” begin with a “preliminary investigation” in which “no process is issued or testimony compelled.” 17 C.F.R. § 202.5(a). Enforcement proceedings may then move on to “formal investigations” including “use of process” where authorized. Id. Both preliminary and formal investigations are “non-public and the reports thereon are for staff and Commission use only.” Id. Persons who “become involved” in any investigation may “submit a written statement . . . setting forth their interests and position in regard to the subject matter of the investigation.” Id. § 202.5(c). Other “interested persons” are also permitted to submit materials. Id. Then, and only then, do the SEC Commissioners decide whether to initiate an enforcement action. See id. § 202.5(b).
The Wells process clearly distinguishes the SEC from the FTC and other agencies that do not afford comparable procedural protections to enforcement targets. The Wells process sets forth an adversarial process in which SEC staff act as prosecutors and the Commissioners act as neutral arbiters weighing the competing positions of the staff and the person under investigation. When deciding whether to file an enforcement action, the Commissioners are best understood as performing a “quasi-judicial function[,]” including weighing evidence on “disputed factual [and] legal questions.” Marshall, 446 U.S. at 247; see Heckler v. Chaney, 470 U.S. 821, 836 (1985) (suggesting that an agency’s own rules may provide the basis for judicial review of enforcement decisions). The proper standard, then, is the one articulated in Cinderella for adjudicators: the “disinterested observer” standard. See 425 F.2d at 591.
The Cinderella decision itself even contemplates applying the “disinterested observer” standard to SEC enforcement decisions. Cinderella, 425 F.2d at 591. There, after the hearing examiner initially dismissed the complaint, the SEC reinstated some of the original charges and then entered relief on them. See id. On review, the court acknowledged that the agency had acted “both” in an “accusatory capacity” and in a capacity to determine the “merits” of a case. Id. at 590. Nevertheless, the court applied the “disinterested observer” standard to evaluate recusal and ultimately vacated the SEC’s order in its entirety. See id. at 591. The same standard should apply to Chair Gensler’s participation in enforcement decisions related to digital assets.
II. Without Recusal, Chair Gensler’s Participation in an Enforcement Decision Related to Digital Assets Will Taint the Entire Proceeding.
Rather than recusing himself from enforcement decisions, Chair Gensler has played an active role in steering the SEC toward a strategy that unfairly targets digital assets. In choosing that path, Chair Gensler risks not only damaging the SEC’s reputation, but also wasting taxpayer dollars and losing active cases that are irrevocably tainted by his prejudice. Since the only possible cures for a biased decisionmaker in the Wells process are recusal or disqualification, Chair Gensler’s vote in favor of bringing an enforcement action requires invalidating the action, as well as all subsequent proceedings.
This outcome is necessary regardless of the quality of the SEC’s deliberations or the margin of the final vote. “Litigants are entitled to an impartial tribunal whether it consists of one man or twenty and there is no way which we know of whereby the influence of one upon the others can be quantitatively measured.” Cinderella, 425 F.2d at 592 (quoting Berkshire Emps. Ass’n of Berkshire Knitting Mills v. NLRB, 121 F.2d 235, 239 (3d Cir. 1941)). In Cinderella, for example, that logic required the invalidation of a unanimous vote of the FTC because one Commissioner’s public statements “indicated [his] pre-judgment of the case[.]” Id. at 584-85. Thus, Chair Gensler’s failure to recuse himself from Wells proceedings involving digital assets requires invalidation of any resulting enforcement action in its entirety.
III. Enforcement Targets in the Digital Asset Industry Can Challenge Chair Gensler’s Bias By Seeking His Recusal.
The SEC has reportedly been aggressive in sending Wells notices to companies in the digital asset industry. Given the above analysis, Wells notice recipients would be wise to discuss raising the issue of Chair Gensler’s recusal with their counsel before the SEC Commissioners vote on whether to initiate an enforcement action. To improve their chance of success, it may be prudent for Wells notice recipients to raise the recusal issue with SEC staff directly. Assuming Chair Gensler does not agree to recuse himself, Wells notice recipients then have two alternative routes by which to seek review: (1) filing a form motion with the agency itself, or (2) suing for relief in federal district court.
First, an investigation subject can seek Chair Gensler’s recusal by filing a formal motion with the agency itself. SEC rules provide that “[a]ll proceedings shall be presided over by the Commission or, if the Commission so orders, by a hearing officer.” 17 C.F.R. § 201.110. Here, the decision to institute an enforcement action is taken by “the Commission . . . in its discretion.” Id. § 202.5(b). Accordingly, the motion is “properly made to the Commission” and not to a hearing officer. Id. § 201.154(a).
The motion to recuse is subject to the standard formalities of any motion directed to the SEC: it “shall be in writing, shall state with particularity the grounds therefor, shall set forth the relief or order sought, and shall be accompanied by a written brief of the points and authorities relied upon.” 17 C.F.R. § 201.154(a). It must also be served in accordance with 17 C.F.R. § 201.150, filed in accordance with 17 C.F.R. §§ 201.151-52, and signed in accordance with 17 C.F.R. § 201.153. Under the SEC’s rules, nothing further is required.
Second, if the SEC ignores or denies the motion, an investigation subject can enforce its due process rights by suing for injunctive and declaratory relief in federal district court before the Commissioners vote on whether to initiate an enforcement action. The rationale for such a pre-enforcement challenge is that, if the court does not grant injunctive and declaratory relief, the investigation subject will suffer a deprivation of their due process rights in a manner that cannot be remedied any other way. “Litigants are entitled to an impartial tribunal whether it consists of one man or twenty,” and due process is violated even if a biased Commissioner’s vote “was not necessary for a majority.” Cinderella, 425 F.2d at 592. Thus, the presence of the biased Commissioner inflicts a Constitutional injury that can be remedied only by ensuring that the Commissioner recuses himself from the decisionmaking process in the first place. See id.
The SEC may argue that the Exchange Act precludes district court jurisdiction over such a claim. Under 15 U.S.C. § 78y(a)(1), only “final order[s]” are reviewable in circuit court. Yet, the Supreme Court recently rejected a similar argument in Axon Enterprise, Inc. v. FTC, 143 S. Ct. 890, 904-05 (2023). Under Axon, a provision like this one precludes district court jurisdiction only if the claim is “of the type” intended to be included in a comprehensive review scheme requiring review by the agency itself in the first instance. Thunder Basin Coal Co. v. Reich, 510 U.S. 200, 207 (1994). To evaluate whether a claim is “of the type” intended to be considered in such a scheme, courts consider three factors: (1) whether precluding district court jurisdiction could “foreclose all meaningful judicial review” of the claim; (2) whether the claim is “wholly collateral” to the “statute’s review provisions”; and (3) whether the claim is “outside the agency’s expertise.” Id. at 212.
Here, all three factors favor immediate district court review. First, and most importantly, preclusion of district court jurisdiction would “foreclose all meaningful judicial review” of this claim. Axon, 143 S. Ct. at 902 (quoting Thunder Basin, 510 U.S. at 212). The injury is “being subjected to unconstitutional agency authority” — one that is “a here-and-now injury.” Id. at 903 (quoting Seila Law, 140 S. Ct. at 2196). Such an injury is “impossible to remedy once the proceeding is over.” Id. It is not enough that the SEC’s decision to initiate proceedings might someday be reversed. See id. (“[I]ndeed, [the complainant] would have the same claim had it won before the agency”). Thus, this first and most important factor favors jurisdiction. See, e.g., Bebo v. SEC, 799 F.3d 765, 774 (7th Cir. 2015) (calling this the “most critical” factor).
So too for the remaining factors. The due process objection would be “collateral” to the agency’s proceedings because the complainant would be challenging the agency’s “power to proceed at all.” Axon, 143 S. Ct. at 904. On “expertise,” the Court has confirmed that an agency lacks any particular expertise in “interpreting the Constitution.” Id. at 905; see also Free Enterprise Fund v. PCAOB, 561 U.S. 477, 491 (2010).
Further, an enforcement target could seek judicial review even after the SEC has initiated an action in court. At that point, the enforcement target could move to dismiss the case on the ground that the agency’s decision to initiate proceedings violated due process. See Free Enterprise Fund, 561 U.S. at 490 (assuming that a structural claim could be raised in a garden-variety appeal in district court). Thus, companies in the digital asset industry targeted by the SEC may want to discuss Chair Gensler’s disqualification with their counsel regardless of where they are in the enforcement process.
CONCLUSION
Preserving the fairness and impartiality of the SEC’s enforcement function is crucial to the agency’s mission and to the protections afforded by the Wells process. Chair Gensler’s prejudgment that all digital assets other than bitcoin are securities has undermined the SEC’s ability to make just and equitable enforcement decisions.
Rather than inviting an inevitable legal challenge, Chair Gensler should immediately recuse himself from any Wells process involving digital assets, and the SEC should reconsider prior actions initiated with — and possibly tainted by — Chair Gensler’s involvement. In lieu of such recusal and reconsideration, companies under SEC investigation may want to consider raising the issue of Chair Gensler’s bias to the SEC itself, or in federal court.
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Disclaimer: This post is for general information purposes only. It does not constitute legal advice and should not be relied upon in making legal decisions. You should consult your own counsel in making any legal decisions.
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Jake Chervinsky
Jake is Blockchain Association’s Chief Policy Officer, leading policy efforts in Washington on behalf of the crypto industry. Jake is an industry veteran, joining the Association from Compound Labs, the developer of a leading DeFi protocol, where he served as General Counsel. Prior to this role, he represented individual and corporate clients in cryptocurrency-related securities and commodities litigation at Kobre & Kim LLP. Jake earned his B.A. from the George Washington University, and his J.D. from the George Washington University Law School. @jchervinsky
Marisa T. Coppel
As Senior Counsel for Blockchain Association, Marisa helps develop and advocate for policy positions on behalf of the crypto industry as well as manages long-term legal projects and strategic litigation. Prior to joining the Association, Marisa represented corporate clients in regulatory enforcement actions, internal investigations, and civil litigation matters at Covington & Burling LLP. Marisa earned her B.A. from Brandeis University, and her J.D. from Loyola Law School in Los Angeles. @MTCoppel
