Securities And Exchange Commission v. Sisu Capital, LLC

Background

The Securities and Exchange Commission sued Sisu Capital, LLC and Timothy Overturf for allegedly violating Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. It sued Hansueli Overturf for allegedly aiding and abetting those violations. The Commission sought an injunction, civil monetary penalties, and other relief.

Hansueli Overturf brought counterclaims alleging that the Commission violated the Fifth Amendment’s Due Process Clause and abused its regulatory authority and legal process. He sought compensatory and punitive damages. The Commission moved to dismiss those counterclaims.

Section 21(g)

The court held that Section 21(g) of the Securities Exchange Act prevents a defendant from bringing counterclaims against the Commission in an enforcement action unless the Commission consents. The court explained that bringing counterclaims would effectively consolidate or coordinate another party’s action with the Commission’s action, which Section 21(g) prohibits.

The court rejected Hansueli Overturf’s argument that Section 21(g) did not apply because the Commission sought civil penalties in addition to equitable relief. The court concluded that the action remained an action for equitable relief and that the additional request for civil penalties did not remove Section 21(g)’s prohibition. The court also held that the prohibition applied to compulsory counterclaims arising from the same events as the Commission’s claims.

Sovereign immunity

The court further held that sovereign immunity independently barred Hansueli Overturf’s counterclaims for compensatory and punitive damages. The United States is generally immune from suit unless it has expressly waived that immunity. The court concluded that the Federal Tort Claims Act did not waive immunity for claims based on the Commission’s discretionary regulatory functions, including its choice to prosecute. It also concluded that the Seventh Amendment did not waive sovereign immunity without an accompanying congressional waiver.

Ruling

The court granted the Commission’s motion to dismiss Hansueli Overturf’s counterclaims. It denied leave to amend, reasoning that Section 21(g) barred any counterclaims Hansueli Overturf might assert against the Commission in this action and that sovereign immunity barred his damages claims. The order did not prevent Hansueli Overturf from defending against the Commission’s claims by challenging the Commission’s authority or raising constitutional arguments. The order disposed of Docket No. 99.