UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
GEORGE R. JARKESY, JR., et al.
Plaintiffs, Civil Action No. 14-114 (BAH)
v. Judge Beryl A. Howell
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION,
Defendant.
MEMORANDUM OPINION
This matter arises out of an administrative proceeding initiated by the Enforcement
Division of the defendant, the U.S. Securities and Exchange Commission (“SEC”), against the
plaintiffs, George Jarkesy and his investment fund management group, Patriot28 (formerly
known as John Thomas Capital Management, LLC) (collectively, “the plaintiffs”). The
gravamen of the plaintiffs’ complaint is that they cannot obtain a fair hearing before the SEC in
an ongoing administrative process because the SEC’s settlement with two of the plaintiffs’ co-
respondents included myriad findings “against Plaintiffs and a formal legal finding that they are
liable for securities fraud.” Compl. ¶ 2, ECF No. 1. Pending before the Court are the plaintiffs’
Motions for Preliminary and Permanent Injunctions and Motion to Expedite (“Pls.’ TRO Mot.”),
ECF No. 3, and their Motion for Leave to Amend Complaint by Filing First Amended Complaint
(“Pls.’ Mot. Am.”), ECF No. 16. Since no District Court has subject matter jurisdiction over this
matter due to the extensive statutory scheme in the securities laws that govern this action, the
plaintiffs’ motions are denied and this matter is dismissed.
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I. BACKGROUND
Plaintiff Jarkesy formed Plaintiff Patriot28 in 2007 “to manage investment funds sold
exclusively by a registered placement agent to high-net-worth individuals who knowingly
accepted the funds’ high-risk investment strategy and acknowledged their ability to bear a loss of
their entire investment.” Compl. ¶ 9. During the financial crisis of 2008, the plaintiffs were
“battered” and still have not fully recovered. Id. ¶ 10. After the crisis, the SEC’s Enforcement
Division investigated and ultimately charged the plaintiffs with violating the Securities Act of
1933 (“the Securities Act”), the Securities Exchange Act of 1934 (“the Exchange Act”), and the
Investment Adviser’s Act of 1940 (“the Adviser’s Act”). Id.
The SEC issued an “Order Instituting Administrative and Cease-and-Desist Proceedings,”
or OIP, on March 22, 2013 against the plaintiffs and two other respondents, John Thomas
Financial, Inc. (“JTF”) and Anastasios “Tommy” Belesis (“Belesis”), who are not parties to this
action. See Pls.’ TRO Mot. Ex. A at 1, ECF No. 3-1. The OIP alleges that the four respondents
engaged in fraudulent conduct and “elevated the interests of Respondents JTF and Belesis over
those of the [Investor] Funds by steering millions of dollars in bloated fees to the broker-dealer.”
Id. at 2.
Using its power under 15 U.S.C. § 77h-1 and 15 U.S.C. § 78u-3, the SEC chose to bring
an administrative action against the plaintiffs and their co-respondents instead of an injunctive
action in a District Court, as provided for in 15 U.S.C. § 78u(d)(1). See Pls.’ TRO Mot. Ex. A at
17; Def.’s Opp’n Pls.’ TRO Mot. (“Def.’s TRO Opp’n”) at 3. As the plaintiffs point out, this
statute allows “[t]he SEC . . . discretion to bring certain cases in an [Administrative Proceeding],
which previously could only be brought in federal court.” Compl. ¶ 25; see also 15 U.S.C. §
78u-3(a) (“If the Commission finds, after notice and opportunity for hearing, that any person is
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violating [securities laws] . . . the Commission may publish its findings and enter an order
requiring such person . . . to cease and desist from committing or causing such violation . . . .”).
Such administrative proceedings are governed by the SEC’s “Rules of Practice,” codified at 17
C.F.R. §§ 201.100 et seq., which provide for, inter alia, procedures for summary disposition, id.
§ 201.250; interlocutory review by the SEC’s Commissioners, id. § 201.400; and, of particular
relevance to the instant matter, settlement before an administrative hearing has been conducted,
id. § 201.240. The settlement portion of the Rules of Practice provides that “[a]ny person who is
notified that a proceeding may or will be instituted against him or her, or any party to a
proceeding already instituted, may, at any time, propose in writing an offer of settlement.” Id.
§ 201.240(a).
In October 2013, the plaintiffs’ two co-respondents exercised the option provided by §
201.240(a) by making an offer of settlement that contained “a consent to a finding that they
‘aided, abetted and caused the Manager’s and Adviser’s breaches of their fiduciary duties to the
Funds.’” Def.’s TRO Opp’n at 7; see Pls.’ TRO Mot. Ex. Q (Order Making Findings, Imposing
Remedial Sanctions and a Cease-and-Desist Order) (“the Order”) at 2, ECF No. 3-3. Neither
plaintiff in the instant matter is referred to by name in the settlement offer, but Plaintiff Jarkesy
admits to being the “Manager” and “Adviser” referred to therein. See TRO Hrg. Tr. (“Tr.”)
6:20-22, Jan. 31, 2014. The SEC accepted the offer of settlement in an Order dated December 5,
2013. See Pls.’ TRO Mot. Ex. O (“Petition for Interlocutory Review and Stay of Proceedings”)
at 1, ECF No. 3-3.
The plaintiffs allege that in accepting the settlement offer and issuing the subsequent
Order, the SEC “entered detailed and unqualified findings of fact and conclusions of law against
Plaintiffs, including finding that Plaintiffs engaged in fraudulent conduct and violated a specific
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provision of the Advisers Act.” Compl. ¶ 19 (emphasis in original). The plaintiffs further allege
that the Order “contains elaborate findings so sweeping as to establish violations of all of the
[SEC’s Enforcement] Division’s charges and to support each of the remedies sought.” Id. The
plaintiffs assert that making such findings in the Order was “totally unnecessary to effect the
settlement with [the plaintiffs’ co-respondents] Belesis and JTF and, therefore, serve[d] no other
purpose than to express the opinions and conclusions of the Commission.” Id. ¶ 20.
Following the entry of the Order and before the commencement of the administrative
hearing against the plaintiffs, the plaintiffs filed a Petition for Interlocutory Review and Stay of
Proceeding, seeking to disqualify the SEC’s Commissioners from hearing any proceedings
related to the matter and a dismissal of the administrative proceeding. Pls.’ TRO Mot. Ex. O at
1. In their petition, the plaintiffs allege that the Order “establishes that the Commission has
conclusively prejudged the case against the [plaintiffs], and engaged in impermissible ex parte
communications with the [Enforcement] Division staff in connection with the settlement.” Id. at
1–2. The administrative law judge (“ALJ”) assigned to the matter denied the plaintiffs’ motion
and the SEC Commissioners subsequently denied the plaintiffs’ interlocutory appeal. See Pls.’
TRO Mot. Ex. N (“Order Denying Certification for Interlocutory Review”) at 1–2, ECF No. 3-3.
The plaintiffs filed suit in this Court on January 29, 2014, seeking a temporary restraining
order to stay the administrative hearing scheduled for February 3, 2014, and a declaratory
judgment that, inter alia, the SEC violated the plaintiffs’ right to due process and violated the
Administrative Procedure Act, 5 U.S.C. § 551 et seq. Compl. ¶¶ 66–72. The Court held a
hearing on the plaintiffs’ Motion for a Temporary Restraining Order, filed contemporaneously
with their Complaint, on January 31, 2014. See generally Tr. Following the TRO hearing, the
Court denied the plaintiffs’ motion for a Temporary Restraining Order. See Tr. 73:1-4.
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Specifically, the Court found that the plaintiffs failed to sustain their burden in seeking
injunctive relief because (1) the Court was “not convinced that [it has] jurisdiction over this
matter or that this case is ripe for decision[;]” (2) the plaintiffs had failed to show they did not
have adequate remedies at law, as provided for by the various securities laws they are accused of
violating; (3) the plaintiffs failed to show that they would be irreparably harmed by submitting to
an ALJ proceeding; and (4) the balance of equities did not favor the plaintiffs. See Tr. 73:5–
74:18. The parties were ordered to submit a proposed briefing schedule to address the pending
motion for preliminary injunction. See Minute Order, Jan. 31, 2014.
Rather than continue briefing on the preliminary injunction motion, the parties proposed
“that the Court first issue a ruling on subject matter jurisdiction” since, if “the Court finds it does
not have subject matter jurisdiction over Plaintiffs’ claims, no further briefing by either party
would be necessary.” Prop. Br. Sched. at 2, ECF No. 11. The parties were subsequently ordered
to show cause why the plaintiffs’ motion for a preliminary injunction was not moot, since the
administrative proceeding the plaintiffs sought to delay had proceeded as scheduled. See Minute
Order to Show Cause, Feb. 18, 2014. In connection with filing their response, the plaintiffs
sought leave to amend their complaint to “add more facts supporting their claims against
Defendant,” in essence to show that the plaintiffs’ request for a preliminary injunction was not
moot. See Pls.’ Mot. Am. Compl. at 1, ECF No. 16; Prop. First Am. Compl. ¶ 1, ECF No. 16-2
(noting plaintiffs sought to “prevent the SEC from proceeding with . . . all other phases of the
[Administrative Proceeding], that has violated, and will continue to violate, Plaintiffs’
fundamental constitutional rights.”). The Court now addresses the threshold issue of whether it
has subject matter jurisdiction over the plaintiffs’ claims.
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II. LEGAL STANDARD
“‘Federal courts are courts of limited jurisdiction,’ possessing ‘only that power
authorized by Constitution and statute.’” Gunn v. Minton, 133 S. Ct. 1059, 1064 (2013) (quoting
Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994)). Indeed, federal courts
are “forbidden . . . from acting beyond our authority,” NetworkIP, LLC v. FCC, 548 F.3d 116,
120 (D.C. Cir. 2008), and, therefore, have “an affirmative obligation ‘to consider whether the
constitutional and statutory authority exist for us to hear each dispute.’” James Madison Ltd. by
Hecht v. Ludwig, 82 F.3d 1085, 1092 (D.C. Cir. 1996) (quoting Herbert v. Nat’l Acad. of Scis.,
974 F.2d 192, 196 (D.C. Cir. 1992)). Absent subject matter jurisdiction over a case, the court
must dismiss it. McManus v. District of Columbia, 530 F. Supp. 2d 46, 62 (D.D.C. 2007).
It is the plaintiffs’ burden to establish a court’s jurisdiction over the subject matter by a
preponderance of the evidence. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 561 (1992).
The Court must accept as true all uncontroverted material factual allegations contained in the
complaint and “construe the complaint liberally, granting plaintiff the benefit of all inferences
that can be derived from the facts alleged and upon such facts determine jurisdictional
questions.” Am. Nat’l Ins. Co. v. FDIC, 642 F.3d 1137, 1139 (D.C. Cir. 2011) (internal citations
and quotation marks omitted). The Court need not accept inferences drawn by the plaintiff,
however, if those inferences are unsupported by facts alleged in the complaint or amount merely
to legal conclusions. See Browning v. Clinton, 292 F.3d 235, 242 (D.C. Cir. 2002). In
evaluating subject matter jurisdiction, the Court, when necessary, may look beyond the
complaint to “undisputed facts evidenced in the record, or the complaint supplemented by
undisputed facts plus the court’s resolution of disputed facts.” Herbert, 974 F.2d at 197; see also
Alliance for Democracy v. FEC, 362 F. Supp. 2d 138, 142 (D.D.C. 2005).
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III. DISCUSSION
The statutory and regulatory regime under which the SEC’s Enforcement Division
brought the instant matter against the plaintiffs precludes this Court from exercising subject
matter jurisdiction to hear the plaintiffs’ claims. The Exchange Act, which the plaintiffs are
accused of violating, provides that “[a] person aggrieved by a final order of the [SEC] . . . may
obtain review of the order in the United States Court of Appeals.” 15 U.S.C. § 78y(a)(1). This
statute presents two insurmountable obstacles for the plaintiffs’ case in this Court: first, no final
order has yet been entered by the SEC, which raises substantial questions about the ripeness of
this action for review; and, second, even were this action ripe, federal court review must take
place in one of the courts of appeals.
With respect to the first issue, the plaintiffs’ counsel implicitly admitted at oral argument
that the SEC has issued no final order binding on the plaintiffs, referring to the Order—against
their co-respondents—as separate and distinct from “the next [order] that would be coming up,
[which] one will have a completely preclusive effect and will trigger a cascade of lawsuits”
against the plaintiffs. See Tr. 50:19-23. In admitting that no final ALJ decision has been entered
against them, let alone a finding by the SEC’s Commissioners, the plaintiffs appear to concede
that they are not yet persons “aggrieved by a final order of the [SEC].” 15 U.S.C. § 78y(a)(1). In
any event, since no District Court would have subject matter jurisdiction over this matter even if
it were ripe for decision, see 15 U.S.C. § 78y(a)(1), the Court need not address this issue any
further.
Two Supreme Court cases, Thunder Basin Coal Co. v. Reich (Thunder Basin), 510 U.S.
200 (1994), and Free Enterprise Fund v. Public Co. Accounting Oversight Board. (Free
Enterprise), 130 S. Ct. 3138 (2010), are dispositive as to why no District Court may hear the
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plaintiffs’ suit. In Thunder Basin, the Supreme Court examined a statutory review mechanism
similar to the one at issue in the instant case. See 510 U.S. at 205. Specifically, the Court
reviewed the Federal Mine Safety and Health Amendments Act of 1977, which provides that
“[c]hallenges to enforcement are reviewed by the Federal Mine Safety and Health Review
Commission . . . and by the appropriate United States Court of Appeals.” Id. at 204. In Thunder
Basin, “[t]he Act establishe[d] a detailed structure for reviewing violations,” consisting of a
proceeding initiated by the agency before an ALJ, who adjudicates any challenges to such action,
an appeal to the agency, and then review before the Court of Appeals. See id. at 207–08. In the
instant matter, a virtually identical four-step process is mandated, where (1) charges are brought
by the SEC’s Enforcement Division before an ALJ; (2) the plaintiffs have the opportunity to be
heard and present evidence challenging the charges; (3) the plaintiffs may appeal an adverse ALJ
decision to the SEC Commissioners; and (4) if the plaintiffs are aggrieved by the resulting final
order, the plaintiffs may appeal to a federal Court of Appeals. See 15 U.S.C. §§ 78u-3,
78y(a)(1).
Where Congress has established such a comprehensive scheme for review of agency
enforcement proceedings, the Supreme Court in Thunder Basin held that litigants may
nevertheless bring claims to the District Court if the “claims considered [are] wholly collateral to
a statute’s review provisions and outside the agency’s expertise, particularly where a finding of
preclusion could foreclose all meaningful judicial review.” 510 U.S. at 212–13 (internal
quotation marks and citations omitted). The Thunder Basin Court went on to find that the
exception did not apply to the plaintiff in that matter, despite the plaintiff raising a constitutional
due process claim—as the plaintiffs are raising here. See id. at 215–16. The Thunder Basin
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Court concluded that any “statutory and constitutional claims . . . can be meaningfully addressed
in the Court of Appeals” following agency review. Id. at 215.
Similarly to the plaintiff in Thunder Basin, the plaintiffs in the instant matter have failed
to establish that the exception outlined by the Supreme Court in that case applies. Although the
plaintiffs raise various allegations of violations of their constitutional rights to due process and
equal protection, see generally Compl., those claims are inextricably intertwined with the
conduct of the very enforcement proceeding the statute grants the SEC the power to institute and
resolve as an initial matter. See 15 U.S.C. § 78y(a)(1). While the constitutional questions may
be outside the purview of the agency’s expertise, there is no dispute that the plaintiffs will have
the opportunity to raise all of their constitutional claims before a Court of Appeals should the
ALJ and the Commission issue orders adverse to them. See id.
The Supreme Court’s decision in Free Enterprise does not counsel a different result and,
indeed, illustrates why the plaintiffs’ claims are not heard appropriately by any District Court. In
Free Enterprise, the Supreme Court found that the petitioners were not challenging the
application of a particular rule to them, but rather they were challenging makeup of the federal
agency in question and whether the agency’s very existence was constitutional, making their
challenge wholly collateral to the statutory scheme that would otherwise strip the District Court
of jurisdiction. See 130 S. Ct. at 3150. Moreover, the Supreme Court noted that, in Free
Enterprise, the petitioners were faced with the prospect of having knowingly to violate the rules
they were challenging, which would entail the risk of a substantial fine, in order to initiate a
proceeding that could eventually lead to judicial review. See id. at 3151 (“We normally do not
require plaintiffs to ‘bet the farm . . . by taking the violative action’ before ‘testing the validity of
the law’” (quoting MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 129 (2007))). Thus, an
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animating concern in Free Enterprise was the fact that the petitioners would have to commit a
violation they otherwise would not have committed merely to trigger the opportunity to review
the constitutionality of the challenged agency’s existence. See id.
Here, the plaintiffs do not raise a “wholly collateral” challenge, nor are they being forced
to “bet the farm” on an action they would not otherwise take. See id. at 3150–51. The plaintiffs
are challenging the SEC’s interpretation of its own regulations—pertaining to ex parte
communications and settlement authority—and the SEC’s interpretation of various securities
laws as they pertain to the plaintiffs. See generally Compl. Far from challenging something
wholly collateral to their own situation, the plaintiffs’ claims here are entirely related to their
own actions, just as were the petitioner’s claims in Thunder Basin. See 510 U.S. at 214.
Additionally, unlike the petitioners in Free Enterprise, who had seen the investigation into their
accounting practices conclude without a recommendation for a sanction, yielding no opportunity
for judicial review, see Free Enterprise, 130 S. Ct. at 3150 (“an uncomplimentary inspection
report is not subject to judicial review”), the plaintiffs in the instant matter will either have the
opportunity to seek judicial review if they are aggrieved by the SEC’s final order or, if they are
not aggrieved, their fact-specific challenges will be moot. In either situation, the plaintiffs in the
instant matter have a “‘meaningful’ avenue of relief,” id. at 3151, similarly to the petitioners in
Thunder Basin and unlike the petitioners in Free Enterprise. 1
The D.C. Circuit and other decisions from this Court have applied Thunder Basin to find
subject matter jurisdiction lacking before the District Court. In Sturm, Ruger & Co. v. Chao, 300
1
The Supreme Court has reaffirmed the reasoning in Thunder Basin at least twice since that case was decided. For
example, in Elgin v. U.S. Department of the Treasury, 132 S. Ct. 2126, 2132 (2012), the Court noted that when “the
plaintiff’s claims could be ‘meaningfully addressed in the Court of Appeals,’” and “Congress’ intent to preclude
district court jurisdiction was “‘fairly discernible in the statutory scheme[,]’” the Constitution allowed an agency to
be the first to hear an as-applied challenge to an agency decision. Likewise, in Shalala v. Illinois Council on Long
Term Care, 529 U.S. 1, 19 (2000), the Court explained that the “strong presumption against preclusion of review is
not implicated by [a] provision postponing review,” again finding that Congress has the power to “channel” the first
review of agency decisions away from District Courts.
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F.3d 867, 874–75 (D.C. Cir. 2002), for example, the D.C. Circuit found that a plaintiff’s claim
was not “wholly collateral” to a statutory agency review provision when evaluating the merits of
the plaintiff’s claims “requires interpretation of the parties’ rights and duties” under the operable
statute. At issue in that case was a provision in the Occupational Safety and Health Act
providing to the Department of Labor powers similar to those provided to the SEC under the
Securities Act. Id. at 868. The D.C. Circuit concluded that “barring district court review . . .
[would] not deprive employers of the opportunity to obtain judicial review” because any
employer aggrieved by the Labor Department’s actions could “contest the citation through the
statutory review procedure that ultimately ends in a court of appeals.” Id. at 874.
Alternatively, when a plaintiff is making a facial challenge to a statute, a situation that is
not present in this case, the general Thunder Basin rule does not apply. See Gen. Elec. v. EPA,
360 F.3d 188, 191 (D.C. Cir. 2004). The General Electric court noted that when a statute barred
District Court review of particular agency actions, such a provision did not divest the District
Court of subject matter jurisdiction over the “statute itself.” Id. While the plaintiff in General
Electric was challenging the constitutionality of a statute, the plaintiffs here have made no such
claim about any statute apart from how the statute is being applied to them in the instant
enforcement action. See id. Thus, the plaintiffs’ claims fall squarely within the controlling
authority of Thunder Basin instead of General Electric and, consequently, this Court is without
jurisdiction to hear their claims.
Courts interpreting Free Enterprise have similarly found that where a statute provides an
agency the first opportunity to review a claim before appeal to a Court of Appeals, the statute
deprives the District Court of jurisdiction. See Amerijet Int’l v. U.S. Dep’t of Homeland Sec.,
No.13-1405, 2014 U.S. Dist. LEXIS 70270, at *40–41 (D.D.C. May 22, 2014) (finding, under
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Free Enterprise standard, that review in Court of Appeals after review of action within agency
deprived District Court of subject matter jurisdiction); see also Morgan Drexen, Inc. v.
Consumer Fin. Prot. Bureau, No. 13-1112, 2013 U.S. Dist. LEXIS 149387, at *33–35 (D.D.C.
Oct. 17, 2013) (denying request for injunctive relief and dismissing matter where District Court
had no subject matter jurisdiction over enforcement proceeding involving constitutional issues
where plaintiff had right to appeal in Court of Appeals). 2
In sum, the statutory regime embodied in the Securities Act sets forth an exclusive
mechanism for the plaintiffs to pursue their claims: first, before an ALJ, then before the SEC’s
Commissioners, and finally, if necessary, before a Court of Appeals. To the extent that the
plaintiffs believe their cause has been prejudged by the SEC’s Commissioners, they may seek
review, if necessary, before the Court of Appeals, but the statute leaves no room for this Court to
provide them the relief they seek.
2
At the TRO Hearing, and in their memoranda in support of their request for that injunctive relief, the plaintiffs
relied heavily on a Southern District of New York case, Gupta v. SEC, 796 F. Supp. 2d. 503, 514 (S.D.N.Y. 2011),
in which the district court allowed an equal protection claim against the SEC to proceed in the context of a challenge
to an administrative proceeding, despite dismissing the plaintiff’s remaining claims. See Tr. 34:6–38:24 (discussing
Gupta and equal protection claim); Pls.’ Mem. Supp. TRO Mot. at 14, 16, 18, 34–35, ECF No. 3-1 (same). Notably,
the plaintiff’s do not mention this case in its memoranda submitted after the TRO Hearing. See generally, Proposed
Briefing Schedule, ECF No. 11; Pls.’ Resp. Ct.’s Show Cause Order, ECF No. 12; Pls.’ Reply Def.’s Resp. Order
Show Cause, ECF. No. 15. As the Court indicated at the TRO hearing, the plaintiffs’ reliance on Gupta is
questionable in the wake of Altman v. SEC, 687 F.3d 44, 45 (2d Cir. 2012), which applied Thunder Basin in
affirming a District Court’s decision that it did not have subject matter jurisdiction over a constitutional challenge to
an ongoing SEC administrative proceeding. In any event, the Court finds the controlling precedent in this Circuit to
support only one outcome in this case: namely, dismissal.
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IV. CONCLUSION
The plaintiffs’ Complaint must be dismissed because this Court lacks subject matter
jurisdiction over their claims. See FED. R. CIV. P. 12(h)(3). Moreover, because the proposed
amended complaint does not add any facts to correct the fatal jurisdictional problems with the
plaintiffs’ claims, the plaintiffs’ Motion to Amend is denied as futile.
An appropriate Order accompanies this Memorandum Opinion.
Date: June 10, 2014
Digitally signed by Beryl A. Howell
DN: cn=Beryl A. Howell, o=District
Court for the District of Columbia,
ou=District Court Judge,
email=howell_chambers@dcd.usco
urts.gov, c=US
__________________________
Date: 2014.06.10 16:53:33 -04'00'
BERYL A. HOWELL
United States District Judge
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