United States District Court Judge Richard M. Berman of the Southern District of New York has been making headlines in recent weeks as he presides over the highly publicized case between the National Football League (“NFL”) and National Football League Players Association (“NFLPA”) regarding the suspension of New England Patriots star quarterback Tom Brady over his alleged role in “Deflategate.” Taking a page from the Patriot’s playbook, Judge Berman recently deflated the United States Securities and Exchange Commission (“SEC”) and its controversial administrative court forum.
On August 12, 2015, Judge Berman issued a preliminary injunction against the SEC preventing it from continuing its administrative proceeding against a former Standard & Poor’s rating services (“S&P”) executive, Barbara Duka. In his Order, Judge Berman found that the SEC administrative law judges (“ALJs”) were not appropriately appointed by the SEC Commissioners pursuant to Article II of the Constitution, and their appointment was likely unconstitutional in violation of the Appointments Clause. The SEC originally brought the administrative action against Ms. Duka on January 21, 2015 alleging that Ms. Duka led the group at S&P that rated commercial mortgage backed securities that failed to disclose its relaxed methodology for calculating debt service coverage ratios when rating the transactions.
The SEC’s administrative proceedings and appointment of ALJs has been highly controversial. We previously covered the various arguments regarding the constitutionality of the proceedings and recent decisions similar to Judge Berman’s. For example, two months ago United States District Court Judge Leigh Martin May of the Northern District of Georgia blocked an SEC administrative proceeding. Judge Berman’s Order continues the recent string of cases criticizing the SEC’s practice. His ruling is notable because he is an experienced and well-respected district court judge in the securities intensive Second Circuit.
Since multiple district court judges in various jurisdictions have granted injunctions preventing the SEC administrative proceedings from continuing further, the SEC will have to decide whether to proceed as is—risking additional injunctions—or change the ALJ appointment process. So although Judge Berman has yet to rule on “Deflategate”, he has already significantly deflated the SEC’s ALJ appointment process.