Administrative Law Judge

Supreme Court Likely to Decide Whether to Hear SEC ALJ Issue This Term

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As the U.S. Supreme Court commenced a new term last week, one issue of substantial interest to many readers of this blog is whether the Court will address the constitutionality of the Securities & Exchange Commission’s use of administrative law judges (“ALJs”) to adjudicate enforcement proceedings. The issue, which we have covered extensively in past posts, essentially comes down to whether SEC ALJs are Officers subject to the Constitution’s Appointments Clause, or whether they are merely employees, who do not require appointment by the President or a Presidential appointee. The SEC currently selects ALJs through an internal administrative process, pursuant to 5 USC 3105.

Advocates on both sides of a clear circuit split have already filed petitions for writ of certiorari. Most recently, on September 29, 2017, the U.S. Department of Justice Solicitor General’s office filed a certiorari petition on behalf of the SEC asking the Court to review the Tenth Circuit’s December 2016 holding in Bandimere v. SEC. That holding, which was denied en banc review by the Tenth Circuit in May, found that SEC ALJs were “inferior Officers” and thus are subject to the Appointments Clause. After the Tenth’s Circuit ruling in Bandimere, the SEC stayed all administrative ALJ proceedings that could be appealed to the Tenth Circuit pending resolution of the issue by the Supreme Court or further order of the Commission.

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ALJs are A-OK: D.C. Circuit Upholds Constitutionality of SEC In-House Courts

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In several recent decisions we have covered (here and here), Federal Circuit Courts have unanimously ruled that respondents in an SEC enforcement action cannot bypass the Exchange Act’s review scheme by filing a collateral lawsuit in federal district court challenging the administrative proceeding on constitutional grounds.  However, those prior opinions all were based on the narrow ground that district courts did not have jurisdiction to hear collateral challenges, and did not reach the merits of the constitutional challenge.  In Raymond James Lucia Cos. Inc. v. SEC,  No. 15-1345 (D.C. Cir. Aug. 9, 2016), the D.C. Circuit became the first federal appellate court to consider the merits and ruled in favor of the SEC.  The court held that SEC administrative law judges are merely employees, rather than officers of the United States, and thus need not be appointed pursuant to the Appointments Clause of the Constitution.  Their appointment satisfied constitutional scrutiny and could not provide grounds to throw out the results of the proceedings before them.

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Equity Trust Notches a Rare Defense Win in SEC Administrative Proceedings

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On June 27, 2016, SEC Administrative Law Judge Carol Fox Foelak dismissed the Division of Enforcement’s charges against IRA custodian Equity Trust Company in connection with the company’s processing of investments marketed by two convicted fraudsters.  Judge Foelak’s decision—a complete defense victory for Equity Trust—shows that while the Division of Enforcement may still win most of its cases in administrative proceedings, it doesn’t win them all.

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Eleventh Circuit Joins Peers in Preserving SEC’s Home Court Advantage

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After four failed attempts at persuading federal appellate courts to hear constitutional challenges to SEC administrative courts, it is increasingly clear that defendants in SEC in-house proceedings will not be able to pursue an early out because of the manner in which SEC administrative judges are appointed.  The latest loss came on June 17, when the Eleventh Circuit in consolidated cases Gray Financial Group Inc. et al. v. SEC, No. 15-13738 (11th Cir. Jun. 17, 2016), and Charles L. Hill v. SEC, No. 15-12831 (11th Cir. Jun. 17, 2016), agreed with the Second Circuit’s decision of three weeks ago in Tilton v. SEC, No. 15-2103 (2d. Cir. Jun. 1, 2016) (which we covered here) in ruling that respondents in an SEC administrative enforcement cannot bypass the Exchange Act’s review scheme by filing a collateral lawsuit in federal district court challenging the administrative proceeding on constitutional grounds.  A different decision from the Eleventh Circuit would have created a circuit split and a heightened possibility of Supreme Court review, but instead it joined the Second, Seventh, and D.C. Circuits in an approach that is unanimous among the circuit courts to have considered the question.  The constitutional legitimacy of SEC administrative law judges is thus likely to continue unchallenged, at least for now.

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BREAKING NEWS: Supreme Court Declines to Address the Constitutionality of Securities and Exchange Administrative Forum

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On March 28, 2016, the Supreme Court denied a petition for certiorari review brought by Laurie Bebo, the former CEO of Assisted Living Concepts Inc., who challenged the constitutionality of proceedings conducted in an SEC administrative tribunal.  Although the Court denied review, there are many more cases like it winding their way through the federal system, and in the likely event a split develops among the circuits, the Supreme Court may be inclined to address the issue, especially given the amount of attention the issue has received.  Indeed, Bebo’s petition itself attracted the notice of celebrity entrepreneur Mark Cuban, who filed an amicus brief in her case arguing that the SEC’s administrative tribunal is a “farce” and unconstitutional.

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Judge Berman Deflates SEC’s ALJ Appointment Process

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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.

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District Judge Takes Jab at SEC’s Home-Court Advantage in Administrative Proceedings, But Defense Bar May Not Have a Slam Dunk

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The defense bar recently won a significant victory in the battle to challenge the SEC’s expanded use of administrative proceedings, following the 2010 enactment of the Dodd-Frank Act, to seek penalties against unregulated individuals and entities.  As we previously wrote in SEC’s Administrative Proceedings: Where One Stands Appears to Depend on Where One Sits and There’s No Place Like Home: The Constitutionality of the SEC’s In-House Courts, SEC administrative proceedings have recently faced growing scrutiny, including skepticism about whether the administrative law judges (ALJs) presiding over these cases are inherently biased in favor of the SEC’s Division of Enforcement.  The Wall Street Journal recently reported that ALJs rule in favor of the SEC 90% of the time in administrative proceedings. Administrative proceedings have also been criticized for the ways in which they differ from federal court actions, including that respondents are generally barred from taking depositions, counterclaims are not permissible, there is no equivalent of Rule 12(b) motions to test the allegations’ sufficiency, and there is no right to a jury trial.

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