Alan J. Bozer and James E. B. Bobseine,
BridgeTower Media Newswires
Administrative law judges (ALJs) at the state and federal level are sometimes the subject of legal challenges based upon the quasi-judicial nature of their job responsibilities. As executive branch officials acting like judges, the scope of their authority to adjudicate some disputes may be called into question. A recent example of a potentially successful challenge to the authority of federal ALJs has arisen in the context of administrative proceedings of the Securities and Exchange Commission (SEC). The question posed by defendants in two federal court cases — Lucia v. SEC and Bandimere v. SEC — is whether the SEC’s practice of using ALJs to adjudicate enforcement proceedings violates the Appointments Clause of the Constitution.
The U.S. Supreme Court may decide the question next spring in the context of ALJs who adjudicate proceedings concerning the federal securities laws, but in so doing, the court’s decision has the potential to call into question the use of ALJs to adjudicate disputes more broadly. Given the entrenched role of ALJs in both the state and federal systems, these cases bear watching.
The U.S. Supreme Court may decide next spring whether lawsuits brought by the SEC in administrative proceedings violate the U.S. Constitution. In July 2017, former “Buckets of Money” radio host Raymond Lucia filed a petition for certiorari, asking the Supreme Court to review a federal appeals court decision that rejected Lucia’s claim that the SEC’s practice of using ALJs to adjudicate enforcement proceedings violates the Appointments Clause of the Constitution. The decision by the U.S. Court of Appeals for the D.C. Circuit created a circuit split, as the Tenth Circuit in May 2017 had concluded that the ALJs were in fact “inferior officers” — a term of art from the Constitution — whose appointment must be made in accordance with the Appointments Clause.
If the Supreme Court takes Lucia v. SEC, resolution of the case would be relevant to anyone who is (or may be) subject to investigation by the SEC, as any investigation has the possibility of being ultimately litigated before an ALJ. If that ALJ — who has the authority to impose fines and penalties, issue cease-and-desist orders, and bar individuals from engaging in certain business — holds office in violation of the Constitution, this would obviously affect the nature of SEC investigations and administrative proceedings. Such an outcome would also be important to individuals and entities that are (or may be) subject to investigation by one of the more than 30 federal agencies — from the Occupational Safety and Health Review Commission to the Commodity Futures Trading Commission, and from the Department of Labor to the Social Security Administration — that resolve legal disputes with the use of ALJs.
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Administrative proceedings and the SEC’s perceived “home court” advantage
The SEC has long been able to bring enforcement actions in either of two fora: federal court before a federal judge, or administrative proceedings before an ALJ. Recent changes to the federal securities laws, however, have brought greater attention to the SEC’s discretion to choose one forum over the other. Before passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) in 2010, the SEC had authority to seek civil money penalties in administrative proceedings only where the defendant was associated with an enterprise regulated by the SEC, such as investment advisers or brokerage firms.
If a defendant was not associated with an SEC-regulated business, the SEC could only seek civil money penalties by suing in federal court, often in a companion case to an ordinary cease-and-desist action before an ALJ. Dodd-Frank expanded the SEC’s capability to seek civil money penalties in administrative proceedings.
After Dodd-Frank, the SEC has the ability to have a single action for monetary penalties and a cease-and-desist order adjudicated by an SEC employee who is also a subject matter expert in the federal securities laws. This might be understood to create an incentive for the SEC to bring as many cases as it can in its administrative “home court,” especially given that administrative proceedings and federal trials differ in several significant ways.
Even after the SEC revised its Rules of Practice last year, the scope of discovery remains narrower than that provided for under the Federal Rules of Civil Procedure, including fewer, and shorter, depositions. At the proceeding itself, of course, there is no jury, and no possibility of a jury. The rules of evidence are different than in federal court, including permitting the introduction of hearsay. After the proceeding ends, any appeal must be taken first to the five-member commission (the Commission) that helms the SEC, which also has the discretion to review (or not) the ALJ’s decision. After the Commission reviews the decision, any appeal must be taken to a federal appeals court that will likely apply a highly deferential standard to conduct its review.
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The Appointments Clause — two views from the D.C. Circuit and the 10th Circuit
The Appointments Clause provides that the President “shall nominate, and by and with the Advice and Consent of the Senate, shall appoint . . . Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.” U.S. CONST. art. II, § 2, cl. 2. Unless stated otherwise elsewhere in the Constitution, “all Officers of the United States are to be appointed in accordance with the Clause.” Buckley v. Valeo, 424 U.S. 1, 132 (1976). Only employees or other “‘lesser functionaries’ need not be selected in compliance with the strict requirements of Article II.” Freytag v. Comm’r, Internal Revenue, 501 U.S. 868, 880 (1991) (quoting Buckley, 424 U.S. at 126 n. 162).
In neither Lucia nor Bandimere did the SEC argue that the ALJ hiring process met the constitutional standard for the appointment of “Officers of the United States.” For this reason, these cases turned on whether the nature of the ALJs’ work rises to the level of “Officers of the United States” or amounts to something less. In analyzing the nature of the ALJs’ work, the federal appeals courts closely examined the nature and extent of the Commission’s review of the ALJ’s initial decision. The initial decision may be reviewed by the Commission on its own initiative or at the request of a party or other aggrieved person. Whether or not a party seeks the SEC’s review of an initial decision, any sanction ordered by an ALJ must await a final order from the SEC before taking effect.
In Bandimere v. SEC, 844 F3d 1168 (10th Cir 2016), reh’g en banc denied, 855 F.3d 1128 (10th Cir. 2017), cert. petition pending, the U.S. Court of Appeals for the 10th Circuit ruled that SEC ALJ were, in fact, “inferior officers” of the United States because “SEC ALJs exercise significant discretion in performing ‘important functions … .’” (quoting Freytag, 501 U.S. at 882). As such, their appointments must be done in accordance with the Appointments Clause. This case began in 2012 when the SEC initiated an administrative proceeding against David Bandimere, a Colorado businessman, alleging violations of federal securities laws.
The ALJ who oversaw the proceeding deemed Bandimere liable, barred him from the securities industry, ordered him to cease and desist from violating securities laws, imposed civil penalties and ordered disgorgement. Bandimere argued to the Commission that the decision by the ALJ was unconstitutional, but the Commission rejected the argument. Bandimere then made the same argument to the 10th Circuit, which granted his petition and accepted his argument. The SEC has appealed the decision to the Supreme Court.
Raymond J. Lucia Cos. v. S.E.C., 832 F.3d 277 (D.C. Cir. 2016), on reh’g en banc, 868 F.3d 1021 (D.C. Cir. 2017), cert. petition pending, centered on allegations against Lucia and his investment firm regarding how they presented their “Buckets of Money” retirement wealth management strategy to prospective clients. The ALJ who oversaw the proceeding found Lucia liable relating to one of the charged misrepresentations, imposed financial sanctions, and issued a lifetime bar. In reviewing the case, the D.C. Circuit reached the opposite conclusion to the 10th Circuit, finding that SEC ALJs were constitutionally appointed because they do not exercise significant final authority, as the Commission has discretion to review any action by an ALJ.
Even if the Commission chooses not to review an ALJs’ decision, that ALJs’ decision is not final and enforceable until the Commission issues an order stating that it has decided not to review the decision and establishing the commencement date of any sanctions. Lucia has appealed the decision to the Supreme Court.
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Alan J. Bozer is a partner with Phillips Lytle LLP and is team leader of the firm’s White Collar Criminal Defense and Government Investigations Practice. He is active is trying criminal and civil cases, and handles appellate and arbitration work as well. He can be reached at abozer@phillipslytle.com or (716) 504-5700. James E. B. Bobseine is an attorney with Phillips Lytle LLP where he focuses his practice in the area of litigation, including defending entities and individuals in white collar matters and government investigations. He can be reached at jbobseine@phillipslytle.com or (716) 504-5794.
