January 6, 2017
[The President] shall nominate, and by and with the Advice
and Consent of the Senate, shall appoint Ambassadors, other public Ministers
and Consuls, Judges of the supreme Court, and all other 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
When the Framers drafted the
Appointments Clause of the United States Constitution in 1787, the notion of
administrative law judges ("ALJs") presiding at securities law
enforcement hearings could not have been contemplated. Nor could an executive
branch made up of more than 4 million people, most of them employees. Some of
them are "Officers of the United States," including principal and
inferior officers, who must be appointed under the Appointments Clause. U.S.
Const. art. II, § 2, cl. 2. In this case we consider whether the five ALJs
working for the Securities and Exchange Commission ("SEC") are
employees or inferior officers.
Based on Freytag v. Commissioner
of Internal Revenue, 501 U.S. 868 (1991), we conclude the SEC ALJ who presided
over an administrative enforcement action against Petitioner David Bandimere
was an inferior officer. Because the SEC ALJ was not constitutionally
appointed, he held his office in violation of the Appointments Clause Exercising
jurisdiction under 15 U.S.C. §§ 77i(a) and 78y(a)(1), we grant Mr. Bandimere's
petition for review.
For those of you who just can't
get enough of federal securities practice and its attendant meandering through
the appeals process, please feel free to read the exhaustive coverage of the
Appointments Clause, SEC ALJs, and the constitutional
challenges in "BREAKING NEWS: Federal Appeals Court Says
Securities and Exchange Commission ALJs Unconstitutional"
(BrokeAndBroker.com Blog, December 28, 2016). For those of you who prefer to simply go
through the motions and just want to get through another day, hey, how are
So . . . why are we back at
Bandimere? Seems pretty clear that 10Cir shot down the SEC's
ALJ system as unconstitutional. To the extent that the SEC is unhappy or
someone else has a problem with the 10Cir's decision, well you can try to take it up with the
Supreme Court. Whether the issue of the constitutionality of the SEC's ALJs is headed or not to the Supreme
Court, we still got to deal with the day-to-day reality that the
SEC has all these ALJs on payroll and, you know, what are we to do with those
judges and their caseloads?
Funny you should
On January 3,
2017, Respondent submitted a motion for a ruling on the pleadings
(motion to dismiss), pursuant to 17 C.F.R. § 201.250(a). On
January 4, 2017, Respondent submitted a motion for withdrawal, in which he
argues that I am disqualified from presiding over this proceeding.
Respondent argues in his motion to dismiss that Commission administrative law judges are appointed in violation of the Appointments Clause of Article II of the Constitution, and that this proceeding must therefore be dismissed. See Motion to Dismiss at 2-3. On the same basis, Respondent argues in his motion for withdrawal that I must disqualify myself from this proceeding. See Motion for Withdrawal. The two United States Circuit Courts of Appeal that would likely have jurisdiction over any petition for review from a final Commission action arising from this proceeding are currently split on the applicability of the Appointments Clause to Commission ALJs. Compare Bandimere v. SEC, __ F.3d __, No. 15-9586, 2016 WL 7439007, at *15 (10th Cir. Dec. 27, 2016), with Raymond J. Lucia Cos. v. SEC, 832 F.3d 277, 283-89 (D.C. Cir. 2016). The Commission, however, has held that its ALJs are not subject to the Appointments Clause. See Raymond J. Lucia Cos., Exchange Act Release No. 75837, 2015 WL 5172953, at *21-23 (Sept. 3, 2015).
Respondent's motion to dismiss is therefore DENIED
IN PART as to his Appointments Clause argument. In responding to the motion to
dismiss, the Division of Enforcement need
only address the remaining arguments. Respondent's motion
for withdrawal is DENIED. This Order does not resolve Respondent's pending motion to
amend his answer, to which the
Division should file a
You know that
expression you use about a "split in the circuits?" Well, here is the
living embodiment of that phrase. As stated in the above SEC Order,
ALJ Elliot acknowledges that the issue of the constitutionality of
the SEC's ALJs is presently subject to dueling opinions in Bandimere (10Cir)
and Lucia (DCCir).
SIDE BAR: Raymond
J. Lucia Companies, Inc. and Raymond J. Lucia, Petitioners, v. Securities and
Exchange Commission, Respondent (Opinion, United
States Court of Appeals for the District of Columbia Circuit, August 9, 2016):
Finally, petitioners point to nothing in the securities
laws that suggests Congress intended that Commission ALJs be appointed as if
Officers. They do point to the reference to "officers of the Commission" in 15
U.S.C. § 77u, but there is no indication Congress intended these officers to be
synonymous with "Officers of the United States" under the Appointments Clause.
Of course, petitioners contend that Congress was constitutionally required to
make the Commission ALJs inferior Officers based on the duties they perform.
But having failed to demonstrate that Commission ALJs perform such duties as
would invoke that requirement, this court could not cast aside a carefully
devised scheme established after years of legislative consideration and agency
implementation. See 5 U.S.C. §§ 3105, 3313; see also Civil Service Reform Act
of 1978, Pub. L. 95-454, 92 Stat. 1111
Page 18 of the DCCir
Given the "split in the circuits," ALJ Elliot
asserts that the "Commission, however, has held
that its ALJs are not subject to the Appointments Clause . . ."
and he proceeds to deny in part Respondent Kon's Motion to
Dismiss and denies Respondent's Motion for
and without any equivocation, I have generally admired ALJ Elliot's service and
demeanor -- no ifs, ands, or buts. Similarly, I fully appreciate that no matter
the ALJ's ruling on the pending motions, any decision will come under fire as
either being in conflict with one of the two competing Circuits. There could be
no clearer example of damned if I do, damned if I don't. I
trust that my sympathies for the ALJ are clear and my professional sensitivity
to the dilemma apparent.
Having noted my own ambivalence, let me be clear in noting my disagreement with ALJ Elliot's decision. Respondent Kon -- and many similarly situated SEC respondents -- is now forced to incur considerable costs in defending allegations of serious misconduct via an in-house SEC proceeding rather than in a federal court. Moreover, Respondent Kon has Bandimere, a 10Cir Opinion, declaring the SEC's ALJs "unconstitutional," and, as such, by inference, deeming the SEC's in-house administrative adjudications unconstitutional by way of the taint of the regulator's ALJs.
Seems to me that any SEC ALJ is irredeemably conflicted when asked to decide whether he is acting in a constitutionally permissible manner after a federal Circuit Court of Appeals has found said service is in violation of the Appointments Clause. It's one thing if there had not been any contrary ruling but the 10Cir has spoken; and that development significantly alters the equation.
It's a bit troublesome for ALJ Elliot to acknowledge the split in the federal appeals courts but to reject the 10Cir ruling by simply concluding that we here, at the SEC, have held that our ALJs are not subject to the Appointments Clause. As of December 28, 2016, the law of the land in Oklahoma, Kansas, New Mexico, Colorado, Wyoming, and Utah was as the 10Cir says: SEC ALJs serve in violation of the Constitution. I do not downplay the significance of the Lucia DCCir Opinion and I acknowledge that the law of the land in the District of Columbia differs from that of its 10Cir sister states. I do question the propriety of a mere SEC ALJ, however, picking sides when the issue is of such fundamental, constitutional import.
In phrasing his decision, ALJ Elliot states the proposition before him as "Respondent submitted a motion for withdrawal, in which he argues that I am disqualified from presiding over this proceeding." In fairness to Respondent Kon, he is not merely arguing that ALJ Elliot is disqualified. Respondent Kon is presenting proof to ALJ Elliot that the 10Cir in Bandimere has concluded that ALJ Elliot is disqualified. That the DCCir and ALJ Elliot and the SEC may all disagree with Bandimere is not a sufficient basis upon which to reduce Kon's submission as little more than a respondent's argument. We're sort of beyond that characterization.
There are 13 federal Courts of Appeal and as of today, the DCCir disagrees with the 10Cir; hence, we got a split in the circuits. That being said, I would think that, for now, SEC ALJs cannot be deemed as disinterested parties and, as such, should not be ruling on whether they serve in compliance with the Appointments Clause. Which is not to say the life must come to a halt at the SEC. The federal securities regulator could take its docket into the federal courts, where many of us believe it belongs. Another option would be for the SEC's Chair and commissioners to conduct plenary hearings and issue the ultimate decisions. Another option would be to appoint ALJs in conformity with the law.
In the end, this debate is reduced to a crap shoot by ALJ Elliot's decision. If the Supreme Court eventually rules on the SEC ALJ/Appointments Clause issue, all is fine if the high court finds that the SEC's ALJ system was and is constitutional; on the other hand, if the Supreme Court finds the SEC's ALJ system unconstitutional, you can hear the cash registers go "ka-ching" at defense law firms all over the country. Worse -- what happens if the Supreme Court fails to achieve a majority consensus and the disparate circuit positions remain? Talk about a new day for forum shopping