UPDATE: In Face Of Split Circuits, SEC ALJ Rules Because We Say So

January 10, 2017

This is an update of "In Face of Split Circuits, SEC ALJ Rules Because We Say So" (BrokeAndBroker.com Blog, January 6, 2017)

It seems only yesterday that I published "BREAKING NEWS: Federal Appeals Court Says Securities and Exchange Commission ALJs Unconstitutional" (BrokeAndBroker.com Blog, December 28, 2016) . . . frankly, it was pretty much only yesterday, give or take a few days. In that article, we considered Article II, Section 2, Clause 2 of the United States Constitution (the "Appointments Clause"), which states:

[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 Departments.

In David F. Bandimere, Petitioner, v. United States Securities and Exchange Commission, Respondent (Opinion, United States Court of Appeals for the Tenth Circuit, 15-9586 / December 28, 2016), upon considering Petitioner Bandimere's appeal, the Court of Appeals for the Tenth Circuit ("10Cir") preliminarily explained that:

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 ya?

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 ask!

Lo and behold, look what comes up the other day: In the Matter of Alexander Kon (Order Regarding Respondent's Motion for Judgment on the Pleadings and Motion for Withdrawal; Admin. Proc. Rul. Rel. No. 4501; Admin. Proc. File No. 3-17674 / January 5, 2017). I don't want to be accused of spinning the facts or the rationale, so here is the verbatim content from the SEC's Order:

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 response.

Cameron Elliot

Administrative Law Judge

Bill Singer's Comment

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 Opinion

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 Withdrawal.

Up front 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 statesI 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

Also read:

UPDATE: January 9, 2017

In the Matter of Alexander Kon (Order Granting Motion to Amend Answer; Admin. Proc. Rul. Rel. No. 4506; Admin. Proc. File No. 3-17674 / January 9, 2017): 

On January 3, 2017, Respondent moved to amend his answer under Rule of Practice 220(e) to assert an affirmative defense based on the Appointments Clause of Article II of the United States Constitution. The Division of Enforcement does not oppose Respondent's motion. Therefore, the motion is GRANTED; Respondent must file his amended answer by January 17, 2017, per the parties' agreed scheduling order.

Cameron Elliot
Administrative Law Judge

ALSO READ: "SEC Opts for Intercircuit Nonacquiescence" (BrokeAndBroker.com Blog, January 9, 2017)