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SEC Issues Historic Stay of ALJ Initial Decisions
May 24, 2017This is an update of "SEC ALJ Says Bandimere Notwithstanding. And So It Goes. And So It Goes" (BrokeAndBroker.com Blog, January 16, 2017).
In"BREAKING NEWS: Federal Appeals Court Says Securities and Exchange Commission ALJs Unconstitutional" (BrokeAndBroker.com Blog, December 28, 2016), 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.SO ORDERED._______________________________Cameron ElliotAdministrative Law Judge
Bill Singer's Comment
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. 1111Page 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 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
Also read:
- "Split In The Circuits Widens As Jarkesy Challenges SEC" (BrokeAndBroker.com Blog, October 1, 2015)
- "BREAKING NEWS: 2nd Circuit Delivers Blow To Tilton Appeal" (BrokeAndBroker.com Blog, June 2, 2016)
UPDATE: January 13, 2017
The gift that keeps on giving -- or, perhaps, more aptly put, the regulatory equivalent of herpes? Solely in the spirit of monitoring the progress of Respondent Kon's Appointments Clause challenge, we now consider In the Matter of Alexander Kon (Order On Motion for Interlocutory Review; Admin. Proc. Rul. Rel. No. 4524; Admin. Proc. File No. 3-17674 / January 5, 2017):
On January 11, 2017, Respondent moved for interlocutory review of my order denying his motion seeking my withdrawal and denying in part his motion for judgment on the pleadings, both of which were based on the Appointments Clause of Article II of the Constitution. Alexander Kon, Admin. Proc. Rulings Release No. 4501, 2017 SEC LEXIS 27 (ALJ Jan. 5, 2017).The motion appears to be directed to the Commission, which may grant a party's petition for interlocutory review or order review on its own motion at any time, although "petitions for interlocutory review are ‘disfavored' and will be granted only in ‘extraordinary circumstances.'" Gary L. McDuff, Exchange Act Release No. 78066, 2016 SEC LEXIS 2121, at *19 (June 14, 2016); 17 C.F.R. § 201.400(a).It is unclear what relief, if any, Respondent requests from me. To the extent Respondent requests that I certify my ruling for interlocutory review under Rule of Practice 400(c), 17 C.F.R. § 201.400(c), I DENY the motion. Under Rule 400(c), I "shall not certify a ruling [for interlocutory review] unless . . . the ruling involves a controlling question of law as to which there is substantial ground for difference of opinion [,] and an immediate review of the order may materially advance the completion of the proceeding." 17 C.F.R. § 400(c)(2)(i), (ii). That standard is not met here. The Commission has made clear that it finds no merit to the contention that its administrative law judges should have been appointed in a manner consistent with the Appointments Clause. Harding Advisory LLC, Securities Act Release No. 10277, 2017 SEC LEXIS 86, at *67-69 & n.82 (Jan. 6, 2017). Respondent has provided no reason why the Commission might rule otherwise in this proceeding, the Tenth Circuit Court of Appeals' decision in Bandimere v. SEC, No. 15-9586, --- F.3d ---, 2016 WL 7439007 (10th Cir. Dec. 27, 2016), notwithstanding.Cameron ElliotAdministrative Law Judge
Bandimere notwithstanding? Bandimere notwithstanding indeed. And so it goes. Well, I guess that we will just have to see how this all turns out in the end. How did Billy Joel put it?
In re Pending Administrative Proceedings (Order, '33 Act Rel. No. 10365; '34 Act Rel. No. 80741; Invest. Adv. Act Rel. No. 4708; and Invest. Co. Act Rel. No. 32643 / May 22, 2017, the SEC ordered that:
In light of the U.S. Court of Appeals for the Tenth Circuit's recent decision denying rehearing en banc in Bandimere v. SEC, 1 we find it prudent to stay all administrative proceedings assigned to an administrative law judge in which a respondent has the option to seek review in the Tenth Circuit of a final order of the Commission under Section 9(a) of the Securities Act, Section 25(a) of the Securities Exchange Act, Section 43(a) of the Investment Company Act, or Section 213(a) of the Investment Advisers Act. The stay is effective immediately and shall remain in effect pending the expiration of time in which the government may file a petition for a writ of certiorari in Bandimere, the resolution of any such petition and any decision issued by the Supreme Court in that case, or further order of the Commission. The administrative law judges, in any applicable case, are directed to issue a notice indicating that the proceeding has been stayed. This order does not preclude the Commission from assigning any proceeding pending before an administrative law judge to itself or to any member of the Commission at any time.We also elect to stay all administrative proceedings pending before the Commission onreview from an initial decision by an administrative law judge in which a respondent has the option to seek review in the Tenth Circuit of a final order of the Commission under the aforementioned provisions of the federal securities laws.By the Commission.Brent J. FieldsSecretary1 844 F.3d 1168 (10th Cir. 2016), rehearing denied, 2017 WL 1717498 (May 3, 2017)(Case No. 15-9586).
Bill Singer's Comment of May 23, 2017
I have been in the securities industry since 1982, when I worked in the Legal Department of Smith Barney, Harris Upham & Company. For one of the few times in my legal career, I am astonished by the SEC's Order to stay all administrative proceedings on review from an ALJ's Initial Decision that are subject to 10Cir review. The SEC's stay is a profoundly commendable step by the federal regulator; and also serves as a confirmation and vindication of my interpretation of Bandimere:
Belatedly but nonetheless correctly, the SEC concedes that an ALJ's constitutional disqualification is no longer a mere argument raised by a Respondent. To the contrary, that position is a holding of at least one federal circuit court. By staying appeals subject to the 10Cir's review, the SEC has intelligently conserved its resources and avoided imposing unfair appellate costs upon respondents. Clearly, this is a circuit split in need of Supreme Court action.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.
In furtherance of the SEC Order, a Notice of Stay was issued in In the Matter of Alexander Kon (Notice of Stay; Admin. Proc. Rul. Rel. No. 4821; Admin. Proc. File No. 3-17674 / May 23, 2017):
This proceeding was stayed on April 21, 2017, based on the parties' agreement in principle to a settlement on all major terms. Alexander Kon, Admin. Proc. Rulings Release No. 4795, 2017 SEC LEXIS 1400, at *1 (ALJ May 11, 2017). On May 19, 2017, the Division of Enforcement submitted a status update representing that the requirements of 17 C.F.R. § 201.161(c)(2) were no longer satisfied. The stay therefore lapsed on May 22, 2017. Alexander Kon, 2017 SEC LEXIS 1400, at *1; see 17 C.F.R. § 201.161(c)(2)(ii).However, in light of the U.S. Court of Appeals for the Tenth Circuit's recent decision denying rehearing en banc in Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016), reh'g and reh'g en banc denied, No. 15-9586, 2017 WL 1717498 (10th Cir. May 3, 2017), the Securities and Exchange Commission has stayed all administrative proceedings assigned to an administrative law judge in which a respondent has the option to seek review in the Tenth Circuit of a final order of the Commission. Pending Admin. Proc., Securities Act of 1933 Release No. 10365, 2017 WL 2224348 (May 22, 2017).Respondent is a resident of Kansas and therefore would, under Section 9(a) of the Securities Act and Section 25(a) of the Securities Exchange Act of 1934, have the option to seek review in the Tenth Circuit of a final order of the Commission in this matter. 15 U.S.C. §§ 77i(a); 78y(a)(1); Order Instituting Proceedings at 1. Accordingly, this proceeding is stayed indefinitely.Cameron ElliotAdministrative Law Judge