Appeals Court Questions Impact of SEC Forum Challenge

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By Antoinette Gartrell

Federal appeals court judges May 24 closely questioned a Washington lawyer about the possible implications for other agencies of his claim the appointment of the Securities and Exchange Commission’s administrative law judges is unconstitutional ( Lucia v. SEC, D.C. Cir., No. 15-1345, 5/24/17 ).

In an oral argument that lasted nearly 90 minutes, the panel of 10 judges of the U.S. Court of Appeals for the District of Columbia Circuit repeatedly asked Gibson Dunn & Crutcher LLP’s Mark A. Perry how other federal ALJs would be affected by a ruling SEC judges were constitutionally infirm.

The only question in this case concerns the SEC’s administrative law judges, Perry responded, saying the impact on ALJs in other agencies is a question for another day.

Perry argued the case on behalf of Raymond J. Lucia, an investment adviser the SEC said misled clients regarding his firm’s “Buckets of Money” investment strategy. On appeal, Lucia claimed the proceedings against him were flawed because the way the agency hires its administrative law judges violates the Appointments Clause.

Last year, a three-judge D.C. Circuit panel rejected Lucia’s argument citing an earlier D.C. Circuit ruling in Landry v. FDIC, which held ALJs aren’t “officers"—and thus subject to the Appointments Clause—because they don’t reach “final” decisions. Shortly thereafter, the Tenth Circuit in Bandimere v. SEC parted ways with Landry and Lucia, ruling that the appointment of SEC ALJs violated the Constitution. Two months later, the full D.C. appeals court agreed to reconsider its decision.


According to Perry, SEC ALJs are “officers” who aren’t appointed in the proper way—that is, by the president, a federal judge or the head of the agency. He pointed to the U.S. Supreme Court’s decision in Freytag v. Commission, which held that the appointment of “special trial judges” of the U.S. Tax Court who preside over trials and make preliminary dispositions are “officers” within the meaning of Article II.

Justice Department attorney Mark Stern, who argued for the commission, told the court that SEC ALJs are mere employees who don’t have final decision-making authority within the meaning of Landry. “It’s the SEC that’s accountable in the courts, no one thinks it’s the ALJs,” he said.

“This is a case about what ALJs have, not what they don’t,” Perry rejoined. They have “the power to shape the record, that’s what makes an adjudicator an officer,” he said. “Seven times the Supreme Court has looked at adjudicators and said they’re officers,” Perry said. Ruling them not to be “isn’t the way to end the litigation because you still have Bandimere,” he said.

Judge Cornelia T.L. Pillard said that in some ALJ cases, the adjudicators’ decisions weren’t subject to review by any higher authority. In this case, she said, the SEC ALJ’s actions must be “ratified” by the commission. Perry, however, pointed to a securities law provision governing the delegation of functions by the commission “which says that I’m right and, in effect, you’re not.”

“[F]inality isn’t the principle,” Judge David S. Tatel said. Several judges commented that SEC ALJs conduct trials and make evidentiary rulings and credibility determinations. Do those activities equate to “significant authority” sufficient to deem them “officers” and therefore subject to Article II restrictions? they queried. The court also said credibility determinations are critical to the outcome of proceedings, even though the ALJs may be “subject to some paper review.”

The judges also expressed concern about what a reversal could mean for ALJs’ tenure protections.

Perry left the argument feeling “encouraged,” he told Bloomberg BNA afterwards. “It’s bad luck to predict outcomes,” he said, but the judges were “very engaged and interested” and were “obviously taking it very seriously.”

High Court Bound

If the D.C. Circuit rules in favor of the SEC, it probably won’t resolve the issue, as the circuit split would be “destined for decision by the Supreme Court, which has shown in the recent days a willingness to limit the reach of the SEC,” R. Daniel O’Connor of Ropes & Gray, Boston told Bloomberg BNA.

New York lawyer David Sullivan of Holwell Shuster & Goldberg LLP, who focuses on appellate and complex commercial litigation, agreed saying, “either way, the Supreme Court will have to intervene.”

For the last several years, the SEC has strongly pursued new authority under the Dodd Frank Act to seek “friendlier footing” in ALJ proceedings, O’Connor, a former SEC enforcement attorney, said. If the D.C. Circuit follows the Bandimere court’s reasoning, “the SEC will be forced to rethink its handling of ongoing matters and will face a substantial challenge as to the validity” of many previously litigated cases, O’Connor said.

“If the DC Circuit reverses itself, then not just Mr. Lucia, but, conceivably, all the other respondents in SEC appeals who were found to be liable could be looking to have their findings of liability vacated, along with the sanctions that were imposed on them,” Chicago securities lawyer Alan M. Wolper of Ulmer & Berne LLP said.

To contact the reporter on this story: Antoinette Gartrell in Washington at

To contact the editor responsible for this story: Phyllis Diamond at

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