The Eye of the Storm: A Year in the Life of ALJ Enforcement

The previous year was certainly a remarkable one for the SEC’s administrative law judge enforcement program. The significance of 2017 did not come from eye-popping penalty awards. Last year, ALJs imposed fewer civil penalties then in the previous four years, and none of the penalties topped $1 million, according to Bloomberg Law data. In April 2016, ALJ Jason S. Patil imposed a civil penalty of more than $12.7 million against a broker who sold unregistered securities and absconded with investor funds to pay personal expenses.

Top Enforcement Issues 2013 - 2017 with Penalties

Top 5 ALJ Issues


Large disgorgement orders also didn’t make 2017 unique. Five initial decisions issued last year ordered disgorgement, and all these orders were for under $1 million.  In the two preceding years, administrative law judges issued 26 disgorgement orders, with one in excess of $2 million and two of $1 million or more. The decline in disgorgement orders may be attributable to the Supreme Court’s decision last year in Kokesh v. SEC, 137 S. Ct. 1635 (2017). The high court held in that case that disgorgement falls under the five-year statute of limitations period set forth in 28 U.S.C. § 2462, which governs most claims brought by the SEC.

Disgorgement in SEC ALJ Enforcement Actions 2013 – 2017

Disgorgement in ALJs

The previous 12 months also saw a familiar litany of charges brought before the SEC’s in-house tribunals. Material misstatements, misrepresentations and omissions again were the most frequent substantive violations charged, accounting for almost half of the offenses among the top five issues brought in 2017. Fraudulent schemes and investment advisory fraud were the next largest categories of intentional violations. 

A statistical review of ALJ enforcement in 2017 produced little that was new and exciting. September did give us some drama with the perhaps unexpected win by Lynn Tilton, the “Diva of Distress,” when ALJ Carol Fox Foelak found that the SEC Enforcement Division failed to prove their substantive claims that Tilton bilked investors out of millions of dollars. The story of the year in ALJ enforcement, however, was the continuing challenge to the validity of the program under the Constitution’s appointments clause.

2017 Top 5 Issues in ALJ Enforcement

Top Five ALJ Enforcement Issues

The controversy revolves around whether ALJs are “inferior officers” of the United States. Under the Appointments Clause, these officers must be appointed by the president, a federal court or a department head. Clearly, the process by which current ALJs were hired did not meet this constitutional requirement. Under the Administrative Procedure Act (APA), agencies hire ALJs through a merit-selection process administered by the Office of Personnel Management (OPM). ALJs also fall under civil service requirements and protections. OPM administers an examination and presents the top three candidates to the SEC for review. The SEC's Chief ALJ then hires from the top three candidates subject to the approval and processing by the SEC's Office of Human Resources.

The SEC’s November Order

The D.C. Circuit in Raymond J. Lucia Cos. v. SEC and the Tenth Circuit in Bandimere v. SEC reached conflicting results on the appointments clause issue. To make matters more interesting, last fall the Solicitor General announced that the government would no longer defend the constitutionality of the SEC’s ALJ hiring process. In response, the SEC issued an order designed “to put to rest any claim that administrative proceedings pending before, or presided over by, Commission administrative law judges violate the Appointments Clause.”

The order provides for the ratification of the SEC’s prior appointment of all current ALJs. In addition, ALJs must reconsider cases in which the judge has not yet reached an initial decision. For cases appealed to the SEC, the matters are remanded to the ALJ that handled the matter initially.

Lucia and the Supreme Court

The SEC order failed to resolve the issue, however. On Jan. 12, 2018, the U.S. Supreme Court granted a petition for certiorari in the Lucia case (in a filing with the Court, the government had identified Lucia as the preferred vehicle for resolving the issue, rather than Bandimere, which might force a recusal from Justice Gorsuch due to Bandimere’s Tenth Circuit origins). Lucia’s lawyers argued that the SEC order did not moot his case because “it has afforded petitioners no redress for having subjected them to trial before an unconstitutionally constituted tribunal.”

This unusual turn of events leaves us in an interesting place. Attorneys sitting at both tables now apparently agree that the administrative law judges are inferior officers, but the Supreme Court is not bound by how the Solicitor General and the SEC characterize the judges. The high court has several options before it. The Supreme Court could appoint an amicus to argue the position formerly held by the SEC and could conclude that the ALJs had been employees all along, but the odds of such a resolution are quite long. The Court could also readily find that the SEC’s November 2017 action resolved the issue for all ALJ cases currently pending before the judges and currently on appeal before the Commission, and leave the matter there. The justices could also find that the SEC had effectively solved the problem, while carving out a narrow “one-off” remedy for Lucia to allow for a rehearing of his case.

The messiest result would be for the Court to find for Lucia and to somehow dismiss the charges against him or to order his case reopened. I can’t speak to the merits of the case against Raymond Lucia, but from a procedural standpoint, his case is no different from hundreds of other enforcement actions that have run their course and been closed. If Ray Lucia prevails, the Supreme Court may be opening a door that every frustrated administrative litigant may well be rushing to push through.

There was an odd element to the Solicitor General’s brief in support of the petition for certiorari.  The brief urged the Court to consider a separation of powers challenge based on the restrictions placed by statute on ALJ removal (as did the parties challenging the statutory authority of the Public Company Accounting Oversight Board before the high court in 2010). The brief for Lucia specifically and fervently rejects this position, however. The constitutionality of the ALJ removal procedures had not been raised by Lucia or in the Bandimere case, argued Lucia, and “thus is not an argument available to the government here.” Lucia's lawyers noted that the "issue was neither pressed nor passed on in any of the proceedings below—the government even refused to take a position on the issue despite multiple questions at oral argument.”

Where Do We Go From Here?

In addition to issuing the ratification order, the SEC has taken other steps to minimize the impact of an adverse ruling on the appointments clause question. For most of 2017, the Enforcement Division has been directing contested enforcement actions to federal district courts rather than to ALJs. District court litigation is far more costly and time-consuming than the SEC’s internal ALJ proceedings. Greater discovery is also available in district court proceedings, and the Federal Rules of Civil Procedure may allow respondents access to a wider range of documents and other materials than might be available in an administrative action. The shift to district court litigation will undoubtedly have a significant impact on an agency that is already facing personnel and budgetary constraints.

The shift is likely temporary, however. It is doubtful that the Court will take drastic action in its review of Lucia. The SEC‘s order solved most of the appointments clause problems, with the appointment ratification and the case review program. Given that the issue was not litigated below, the justices are also unlikely to take a full swing at the removal question without letting the lower courts deal with it first.

That leaves us with Raymond J. Lucia, his “Buckets of Money” investment program, and the hundreds of litigants in long-closed cases lined up behind him. If I were to glance into my rather hazy crystal ball, I would not be surprised to see the Court craft a closely-tailored remedy for Lucia. That ever-so-carefully crafted remedy would likely allow him to plead his case before a now-properly appointed ALJ without opening up the logistical nightmare of hundreds of cold case parties seeking new hearings based on their own perceived constitutional slights. That crystal ball is indeed hazy, though, and unfortunately, it is no longer under warranty.

For more data and analysis on Administrative Law Judge actions, Bloomberg Law subscribers can access SEC ALJ Enforcement Analytics and the SEC ALJ Enforcement Tracker.