SEC Judges Are Merely ‘Pet Court,' D.C. Cir. Is Told

Securities Law Daily provides daily coverage of developments in the regulation of federal, state, and international securities and futures trading, with objective coverage of the...

By Rob Tricchinelli

May 13 — D.C. Circuit judges examined an investment adviser's claims May 13 that the Securities and Exchange Commission's administrative law judges are unconstitutionally appointed, wading with the parties into administrative and constitutional issues.

In an oral argument that lasted more than 90 minutes, both sides dug deeply into the nuances of what makes agency employees “officers” subject to the Appointments Clause, and whether and how decisions of the SEC's ALJs are considered final.

The administrative forum is simply the SEC's “pet court” and the agency is “selling a false independence” for its judges, Mark A. Perry of Gibson, Dunn & Crutcher LLP said to a panel of the U.S. Court of Appeals for the District of Columbia Circuit. Perry represents Raymond J. Lucia, an adviser whose constitutional challenge is part of his appeal of an ALJ's decision that barred him from the industry for life.

Officers?

Perry argued that the SEC's ALJs are executive branch “officers,” and because they aren't appointed by the president or the commissioners, their hiring was unconstitutional.

They are officers who have the power to make decisions on behalf of the agency, in part because most initial decisions become final without modification or action from the commission, he said.

When an ALJ's initial decision becomes final, the stock language is that the commission “has not chosen to review” the decision. That language reflects inaction on the part of the SEC, Perry argued, which would be different if the orders said the commission “has chosen not to review” a decision.

“Words are important,” Perry said.

Judge Cornelia T.L. Pillard went back and forth with Perry on the matter but didn't seem disposed to a ruling either way. Pillard called it a “tough issue.”

SEC, DOJ

The agency was represented by SEC Senior Litigation Counsel Dominick V. Freda and Justice Department appellate attorney Mark B. Stern.

They pushed back on Perry's reading of both federal statutes and SEC regulations, saying Congress's intent was to allow ALJs to conduct independent hearings while still granting ultimate authority to politically accountable agency heads—the SEC, in this case—subject to judicial review.

At the end of his constitutional argument, Perry said the agency's hiring of ALJs violated the Appointments Clause in a “blatant, violent, disobedient” way.

“Tell us how you really feel,” Judge Robert L. Wilkins joked in response. Judge Judith W. Rogers also sat on the panel.

‘Buckets of Money.'

Lucia's case came on appeal from an administrative proceeding against him and his firm, in which they were accused of misleading investors about their “Buckets of Money” investment strategy (172 SLD, 9/6/12).

In July 2013, ALJ Cameron Elliot revoked Lucia's adviser registration, hit him with an industry bar, and ordered him and his company to pay $200,000 (133 SLD, 7/11/13). The SEC didn't take up Elliot's decision and Lucia appealed to the D.C. Circuit.

The appeals court briefly addressed the merits of the SEC's allegations, but the majority of the argument was taken up by the constitutional issues.

To contact the reporter on this story: Rob Tricchinelli in Washington at rtricchinelli@bna.com

To contact the editor responsible for this story: Phyllis Diamond at pdiamond@bna.com