• The 10th Circuit Declares SEC’s Home Courts to be Unconstitutional and Creates Circuit Split
  • January 11, 2017 | Author: Terry R. Weiss
  • Law Firm: Greenberg Traurig, LLP - Atlanta Office
  • Right after Christmas, the United States Court of Appeals for the Tenth Circuit delivered a lump of coal to the Securities and Exchange Commission in Bandimere v. U.S. SEC,1 ruling that the SEC's administrative law judges (ALJs) who preside over SEC enforcement actions hold their positions in violation of the Appointments Clause of the United States Constitution. The Bandimere decision in its entirety may be found here. Concluding that SEC ALJs are inferior officers, rather than mere employees of the agency, the Tenth Circuit adopted the same arguments that plaintiffs such as Gray Financial Group, Inc. (Gray) and others successfully pressed in multiple district courts which ultimately enjoined unconstitutional administrative proceedings. SEC ALJs preside over many SEC enforcement actions, and the Bandimere holding potentially undermines the constitutionality of their proceedings, if not ultimate rulings, on a countless number of cases. And because ALJs are not used by only the SEC, but also by other administrative agencies as well, the Bandimere decision therefore may have broader implications beyond just the SEC. The Bandimere ruling creates a circuit split with the D.C. Circuit’s decision earlier this year in Lucia v. SEC,2 perhaps setting the stage for the United States Supreme Court to decide the issue of SEC ALJ constitutional officer status.

    Bandimere involved an appeal from an SEC administrative enforcement proceeding presided over by ALJ Cameron Elliot, where the SEC rejected the argument that ALJ Elliot was an inferior officer.3 The Tenth Circuit decided that because ALJ Elliot is an inferior officer, he “held his office unconstitutionally when he presided over Mr. Bandimere’s hearing” and the SEC’s decision against him must be set aside.4 Bandimere issues a clear directive to the SEC that its ALJs violate the Constitution.

    The Bandimere majority explained that “[a]lthough the Supreme Court has not stated a specific test for inferior officer status, ‘[e]fforts to define [‘inferior Officers'] inevitably conclude that the term's sweep is unusually broad.’”5 The Tenth Circuit rested its holding that SEC ALJs are inferior officers on the Supreme Court’s Freytag opinion, in which a unanimous Court concluded that the Tax Court’s special trial judges (STJs) were inferior officers and not employees.6 The lynchpin for the Freytag Court was “the significance of the duties and discretion that special trial judges possess.”7 Bandimere followed Freytag’s “three characteristics” to determine that SEC ALJs, like STJs -- whom SEC ALJs “closely resemble” -- are inferior officers.8 First, the SEC ALJ position was “established by law,” in the Administrative Procedure Act. Second, statutes set out SEC ALJs’ duties, salaries, and hiring process. Third, “SEC ALJs exercise significant discretion in performing ‘important functions’ commensurate with the STJs’ functions described in Freytag.”9 Examples of SEC ALJs’ exercise of significant authority include: making credibility findings to which the SEC gives “considerable weight,” “shap[ing] the administrative record by taking testimony,” ruling on discovery, admissibility of evidence and dispositive motions, entering default judgments, and issuing initial decisions that publicly “declare respondents liable and impose sanctions.”10 The Tenth Circuit also concluded that its holding promotes “the accountability that the Appointments Clause was written to secure” by identifying the public officials who must appoint SEC ALJ inferior officers.11

    The Bandimere majority rejected the SEC’s argument that the Freytag Court relied on the STJs’ “final decision-making power” to decide they were inferior officers. According to the Tenth Circuit’s careful analysis, the SEC and the D.C. Circuit’s decision in Landry v. FDIC, upon which the SEC relied, misinterpreted Freytag by “plac[ing] undue weight on final decision-making authority.” Accordingly, Bandimere expressly disagreed with Lucias holding that SEC ALJs are not inferior officers, which “was based on the court’s conclusion that SEC ALJs cannot render final decisions.”12

    In contrast, the Bandimere dissent favored the “final decision-making authority” (mis)understanding of Freytag, but appeared most concerned about “the probable consequences” of the majority’s holding, in that “all federal ALJs are at risk of being declared inferior officers.” Whatever implications Bandimere may have for ALJs in other agencies, the dissent correctly points out that for the SEC, the holding “has effectively rendered invalid thousands of administrative actions.”13

    It is highly doubtful that the SEC in the waning days of the Obama Administration will “fix” the constitutional problem of its ALJs by properly appointing them. Rather, the agency likely will petition the Supreme Court for a writ of certiorari to review the Tenth Circuit decision. Given the split in the circuits and the significant constitutional question presented, which implicates the validity of all SEC (and possibly other) administrative proceedings, the Supreme Court may well grant review. If the Supreme Court agrees with the Tenth Circuit majority that SEC ALJs and their administrative proceedings are unconstitutional, this groundbreaking holding will raise serious questions about countless past and pending SEC administrative proceedings presided over by SEC ALJs.

    1 --- F.3d ---, No. 15-9586, 2016 WL 7439007 (10th Cir. Dec. 27, 2016).

    2 832 F.3d 277 (D.C. Cir. 2016).

    3 Coincidentally, the ALJ in the Bandimere and the Gray administrative proceedings is the same ALJ, Judge Elliot.

    4 Bandimere, 2016 WL 7439007, at *15.

    5 Id., at *4 (quoting Free Enter. Fund v. PCAOB, 561 U.S. 477, 539 (2010) (Breyer, J., dissenting)).

    6 Id., at *4-6; Freytag v. Comm’r of Internal Revenue, 501 U.S. 868 (1991).

    7 Freytag, 501 U.S. at 881.

    8 Bandimere, 2016 WL 7439007, at *8, 9.

    9 Id., at *8.

    10 Id., at *8-9.

    11 Id., at *10.

    12 Id.

    13 Id., at *25 (McKay, C.J., dissenting).