Supreme Court review of SEC judges could roil pending cases

But long-term, the agency may get around questions of constitutionality by changing the way it brings on administrative law judges

Jan 16, 2018 @ 3:43 pm

By Mark Schoeff Jr.

A Supreme Court case on the Securities and Exchange Commission's use of internal judges could put into limbo more than 100 pending enforcement actions but may not end the agency's ability to adjudicate such matters on its home court.

On Jan. 12, the Supreme Court put on its docket a case involving former investment adviser Raymond J. Lucia, whom the agency barred from the industry in 2013 and fined $300,000 for what it alleged was Mr. Lucia's misleading claims about his so-called "buckets of money" retirement investing strategy.

Mr. Lucia argued that SEC administrative law judges were unconstitutionally hired because they are "officers" rather than employees of the SEC. As officers under the Appointments Clause, they would have to be appointed by the president, a department head or a court.

Circuit courts have split on whether SEC judges are officers or employees. Other cases working their way through the court system also involve investment advisers, including Dawn Bennett.

The Supreme Court's decision could affect more than 100 pending SEC cases, which were listed in a Nov. 29 order issued by the agency. In that order, SEC members ratified the appointment of its five internal judges and said they should review those cases. It's unclear whether that order will influence the Supreme Court's decision.

If the Supreme Court rules that the current SEC ALJ's were unconstitutionally hired, the cases in the SEC pipeline would be put in limbo.

"That could have a very significant impact for the parties in those cases and for people affected by those decisions," said Ira Matetsky, partner at Ganfer & Shore. "I'm sure you would see attempts to re-open even concluded cases."

Lawyers for investment advisers and others who have cases pending will probably try to delay the proceedings. A Supreme Court ruling is anticipated by the end of the court's term in late June.

"You want to do whatever you can to push it off until after the Supreme Court decision," said Mitchell Littman, partner at Littman Krooks.

Investment advisers and others who are hoping that the court's decision will fundamentally change the SEC's enforcement process may be disappointed.

The question before the court is whether SEC judges are "officers," not whether the position should exist in the first place. The court's ruling is likely to give direction to the SEC and other agencies, such as the Federal Deposit Insurance Corp., on how to appoint their internal judges.

"Presumably, on a going-forward basis, they can fix this easily," said Ken Berg, partner at Ulmer & Berne. "After they fix the constitutional problem, I expect the process will continue in the SEC administrative forum pretty much the way it's been."

Targets of SEC enforcement contend that the SEC has a tremendous home-court advantage when it tries cases before its internal judges, where most of them are heard.

But a "revolution" is not in the offing, said Mr. Matetsky.

"We're not talking about eliminating ALJs here," he said. "This is more about the mechanical operation of the ALJ system."

But even if the court keeps ALJs in place, the ruling may affect the atmosphere in which they do their jobs.

"The balance of equity may change in terms of how deferential or favorable [an administrative law judge] may be to the SEC's internal concerns," said Ilya Shapiro, a senior fellow in constitutional studies at the Cato Institute in Washington.

The fact that the Trump administration sides with Mr. Lucia and argues that ALJs are officers, a change in the government's position from the Obama administration, "is telling," Mr. Littman said.

"The solicitor general is part of an administration that wants less of a regulatory scheme, rather than more," he said.


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