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From Securities Regulation Daily, July 24, 2017

Raymond Lucia asks justices to decide SEC ALJ question

By Mark S. Nelson, J.D.

Raymond J. Lucia formally asked the Supreme Court to decide if the SEC’s administrative law judges are officers for purposes of the Appointments Clause. Lucia’s petition for certiorari follows the dramatic spring doubleheader en banc rehearings of both Lucia’s case and another case, indirectly linked to Lucia’s case, regarding the Consumer Financial Protection Bureau’s director-led structure. While a decision in the CFPB case is still pending, the ten judge en banc D.C. Circuit panel deadlocked on the ALJ question in Lucia’s case. If the justices take the case, it would become the fourth securities case expected to be heard in OT 2017; the Court’s docket already spans questions about disclosure liability, state court actions predicated on federal securities law, and Dodd-Frank Act whistleblowers (Raymond J. Lucia v. SEC, July 21, 2017).

Setting the stage. The Commission upheld an ALJ’s finding that Lucia violated the Investment Advisers Act by using misleading language about the role of "backtesting" in presentations about his "Buckets of Money" investment strategy. That decision drew a dissent from then-Commissioner Daniel Gallagher and former Acting Chairman (and still Commissioner) Michael Piwowar. The dissent focused on the facts of the case, but briefly suggested that even though the Commission can state its view of the Appointments Clause, the federal courts should decide the constitutional question regarding the agency’s ALJs.

Lucia’s petition states a singular question: "Whether administrative law judges of the Securities and Exchange Commission are Officers of the United States within the meaning of the Appointments Clause." A footnote at the end of the petition argues that Lucia’s case would be a better vehicle for the court to decide the ALJ question than the divided Tenth Circuit decision in Bandimere, which held the opposite: that the SEC ALJ in that case was unconstitutionally appointed. According to the petition, the government, on the SEC’s behalf, could likewise seek review of Bandimere by the Supreme Court, but that case brings with it some risk of recusals.

Lucia says ALJs are officers. The petition argues that the SEC’s ALJs are "officers of the United States" under the Appointments Clause of Article II of the U.S. Constitution. As many similar cases have also done, the petition leans heavily on the wide discretionary power of SEC ALJs. The petition also invokes much the same language as other cases by noting the Edmond and Buckley tests, the latter of which posits that an officer is someone who exercises significant authority.

Lucia’s petition also takes a closer look at specific statutory language. For one, the petition notes the use of "officers of the Commission" in the SEC’s statutes (the Commission itself, the petition noted, calls its ALJs "hearing officers"). Lucia also cites 5 U.S.C. §3105 for the proposition that an agency must appoint its ALJs.

Panel overemphasized finality. One of the hard-fought issues in cases challenging the SEC’s ALJs has been how to interpret the D.C. Circuit’s Landry decision, which upheld the Federal Deposit Insurance Corporation’s imposition of a sanction on a bank executive. Lucia’s petition argues that the D.C. Circuit majority in Landry misread Supreme Court precedent.

The D.C. Circuit’s panel decision in Lucia’s case followed Landry as circuit precedent. But questions still arise whether the Landrymajority read the Supreme Court’s Freytag opinion too narrowly, leading the panel majority to place extra emphasis on the lack of finality of the FDIC’s ALJs, further leading to a conclusion that the ALJs were employees instead of officers. Judge Randolph concurred in Landry to make the point that Freytag did not make finality the sole touchstone regarding officer status, something Judge Randolph called the "alternative holding" in Freytag.

Still, the Landry majority determined that the ALJs there were subject to the FDIC’s final decision powers; the government has similarly argued that the SEC’s ALJs render only initial decisions subject to Commission review or to an order of finality. Lucia’s petition argues to the contrary that the SEC’s ALJs are often final because the Commission reviews few matters and it often defers to certain findings made by its ALJs.

The Supreme Court majority in Free Enterprise, which rejected the dual for-cause removal structure of the Public Company Accounting Oversight Board, but still upheld the board’s existence, said in a footnote that it was an open question whether ALJs are officers of the U.S., while noting the controversy over Landry’s reach. Lucia’s petition concluded that the diametrically opposed conclusions of the D.C. and Tenth Circuits cannot stand, especially in light of the prospect that a respondent in an SEC matter may appeal to the D.C. Circuit or the circuit encompassing their place of residence or business. Lucia also noted that the SEC’s orders staying Tenth Circuit matters is likewise "untenable."

Attorneys: Mark A. Perry (Gibson Dunn & Crutcher LLP).

Companies: Raymond J. Lucia Companies, Inc.

MainStory: TopStory DoddFrankAct Enforcement FraudManipulation InvestmentAdvisers SupremeCtNews

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