Miscarriage of Justice at the SEC


The United States Constitution lays out the principle of the separation of powers in three simple steps. Article I of the Constitution gives Congress the power to make the laws of the United States. Article II entrusts the President to take care that the laws be faithfully executed, usually through the actions of other executive branch individuals. Article III then charges the federal courts with applying the laws passed by Congress and enforced by the executive branch when deciding cases and ordering remedies. This constitutional structure avoids concentrating excessive power in any one branch—a protection that is lost when all three functions are put in the hands of a single agency.

Thanks to the rise of the administrative state, agencies like the Securities and Exchange Commission are taking over responsibility for all three functions. The agency promulgates extensive regulations that have the force of law, which it then enforces against individual defendants, often in an SEC tribunal, not in an Article III court. This cozy arrangement is now being tested in Lucia v. Securities and Exchange Commission, argued last week before the Supreme Court.

Before his run in with the SEC, Raymond J. Lucia was an investment professional who regularly gave complimentary public presentations on his “Buckets of Money” (BOM) strategy for individual retirees. BOM starts with a diversified stock portfolio in which low-risk investments are sold first, allowing high-risk investments more time to appreciate. Lucia’s standard presentation relied on a large deck of slides, two of which gave “hypothetical” examples of how this strategy might work. The SEC ultimately determined that these slides were seriously misleading, even though they had repeatedly passed muster before a private industry group known as FINRA (The Financial Industry Regulatory Authority) and had previously been presented to the SEC, which had raised no objection to them. None of the 50,000 people who attended these presentations over the years filed any complaint against Lucia, let alone lost any money. At these presentations, Lucia asked attendees to contact him directly if they wanted additional personal advice.

Congress, under the 2010 Dodd-Frank Act, authorized the SEC to try major cases before internal agency tribunals, which “involve less discovery than federal court actions and do not involve depositions, interrogatories, juries or rules of evidence.” The SEC now refers some 80 percent of its cases, including Lucia’s, to these internal courts, which are presided over by Administrative Law Judges (ALJs) not appointed by the President, the federal courts, nor even by the head of SEC itself. Instead, the Chief Judge of the SEC makes the appointment. In this instance, Cameron Elliot was appointed, who had never ruled against the SEC’s enforcement division in the 50 or so cases he oversaw. Elliot conducted a full-scale trial of the case, after which he concluded that Luria should be suspended for life from the securities profession. This initial decision was not final; it had to be reviewed by the agency’s five commissioners, who in 2015 followed Elliot’s recommendation in a 3-2 decision. The ruling was then challenged in the United States Court of Appeals for the District of Columbia. In 2016, a unanimous three-judge panel of that court, speaking through now-retired Judge Janice Rogers Brown, adopted an “especially deferential” standard of review on the severity of the sentence and thus enforced the ban. In a split 5-to-5 decision, the D.C. Circuit, en banc, let the decision stand in 2017.

The Supreme Court rarely, if ever, takes a case to review its facts. True to form, in this instance, the Court took the case to answer this abstruse question: “Whether administrative law judges of the Securities and Exchange Commission are Officers of the United States within the meaning of the Appointments Clause” to the United States Constitution. That Clause creates a three-fold classification of persons who are to be appointed by the President. At the top of pyramid are “Ambassadors, other Public Ministers and Consuls, and Judges of the Supreme Court” who can only be appointed with the advice and consent of the Senate. In the middle are “inferior” officers, who need not obtain Senate consent, given that “Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.” At the bottom are federal employees outside the scope of the Appointments Clause. If ALJs qualify as inferior officers, their appointment by the Chief Judge of SEC was invalid.

In her lengthy opinion, Judge Brown held that these ALJs were not inferior officers but only employees because their decisions are not final, given the SEC review that follows. That conclusion was emphatically rejected by the Fifth Circuit in Bandimere v. SEC, which held that ALJ’s were inferior officers “because they exercise significant authority pursuant to the laws of the United States.” And below them are government “employers” not covered by the Appointments Clause. Tellingly, the Deputy Solicitor General, Jeffrey Wall, argued for Lucia, so the Supreme Court had to appoint an independent lawyer, Anton Metlitsky, to argue on behalf of the SEC.

I have little doubt that Bandimere is correct: If district court clerks, assistant surgeons, election supervisors, cadet engineers, and commissions of the circuit court count as inferior officers requiring appointment, then so too does any federal judge that presides over a trial, even if he does not have the power to make a final decision. During argument in Lucia, Justices Kennedy and Sotomayor asked whether treating the ALJs as inferior officers would mean that judges hearing social security and immigration cases would also be covered under the Appointments Clause, to which the sensible response was that higher levels of protections and accountability should be required in those adversarial cases in which the government seeks to impose heavy sanctions, unlike those in which individuals are asking for some favorable treatment on a social securities benefit or their immigration status.

Justice Breyer worried that treating these ALJs as inferior officers might undermine our system of “a merit-based civil service.” Justice Kagan then chimed in that it was critical to insulate these ALJs from the political process so that under the Administrative Procedure Act these judges “would have some detachment, would have some insulation from the political system. Not the way an Article III judge does, but still something.”

Left unexplained in these exchanges is why civil service protection does anything whatsoever to protect the independence of these judges from political influence. The key point here is that the leadership of the SEC (which is divided on strict party lines) gets the power to appoint whatever individual ALJ it chooses to hear any given case. It is widely understood that it is a serious abuse in Article III Courts to let the Chief Justice stack a panel with judges that might well comport with his or her views. Instead, a system of random assignment, difficult to achieve in practice, is regarded as a critical safeguard—but such a thing was wholly absent in the procedures that allowed the SEC to reach a decision that, to put the matter charitably, seems vindictive relative to any purported harm. According to Ronald Mann at SCOTUSBlog, Elliot “adopted a bright-line rule of issuing lifetime bans on employment in the investment industry against any defendants who had the nerve to contest the proceedings against” the SEC. Not good.

Another hard question in this case is whether the SEC’s truncated procedures satisfy the Fifth Amendment, under which the United States may not deprive any person of life, liberty or property without due process of law. The words “due process” are supposed to offer strong protections against even the appearance of bias—a bias that seems evident in this case given the harsh sentence for Lucia’s dubious first offense. Judge Brown in the District of Columbia Circuit should have stopped that abuse in its tracks by imposing an especially high standard of review, given the risk of bias.

The Appointments Clause argument on which the case will apparently turn does not address this essential point. Even if the ALJ had been appointed by the SEC, separation of powers is heavily compromised if any executive branch official can appoint a judicial officer to decide cases that are brought by its own enforcement division, as occurred here. Civil service protections are neither here nor there. Justice Kagan therefore was right to note that the APA does not afford Lucia the procedural protection given by an Article III court. But that is precisely the point. It may be too late in the troubled life of the administrative state to require any separation between rule-making and enforcement, but there is no reason whatsoever why partisan ALJs should rule in big cases. Dodd-Frank wrongly authorized these in-house tribunals to dispense ad hoc decisions. In this case, the Appointments Clause challenge is correct. But curing that error does not ensure that only Article III courts adjudicate major enforcement actions intended to curtail the liberties of the ordinary people of the United States. The Supreme Court should squarely hold that in any contested case with heavy sanctions, an Article III adjudication is a constitutional necessity.

© 2018 by the Board of Trustees of Leland Stanford Junior University

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  1. Bryan G. Stephens Thatcher
    Bryan G. Stephens

    One more way we can see the financial crisis was used to hurt the normal citizen while protecting the connected. 

    • #1
  2. Stad Coolidge

    If I had my druthers (lost them a long time ago), there would be no such thing as regulations – Congress would make all laws, and if they wanted to get into the weeds when it came to deciding specifics (like the definition of a “wetland”), they had to do it, not pass the buck to the Executive Branch.

    I would also end the practice of things such as arbitration (particularly binding arbitration).  Yes, it saves time and money, and it keeps the courts from getting clogged, but forcing a citizen who disagrees with a government decision (or private business decision) into arbitration vice a trial denies him his rights, IMHO.  If this does clog the courts, maybe judges would be more willing to throw out frivolous lawsuits.

    Finally Richard, you made this statement:

    “The Supreme Court rarely, if ever, takes a case to review its facts.”

    This scares me.  What if justice hinged on whether or not a case was decided on the facts presented, and whether or not those facts were indeed actual “facts”?


    • #2
  3. Cato Rand Inactive
    Cato Rand

    Could not agree more.  An appointments clause victory would be a half measure at best.  The combination of executive, legislative and judicial powers within agencies, when combined with requirements like exhaustion of administrative remedies, make effective defense against administrative overreach so financially ruinous for most people, even if successful, that it is imprudent to try.  The cost of the process itself coerces settlement by both the innocent and the guilty.  It is government run completely amok.  If these tribunals are to exist at all, it should be on an “opt in” basis like voluntary arbitration.

    • #3
  4. Unsk Member


    “If I had my druthers (lost them a long time ago), there would be no such thing as regulations – Congress would make all laws, and if they wanted to get into the weeds when it came to deciding specifics (like the definition of a “wetland”), theyhad to do it, not pass the buck to the Executive Branch.”

    But,but but, wasn’t that exactly what Section 1 Article 1  of the Constitution means when it reads “All legislative Powers herein granted shall be vested in a Congress of the United States, which shall consist of a Senate and House of Representatives.”

    It’s got that terrible word in there right at the beginning -“all”.  That doesn’t seem to leave any wiggle room at “all ” for Administrative agencies legislating even the most minor of minor regulations. Still under the mad power grab granted to them by the Supreme Court, Administrative Agencies rein supreme.

    We have become nearly  an Administrative State dictatorship , where our nicely  bought and paid for legislatures, particularly Congress,  write lofty sounding  “goals” as laws and then we  have our wondrous Administrative State bureaucracies flesh out the details for them behind closed doors with the ever helpful assistance of our really Special Interests  in a very cute end run around “will of the people”.

    • #4
  5. Doug Kimball Thatcher
    Doug Kimball

    All I can say is, it’s about time!  These abuses are legion up and down the Federal Bureaucracy, at the SEC, the EPA, the Department of Revenue.  Yes, the defendants can appeal to a federal court, but who has the money, the time, the patience to go that far?  And often penalties and fines continue to amass, or are trebled, or must be placed in escrow in their entirety before an appeal can even be considered.  This tactic is especially potent at the state level, with both ALJs and with settlement liaisons (people in a position to hear the facts and negotiate a settlement), all of whom are appointed and employed by the government entity bringing the action.  In California the Labor Board will bring an action, adjudicate it through their captive system and if you wish to appeal, force the funding of treble damages before an appeal can be made.  Treble damages equals all fines, penalties and assessments times three!

    These are not just outrageous tactics, it is a shakedown of the highest order.  I think someone should bring a federal RICO action against one of these more abusive state bureaucracies.


    • #5
  6. Bryan G. Stephens Thatcher
    Bryan G. Stephens

    This is why, as President, my first Executive Order would be to suspend any regulations not written into law by Congress on the grounds that Congress cannot legislate away its power to legeslate. 

    • #6
  7. Stad Coolidge

    Bryan G. Stephens (View Comment):
    Congress cannot legislate away its power to legislate. 

    I like this statement . . .

    • #7
  8. Bryan G. Stephens Thatcher
    Bryan G. Stephens

    Stad (View Comment):

    Bryan G. Stephens (View Comment):
    Congress cannot legislate away its power to legislate.

    I like this statement . . .


    I posted some place my ingural address. I need to dig it up and repost it. 

    • #8

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