On The Case

SCOTUS petition claims Justice memo is smoking gun on SEC ALJs

(Reuters) - On Friday, lawyers for onetime “Buckets of Money” radio host Raymond Lucia filed a petition asking the U.S. Supreme Court to review whether the Securities and Exchange Commission’s use of administrative law judges is unconstitutional under the Appointments Clause. And according to the petition, one of the strongest arguments that SEC ALJs are subject to the clause comes from a 2007 memo from the Justice Department - the same Justice Department that has been defending the SEC in a spate of Appointment Clause challenges in the past few years.

As you probably recall, there is a split in the federal circuits on the question presented in Lucia’s petition for Supreme Court review. Under the Appointments Clause of the constitution, “officers of the United States” must be appointed by officials accountable to the president. SEC administrative judges are appointed through a bureaucratic process, not directly by commissioners. So if they are officers of the United States the SEC’s appointment process is unconstitutional. If SEC ALJs are mere employees outside of the scope of the Appointments Clause, the hiring process doesn’t implicate the Constitution.

A three-judge panel of the District of Columbia U.S. Circuit Court of Appeals ruled last August in Lucia’s case that the SEC’s administrative law judges are not officers of the United States because they do not have the power to issue final decisions. (I’m simplifying, but that’s the essence of the holding.) A three-judge panel from the 10th Circuit rejected the D.C. Circuit’s interpretation last December in Bandimere v. SEC, ruling that under the Supreme Court’s 1991 decision in Freytag v. Commissioner of Internal Revenue, SEC ALJs are inferior officers, akin to the IRS special trial counsel in the Freytag case, so the agency’s hiring process is unconstitutional.

The 10th Circuit declined en banc review of the Bandimere case. The D.C. Circuit, after the 10th Circuit issued its panel opinion in Bandimere, agreed to hear Lucia’s case en banc, but in its en banc decision last month, the court said just that it had split evenly. The per curiam ruling didn’t address the merits of whether SEC ALJs are covered by the Appointments Clause.

Lucia’s lawyers at Gibson Dunn & Crutcher told the Supreme Court in Friday’s petition that the three-judge D.C. Circuit panel was wrong to pin its analysis entirely on the ALJs’ authority to issue final decisions. ALJs have “extensive authority,” the petition said, including “the powers to oversee hearings and discovery, rule on motions (including summary disposition), enter default judgments and impose or modify sanctions.” About 90 percent of the decisions by SEC ALJs, according to Gibson Dunn, are not reviewed by SEC commissioners, belying the SEC’s argument that ALJs do not render final decisions.

The petition is an interesting read, even if you’ve already been following the SEC ALJ Appointment Clause controversy – which has now been raised in at least 30 SEC proceedings. Lucia’s lawyers cite a lot of interesting history, including a series of 19th- and early-20th-century decisions holding that various federal officials, including extradition commissioners, court clerks and even U.S. doctors and engineers, fall under the aegis of the Appointments Clause.

In one of the brief’s subtler arguments, Lucia’s lawyers assert that the U.S. Supreme Court’s 1997 decision in Edmond v. United States implicitly contradicts the D.C. Circuit’s decision in Lucia. The justices ruled in Edmond that Coast Guard judges, whose decisions are subject to review by the U.S. Court of Appeals for the Armed Forces, are covered by the Appointments Clause. According to the Lucia Supreme Court petition, the Edmond ruling means that ALJs are not automatically outside the scope of the clause simply because SEC commissioners can overrule them.

But the best evidence that the D.C. Circuit reached the wrong conclusion about whether ALJs are covered by the Appointments Clause, according to Lucia’s petition, comes directly from the executive branch – indeed, from the SEC’s own defenders at the Justice Department. In a 2007 memo, DOJ’s Office of Legal Counsel opined that an “officer of the United States” – the key constitutional phrase – is someone who “possesses delegated sovereign authority to act in the first instance, whether or not that act may be subject to direction or review by superior officers.”

The Lucia petition contends that the OLC opinion describes exactly the role of SEC administrative law judges. It’s never been withdrawn or disavowed by the president or the attorney general, Lucia’s lawyers said. It’s also in line, according to the petition, with the Justice Department’s arguments in two Supreme Court cases after Edmond, in which the Justice Department told the court that the “inability to render a final decision” indicates not that decision-makers are outside the bounds of the Appointments Clause but that they’re inferior officers (as opposed to principal officers) for Appointments Clause purposes.

This isn’t the first time Gibson Dunn has cited the 2007 OLC memo as proof that the executive branch’s own definition describes ALJs as officers of the United States. The firm previously asserted that argument in briefs to the en banc D.C. Circuit.

The SEC’s en banc brief said the 2007 OLC opinion actually supports the D.C. Circuit’s ruling that ALJs aren’t covered by the Appointments Clause because they don’t have final authority to issue decisions. The opinion describes officers of the U.S. as those who have the power to bind the federal government or have been vested with “a portion of the sovereign powers” of the government. SEC ALJs, according to the SEC, don’t meet either of those criteria.

The SEC has not sought Supreme Court review of the 10th Circuit’s decision in Bandimere, perhaps because it was waiting for the en banc D.C. Circuit in Lucia. Now that Lucia has made the first move at the Supreme Court, it will be interesting to see if the SEC files its own cert petition in Bandimere, backs Lucia’s call for Supreme Court review or argues against the issue going before the justices at all.