Many industry authors – including me[1] – have devoted a lot of attention lately to the SEC’s increased use of Administrative Proceedings (rather than Federal court cases) in recent years, and questioned the fairness of such proceedings, given their relative lack of discovery tools, the short timeframe provided within which to prepare a case for hearing, the fact that the Rules of Evidence don’t apply, and the knowledge that even if you win, the Division of Enforcement gets to appeal its loss to…the SEC, i.e., the very same people who authorized the issuance of the complaint in the first place. There is another argument that has become fashionable to raise, however, and that is whether or not the ALJs who hear SEC Administrative Proceedings were appointed to their roles in a manner that comports with the requirements of the U.S. Constitution. Until late December, that was largely an academic argument, as it wasn’t getting traction in courts, at least courts of appeals. While some District Courts appreciated the argument, when the D.C. Circuit had the opportunity to entertain it, the notion was rejected.
But, on December 28, perhaps representing a late Xmas present to the securities defense bar, not to mention everyone regulated by the SEC, the U.S. Court of Appeals for the 10th Circuit issued its decision in Bandimere v. SEC. In that case, Mr. Bandimere lost the Administrative Proceeding the SEC had filed against him and heard by an ALJ. Mr. Bandimere then appealed that decision to the SEC, which (naturally) upheld the ALJ’s Initial Decision. Mr. Bandimere then appealed the SEC’s ruling against him to the 10th Circuit.
In its decision, a divided panel of the 10th Circuit determined that the SEC ALJ who heard Mr. Bandimere’s case was, in fact, unconstitutional. Why? Because the Court concluded that the ALJs are not mere “employees” of the SEC, but, rather, “officers,” at least as that word is used in the Appointments Clause of the Constitution. As a result, the ALJs need to be appointed by the SEC Chairman for their appointments to be valid. In fact, however, the ALJs are selected through a different administrative procedure, one in which the SEC Chairman does not participate. Thus, the ALJ that heard Bandimere was not Constitutionally apppointed, so the Court set aside the SEC’s decision!
Holy Cats! You don’t have to be a Constitutional scholar to appreciate the magnitude of this development. Or at least the potential magnitude. Does it mean that every decision in every SEC Administrative Proceeding ever held needs to be set aside? Does it mean that only such decisions in the 10th Circuit need to be set aside? Either way, can the problem be easily fixed, by having the current SEC Chair now sign off on the appointments of the five SEC ALJs and making that appointment effective retroactively? No one knows yet.
The 10th Circuit declined to address any of these issues, and seemed content to let the chips fall where they may. Given the clear split between the D.C. and 10th Circuits that Bandimere created, it may mean the U.S. Supreme Court will step in and resolve the split, a typical result in such situations. Perhaps it means some curtailment by the SEC of its use of Administrative Proceedings, while the issue gets sorted out. Bottom line is for people like me, who defend individuals and firms in SEC Enforcement actions, it is not a bad development, not bad at all. In a best case scenario, cases we thought we lost may now have to be vacated. As I said, a late Xmas present, for sure.
When you combine this decision with the nomination of Jay Clayton as the new SEC Chairman, an individual who is reputed not to be particularly interested in the “broken windows” approach to Enforcement espoused by outgoing Chairman MaryJo White – an approach that resulted in the SEC bringing a record number of cases last year – 2017 is looking downright positive for defense counsel.
[1] You might be interested in this article on the subject, co-authored by Heidi VonderHeide, a frequent contributor to this blog.