Source: https://securitiesdiary.com/2015/08/12/what-is-the-sec-backup-plan-if-it-loses-the-alj-constitutionality-issue-in-court/
Timestamp: 2019-04-21 10:36:36+00:00

Document:
What Is the SEC Backup Plan if It Loses the ALJ Constitutionality Issue in Court?
The saga of challenges to the constitutionality of the SEC’s administrative law proceedings — and in particular the appointments and removal protections of the administrative law judges — has played out over many months in both court and commentary. After some early SEC victories on jurisdictional challenges, the Commission seemed content to try to fend off the court cases on such procedural grounds, and fight the merits by deciding the issue in its own favor on a petition for review of one of these proceedings (like the one now before it in the Timbervest case), with perhaps an upper hand once the case reached a federal appeals court.
If that was the early strategy, it now seems to be in need of reconsideration. Two federal district court judges found jurisdiction over cases making such challenges in four separate cases, and ruled on preliminary injunction motions that the plaintiffs will likely succeed on the merits. In three of those four cases, involving proceedings against Charles Hill, Gray Financial Group, and Barbara Duka, the SEC is now preliminarily enjoined from moving forward with its administrative proceedings. (In the other, against Timbervest, the preliminary injunction was denied because the case had already been tried and was now before the SEC for review.) See Court Issues Preliminary Injunction Halting Likely Unconstitutional SEC Proceeding; N.D. Ga. Judge Leigh May Issues Injunction for Gray Financial and Denies One for Timbervest; SDNY Court Ups the Ante, Allowing Duka Injunctive Action To Proceed on Appointments Clause Issue; Order Issuing Preliminary Injunction in Duka v. SEC. The merits of the constitutionality issue now can no longer be dismissed as fringe advocacy. The main issue in these cases — whether the SEC ALJs are “inferior officers” under Article II of the Constitution — has now been substantially vetted by two courts, which found they were, indeed, inferior officers under closely analogous Supreme Court decisions. Beyond this, the SEC made embarrassing errors in court submissions about how its ALJs were appointed, and at a minimum seems incompetent at figuring out and reporting to the courts on this simple factual issue. Indeed, even in the SEC’s own proceeding in Timbervest, the Enforcement Division refused to comply with an adjudicative order from the Commission to provide the Commissioners with a description of how the ALJs were appointed. Whether it was because they couldn’t do so, or just didn’t want to do so, is not clear. See SEC Bumbles Efforts To Figure Out How Its Own Administrative Law Judges Were Appointed. In this context, the SEC itself will have difficulty writing an opinion in Timbervest upholding the constitutionality of the ALJs that would not be in significant danger of being overturned.
But the SEC continues to take a “business as usual” approach in its administrative court proceedings. Many of these are ongoing, and more are assigned each day (or at least each week). Any defense lawyer could be committing malpractice by failing to challenge a pending or new case on grounds of unconstitutionality. Indeed, I question why the ALJs themselves don’t make clear in each such case that the constitutionality of their appointments is now at issue, and stating sua sponte that each respondent would be deemed to have challenged the proceeding on that ground, in the event the argument was ultimately upheld in the courts.
So, what happens if the SEC’s stonewalling defense posture fails; if the constitutionality challenge is ultimately upheld? If the status quo prevails, my guess is near chaos. To be sure, the ruling is likely to be applied prospectively, and stayed for some time to allow for some remedial steps to be taken, akin to the approach taken when the bankruptcy courts were ruled unconstitutional. See Northern Pipeline Co. v. Marathon Pipe Line Co., 458 U.S. 50, 87-88 (1982). But I don’t see how every case currently pending, or instituted between now and when such a decision occurs, in which such a challenge is made, would not be vacated. See D.C. Circuit Invalidates Appointment of Former Acting GC for Labor Board (DC Circuit holds in SW General, Inc. v. NLRB, No. 1107, that NLRB action by Acting General Counsel serving unlawfully must be vacated). That could be a lot of cases that need to be retried (or reconsidered or settled). Perhaps the Commission is counting on the appellate courts (and the Supreme Court) to blanche at the prospect of vacating such a large number of prosecuted cases.
Even a Commission confident in its arguments needs to consider how to proceed in a way that minimizes chaos if it loses. What could it do now to protect against that future result? Two steps immediately come to mind. First, at least for now, while the constitutionality issue remains in doubt, reverse its new policy of bringing more of its complex cases in the administrative court and go back to the model in which those cases were brought in federal court. To save face, this need not be announced; it can be effected sub silentio. The Commission seems to prefer secrecy over sunshine, although a little more open discussion of how it approaches these issues would probably do a lot more good than harm. An open statement of this discretionary decision would evidence more good faith than we’ve seen over the past year. Second, obtain a waiver of the constitutionality issue from fully informed respondents before commencing new proceedings, or continuing pending proceedings. I haven’t researched the issue, but my bet is that the SEC and an opposing party can, by mutual consent, agree to any forum to resolve cases, and a fortiori, an agreement to use the administrative court with its current ALJs likely would be enforceable. At a minimum, a party that agreed to proceed on this basis would likely be estopped from making a future challenge on this ground. The SEC might have to make some concessions to get such an agreement — probably involving fairer rules for discovery and scheduling in these cases — but by now they should recognize that this might not be a bad thing. Many respondents with limited defense resources could well prefer, and agree to, this approach. That would take a lot of potential future vacated results off the table.
No doubt there are other steps that can be taken to avoid a potential future quagmire. The important thing is that the Commission and its staff should be thinking about, and implementing, these kinds of steps, because, like it or not, the Commission may find itself on the losing end of the constitutional question.
This entry was posted in Administrative Proceedings, SEC Enforcement, Securities Law and tagged administrative courts, administrative law judge, administrative proceeding, ALJ, Appointments Clause, Article II, Barbara Duka, Charles Hill, Commission, constitutionality, due process, Duka v. SEC, Enforcement Division, Gray Financial Group, Gray Financial Group v. SEC, Hill v. SEC, In the Matter of Timbervest, In the Matter of Timbervest LLC, Judge Berman, Judge Leigh Martin May, Judge Leigh May, Judge Richard Berman, lawyer, legal analysis, Northern Pipeline, Northern Pipielien v. Marathon Pipe Line, SEC, SEC enforcement, securities, Securities and Exchange Commission, securities fraud, securities law, securities litigation, separation of powers, SW General v. NLRB, Timbervest, Timbervest LLC v. SEC on August 12, 2015 by Straight Arrow.

References: v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v. 
 v.