Thursday, August 13, 2015

Federal Court Halts SEC ALJ Proceeding Over Constitutional Issues

By Amanda Maine, J.D.

The federal district court in Manhattan entered a preliminary injunction against the SEC, ordering the agency to halt administrative proceedings against former S&P managing director Barbara Duka. The court determined that, absent the injunction, proceedings against Duka would cause irreparable harm. The court also stated that SEC administrative law judges (ALJs) were not appropriately appointed according to the U.S. Constitution, and that Duka therefore had established a likelihood of success on the merits of her case (Duka v. SEC, August 12, 2015, Berman, R.).

ALJs and the Constitution. Duka’s case is one of several brought in federal district courts on constitutional grounds. Administrative proceedings instituted against Duka in January 2015 alleged a scheme and a fraudulent practice or course of business that led to false and misleading statements by S&P concerning its post-financial crisis methodology for rating commercial mortgage-backed securities. Duka and others subject to proceedings presided over by SEC ALJs have argued that ALJs are “inferior officers” under the Constitution. The Constitution requires that “inferior officers” be appointed by the President, the heads of departments, or courts of law. Duka and others have argued that ALJs are similar to persons deemed to be inferior officers, contending that SEC ALJs are “established by law”; that their duties, salary, and means of appointment are specified by statute; and that they carry out “important functions” such as taking testimony, conducting trials, ruling on the admissibility of evidence, and possessing the power to enforce discovery compliance.

The court stated that because the SEC ALJs involved in the administrative proceeding against Duka were not appointed by the SEC, they were not appropriately appointed, which violates the Constitution’s Appointments Clause. The court disagreed with Duka’s secondary argument that the ALJs’ two-level tenure of protection violated the Constitution’s appointment and removal powers, however.

The first argument was sufficient to support the entry of a preliminary injunction, the court concluded. Duka had sufficiently demonstrated that she would suffer irreparable harm if forced into an unconstitutional proceeding from which she would be unable to recover monetary damages, according to the court. Duka had also demonstrated a likelihood of success on the merits of her claim that the SEC had violated the Appointments Clause of the Constitution. As such, the court found that a preliminary injunction against the administrative proceeding against Duka was appropriate.

The case is No. 15-CV-00357-RMB.

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