Monday, October 05, 2015

SEC Admits Two ALJs Not Appointed by Commissioners

By Mark S. Nelson, J.D.

The SEC said in its answer to Barbara Duka’s suit disputing the constitutional validity of the agency’s enforcement regime that two of its administrative law judges were not appointed directly by the commissioners. A federal judge previously halted the SEC’s in-house proceeding against Duka, but the agency’s appeal of that decision is still pending in the Second Circuit (Duka v. SEC, October 2, 2015).

The SEC’s answer to Duka’s amended complaint acknowledged that ALJs James Grimes and Cameron Elliot were not hired by the commissioners themselves. The answer also concedes that the SEC’s ALJs enjoy more than one layer of tenure protection. But the SEC said other aspects of Duka’s claims were too conclusory to merit a reply, or the agency denied the allegations.

In July, the SEC’s Chief ALJ, Brenda Murray, briefly stepped into the Duka administrative proceeding when she assigned a new ALJ. Duka’s in-hosue case was being handled by ALJ Elliot, but the mid-year order removed Elliot and instead appointed Grimes. Chief ALJ Murray gave no explanation for the change. ALJ Grimes cancelled Duka’s hearing that was set to begin in September after a federal judge ordered the SEC to stop the administrative proceeding.

Duka, the ex-Standard & Poor’s Ratings Services executive, is one of a small group of SEC enforcement targets that has taken on the agency in federal court by asserting the SEC’s ALJs are hired through a process that involves another federal agency resulting in the ALJs enjoying too many lawyers of good cause removal. Central to this claim is the assumption that the SEC’s ALJs are inferior officers under Article II of the U.S. Constitution, a conclusion the SEC has disputed in each of the suits against it, and in two recent Commission opinions (Raymond J. Lucia Companies and dissent; Timbervest).

The case is No. 15-cv-357.