Tuesday, March 22, 2016

SEC Opposes Cert in More ALJ Constitutional Litigation; Bebo Files Supplemental Brief

By Amanda Maine, J.D.

The SEC has filed a brief opposing a petition for a writ of certiorari to the Supreme Court on whether the SEC’s administrative law judges are inferior officers unconstitutionally appointed under the Appointments Clause. The SEC’s ALJ regime has faced a number of constitutional challenges, including appeals pending before the Second, Fourth, and Eleventh Circuits (Pierce v. SEC, March 17, 2016).

Administrative proceeding. An initial decision by an SEC ALJ in an administrative proceeding against Gordon Brent Pierce found that Pierce sold unregistered securities and failed to report his beneficial ownership of certain stock in violation of federal securities laws. He was ordered to cease and desist from further violations and to pay $2 million in disgorgement. The Commission adopted the decision as its own in July 2009 and Pierce did not seek judicial review.

A year later, the SEC instituted another administrative proceeding against Pierce, alleging that he fraudulently concealed his interest in corporate accounts and his stock sales through those accounts. Pierce raised a number of procedural challenges, but the ALJ rejected them and found that he had violated the federal securities laws. After the Commission rejected his appeal, Pierce sought judicial review in the D.C. Circuit. An appellate panel also found his arguments to be without merit. He sought a rehearing en banc, contending for the first time that SEC ALJs are inferior officers who have not been properly appointed under the Appointments Clause. The rehearing was denied by the D.C. Circuit without opinion, and he petitioned the Supreme Court for a writ of certiorari.

Forfeiture. The SEC first argued that Pierce forfeited his right to have his Appointments Clause claim heard by failing to raise it at earlier stages in the litigation. The brief takes issue with cases cited by Pierce where the Supreme Court has exercised its discretion to hear certain waived Appointments Clause claims, noting that his examples concerned the authority of Article III courts, and not the status of executive branch officials.

The SEC also acknowledged that several cases regarding the constitutionality of the appointment of ALJs have been addressed by, are currently pending, or await review petitions before federal circuit courts on appeal from the Commission (Timbervest and Raymond J. Lucia Companies) or in the form of injunction proceedings in federal district courts. In these cases, the respondents had preserved their constitutional argument by raising it in earlier proceedings, and the SEC has presented arguments against the respondents’ claims both on jurisdictional grounds and on the merits, the SEC noted.

The SEC, observing that there is no compelling reason for excusing Pierce’s failure to observe “the bedrock procedural rule” that a non-jurisdictional argument is forfeited unless timely asserted, urged the Court to deny cert.

Appointments Clause. The SEC’s brief also addressed Pierce’s Appointments Clause arguments. The SEC pointed out that the Supreme Court’s Freytag decision, which held that special trial judges of the Tax Court were inferior officers, and on which Pierce’s argument heavily relies, is not in conflict with its position. Freytag, the SEC wrote, concerned the authority of a Tax Court special court judge, who has more authority, including the authority to issue final decisions, than an SEC ALJ. ALJs are analogous to FDIC ALJs, which, under the D.C. Circuit’s Landry decision, do not possess the power of final decision, and therefore are not inferior officers under the Appointments Clause, the SEC contends.

Bebo supplemental brief filed. One of the more prominent figures in the recent litigation against the SEC’s administrative adjudication process, Laurie Bebo, also filed a supplemental brief to her petition for certiorari. Bebo’s challenge focuses on the lower courts’ refusal to exercise subject matter jurisdiction of her constitutional claims. Bebo argues that Seventh Circuit misapplied the Supreme Court’s jurisdictional test in ruling she could not challenge the constitutionality of the SEC’s administrative law judges in a federal district court.

Bebo’s supplemental brief cites the “frustration” of the Eleventh Circuit’s chief judge about the jurisdictional analysis faced by federal judges. At an oral argument for two consolidated cases over the subject matter jurisdiction issue (Hill and Gray Financial), Chief Judge Edward Carnes expressed concerns about how judges are supposed to reconcile the controlling Supreme Court decisions (Thunder Basin, Elgin, and Free Enterprise) regarding the issue and expressed his desire for “the Supreme Court to tell me what they want me to do.”

He also questioned the D.C. Circuit’s jurisdictional analysis in the Jarkesy case, which concluded that Congress had implicitly precluded concurrent district court jurisdiction over constitutional claims by establishing a statutory scheme providing for an administrative proceeding plus the prospect of judicial review in the federal appeals courts, according to Bebo.

Bebo’s supplemental brief has been distributed ahead of the Court’s March 25 conference.

The cases are No. 15-901 (Pierce) and No. 15-997 (Bebo).

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