Wednesday, April 12, 2017

Lucia brief hits back at SEC over ALJ regime

By Amanda Maine, J.D.

A reply brief for Raymond J. Lucia Companies and its principal Raymond J. Lucia (petitioners) filed in the D.C. Circuit dissected the SEC’s brief supporting a panel decision by the court, which had sided with the SEC’s argument that its administrative law judges are not inferior officers under the Constitution. The brief again took issue with the SEC’s argument that its ALJs are not inferior officers because they do not have authority to issue final decisions and reiterated contentions made in its letter requesting a rehearing en banc that the D.C. Circuit should follow the Tenth Circuit’s decision in Bandimere holding that SEC ALJs are unconstitutionally appointed inferior officers (Raymond J. Lucia Companies v. SEC, April 10, 2017).

D.C. Circuit panel decision. An SEC ALJ’s initial decision found that the petitioners’ misleading advertising had violated the Investment Advisers Act and imposed an associational bar and monetary penalties. The petitioners appealed to the D.C. Circuit, arguing that under the Supreme Court’s 1991 Freytag decision, SEC ALJs possess similar authority to the Tax Court’s special trial judges, which were deemed inferior officers under Freytag. As the SEC ALJ who issued the initial decision was not appointed in a matter consistent with the Constitution, the ALJ’s order should be vacated, the petitioners argued.

The panel sided with the SEC, finding that the SEC’s ALJs more closely resembled those of the FDIC, which the D.C. Circuit held in its 2000 Landry decision are not inferior officers, than the special trial judges in Freytag. The court granted the petitioners’ request for a rehearing en banc, and the SEC filed its brief defending the panel’s decision in late March 2017.

Supreme Court precedent. In their reply brief, petitioners cited the Supreme Court decisions in Freytag and Buckley v. Valeo (1976) in support of their position that ALJs are officers, and not mere employees. According to the brief, the SEC has argued that an “officer” must exercise independent authority in his own right; however, this additional requirement is not found in Buckley and was essentially rejected in Freytag.

The brief also takes issue with the SEC’s contention that ALJs do not wield “sufficient authority” because they cannot impose fines or imprisonment for contempt. According to the petitioners, the judicial power allegedly exercised by the Freytag special trial judges was irrelevant to their status as officers, and that, in any event, SEC ALJs do have the authority sanction parties through contemptuous conduct by summarily suspending them from practicing law.

In an argument which has been at the heart of many challenges to the SEC’s in-house regime, the brief disagreed that authority to enter final decisions is critical to the holding in Freytag. The principal holding of Freytag, the brief explained, is that the special trial judges exercised significant authority in the course of carrying out their day-to-day functions administering trials, and that the decision placed no exceptional stress on their final decision-making power.

DOJ counsel opinions. The brief also cited a number of opinions from the Department of Justice’s Office of Legal Counsel in support of its position that ALJs are officers. In particular, a 2007 opinion, which concluded that “any position having the two essential characteristics of a federal office is subject to the Appointments Clause—the position must be ‘continuing’ and ‘invested by legal authority with a portion of the sovereign powers of the federal government,’” easily describes SEC ALJs, according to the brief.

Statutory text and history. Statutory text and history also supports the position that ALJs are officers, the brief advised, citing an amendment to the Administrative Procedure Act defining an officer as “an individual … required by law to be appointed in the civil service by … the head of an Executive agency.” The petitioners described the SEC’s brief arguing legislative intent as “patching together snippets of the legislative history from the APA” while failing to address the history of the actual securities statutes, which, according to the petitioners’ brief, “clearly demonstrates that Congress intended that SEC hearing officers be Constitutional officers.”

Characterizing the SEC’s argument as based on a “manifestly erroneous premise” that civil service personnel cannot be officers, the brief cited numerous individuals with civil service protections who have been found to be constitutional officers.

Overrule Landry. Finally, the petitioners called for the court to overrule its decision in Landry, whose finality requirement is the SEC’s main argument in support of its position that ALJs are not inferior officers. According to the brief, the Supreme Court’s Freytag decision expressly rejected that argument, and the SEC has not addressed this point.

In addition, the brief points out that the decisions of FDIC ALJs at issue in Landry are reviewed by the FDIC de novo, whereas the Commission accepts its ALJ credibility findings unless there is overwhelming evidence to the contrary. The brief also chastised the SEC for ignoring the Tenth Circuit’s decision in Bandimere, which supports the petitioners’ contention that SEC ALJs are inferior officers under the Freytag decision.

Oral argument on the petition for review is scheduled for May 24, 2017.

The case is No. 15-1345.

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