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News May 7, 2018 Issue

ALJ Case: Supreme Court Oral Arguments Shed Little Light on Anticipated Ruling

Raymond Lucia got his day before the Supreme Court, but other than the satisfaction of getting that far, it remains unclear just how the high court will rule on his petition challenging how SEC administrative law judges are appointed.

The justices on April 23 spent one hour listening and responding to oral arguments from attorneys representing both sides in Luciaís challenge of a lower court ruling. The lower court had rejected Luciaís argument that the SECís use of an ALJ in an administrative enforcement action against Lucia was unconstitutional. A decision is expected sometime around June, if the timing of past high court decisions is a guide.

The case in question, Lucia v. SEC, centers around the question of whether ALJs are currently appointed correctly under the U.S. Constitution. Lucia, an investment adviser and nationally syndicated radio personality who marketed a "buckets of money" investment strategy, petitioned the Supreme Court following a ruling against him by the U.S. Court of Appeals for the District of Columbia (the 2nd Circuit). His argument is that the SEC unconstitutionally hired its ALJs as civil service employees, because they must be appointed as officers by the President, a department head, or the courts, as required by the Constitutionís Appointments Clause.

The Justice Departmentís point of view Ė or at least it was until the Trump Administration reversed it this past November (even though it had won with that position at the appellate level) Ė was that ALJs are not officers, but simply agency employees. Its current position is in alignment with Luciaís. The Supreme Court appointed an amicus curiae attorney to represent the appellate courtís judgment.

Should Luciaís arguments prevail, the ripples of that decision may spread to other federal agencies, both in terms of cases already decided and those yet to come. The SEC itself has already hedged its bets to some†degree, with the Commission in November also ratifying the appointment of its five existing ALJs.

"Currently, the SEC is bringing few if any litigated†administrative proceedings against investment advisers due to the constitutional uncertainty surrounding its ALJs," said Cleary Gottlieb partner and former SEC chief litigation counsel Matthew Solomon. "Should the Supreme Court find a Constitutional impairment to those proceedings, the Commission would lose a powerful tool to litigate against securities industry professionals. This may raise issues for the SECís enforcement program and for the Asset Management Unit, in particular, because the SECís cases against investment advisers can be highly technical and, as a result, often challenging to litigate in federal court."

"The broader issue is not SEC enforcement (important enough, to be sure), but whether the Court is seeking to constrain and downsize the administrative state by†reducing the powers of all administrative agencies," said Columbia Law School professor John Coffee. "There have been footnotes in recent cases suggesting that some justices do have that goal in mind. I doubt that they constitute a majority but we will see in June."

Coffee also expressed the view that "the actual issue here (the Appointments Clause) will not have earth-shaking consequences, however this case comes out."

Some defense attorneys have long criticized the SECís use of ALJs and the way administrative proceedings are conducted. "The administrative hearing process is fundamentally unfair to defendants, particularly when compared with litigation in federal court: no jury trial option, limited discovery, expedited process initiated by the SEC only after a one-sided investigation that could have lasted years," said Paul Hastings partner Nicolas Morgan.

"Nevertheless," he continued, "the current challenge to the administrative hearing process, which began by including arguments about fundamental fairness and due process, has been limited to a fairly meaningless argument about how the ALJs are appointed. At best, if it decides to overturn the method of ALJ appointments, the Supreme Court may hint at other, broader infirmities in the administrative hearing process that could point the way for future challenges."

The arguments and the justices

Justices Stephen Breyer, Elena Kagan and Sonia Sotomayor appear to have asked the most questions during the oral arguments. While they approached the issue at times from different perspectives, they all seemed to have concerns about changing how ALJs are placed in their positions.

"The problem I have with this, the whole thing, is I have no idea of what the nature of jobs are throughout the civil service, I mean, in terms of importance," Breyer said. "There are probably people in the civil service who can order inspections of nuclear power plants. There are probably people at OSHA who can order that the company be open . . . at 2:00 in the afternoon so we can come in and see if thereís a dangerous situation. There are probably people in the EPA who can go out and say your, whatever it is, violates this or that."

"But I donít Ė I donít know that anyone in this case has methodically gone through civil service protections to tell me whether or not, if we decide one way or the other and on the theory, we are driving wedges of†dependence into what was to be since [former President] Chester Alan Arthur a merit-based civil service. . . . Thatís my concern, and I do not know what to do next."

Who signs the orders?

Sotomayor approached the issue in terms of the ALJs signing orders. "Why is merely issuing the order to show cause a sovereign enough power to designate someone a Ė a officer rather than an employee, when itís being done on behalf of, not in the name of, on behalf of the SEC?"

Later, she made the point that "our founding fathers designated some people employees and others not, serving somewhat similar functions or not, so that we canít really go by the founding fathersí practices†because they were rather mixed."

"Doesnít the SEC have full power to overturn anything the ALJ does?" she asked. "This is not where, by statute or regulation, the ALJís findings are given conclusive effect. Theyíre reviewed de novo. So why isnít that the line? Whether the ALJís word is final or not?"

A question of political independence

Kagan appeared to note the irony that having ALJs appointed as officers would tie them more closely to political figures, thereby removing some of their independence.

"There are different ways to interfere with decisional†independence," she said. "One is by docking somebodyís pay. One is by having a removal power that you hang over your head. And another is by being the person who gets to decide who gets the job or not."

"And so all of these things in some manner tie the adjudicator more closely to the political system," she said. "And the [Administrative Procedures Act] came up with this foundational compromise which had as a very significant part of it that the hearing examiners, the adjudicators, would have some detachment, would have some insulation from the political system. . . ."

"And you want to ratchet that down. And the question is, isnít that interfering with decisional independence?" Kagan asked.