For the past several years, the Securities and Exchange Commission (SEC) has brought the vast majority of its enforcement proceedings before its own administrative law judges (“ALJs”). The SEC’s success rate in cases before ALJs has been a startling 90% over the past 4.5 years, compared with 69% in federal court over the same period.
Facing these odds, parties threatened with or subject to SEC administrative proceedings recently have argued, inter alia, that the SEC’s ALJ appointment process violates the Constitution’s Appointments Clause, which requires that “inferior officers” of the United States be appointed by the President, a Court of Law, or the Head of a Department. This argument was recently affirmed in principle by a federal judge in Georgia. The court granted a preliminary injunction that stayed an SEC administrative proceeding because the challenge to the ALJ’s appointment established a “likelihood of success on the merits.” Hill v. SEC, No. 15-cv-1801-LMM, 2015 U.S. Dist. LEXIS 74822, at *52 (N.D. Ga. June 8, 2015).
A key question raised by Hill’s holding is: If other courts adopt Hill’s reasoning, what is the potential scope of the disruption of the SEC’s expanded use of its administrative apparatus? This is a complex question, on which the authors have written at length. See Hardy, Kendall, and Rein, The Appointment of SEC Administrative Law Judges: Constitutional Questions and Consequences for Enforcement Actions, BNA Securities Regulation and Law Report (June 19, 2015). Further, this issue potentially applies to other agencies’ administrative proceedings.
The answer can be divided into three parts:
- Parties whose appeals have been denied or whose time to appeal has expired likely will be unaffected. The Supreme Court has made clear that finality is of such importance that even when the adjudicator lacked the power to decide the case, once a judgment has become final, the defect generally cannot be raised collaterally. Travelers Indem. Co. v. Bailey, 557 U.S. 137, 154 (2009).
- Parties whose adjudications are not yet final may be able to void their adjudications. The Supreme Court consistently has held that a judgment entered by an improperly appointed adjudicator is void and “should certainly be set aside or quashed by any court having authority to review it by appeal, error or certiorari.” American Constr. Co. v. Jacksonville, T. & K. W. R. Co., 148 U.S. 372, 387 (1893).
- As to parties against whom the SEC may in the future bring administrative proceedings, the SEC theoretically has available the easy fix of simply re-appointing its ALJs under a constitutionally-adequate process and proceeding as normal. But this option may meet real-world obstacles: The SEC may, for example, resist what could be perceived as a concession that past practices were improper; the Commissioners – who do not always see eye to eye – may have difficulty working together; and regulations governing the appointments process could slow matters down by, for example, requiring appointees to undergo the current ALJ exam.
Until the SEC resolves this problem, bringing enforcement actions in federal court may be the only way to ensure that it uses its resources effectively, rather than pursuing judgments that ultimately may be voided.
Peter D. Hardy, Carolyn H. Kendall and Abraham J. Rein practice in the Internal Investigations & White Collar Defense Practice Group of the law firm of Post & Schell P.C., in Philadelphia, PA. Hardy, a principal with the firm, is a former federal prosecutor. Hardy, Kendall and Rein served as co-counsel in the first federal court action ever filed that sought to prevent an administrative enforcement proceeding by the Securities and Exchange Commission based on an alleged violation of Article II of the Constitution.