The ability of the Securities and Exchange Commission (SEC) to prosecute enforcement actions selectively through its own administrative proceedings is under constitutional attack in cases pending in the Fifth and Ninth Federal Judicial Circuits. The Ninth Circuit case was brought by Raymond Lucia, the same former investment adviser who succeeded in a constitutional challenge to the method of appointment of the SEC’s Administrative Law Judges (ALJs) in 2018. In that case, Lucia v. SEC, the U.S. Supreme Court held that these ALJs were “Inferior Officers” for purposes of the Constitution’s Appointments Clause, meaning that they must be appointed by either the President or the SEC itself. Prior to the decision in that case, ALJs were hired pursuant to the regular civil service process applicable to federal employees. In response to the Supreme Court’s ruling, the SEC ratified the appointment of its existing ALJs.
Lucia’s new challenge, and a similar challenge brought by accountant Michelle Cochran, are pending in the Ninth and Fifth Circuits, respectively. In those cases, the plaintiffs continue to challenge the constitutionality of the SEC administrative enforcement process. Among other things, the plaintiffs argue that the procedures in place preventing the removal of the ALJs are unconstitutional and that the administrative proceedings deprive respondents of the Seventh Amendment’s guarantee of trial by jury.
Lucia is represented by the New Civil Liberties Alliance, a nonprofit organization that, according to its website, “views the administrative state as an especially serious threat to constitutional freedoms.” It assists litigants in challenging what it considers to be unconstitutional administrative processes.
Another issue raised by the plaintiffs is whether the SEC’s ability to “forum-shop” between two or more different venues (an ALJ or one or more available federal judicial districts) violates the constitution because the due process protections and jury trial guarantees available in judicial civil actions are unavailable in administrative proceedings. Both Lucia’s and Cochran’s challenges were dismissed by district courts and are now on appeal.
The cases have also drawn interest from public interest groups such as the libertarian Cato Institute and the Competitive Enterprise Institute, and conservative organization Americans for Prosperity Foundation. Those three groups filed a joint amicus (friend of the court) brief in support of Luci and Cochran.
A key threshold issue is whether these constitutional challenges can be heard by the federal courts while the administrative cases are pending, or rather must wait for review until after the administrative trial and review by the full Commission, after which litigants have a statutory right to appeal a decision by the Commission to the federal district courts. The plaintiffs and the public interest groups contend that the district courts must hear these constitutional challenges before the administrative trials, and that forcing a litigant to wait until an appeal that follows a long and expensive administrative process also deprives litigants of constitutional protections.
Also filing amicus briefs are a trio of past litigants with the SEC – hedge fund managers Phillip Goldstein and Nelson Obus and Dallas Mavericks owner Mark Cuban.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including compliance with federal and state laws and rules. Please visit our website for more information.