(CN) — Siding with a Texas accountant accused of violating accounting standards, the full Fifth Circuit ruled that the administrative law judge presiding over her enforcement proceeding was unconstitutionally protected from removal.
Michelle Cochran, a certified public accountant from Dallas, is entitled to bring a challenge to her case in federal court, the en banc appellate court ruled Monday, and avoid what her attorneys describe as “an endless series of unlawful agency hearings.”
“The Fifth Circuit majority resoundingly vindicated Michelle Cochran’s right to be tried before a constitutional tribunal,” said Peggy Little, senior litigation counsel at New Civil Liberties Alliance, who represented Cochran. “In doing so, the court faithfully applied controlling Supreme Court precedent...thereby correcting wayward decisions from five other circuit courts of appeals that had consigned Americans to be judged by SEC administrative law judges who enjoy unconstitutional tenure protections.”
Cochran’s lawsuit came after an administrative law judge appointed by the Securities and Exchange Commission ruled against her challenge to the enforcement action in 2017 and imposed a $22,500 penalty and a five-year ban on practicing before the SEC. Constitutional protections don’t apply to individuals appearing before an administrative law judge, according to her attorneys.
The following year, while Cochran appealed her case, the U.S. Supreme Court ruled that SEC administrative law judges were not properly appointed under the Constitution. The high court found that administrative law judges are “officers of the United States,” and must be appointed by the president rather than hired by the agency.
Facing the enforcement process a second time, Cochran claimed another constitutional problem with SEC administrative law judges: the president’s inability to remove them from office because of their multiple layers of protection. They can only be removed for cause and only by SEC commissioners and Merit Systems Protection Board members.
Monday’s Fifth Circuit ruling found that Section 78y of the Securities and Exchange Act of 1934 does not implicitly strip federal district courts of subject-matter jurisdiction to hear structural constitutional claims.
“Section 78y reflects the thinking of men like Woodrow Wilson who argued that universal suffrage would make the three branches of government ignorant, indolent, and incapable of regulating modern affairs,” wrote U.S. Circuit Judge Catharina Haynes, a George W. Bush appointee, for the majority. “Wilson’s solution? He wanted administrative agencies to operate in a separate, anti-constitutional, and antidemocratic space—free from pesky things like law and an increasingly diverse electorate.”
The en banc appellate court was split 9-7 on the issue.
In a dissenting opinion, U.S. Circuit Judge Gregg Costa said his colleagues in the majority created a new path that "contravenes a statutory scheme that 'allocate[s] initial review to an administrative body.'"
"Before today, every court of appeals to consider the question has answered that a person facing an SEC enforcement action may not mount a collateral attack against the agency proceeding in federal district court. Now, for the first time in the 80-plus year history of the SEC, an appellate court is allowing that district court intervention," the Barack Obama appointee wrote.
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