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SEC Illegally Appoints Administrative Law Judges

The Securities and Exchange Commission illegally appoints administrative law judges in violation of the Appointments Clause to render decisions and impose penalties, the 10th Circuit ruled Tuesday.

DENVER (CN) - The Securities and Exchange Commission illegally appoints administrative law judges in violation of the Constitution’s Appointments Clause to render decisions and impose penalties, the 10th Circuit ruled Tuesday.

The ruling vacated an agency fraud determination against a Denver businessman on the basis that the SEC administrative law judge who heard the case was not "constitutionally appointed" and held his office in violation of the Appointments Clause, U.S. Circuit Judge Scott Matheson, Jr. wrote for a divided three-judge panel in a 37-page opinion.

In 2012, the SEC accused petitioner David F. Bandimere of committing two securities fraud violations and two securities registration violations, and an SEC administrative law judge presided over a "trial-like hearing," Matheson wrote.

The SEC administrative law judge concluded Bandimere broke the law; the judge then imposed civil penalties and ordered disgorgement of profits. A subsequent review by the SEC reached the same conclusion.

But Bandimere petitioned for review, claiming the SEC administrative law judge was not constitutionally appointed.

"The [SEC's] opinion must be vacated because it resulted from a process in which an improperly appointed inferior officer played an integral role," Bandimere argued in his petition.

The 10th Circuit granted review to Bandimere's case, setting aside the SEC's opinion and vacating its findings against Bandimere.

The SEC concedes the administrative law judge was not constitutionally appointed, but disagrees that this makes him “an inferior officer,” Matheson wrote.

Matheson said the Appointments Clause, which allows the President, the courts or the heads of federal departments to appoint other public officials, "promotes public accountability by identifying the public officials who appoint officers" and "prevents the diffusion of that power by restricting it to specific public officials."

Quoting Freytag v. Commissioner of Internal Revenue, an earlier Supreme Court ruling dealing with a similar issue, Matheson wrote, "'The framers understood ... that by limiting the appointment power, they could ensure that those who wielded it were accountable to political force and the will of the people.'"

The Supreme Court defines an officer as an appointee who exercises significant authority regarding the nation's laws, while an inferior officer suggests a relationship with a higher-ranking officer or officers who are directly beneath the president, Matheson said.

If an officer has a superior, he or she is an inferior officer, Matheson wrote, expressing the 10th  Circuit’s concern with the "distinction between inferior officers and employees."

Matheson said the Supreme Court has described inferior officers as those who administer and enforce public law and are granted "'significant authority,'" those who conduct civil litigation in court, and those who are said to hold an office that has been created by a regulation or statute.

According to Matheson, the office of the SEC administrative law judge was established by law, and the Securities and Exchange Act of 1934 allows the SEC to delegate any functions other than rule-making to administrative law judges.

The administrative law judges are appointed until they retire or die, can preside over “trial-like hearings,” and can only be removed for good cause, Matheson said.

"We therefore hold that the SEC [administrative law judges] are inferior officers who must be appointed in conformity with the Appointments Clause," Matheson wrote.

Matheson went on to criticize the current method of appointing judges. “The current [administrative law judge] hiring process whereby the [agency’s office of personnel management] screens applicants, proposes three finalists to the SEC, and then leaves it to someone at the agency to pick one, is a diffuse process that does not lend itself to the accountability that the Appointments Clause was written to secure,” he wrote.

The SEC disagreed, arguing that its judges are more “employees” than “inferior officers” because their final decisions are subject to SEC review.

Matheson rejected the SEC's argument, saying the administrative law judges exercise a great deal of discretion and perform important functions, making them inferior officers regardless of who has final decision-making powers.

U.S. Circuit Judge Monroe G. McKay disagreed, arguing in his 15-page dissent that the majority opinion would "throw out of balance the teeter-totter approach to determining which of all the federal officials are subject to the Appointments Clause."

McKay said the Supreme Court "opened the door to such an approach" in its Freytag ruling, which said chief tax judges could appoint trial judges to oversee certain proceedings.

"I would not throw it open any further, but in my view that is exactly what the majority has done," McKay wrote.

He said Freytag does not require the ruling reached by the majority and "the probable consequences are too troublesome to risk without a clear mandate form the Supreme Court."

U.S. Circuit Judge Mary Beck Briscoe joined in the majority opinion.

Bandimere is represented by attorney David Zisser of the Jones & Keller law firm in Denver.

Categories / Appeals, Courts, Securities

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