SEC Strengthens Appointments Clause Challenge to ALJs by Admitting It Was Not Responsible for at Least One ALJ Appointment

Court filings indicate that the SEC made a significant admission relevant to the constitutionality of its administrative law court during a hearing in the case brought by Lynn Tilton to enjoin the administrative proceeding brought against her.  A letter sent to Judge Richard Berman, who is presiding over the similar action brought by Barbara Duka, Duka v. SEC, No. 15-cv-357 (SDNY), lays out what happened with a quote from a hearing transcript in Tilton v. SEC, No. 5-cv-02472 (SDNY). The letter was sent by the Justice Department, and it lays out the parties’ positions on the significance of what occurred in the Tilton case.  (You can read a copy here: Letter to Judge Berman in Duka v. SEC.

The letter quotes relevant portions of the hearing in the Tilton case before Judge Ronnie Abram, in which counsel for the SEC admitted that the administrative law judge in the administrative action brought against Ms. Tilton, Carol Foelak, was not appointed by the SEC Commissioners, and that this strengthens the argument that, as to at least cases before that judge, SEC proceedings may violate the Appointments Clause in Article II on the Constitution.  That clause states:

[The President] shall nominate, and, by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.

This would appear to mandate that “inferior Officers” of the United States may be appointed, with Congress’s approval, only by the President, the Courts of Law, or “the Heads of Departments.”  The only way that could be satisfied as to the SEC ALJs (if they are “inferior Officers”) is if the SEC Commissioners are a “Head of Department” and they make the appointments of their ALJs.

Here is the quoted portion of that hearing transcript:

THE COURT: Can I ask you the factual question that I asked of Mr. Gunther? Who exactly appoints SEC ALJs? Can you tell me more about the appointment process?

MS. LIN: Your Honor, those facts are not in the record here, but we acknowledge that the commissioners were not the ones who appointed, in this case, ALJ [Foelak], who is the ALJ presiding –

THE COURT: There is no factual dispute, okay.

THE COURT: Let me just back up for a minute and ask you a question. If I find that the ALJs are inferior officers, do you necessarily lose?

MS. LIN: We acknowledge that, your Honor, if this Court were to find ALJ [Foelak] to be an inferior officer, that that would make it more likely that the plaintiffs can succeed on the merits for the Article II challenge, at least with respect to the appointments clause challenge.

In the letter to Judge Berman, Ms. Duka argues “this the first time the SEC has ever acknowledged that SEC Commissioners do not appoint SEC ALJs in some or all administrative proceedings” (emphasis in original), and seeks to amend her complaint to add an Appointments Clause violation as grounds for the injunctive relief she seeks.  She also argues that in his previous decision denying a preliminary injunction, Judge Berman wrote “[t]he Supreme Court’s decision in Freytag v. Commissioner, 501 U.S. 868 (1991) … would appear to support the conclusion that SEC ALJs are also inferior officers,” and the “[b]ased on SEC’s admissions,” a ruling to that effect “would mean that Plaintiff is likely to succeed on the merits of her claim.”  See In Duka v. SEC, SDNY Judge Berman Finds SEC Administrative Law Enforcement Proceedings Constitutional in a Less than Compelling Opinion.

 The SEC consented to the amendment of the complaint, but argued that its ALJs are “not Constitutional officers, and therefore the Appointments Clause is not applicable,” and that the amendment should not be grounds for new briefing of the motion for preliminary injunction.

As noted in an earlier blog post, the SEC itself asked for briefing on the Appointments Clause issue in its review of the Iniital Decision in In the Matter of Timbervest, LLC.  See SEC Broadens Constitutional Inquiry into Its Own Administrative Judges in Timbervest Case.

Straight Arrow

June 1, 2015

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