Tag Archives: inferior officers

Division of Enforcement Continues To Refuse To Comply with SEC Orders in Timbervest Case

Two days ago, we wrote about the Division of Enforcement’s refusal to comply with an SEC adjudicative order in In the Matter of Timbervest, LLC.  Instead of complying with a Commission Order to supply information about the circumstances of the hiring of ALJs Brenda Murray and Cameron Elliot, the Division provided information that it deemed sufficient to address the Appointments Clause issue raised by the respondents.  Then, amazingly, the partial response the Division deigned to supply, based on what it decided was relevant, was wrong, which was learned when ALJ Elliot corrected the errors on the record in a different proceeding.  See SEC Bumbles Efforts To Figure Out How Its Own Administrative Law Judges Were Appointed.

Well, paraphrasing a former President’s famous one-liner: “There they go again!”

Yesterday, the Division made another filing in the Timbervest administrative proceeding that refused to comply with a Commission Order.  Instead, the Division again told the Commission that it really shouldn’t have asked for the submission it ordered, and declined to respond.  If there were any further evidence needed of the inherent unfairness of the administrative adjudicatory process to respondents, and the inability of the Commission to address fundamental constitutional issues under its own roof, this is it.  The Division would not dare thumb its nose in the face of a district court judge in this manner, even if it were really upset that it was being ordered to make submissions it really preferred not to make.  But here, Mr. Ceresney has no reason for concern because the “chief judge” he is facing — Mary Jo White — is his former law partner, and the person who appointed him head of the Enforcement Division.  Conflict of interest?  Perhaps not, technically.  But how fair would you think this adjudicative forum is if you were in Timbervest’s shoes on the other side of the “v.” from Mr. Ceresney when the Division was allowed to make its own decisions about the extent it would comply with Commission orders?

Here is what happened.  In response to a motion from the respondents, on May 27, 2015, the Commission, sitting in its capacity as adjudicator of the Timbervest enforcement action:

ORDERED that the parties shall file simultaneous supplemental briefs, not to exceed ten double-spaced pages, by July 1, 2015. The briefs shall be limited to the following two issues: (1) whether, assuming solely for the sake of argument that the Commission’s ALJs are “inferior officers” within the meaning of Article II, Section 2, Clause 2 of the Constitution, their manner of appointment violates the Appointments Clause; and (2) the appropriate remedy if such a violation is found.

The Order “assum[ed] solely for the sake of argument” that the Commission’s ALJs are ‘inferior officers'” under Article II, Section 2, Clause 2, and mandated short submissions on two specific points: (1) under that assumption, have the appointments of SEC ALJs violated the Appointments Clause, and (2) “if such a violation is found,” what should be the appropriate remedy?

The parties’ responses were filed yesterday.  The respondents’ submission can be read here: Brief of Respondents In Response to the Commission’s May 27, 2015 Order.  The Division of Enforcement’s submission, personally signed by Enforcement Director Andrew Ceresney, can be read here: Division of Enforcement’s Response to the Commission’s May 27 Order

The respondents submitted what the SEC ordered.  They laid out their argument why the appointment of the ALJ who presided over most of their proceeding violated the Appointments Clause, assuming he was indeed an “inferior officer” under that clause.  They then argued that the violation makes the proceeding and findings of the ALJ invalid, requiring that the Initial Decision be vacated.  If a new proceeding is to be commenced (which they argue is not in the public interest), it must be, they say, before an ALJ properly appointed under the Appointments Clause.

The Division, on the other hand, chose (again) not to submit what the Commission ordered.  The Division’s brief acknowledges that, based on the known circumstances of the appointment of SEC ALJs, if one assumes “for the sake of argument” that the SEC’s ALJs are “inferior officers,” their appointments did not comply with the Appointments Clause:

In response to the Commission’s first question, “assuming solely for the sake of argument that Commission ALJs” who presided over Respondents’ administrative hearing are “‘inferior officers’ within the meaning of Article II, Section 2, Clause 2 of the Constitution,” the Division believes that their manner of appointment would be inconsistent with the terms of the Appointments Clause.

SEC Brief at 1.

But on the second issue — the appropriate remedy in the event such a violation is found — the Division gave no response.  Instead, it argued (again) that SEC ALJs are mere employees, and that therefore no remedy is needed.  In short, the Division refused to comply with the SEC’s Order:

In response to the Commission’s second question, the Division strongly urges the Commission to refrain from fashioning a fix for a non-existent constitutional violation. Rather, and for the additional reasons explained below, the Commission should find that ALJ Elliot was hired in a manner consistent with Article II, Section 2, Clause 2 of the Constitution because he is an employee, and not a constitutional officer, and that there is therefore no Appointments Clause defect to remedy.

SEC Brief at 2.  Later in the submission, the Division says:

Because there is no constitutional violation under the Appointments Clause, there is no basis for a “remedy.”  If, however, the Commission holds that SEC ALJs are inferior officers and that their hiring violated the Appointments Clause because they were not hired with the approval of the Commissioners, the Division requests that it be permitted to submit additional briefing about components of any appropriate remedy, such as ratifying SEC ALJs’ prior hiring.  To be clear, the Division does not seek any remedy, including as an alternative measure, at this juncture.  Because of the potential ramifications of such a remedy [fn] and because Congress has set out a scheme, implemented by OPM, for the hiring of these employees, the Division believes that any Commission efforts to superimpose on this scheme a remedy to rectify a problem that does not exist is inadvisable at this time.

[fn]: Such a remedy is not only unnecessary but also fails to resolve the ongoing litigation before the Commission and in district courts around the country given the other constitutional claims raised in this case and others that would not be addressed by such action.  Further, it seems likely to prompt new issues in litigation, whether in this case or others.

SEC Brief at 5-6.

Not to belabor the point, but if the Division believed the submission it was ordered to make was inadvisable at this time, for tactical litigation reasons involving other cases or for whatever other cause, it should have asked for relief from the Order and allows the Commission to decide whether the Order should be revised.  Simply refusing to comply and asking for the right to address the issue later if necessary is contemptuous of the adjudicator (here, the Commission), and of the proceeding itself, which does not permit parties to dictate when they will and will not comply with the administrative court’s orders.

Straight Arrow

July 2, 2015

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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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