I find it fascinating when two people look at the same thing and come to completely different conclusions about it. OK … maybe fascinating is too strong a word, but it is interesting that two people can see the exact same thing and disagree on what it means. One might look at an impressionist painting and say “it’s a masterpiece” while another says “it’s garbage.” One might read a book and believe it inspired them and another might say it inspired them to vomit. And on it goes. Mostly, I think these things boil down to personal preference, emotional connection, and other subjective ways of evaluating things.
But what about something that should be devoid of subjective viewpoints and emotional connections? For example, what about caselaw? Surely, judges, particularly circuit court judges, try to view things dispassionately and objectively. And yet, we still have circuit splits. Some of this can be explained if there is no definitive interpretation of a law floating around. But what about when the Supreme Court has spoken on an issue? In that case, no circuit split should exist. And yet, it happens.
One such issue is important to those who find themselves in front of one of the SEC’s administrative law judges (“ALJ”). Now, before we go on, I must disclose that I find the whole ALJ process at the SEC to be one-sided and unfair. The number of wins the SEC has on its home-court makes them harder to beat than the New England Patriots. The fact that the Commission, the same entity, that made the decision to charge a defendant, is the same body that hears the initial appeal feels patently unfair. And while it would be enjoyable for me to launch into a one-sided barrage at the SEC’s ALJ proceedings, it is not the point of this post. The circuit split involving them is.
Recently, certain individuals who have found themselves on the wrong end of the SEC administrative law proceedings have started to challenge the constitutionality of the process. The most common issue is whether the Commission must appoint the ALJs per the Appointments Clause of the US Constitution or whether the SEC human resources department may hire these judges. It is a seemingly easy issue to resolve, and yet it has proven to be quite the battle ground around the country.
The argument that ALJs must be constitutionally appointed under the Appointments Clause is that they are imbued with significant powers. They have authority to hear cases, issue deposition orders, swear in witnesses, rule on motions, make evidentiary rulings, enter default judgments, questions witnesses, punish contemplable behavior, and much more. The argument against is that an ALJ does not have final decision making authority. ALJs recommend actions to the Commission. If the Commission does nothing the ALJ’s recommendation becomes the final ruling of the Commission. The Commission has the authority to amend, in part or in total, the ALJ’s recommendation and thus the ALJ’s role is more ministerial in nature.
The seminal case courts look to on this question is Freytag v. Commissioner of Internal Revenue, 501 U.S. 868 (1991). There, the Supreme Court held that IRS special tax judges (“STJ”) were inferior officers under US law. The High Court decided that STJs exercised significant powers and therefore their duties and responsibilities were inconsistent with lesser functionaries, or employees. The Court held that “[STJs] take testimony, conduct trials, rule on the admissibility of evidence, and have the power to enforce compliance with discovery orders. In the course of carrying out these important functions, the [STJs] exercise significant discretion.” Id. at 881-82. Additionally, Freytag noted that while not all of the STJs in question had final decision making authority, some groups of STJs did; this too was relevant to the Supreme Court’s analysis.
Thus far, two circuit courts have addressed the issue as it relates to SEC ALJs. And, you guessed it, they came out on opposite ends of the spectrum. The D.C. Circuit held that SEC ALJs are not inferior officers and do need not be constitutionally appointed. The Tenth Circuit held that SEC ALJs are inferior officers and must be appointed under the Appointments Clause. Both circuit courts rely on the Supreme Court’s decision in Freytag for their disparate conclusions.
In Lucia v. SEC, the D.C. Circuit held that SEC ALJs are not inferior officers. Analyzing Freytag, the court stated, “This court understood that it ‘was critical to the Court’s decision’ in Freytag that the special trial judge had authority to issue final decisions in at least some cases, because it would have been ‘unnecessary’ for the Court to consider whether the tax judges had final decision-making power when the judge in Freytag’s case exercised no such power. Id. (citing Freytag, 501 U.S. at 882).” In essence, the D.C. Circuit hung its hat on the fact that ALJs do not have final decision making authority, because the Commission can review and overrule those recommendations. The D.C. Circuit was unpersuaded by the argument that if the Commission fails to act the ALJ’s recommendation becomes final. This, it held, does not mean the ALJs have final decision making authority. As noted by the D.C. Circuit, its decision began and ended with the final authority question.
In Bandimere v. SEC , the Tenth Circuit read Freytag quite differently. While it acknowledged that part of the Supreme Court’s analysis incorporated the final decision making authority of the judge at issue, there were other factors that Freytag considered. The Circuit Court noted that the SEC and the D.C. Circuit placed “exceptional stress” on the final decision making authority of the ALJs, whereas Freytag did not. Instead, when it applied Freytag to SEC ALJs, the Tenth Circuit focused on the “significance of the duties” that the Supreme Court had emphasized. The Bandimere Court, listed approximately 20 different areas of significant duties and discretion the SEC ALJs possess, including those mentioned above. The court held that the STJs and the ALJs closely resemble each other and found that, under Freytag, ALJs were inferior officers requiring constitutional appointment to their positions.
From where I stand, a fairer reading of Freytag looks beyond the final authority issue and encompasses a more complete understanding of the wide range of duties carried out by the ALJs and the discretion they possess in carrying out those functions. In short – the Tenth Circuit gets it right. With the Second, Fourth and Eleventh Circuits likely to take up this issue in the near future, opinions will abound. At some point, the Supreme Court will have to resolve once and for all which one of the circuits’ vastly different readings of a fairly straightforward opinion is the right one. I am betting the Supreme Court sides with the Tenth Circuit, and since I will have an appeal in the Fourth Circuit on this very issue soon, I am also hoping I am right!
That brings us back to where we started above – perspective driven by subjective evaluation. Do I place the Tenth Circuit decision in the “it’s a masterpiece” category because it is or because I want it to be? Reasonable minds might disagree. I am pretty sure that the SEC believes the DC Circuit, and not the Tenth, is right. So who knows? In the end, the Supreme Court will have the final say. That said it will only be final insofar as it agrees with me and the Tenth Circuit. If it doesn’t, I will have plenty more to say about it.
Gregory Morvillo is a partner in the New York office of Morvillo LLP. He specializes in insider trading and securities fraud cases.
Disclaimer
The views, opinions and positions expressed within all posts are those of the author alone and do not represent those of the Program on Corporate Compliance and Enforcement or of New York University School of Law. The accuracy, completeness and validity of any statements made within this article are not guaranteed. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them.