In Lucia v. Securities and Exchange Commission, the SEC brought an administrative action before one of its administrative law judges, or ALJ’s, against Raymond Lucia for allegedly using misleading slide presentations to deceive prospective investors using a retirement savings strategy called “Buckets of Money.” The ALJ that adjudicated the case issued an initial decision finding Mr. Lucia violated the law and imposed sanctions.
Mr. Lucia then began the lengthy appellate process, appealing to the SEC and arguing the administrative proceeding was invalid because the ALJ had not been constitutionally appointed. The argument goes something like this: The Appointments Clause of the U.S. Constitution requires that “inferior officers” be appointed by the President, department heads or courts of law. SEC administrative law judges, or ALJs, are not appointed by the SEC – they are hired by the SEC’s Office of Administrative Law Judges, with input from the Chief Administrative Law Judge, human resource functions and the Office of Personnel Management. If the ALJ is an inferior officer, the ALJ was not constitutionally appointed and the administrative proceeding is invalid.
The SEC rejected Mr. Lucia’s arguments, holding that ALJs are not officers of the United States but are instead mere employees – officials with lesser responsibilities who are not subject to the Appointments Clause. The Court of Appeals for the D.C. Circuit held the same on a subsequent appeal.
Along the way, things got weird. In a man-bites-dog twist of fate, the Solicitor General, arguing on behalf of the United States, abandoned its position and switched sides before the Supreme Court heard the case, effectively supporting much of Mr. Lucia’s position. In response to the defection by the Trump Administration, the SEC ratified the appointment of the current (not former) ALJs and directed the ALJs to review their actions in all open administrative proceedings to determine whether to ratify those actions. The ALJs were directed to reconsider the record, and allow parties to submit new evidence when ratifying their prior actions.
The Supreme Court held the ALJs were not validly appointed. Much of the opinion rests on Freytag v. Commissioner, a case that found special trial judges, or STJs, of the Tax Court were not validly appointed. Among other things, the Court’s opinion noted the SEC’s ALJs, like the Tax Court’s STJs, hold a continuing office established by law. The SEC’s ALJs exercise the same “significant discretion” when carrying out the same “important functions” as STJs do. The ALJs and STJs both take testimony, conduct trials, rule on the admissibility of evidence and have the power to enforce discovery orders. To protect Mr. Lucia’s constitutional rights, the Supreme Court held that a different ALJ must hear Mr. Lucia’s case on remand.
So the question at hand is what happens to all of the prior cases and cases in process adjudicated by the ALJs? John Jenkins at TheCorporateCounsel.net (with appropriate disclaimers) notes the following passage in the Courts opinion: “This Court has held that “One who makes a timely challenge to the constitutional validity of the appointment of an officer who adjudicates his case” is entitled to relief. Ryder v. United States. Lucia made just such a timely challenge: He contested the validity of Judge Elliot’s appointment before the Commission, and continued pressing that claim in the Court of Appeals and this Court.” Does that infer those who did not make a timely challenge are out of luck in overturning an ALJs findings?
Also disclaiming an inability to predict what will happen, I took a high level, non-exhaustive look at the case law. Ryder involved an enlisted member of the Coast Guard, who was convicted by a court-martial of drug offenses, and the Coast Guard Court of Military Review affirmed. After rehearing and on appeal the Court of Military Appeals agreed with petitioner that the appointment of civilian judges to the Coast Guard Court of Military Review violated the Appointments Clause. The case was then appealed to the Supreme Court.
In Ryder the Supreme Court discussed the de facto officer doctrine, which confers validity upon acts performed under the color of official title even though it is later discovered that the legality of the actor’s appointment or election to office is deficient. The Supreme Court found the de facto officer doctrine inapplicable on the facts presented. After examining the difference in function and authority between the Coast Guard Court of Military Review, and the Court of Military Appeals, the Supreme Court said “we therefore hold that the Court of Military Appeals erred in according de facto validity to the actions of the civilian judges of the Coast Guard Court of Military Review. Petitioner is entitled to a hearing before a properly appointed panel of that court.” It is not necessarily clear that a timely challenge is a condition precedent to finding the de facto officer doctrine is inapplicable. The passage referred to in Lucia may have been a convenient way to skirt the issue because it fit the facts in that case.
Nguyen v. United States is another Supreme Court cases decided after Ryder. In that case, petitioners were tried, convicted, and sentenced on federal narcotics charges in the District Court of Guam, a territorial court with subject matter jurisdiction over both federal-law and local-law causes. The Ninth Circuit panel convened to hear their appeals included two judges from that court, both of whom were life-tenured Article III judges, and the Chief Judge of the District Court for the Northern Mariana Islands, an Article IV territorial-court judge appointed by the President and confirmed by the Senate for a 10-year term. Neither petitioner objected to the panel’s composition before the cases were submitted for decision, and neither sought rehearing to challenge the panel’s authority to decide their appeals after it affirmed their convictions. However, each filed a certiorari petition claiming that the judgment is invalid because a non-Article III judge participated on the panel.
From the emanations and penumbra of Nguyen we learn actions are de facto only with respect to a technical violation, significant defects mean the action of the defectively appointed officer are invalid and that inaction to raise an argument on the part of a defendant cannot create authority in an invalidly appointed officer. In limiting its review to a statute conferring jurisdiction and not constitutional questions, the Supreme Court noted “we have found a judge’s actions to be valid de facto when there is a “merely technical” defect of statutory authority.” In discussing the impermissible panel designation, the Supreme Court noted it was akin to “the difference between an action which could have been taken, if properly pursued, and one which could never have been taken at all.” The Supreme Court also noted that ignoring the violation of the designation would incorrectly suggest that some action (or inaction) on petitioners’ part could create authority on the part of the panel.
What then is the effect of the subsequent SEC ratification of ALJ appointments? Probably not much. First, the ratification only related to the current ALJs and unfinished business before the ALJs. This is a small subset of the decisions rendered by the unconstitutionally appointed ALJs. But the ratification is suspect in and of itself. In CFPB v Gordon et al, the Ninth Circuit found that Richard Cordray, Director of the CFPB, properly ratified his prior bureau actions upon being properly appointed and therefore the court did not examine the de facto officer doctrine. Gordon is likely inapplicable because in Lucia the Supreme Court directed a different ALJ to proceed over any subsequent adjudication. The SEC ratified the apointmens of its ALJs and directed them to reexamine their own proceedings which does not fit in the confines of the remedy accorded in Lucia.
It’s important to keep the issue in context. The SEC loves to tell us that the lion’s share of the work done by the (unconstitutionally appointed) ALJs does not relate to contested adjudications such as Mr. Lucia and his “Buckets of Money” strategy. Rather the administrative court’s business largely relates to approval of agreed settlements, delisting issuers that do not file their Exchange Act reports and the like. As such those contesting prior ALJ decisions will likely not result in a wave of securities law recidivists having their records erased and going free. Dealing with the issue may well be burdensome for the SEC but the storm clouds were brewing for years and it did nothing.
Those choosing to challenge prior ALJ adjudications under Lucia that did not previously raise the issue have an uphill battle. However, case law reviewed above offers a few glimmers of hope.