SEC Faces Do-overs in Hundreds of Enforcement Cases

SEC Faces Do-overs in Hundreds of Enforcement Cases

A Supreme Court ruling has prompted the Securities and Exchange Commission to revisit more than 100 cases pending before its in-house judges, a do-over of epic proportion.

In June, the court decided in Lucia v. Securities and Exchange Commission that the appointment of the SEC’s five administrative law judges (ALJs) was not kosher, constitutionally speaking. The ruling was handed down in the case of investment adviser and radio host Raymond Lucia of San Diego, who was challenging a 2013 ruling by an SEC ALJ that banned him from the financial industry and imposed a $300,000 fine (maybe not shocking, given that he marketed a program called “Buckets of Money”). But as we’ll see, the impact of the case goes far beyond Mr. Lucia.

The Supreme Court’s decision hinged on an obscure constitutional nuance: whether or not ALJs qualify as “Officers of the United States.” If so, they are subject to the Appointments Clause and can only be appointed by the President, “Courts of Law,” or “Heads of Departments.” It’s generally accepted that SEC commissions are “heads of departments,” but at the time of Lucia’s appeal, ALJs were appointed by lowly SEC staffers. Adding to the case’s oddities was the fact that the Department of Justice raised something of a white flag, essentially agreeing that the ALJs had not been constitutionally appointed.

The Supreme Court’s ruling granted a new hearing with a new ALJ for Lucia. But that’s little more than a sideshow now. Once the appeal went Lucia’s way, a much larger question reared its head: what about all the other cases before ALJs? The SEC tried to preemptively address that matter last fall. Two days after the Solicitor General filed his brief taking Lucia’s side on the main question, the SEC “ratified” the appointment of all ALJs. This ratification, it said, cured any constitutional problem. Nothing to see here.

Alas, nobody really fell for it. The law firms Hughes Hubbard & Reed and Boies Schiller Flexner took a dismissive view of the SEC’s move, arguing in a separate case that “a ratification can confirm that an apple is an apple, but it cannot transform an apple into an orange.” The Supreme Court didn’t speak directly to the issue, but even so the SEC gave up on its ratification maneuver. Recognizing that the Lucia decision had cast doubt on all judgments by ALJs who were not properly installed, the SEC ordered a stay of all administrative decisions shortly after the Supreme Court’s decision in June.

Now, the SEC has gone all the way. The commission has reaffirmed the appointment of its ALJs, and is granting new hearings on all cases pending before ALJs. All cases, in effect, start over before new judges. Additionally, the commission has instructed the ALJs to “not give weight to or otherwise presume the correctness of any prior opinions, orders, or rulings issued” in the cases. This is an even bigger deal than it would have been ten years ago, given that the number of enforcement actions at the SEC have increased greatly since Dodd-Frank financial reform legislation in 2010.

So yes, it’s do-over time at the SEC.

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