no mention of PTAB here, but is this another bite at that apple.
Supreme Court Weighs Hiring Process for Special Government Judges
Case involving SEC’s in-house judges has implications for various federal agencies
The Supreme Court case involves former investment adviser Raymond Lucia, who was alleged to have committed fraud by hyping how much research and backtesting he applied to an investment strategy.
The Supreme Court case involves former investment adviser Raymond Lucia, who was alleged to have committed fraud by hyping how much research and backtesting he applied to an investment strategy. Photo: J. Scott Applewhite/Associated Press
By Dave Michaels and
Brent Kendall
April 23, 2018 5:30 a.m. ET
WASHINGTON—The Supreme Court on Monday will consider whether special judges who hear securities enforcement cases were picked in a way that violates the Constitution, a case with implications for an array of federal agencies.
The case focuses on the world of administrative law courts, where judges employed by agencies referee a range of disputes. Over 1,000 administrative law judges serve at the Social Security Administration, and more are employed by other bureaucracies that use them for cases involving labor, trade and consumer protection.
Securities and Exchange Commission judges wield formidable powers, including the ability to bar stockbrokers and money managers from the securities business. SEC judges also can order wrongdoers to disgorge ill-gotten gains and pay other types of fines. Their decisions are subject to review by the agency’s five commissioners.
The case being argued before the Supreme Court involves former investment adviser Raymond Lucia, who was alleged to have committed fraud by hyping how much research and backtesting he applied to an investment strategy. An SEC judge in 2013 sided with the agency’s enforcement division and barred Mr. Lucia from the securities industry. Commissioners later upheld the ban.
Mr. Lucia argued the judge was improperly installed, in violation of a clause in the Constitution that addresses the president’s power over executive-branch officials. The SEC argued the in-house judges are employees without final authority over sanctions and don’t need to be picked by commissioners, who are presidential appointees. Instead, the SEC’s judges were historically selected through a process managed by human-resources officials.
One federal appeals court, with 10 judges participating, deadlocked in Mr. Lucia’s appeal last year and a separate appeals court in a different case sided with the SEC’s challenger.
Mark Perry, a partner at Gibson, Dunn & Crutcher LLP who will argue Mr. Lucia’s case, said the fight remains important because “the enforcement division continues to bring a significant number of actions in the SEC’s administrative forum, and the constitutional constraints on that forum are important.”
The SEC’s in-house courts generated little controversy for decades, until the 2010 Dodd-Frank Act allowed the SEC to use them to seek fines against a broader group of defendants. The commission’s decision to ramp up its use of the administrative courts in 2014 sparked complaints about their fairness and independence. Since then, the SEC has pared back its use of them.
Just 18% of the SEC’s contested enforcement actions filed in 2017 were sent to SEC administrative courts, down from 38% in 2014, according to data compiled by Georgetown University law professor Urska Velikonja. The share of defendants charged in contested administrative actions fell to 9% in 2017, compared with 23% in 2014.
Bridget Fitzpatrick, a top SEC enforcement official, at a February legal conference said the regulator is still using the courts for certain types of contested cases where only an SEC administrative judge can mete out a unique penalty, such as barring accountants from auditing the books of public companies.
Where the same penalties are available through federal court, the SEC has chosen over the past year to file those actions in federal courts, she said.
The Justice Department under Trump administration leadership in November reversed its earlier support for the SEC’s system and urged the justices to hear Mr. Lucia’s case. In the government’s main legal brief, U.S. Solicitor General Noel Francisco argued government officials such as the SEC judges need to be directly accountable to the executive branch—meaning commissioners need to appoint them.
The Justice Department’s brief also urged the court to make it easier for agency leaders to remove in-house judges, citing the president’s authority over appointees. It isn’t clear whether the high court will take up that issue.
Because the government no longer is defending the SEC’s position, the Supreme Court appointed a lawyer to do so. That attorney, Anton Metlitsky, said there was nothing wrong with the way SEC judges were selected because their work didn’t bind the commissioners, who have the final word.
A win for Mr. Lucia could “call into question the constitutionality of the appointment process of untold number of federal actors who perform significant functions,” Mr. Metlitsky said.
If the justices rule for Mr. Lucia, it could invalidate the penalties against him and give a leg up to a handful of other defendants who similarly disputed the hiring process for SEC judges. It also could encourage challenges from defendants who grappled with administrative law judges at other federal agencies.
A decision is expected by the end of June.
Write to Dave Michaels at dave.michaels@wsj.com and Brent Kendall at brent.kendall@wsj.com
