Over the past year or so, there have been numerous challenges to the constitutionality of the SEC’s “administrative courts.” While the Supreme Court recently bypassed two opportunities definitively to settle the issue, the cases it declined to hear did not directly present the constitutional issue. As further cases progress through the courts, the Supreme Court will likely ultimately be required to address the issue.
Cases challenging the constitutionality of the Commission’s administrative courts generally rely on the argument that the administrative law judges (“ALJ’s”) employed by the Commission are improperly appointed, in large part because they cannot be removed other than for cause. In the past month, the Supreme Court has declined to hear two cases raising this challenge. Each case, however, involved complex procedural issues that may have led the Court to conclude that neither was a good case to address an otherwise important constitutional issue.
In the first, Bebo v. Securities and Exchange Commission, Laurie Bebo was accused by the Commission of, among other things, falsifying the books and records of a public company and making false disclosures to the SEC. The matter was assigned by the Commission to an ALJ and, while that case was pending, Bebo filed a separate challenge to the procedure in federal district court. The District Court and Court of Appeals both declined to hear her challenge, concluding that Bebo could only raise her objections in federal court as part of a challenge to an adverse ruling by the ALJ and Commission. She sought review of these rulings in the Supreme Court, which declined to hear her case without comment.
In the second case, Pierce v. Securities and Exchange Commission, Gordon Brent Pierce, who had been accused by the SEC in two proceedings of selling unregistered stock, challenged the Commission’s ability to bring two separate cases on an interrelated set of facts. After losing both cases in front of the Commission, he challenged the Commission’s actions in the Court of Appeals. He did not, however, challenge the constitutionality of the ALJ system until after the Court of Appeals ruled against him. He filed a petition with the Supreme Court arguing that he had not waived his constitutional challenge, but the Court declined to hear his case, again without comment.
The Court’s decision not to hear these cases does not suggest that it will never address this issue. Rather, the Court likely declined to hear the cases because of the procedural issues involved in each matter. Moreover, there are a number of cases pending in the Courts of Appeal that present the issue squarely, and thus could well present the Supreme Court with a cleaner opportunity to address the constitutionality of the Commission’s administrative courts. For example, two appeals of SEC decisions concluding that the appointment of its ALJs is constitutional (In re Raymond J Lucia Companies and In re Timbervest LLC) are currently pending before the DC Circuit.
The Court of Appeal’s decision in the Bebo case is available here. In Pierce, the best descriptions of the constitutional issues are in the briefs filed by the parties at the Supreme Court. The government’s brief can be found here, and Pierce’s brief can be found here.