SEC Loses Case Over In-House Judges (Audio)

SEC's use of in house judges was constitutional. A conflict between the circuits is often a direct road to the Supreme Court, but House Republicans may reintroduce legislation to allow SEC defendants to choose federal judges or juries instead of in house judges. My guests are Peter Henning, professor at Wayne State University Law School and a former senior attorney at the SEC, and Gregory Moore Ville, founding partner at More villow LLLP, and the attorney who won the landmark

insider trading case U S v. Newman. Peter explained the reasoning that had these appellate courts to come to different conclusions, completely different conclusions. Well, the issue here is whether the SEC's administrative law judges are what are called inferior officers. The Constitution requires that an inferior officer be appointed either by the President or by someone who Congress designates who can appoint that person, and so you have to go

through a particular appointment process. If you're just an employee like I was back long ago, then you're just hired through the regular civil service process. The split here is whether these judges are inferior officers do they qualify for that position? And there's some history in the Supreme Court about that, but it's really a pretty simple straightforward issue. Are they or aren't they? Of course playing that out

will be the really difficult part. Greg The SEC has been using administrative judges since shortly after it was created. In why the controversy now, Well, the controversy stems from the fact that most defendants don't believe it is an inherently fair process. The SEC wins somewhere in the neighborhood of of their cases that are brought in front of an SEC a l J, whereas when they bring cases in federal court there down and around the SEV mark.

So the difference between going to federal court and going to have your case heard before in a l J is a huge one in terms of that of whether you can or can't win. And indeed there are some a ljs who have never decided for anyone but the SEC and two defendants look at it and they think this is an unfair, inherently unfair process. That's how it started this this kind of a challenge. There was a first to due process challenge, and then it moved on

it morphed into this constitutional challenge. Peter, when you look at the constitutional challenge, how did each of the courts look at it in order to come to the opposite conclusion? Well, the District of Columbia Circuit, which is really the pre eminent court for administrative law matters. Uh, that court ruled in August that the sec A l j's are not these inferior officers. In other words, they don't have to go through a different appointment process than an ordinary employee.

They reached that decision by really focusing on do the administrative law judges have some kind of fun old decision making power and they found that they didn't. That the Commission can review any of their decisions. And it's really

the five SEC commissioners who decide. The Tent Circuit out in Denver that came to the opposite conclusion, said, no, if you look at the importance of these judges, all of the decisions they make, and that this is really a trial like proceeding, that these are really judges that have great a great deal of authority enough to call them this inferior officer category. Inferior not meaning that they are anything less than important, but that they don't have

to go through the Senate. But that here the Tent Circuit said no, no, no, they are inferior officers. They have enough authority. So it really comes down to I don't want to say it's a coin toss, but you've got to pick one or the other. And what we have now, of course, is a classic split between the federal circuits greg Many federal agencies rely on similar in house courts, So could what happens with the sec judges

have implications for other agencies. It could, But the Supreme Court case, which is the seminal case on this issue, fried Tag, makes it clear that this is a case by case issue. So the dissenting judge in the Tenth Circuit um in in his dissent essentially says this is like opening Pandora's box. It could have catastrophic effects for all a ljs in different places, and the majority opinion and specifically the concurring opinion says that's overblown and it's

not in front of us. We're not concerned with what some other litigant might try to litigate later in the future. We're concerned with whether or not the SEC A ljs are constitutionally appointed, and they decided, based on the fried Tag analysis of the Supreme Court some twenty five years ago, that they were not. So it could have implications for other agencies, but those implications were there regardless of what

the tent circuits decided. There is this case fried Tag, which tells the courts how they have to decide whether an a l J is an inferior officer or not. So the risk is there regardless of what the tent circuit decided. We're talking about the tense Circuit Court of Appeals in Denver ruling that the use of in house judges by the SEC violates the Constitution's appointments clause. And that is contrary to a ruling in August by the

Court of appeals for the d C Circuit. I've been talking with Gregory more Villo, founding partner of more villow LLLP, and Peter Henning, professor at Wayne State University Law School. Peter, I'd like you to go into a little more detail about what the SEC may do here, because you said that the UH the d C circuit case is already on on the road to having an on bank hearing or a request for it. Will the SEC have to make the same request in order to get the Denver

case on track. I don't think they have to make that request in the tense circuit, although I expect they will if they don't hear anything from the d C circuit. And so really part of it for now is just a waiting game to see UM and then try to get one of those cases to the Supreme Court. That the real challenge for the SEC is that they have

an easy fix here. They could go back and just reappoint the five administrative law judges and say, fine, we're picking them rather than having them go through the employment process. But then that might be seen as a concession that they were not properly appointed, and so SEC has a bit of a conundrum here as to you know, do you leave well enough alone hope Supreme Court rules in your favor, or do you try to solve it but then throw into doubt any other cases, in fact, cases

that are now closed. That's really something that's going to also be on the SEC's plate. Now. Looking ahead, Greg, we have present elect Donald Trump coming into office, and we have Congressman Jeb Hencerling being among those who have already announced plans to rip up Dodd Frank, And of course the SEC started pumping up these hearings with with Dodd Frank in. Is that likely to have an effect on this? I don't know. I'm not sure that anybody is going to rush to judgment on this right away.

There are many many issues that I think are more pressed for the United States, for the President, for the Congress as to whether or not the h A l J's have been constitutionally appointed. But I do believe that at some point within the next four years we will we will be in a position where Congress is debating whether Don Frank has continued viability, particularly as it applies to situations like this. So I expect some changes because

I expect this to go to the Supreme Court. But I would expect that to happen before I would expect Don Frank to be repealed or or Congress to take on this a LJ Inferior Office officer issue, Peter. If it does go to the Supreme Court, is this a question of liberal versus conservative or is it a different kind of question? Well, that's a very good question, Um, because it doesn't divide up liberal conservative it is. This

is really a a fairly technical issue. But one thing the court is going to pay attention to is, you know, as Greg said, the freight tag case says, let's take this on a case by case basis, how these judges operate. But of course, if everyone reads into opinions, how does this affect other areas? And the SEC has five judges but Social Security Administration has fifteen hundred judges. What is the court going to do when it figures this out.

I don't think it's going to divide up so much liberal conservative as how much authority do we want to give to these types of judges and these administrative agencies? And Greg finally about thirty seconds, on a scale of one to ten, how big? How much damage has this caused? The SEC? I don't think this has caused very much damage to the SEC itself because there are at least four or five or other challenges to this specific issue

out there floating through circuit courts. I have one myself that's going to the Fourth Circuit, So there are multiple defendants who are challenging these cases. Eventually, I believe this was going to end up in the Supreme Court regardless of what the ten Circuit did. Thank you both for being on Bloomberg Law. That's Gregory Moore Villow, founding partner of More Willow LLLP and Peter Henning, professor at Wayne State University Law School. Thanks you both. Thanks to you both.

Coming up new legal arguments may allow some borrowers to discharge their student loans in bankruptcy. Although it's a very narrow opening, it's a new thing that's coming up in light of the trillion of dollars in student loans that are out there. We're going to be discussing that coming up on Bloomberg Law. I'm June Grossell. You're listening to Bloomberg Law. This is Bloomberg