Seyfarth Synopsis: What, if any, steps the government will take to appeal the Tenth Circuit’s Bandimer’s decision remains to be seen. The government may elect to petition the entire Tenth Circuit to hear the case en banc. Or the government might ask the Solicitor General to petition the Supreme Court to grant certiorari to take up the issue and resolve this newly-formed circuit split once and for all.
A divided Tenth Circuit Court of Appeals has held that the U.S. Securities and Exchange Commission’s (SEC) in-house administrative law judges (ALJs) are not constitutionally appointed as required by the Constitution’s Appointment Clause, thereby increasing the likelihood that the U.S. Supreme Court will take up the issue to resolve a circuit split between two federal appellate courts. The ruling by the Denver-based federal appeals court, marked a setback for the SEC amid increased challenges by defendants who question the fairness of the agency’s administrative court system. Bandimere v. United States Securities and Exchange Commission, No. 15-9586 (10th Cir. December 27, 2016).
The holding in Bandimere also marked a significant departure from the D.C. Circuit, which in August 2016 upheld the constitutionality of the SEC’s use of in-house administrative judges. See Raymond J. Lucia Companies, Inc., et al. v. Securities and Exchange Commission, 832 F.3d 277, 281 (D.C. Cir. 2016).
In Bandimere, the Tenth Circuit considered whether the five ALJs working for the SEC were employees or inferior officers. The court concluded that, based on Freytag v. Commissioner of Internal Revenue, 501 U.S. 868 (1991), the SEC ALJ who presided over an administrative enforcement action against the petitioner David Bandimere was an inferior officer. Because the SEC ALJ was not constitutionally appointed, the Court held that the ALJ held his office in violation of the Appointments Clause. U.S. Const. art. II, § 2, cl. 2.
In his dissent, Circuit Judge Monroe McKay expressed his “fears of the probable consequences” that may “allow malefactors who have abused the financial system to escape responsibility.” Bandimere, p. 11. Judge McKay observed that the majority had “effectively rendered invalid thousands of administrative actions” through its potential impact on ALJs at agencies beyond the SEC.
In addition, the Wall Street Journal had previously studied the issue and demonstrated that over the last several years, the SEC has been sending more cases to its in-house ALJs, and in doing so, was “enjoying a higher success rate there than in federal courts.” A U.S. Chamber of Commerce report expressed similar concerns, saying “the [SEC] preference for litigation of significant cases before administrative law judges has not been confined to insider trading violations.” Examining U.S. Securities and Exchange Commission Enforcement: Recommendations on Current Processes and Practices (July 2015), p. 14.
What, if any, steps the government will take to appeal the Tenth Circuit’s Bandimer’s decision remains to be seen. The government may elect to petition the entire Tenth Circuit to hear the case en banc. Or the government might ask the Solicitor General to petition the Supreme Court to grant certiorari to take up the issue and resolve the newly-formed circuit split once and for all. In the meantime, many litigants who have received adverse rulings from the SEC’s ALJs are expected to dispute those rulings in federal court. How the federal courts will handle such challenges remains an open question, but the uncertainly of the current state of affairs certainly presents an avenue worth exploring for many defendants who disagree with their SEC ALJ outcomes.
Those with questions about any of these issues or topics are encouraged to reach out to the authors, your Seyfarth attorney, or any member of the Seyfarth Shaw’s White Collar, Internal Investigations, and False Claims Team, Securities Litigation Team, or Whistleblower Team.