Since this blog began in January 2014, several topics have garnered substantial ink. These include: (1) the SEC’s apparent growing preference for litigating contested cases on their home turf, administratively, rather than in federal court. ( June 19, 2014, July 10, 2014, May 26, 2015, May 22, 2015); and (2) the difficulties the government (both the SEC and DOJ) have encountered bringing insider trading cases and, in particular, the continuing saga of United States v. Newman, in which the DOJ’s petition for writ of certiorari is now pending before the United States Supreme Court. Both these issues continue to generate news, and they even converged recently. SEC’s Administrative Law Courts On the administrative court front, the SEC has been criticized repeatedly about the potential due process implications of bringing cases, including insider trading cases, in the SEC’s administrative court where there are significant limitations on discovery, very short time periods between initiation of proceedings, and an apparent bias in favor of the agency and against defendants. The agency’s administrative proceedings have also been criticized on the grounds that at least some administrative law judges (ALJs) may not have been appropriately appointed under the Appointments Clause of Article II of the U.S. Constitution. Several defendants have sued the SEC in federal court seeking injunctions of ongoing administrative proceedings. While defendants’ due process arguments thus far have not gotten much traction (see the Seventh Circuit’s decision in Bebo v. SEC), multiple district courts have concluded recently that the SEC’s appointment process for its ALJs may violate the Appointments Clause. At least two district courts, in the Southern District of New York (in Duka v. SEC) and in the Northern District of Georgia (in Hill v. SEC and in Gray Financial Group v. SEC), have issued preliminary injunctions halting ongoing SEC administrative proceedings on the grounds that SEC ALJs are not appointed by SEC Commissioners and therefore their appointments are likely unconstitutional violations of the Appointments Clause. Both these cases are currently on appeal. Meanwhile, the commissioners themselves last week in In re Timbervest affirmed an ALJ’s decision and, in doing so, expressly addressed some of the constitutional challenges to their proceedings, summarily rejecting them all. Specifically, the commission concluded that its ALJs are employees, not “inferior officers,” because they do not make “final decisions.” As a result, they are not covered by the Appointments Clause. They also concluded that the multiple layers of separation between the president and ALJs did not impair the Executive Branch’s ability to “take Care that the Laws be faithfully executed.” And the SEC concluded that its discretion to bring an action in its administrative forum, rather than federal court, did not violate defendants’ right to equal protection under the law. Finally, on Sept. 24, the commission announced two sets of proposed changes to its ALJ system. While neither of these proposed revisions addresses the constitutional issues, if adopted, they could potentially level the playing field somewhat. In one proposal, the SEC recommended increasing the length of time between the SEC’s initial filing in an enforcement action and the hearing (at least in “appropriate” cases) and allowing for depositions. In the other proposal, the SEC proposed that parties to an SEC action make their filings electronically. Each of these developments demonstrates that the legality of the SEC’s administrative adjudications remains very much in question. Newman Updates Things are also proceeding apace in the government’s effort to get the Supreme Court to reverse the Second Circuit’s decision in Newman. In early September, the United States filed its reply brief in Newman. In it, the government reiterated the positions in its opening brief, arguing that:
- Newman directly conflicts with Dirks;
- Newman conflicts with other appellate decisions, including, under the government’s view, the Ninth Circuit’s decision in United States v. Salman;
- The government’s failure to appeal the Second Circuit’s “lack of knowledge” determination should not preclude review because a reversal would require the Second Circuit to review this conclusion also; and
- Leaving Newman intact would cause “significant harm” by curtailing antifraud enforcement and decreasing public confidence in the securities markets. The government contends that Newman has been “profoundly destabilizing,” and review is needed to “restore certainty and order.”