Legal Newsline

Wednesday, November 13, 2019

SEC target waiting to see if Trump's agency will appeal important decision on ALJs

By Christopher Knoll | Feb 7, 2017

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DENVER (Legal Newsline) – If left intact by the U.S. Supreme Court or new presidential regime, the Dec. 27 decision by the U.S. Court of Appeals for the 10th Circuit regarding the use of administrative law judges could cause a tectonic shift in the legal powers of bureaucracies and may undo a wide range of decisions handed down during prior cases.

At the closing of last year, 10th Circuit judges in a 2-1 decision ruled that administrative law judges (ALJs) being used by the Securities and Exchange Commission (SEC) were not just typical employees of an agency, but were in fact “inferior officers,” necessitating appointment by the heads of governmental departments. According to the ruling, agencies like the SEC had thus violated the Appointments Clause of the U.S. Constitution.

The case in question, Bandimere v. SEC, emerged from the economic carnage of the 2008 financial crisis and the resultant massive Dodd-Frank financial regulations law passed in 2010. Following the economic meltdown, the SEC became swamped with a flood of cases involving alleged financial chicanery. 

To speed up the processing of these cases, the SEC relied increasingly on ALJs, but that decision left some asserting that the move had caused much unfairness in regards to a defendant’s right of due process.

David Zisser, an attorney with Jones & Keller P.C. of Denver, represented David Bandimere in the suit. Zisser told Legal Newsline that the Tenth Circuit's ruling might undo a plethora of SEC decisions.

“It certainly has the potential; which ones, it is hard to say. Cases in the process of a decision” would certainly feel the result of the ruling, he said.

The SEC has stated that it is reviewing the Bandimere ruling and weighing its options going forward. Legal Newsline asked the SEC about the case and was told by Erin Stattel, press officer for the Commission, “We decline to comment.”

Zisser, however, confirmed the SEC's current thinking - it needs more time because of the transition to President Trump.

“I got an email from [the SEC] last Friday, where they asked for additional time to consider a rehearing (before the full 10th Circuit)," Zisser said. "The reason given was the change in the current [presidential] administration.” 

Zisser said he found the request reasonable and now waits to see what course a newly staffed SEC will take. 

“Most people assume the SEC will take steps to continue the litigation,” Zisser stated. 

In 2012, Bandimere was accused by the SEC to have conducted securities services with family and friends between 2006 and 2010, when he unknowingly became ensnared in a Ponzi scheme. His alleged transactions included those reserved for a registered broker. 

According to Zisser, Bandimere had conferred with a lawyer concerning the securities prior to his actions and was not advised that participating in any transaction would make him an unregistered broker and open to prosecution. 

When an ALJ concurred with the SEC accusation against Bandimere, he immediately denied the allegations and, among other rebuttals, claimed the ruling was invalid because the ALJ was not constitutionally appointed as an inferior officer. 

The SEC, however, carried the ALJ ruling and, while agreeing that the judge had not been constitutionally appointed, stated that this was because the ALJ was an employee and not an inferior officer. Bandimere was subsequently found guilty, had his activities curtailed and fined more than $1 million.

The stated role of ALJs within the SEC is that of “independent adjudicators” with the power to conduct public hearings, “issue subpoenas, hold prehearing conferences, and rule on motions and the admissibility of evidence.” 

Afterward, the ALJ can submit briefs, findings and conclusions of law that are delivered via an “initial decision”.

Agencies like the SEC have said that in-house ALJs were "employees" because they were not empowered to deliver final decisions and that ultimately their rulings were reviewed by the retaining agency. For these reasons, the SEC claimed that its ALJs did not meet the "significant discretion" requirement of inferior officers set forth by the U.S. Supreme Court in Freytag et al. v. Commissioner of Internal Revenue (1991). 

The Tenth Circuit found otherwise. In its majority decision, the court found that “ALJs exercise significant discretion in performing ‘important functions’ commensurate with the STJs’ functions described in Freytag.” The justices also noted that the SEC ALJs had the power to make final decisions that were legally binding. 

According to Zisser, the phrase "significant discretion" is open to interpretation, but the underlying definition adhered to in his case derived from Freytag, in which the Supreme Court found that tax court judges used by the Internal Revenue Service (IRS) were conducting significant discretion during the fulfillment of their duties. These actions were very similar if not exact to those being carried out by the SECs administrative law judges.

The Bandimere ruling contrasts with another appeals court decision involving the same federal agency. Four months prior to the Bandimere case, the U.S. District Court of Appeals for the District of Columbia ruled in Raymond J. Lucia Cos. v. SEC that SEC had reasonably interpreted the role ALJs as being that of employees.


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