NEW ORLEANS (Legal Newsline) - The Securities and Exchange Commission can’t prevent a federal court from hearing a constitutional challenge to how it operates, the Fifth Circuit Court of Appeals ruled, in a strong rebuke to the concept of “independent” administrative agencies that are insulated from political pressure as well as judicial oversight.
Reversing an earlier panel ruling, a majority of judges on the Fifth Circuit decided en banc that Michelle Cochran had the right to sue in federal court over the three layers of protection the SEC’s governing statute gives administrative law judges to insulate them from political pressure. Cochran and her supporters argue that is two too many layers of protection under U.S. Supreme Court precedent.
The Fifth Circuit agreed, in a 9-7 decision that drew a lengthy concurrence that was harshly critical of the administrative state as well as a dissent that argued federal courts should leave agencies like the SEC alone to do their jobs. The decision by the historically conservative Fifth Circuit conflicts with precedent in at least three other federal circuits and may well wind up before the Supreme Court as conservatives and liberals fight over how accountable federal regulatory agencies must be to elected officials and the courts.
Michelle Cochran was represented by the New Civil Liberties Alliance, a nonprofit group founded by Columbia Law School professor Philip Hamburger that uses litigation to challenge the structure of administrative agencies and their decisions. NCLA represents publisher Ben Domenech, for example, in his lawsuit seeking to overturn a National Labor Relations Board decision penalizing him for a joking tweet about sending his employees “back to the salt mine” if they vote to firm a union.
In its Dec. 13 decision, the Fifth Circuit ruled that Section 78y of the Securities Exchange Act doesn’t strip federal courts of jurisdiction to hear constitutional questions about agency structure. The SEC argued – and multiple courts have agreed – that the statute requires the targets of SEC investigations to wait until their cases are concluded before appealing any administrative decision to a so-called Article III federal court.
The law does prevent courts from interfering in ongoing investigations, the Fifth Circuit ruled, but not fundamental challenges to an agency’s legitimacy.
“Cochran challenges the entire legitimacy of her proceedings, not simply the cost and annoyance,” the majority ruled.
The opinion cites Free Enterprise Fund v. Public Company Accounting Oversight Board, a 2010 Supreme Court decision that allowed the target of another federal administrative agency to challenge how board members were removed. The plaintiff in that case gave up out of exhaustion before fighting it back through lower courts, said Peggy Little, who argued for Cochran before the Fifth Circuit.
“His prize was, well, you get to go back and do it all over again,” Little said. Since Cochran’s case raised the same issues, NCLA agreed to represent her before the Fifth Circuit.
The Cochran case drew a friend-of-the-court brief from billionaire Mark Cuban, who actually fought SEC insider-trading charges in court and won. Cuban believed there was no way he could win before an ALJ, Little said.
“They are hired by the SEC,” she said. “The SEC is their boss.”
One goal of pre-enforcement challenges is to change the structure of federal agencies and make them more accountable to elected officials, and ultimately voters. The Consumer Financial Protection Bureau was forced to place its director under the oversight of the President after the Supreme Court ruled its structure to be unconstitutional in the 2020 decision Seila Law v. CFPB, for example. Other agencies including the SEC changed how they appoint some officials in response.
Cochran faces a tough battle challenging the removal process for ALJs since it is written into federal statute, Little acknowledged.
“Congress set up the SEC with too many layers of protection and Congress has to fix it,” she said.
The Fifth Circuit decision included a lengthy concurrence by Judge Andrew Oldham, joined by five other judges. In it, he drew a direct line between the SEC and President Woodrow Wilson, who he said developed theories about an administrative state immune to political oversight by studying under German-trained professors who were influenced by philosopher Friedrich Hegel.
The SEC Act “reflects the thinking of men like Woodrow Wilson who argued that universal suffrage would make the three branches of government ignorant, indolent, and incapable of regulating modern affairs,” the judge wrote. “Wilson’s solution? He wanted administrative agencies to operate in a separate, anti-constitutional, and anti-democratic space — free from pesky things like law and an increasingly diverse electorate.”