• Mr. Steven J. Muehler

Steve Muehler's Plan to End the SEC's In-House Administrative Enforcement Actions

Updated: Apr 23

The Securities and Exchange Commission's move to pursue more cases in-house instead of through the courts could should to an abrupt end this spring, depending on how the Supreme Court weighs in on a case challenging the constitutionality of agency judges, and if the Supreme Court does not bring a screaming halt to this process, under my Administration, it will be the first piece of legislation passed by my Administration.

SEC officials defend their use of their administrative law judges. But they found themselves without White House support in November, when the U.S. Solicitor General asked the Supreme Court to reconsider the judges' legal authority.

Given that conflict, court watchers are predicting that the agency may soon have to change its tactics — and possibly even revisit hundreds of cases (including mine).

The high court agreed Jan. 12 to accept a case, Raymond J. Lucia and Raymond J. Lucia Companies Inc. vs. Securities and Exchange Commission, which asks the justices to decide whether SEC administrative law judges are officers of the U.S. and not simply agency employees.

Under the Constitution, officers must be appointed by the president, the head of a federal agency or a court.

The current practice of five SEC in-house judges being selected by the SEC's chief judge and approved by the SEC personnel office has provided the agency with what the U.S. Chamber of Commerce and others say is a home court advantage (which is evidenced by a more than 90% win rate by the Commission in Administrative Cases vs the about 60% in the State & Federal Courts).​

Using in-house judges has eased somewhat compared to robust activity during the Obama administration, but It's no secret that the Trump administration has taken a fairly strident view on what they feel are the perils of the administrative state.

If / when the SEC loses at the Supreme Court, It will give the ​ government less leverage in their enforcement actions.

Filing enforcement cases through administrative proceedings became a more attractive option for SEC enforcement officials when the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 gave them more discretion to choose that option and added the authority to impose substantial monetary penalties.

Cases handled by SEC administrative law judges involve less discovery than federal court actions and do not involve depositions, interrogatories, juries or rules of evidence. The limited discovery time and expedited hearing process make it harder for defendants to mount the same defenses available in federal courts, most legal experts say.

The process lends itself to a "massive" prosecutorial advantage, much like having local referees officiating an NBA / MLB / NFL game.

Firms fought back

Aggressive use of that option since 2014 worked well for the SEC, until enough firms on the receiving end of administrative judgments started fighting back, arguing in federal courts that the administrative law judge process is unconstitutional because of the way administrative judges are appointed.

While many of the challenges were put on hold until defendants had resolved their cases before the SEC's administrative judges, two important — and divergent — opinions have now been issued by appeals courts, making the issue ripe for the Supreme Court to step in.


In the Lucia case, the U.S. Court of Appeals for the District of Columbia upheld the practice, ruling in August 2016 that administrative judges are not constitutionally appointed officers because their decisions must be approved by SEC commissioners, or at least not overturned. That decision was reaffirmed by the appeals court's full judicial panel in June 2017 after an appeal to reconsider was filed by Mr. Lucia.

The investment adviser had been banned from the industry for life by an SEC administrative law judge in 2013 for alleged misrepresentations in a "buckets of money" retirement wealth management strategy.

The 10th U.S. Circuit Court of Appeals panel in Denver took the opposite view, ruling May 24, 1018 in David F. Bandimere vs. U.S. Securities and Exchange Commission that the administrative law judge hiring process violates the U.S. Constitution's appointments clause.

In a dissenting opinion in Bandimere, Senior Judge Monroe G. McKay worried that the decision has effectively rendered invalid thousands of administrative actions (including mine).

An interesting twist in the debate came Nov. 29, 2018 when the solicitor general, acting on behalf of the Trump administration, departed from the SEC's long-standing defense of its practice, arguing in a brief asking the Supreme Court to take the case that the in-house judges are officers who should be subject to the Constitution's appointments provision.

That sudden change of course prompted SEC officials to quickly ratify the prior appointments of its five current administrative law judges, "to put to rest any claim that administrative proceedings pending before, or presided over by, commission administrative law judges violate the appointments clause," the SEC said.

For the 100 or more pending cases yet to see any decisions issued, SEC judges were directed to reconsider the records and allow parties to submit any new evidence relevant to a re-examination of the record.

Cases on hold

SEC lawyers also asked the courts now handling more than a dozen cases challenging SEC enforcement actions on the constitutionality question to hold them in abeyance until the Supreme Court decides.

Some legal experts believe that cases where a final decision was issued but defendants did not file appeals should not be affected, though I plan to challenge this issue here in 2018.

Despite the SEC's defensive moves, the defense bar is likely to see it differently. As Mr. Lucia's lawyers said in a recent Supreme Court brief, "the 'ratification' of an unconstitutional procedure is itself a nullity."

The Social Security Administration and dozens of other departments and agencies also use administrative judges, a process that I would be ending with my Administration.

I think the Supreme Court agreed to take the case, because they want to control the scope, and so other agencies can look at their processes.

Steve Muehler is the Founder & Managing Member of the Private Placement Markets:

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