Duka v. SEC and the Constitutionality of Administrative Law Judges (Part 5)

In Duka v. SEC, the plaintiff challenged the appointment process for ALJs at the SEC as part of a collateral attack on the SEC's efforts to initiate an administrative proceeding against plaintiff.  This case arose in the SD of NY.

Following the institution of an administrative proceeding on January 2015, Duka moved for a temporary restraining order and a preliminary injunction in an effort to prevent the AP from moving forward.  The court denied the motion in April.  It looked like the hearing scheduled for Sept. 16, 2015 would proceed.  

A second round of motions, however, began in July.  This time plaintiff argued that the system for designating ALJs violated the appointments clause.  Once again, the SEC defended the allegation by arguing that ALJs were not inferior officers and therefore not subject to the Appointments Clause.  As for the process of appointment, the Commission acknowledged that “it remains unclear who appoints SEC ALJs”.  Plaintiff described the Commission’s position as one of “apparent disarray.”  See MEMORANDUM OF LAW IN SUPPORT OF PLAINTIFF BARBARA DUKA’S MOTION FOR A PRELIMINARY INJUNCTION, at 3. 

Whatever the precise method, the one undisputed fact was that the ALJs were not appointed by the Commission.  That was enough for the court.   

  • There appears to be no dispute that the ALJs at issue in this case are not appointed by the the SEC Commissioners. Indeed, in an Affidavit, dated June 4, 2015 that was taken in In the Matter ofTimbervest, LLC et al, Jayne L. Seidman, Deputy Chief Operating Officer ofthe SEC, stated that, "[b ]ased on [her] knowledge of the Commission's ALJ hiring process, [SEC] ALJ [Cameron] Elliot was not hired through a process involving the approval of the individual members ofthe Commission." In the Matter ofTimbervest, LLC et al., Admin. Proc. File No. 3- 15519 (attached as Ex. 1 to Am. Compl., dated June 10, 2015). 

The decision, however, had a cure.  As the court noted:   

  • Judge May [in Hill] also determined that "the ALJ's appointment could be easily cured by having the SEC Commissioners issue an appointment or preside over the matter themselves." (Id. at 44.) Plaintiffs counsel in the instant case reached the same conclusion at a conference held on June 1 7, 2015, stating that "I think that [having the Commissioners appoint the ALJ s] is one of [the easy cures]." (See Tr. of Proceedings, dated June 17,2015, at 4.) 

Moreover, the Commission was apparently mulling its choices.  Id. ("And, it appears that the Commission is reviewing its options regarding potential "cures" of any Appointments Clause violation(s). (See Tr. of Proceedings, dated June 17, 2015, at 10.)").  The court, therefore, delayed implementation of the injunction and gave the SEC 7 days to "notify the Court of its intention to cure any violation of the Appointments Clause."

The Commission ultimately informed the court that there would be no cure.  As counsel noted in a letter to the judge: 

  • As this Court is aware, respondents in several pending SEC administrative proceedings have raised before the Commission Appointments Clause challenges to the authority of the SEC ALJs who presided over the initial stage of their proceedings. In at least one proceeding, the Commission has heard argument on the constitutional challenge and has also ordered supplemental briefing. Although the Commission in its adjudicatory capacity may decide in due course whether SEC ALJs’ appointments violate the Constitution and, if so, the appropriate remedy for such a violation, as of the filing of this letter, the Commission has not issued a decision or otherwise taken any public action on these questions. 

A few days later, the court granted the injunction sought by plaintiff, finding a likelihood of success on the claim that the process of designating ALJs at the SEC violated the Appointments Clause.  The court reiterated that the SEC did not appoint ALJs as required by the Clause. Opinion, Aug. 12, 2015 ("Here, the Court has determined that the ALJs at issue were not appointed by the SEC Commissioners. See August Decision & Order at 5. As they were not appropriately appointed pursuant to Article II, their appointment is likely unconstitutional in violation of the Appointments Clause.”).  

For primary materials in the Duka case, go to the DU Corporate Governance web site.  

J Robert Brown Jr.