SEC fine of radio presenter puts watchdog on the line

On April 23, the US Supreme Court is scheduled to hear arguments about whether the Securities and Exchange Commission’s cadre of in-house judges exists in violation of the constitution.

Rather than deliberate on some esoteric administrative foible with little consequence, America’s highest court is about to decide an issue that could dramatically change how justice is dealt with in many areas of society — including how the SEC passes judgment on financial advisers accused of swindling or misleading clients.

Lucia v SEC comes to the Supreme Court as an appeal from Raymond Lucia, a banned financial adviser and radio personality, who was fined $50,000 after an SEC administrative law judge (ALJ) found he had misled prospective clients.

Mark Perry, a partner at Gibson Dunn & Crutcher and attorney for Mr Lucia, contends the SEC’s in-house judges had no constitutional right to make such a ruling.

Mr Perry’s reasoning, which was persuasive enough for the Supreme Court to review the ruling, is that the US constitution considers judges “officers of the United States” and as such they must be appointed by either the president, a government department head or a court. Yet the SEC treats its so-called ALJs as mere employees of the regulator, says Mr Perry. If his argument is accepted, he says the authority of such judges — and therefore their decisions — become legally dubious under the constitution.

If the court agrees, the implications for US justice do not stop at the in-house courts of the nation’s financial regulator. Administrative judges are used widely in the American justice system to deal with legal issues that may otherwise clog up the country’s federal court system, says Robert Glicksman, a law professor at George Washington University.

If the SEC’s use of ALJs is unconstitutional, scholars argue, so too might be the use of myriad judges deliberating throughout the organs of government. In-house judges at the Department of Veterans Affairs review benefit claims; Department of Labor ALJs decide if coal workers with black lung disease deserve compensation; the Department of Commerce uses its equivalent in-house judges to adjudicate disputes in its patent and trademark office.

Mr Perry insists they are beholden to the SEC: ‘They’re a captive tribunal.’

At the SEC in particular, lawyers say the Supreme Court decision could affect more than 100 investor cases that are now in front of ALJs. It would profoundly change the regulator’s ability to go after rogue brokers, lawyers say. In 2017 the SEC’s in-house judges saw 121 initial proceedings, records show. In their petition, Mr Lucia’s lawyers cite a 2015 Wall Street Journal article. This claimed that, from October 2010 to March 2015, the SEC’s enforcement division prevailed in 90 per cent of proceedings it brought before its own administrative judges, while it only prevailed in 69 per cent of the cases it brought in federal court.

However, Georgetown University law professor Urska Velikonja takes issue with not only these statistics but also the argument Mr Lucia’s lawyers purport carries with them. Ms Velikonja analysed cases brought by the SEC to both their ALJs and federal courts and maintains that the commission does not have a home court advantage when it litigates before its own ALJs, nor is the regulator filing more cases within its in-house courts to take advantage of any perceived benefit.

“Most of the SEC’s contested cases end up in federal court — not in front of its ALJs,” Prof Velikonja says.

Regardless, says Mr Perry, such in-house judges are “deciding the rights of citizens without the benefits of a trial by jury or an independent judiciary”. To the SEC’s claims that ALJs are independent, Mr Perry insists they are beholden to the SEC: “They’re a captive tribunal.”

The Department of Justice — whose Solicitor General’s office is usually tasked with defending legal assaults on government organs in the Supreme Court — appears to have further complicated the case by switching sides. Last month the solicitor general Noel Francisco signalled his office supported arguments made in Mr Lucia’s petition, according to Mr Perry. Subsequently a third-party trial attorney — Anton Metlitsky, a partner at O’Melveny & Myers — was appointed on January 18 to argue the case from the SEC’s perspective. Mr Metlitsky declined to be interviewed. Both the SEC and the Department of Justice declined to comment on the upcoming case.

“That the government switched sides is unusual,” says Prof Glicksman, one of several law professors who wrote to the Supreme Court, asking its justices to maintain the independence of ALJs. “Whichever way the court resolves the issue, it needs to ensure the independence of administrative judges, otherwise the risk is that litigants will not get a fair shake,” he adds.

Ultimately, Mr Perry insists curbing ALJs would be good for American justice: “This may constrain the SEC, but that’s a good thing; these judges need to be held accountable under the terms of the constitution. Just because ALJs are expedient isn’t an excuse for their existence. Expediency isn’t always the best thing in the justice game.”