Speaker 1: A major setback for the Securities and Exchange Commission tease
Speaker 1: up a Supreme Court challenge over the use of administrative
Speaker 1: law judges, a challenge that could have repercussions for many agencies.
Speaker 1: The ten Circuit Court of Appeals in Denver has ruled
Speaker 1: that the use of in house judges by the SEC
Speaker 1: violates the Constitution's appointments clause, but in August, the Court
Speaker 1: of Appeals for the d C Circuit ruled that the
Speaker 1: SEC's use of in house judges was constitutional. A conflict
Speaker 1: between the circuits is often a direct road to the
Speaker 1: Supreme Court, but House Republicans may reintroduce legislation to allow
Speaker 1: SEC defendants to choose federal judges or juries instead of
Speaker 1: in house judges. My guests are Peter Henning, professor at
Speaker 1: Wayne State University Law School and a former senior attorney
Speaker 1: at the SEC, and Gregory Moore Ville, founding partner at
Speaker 1: More villow LLLP, and the attorney who won the landmark
Speaker 1: insider trading case U S v. Newman. Peter explained the
Speaker 1: reasoning that had these appellate courts to come to different conclusions,
Speaker 1: completely different conclusions. Well, the issue here is whether the
Speaker 1: SEC's administrative law judges are what are called inferior officers.
Speaker 1: The Constitution requires that an inferior officer be appointed either
Speaker 1: by the President or by someone who Congress designates who
Speaker 1: can appoint that person, and so you have to go
Speaker 1: through a particular appointment process. If you're just an employee
Speaker 1: like I was back long ago, then you're just hired
Speaker 1: through the regular civil service process. The split here is
Speaker 1: whether these judges are inferior officers do they qualify for
Speaker 1: that position? And there's some history in the Supreme Court
Speaker 1: about that, but it's really a pretty simple straightforward issue.
Speaker 1: Are they or aren't they? Of course playing that out
Speaker 1: will be the really difficult part. Greg The SEC has
Speaker 1: been using administrative judges since shortly after it was created.
Speaker 1: In why the controversy now, Well, the controversy stems from
Speaker 1: the fact that most defendants don't believe it is an
Speaker 1: inherently fair process. The SEC wins somewhere in the neighborhood
Speaker 1: of of their cases that are brought in front of
Speaker 1: an SEC a l J, whereas when they bring cases
Speaker 1: in federal court there down and around the SEV mark.
Speaker 1: So the difference between going to federal court and going
Speaker 1: to have your case heard before in a l J
Speaker 1: is a huge one in terms of that of whether
Speaker 1: you can or can't win. And indeed there are some
Speaker 1: a ljs who have never decided for anyone but the
Speaker 1: SEC and two defendants look at it and they think
Speaker 1: this is an unfair, inherently unfair process. That's how it
Speaker 1: started this this kind of a challenge. There was a
Speaker 1: first to due process challenge, and then it moved on
Speaker 1: it morphed into this constitutional challenge. Peter, when you look
Speaker 1: at the constitutional challenge, how did each of the courts
Speaker 1: look at it in order to come to the opposite conclusion? Well,
Speaker 1: the District of Columbia Circuit, which is really the pre
Speaker 1: eminent court for administrative law matters. Uh, that court ruled
Speaker 1: in August that the sec A l j's are not
Speaker 1: these inferior officers. In other words, they don't have to
Speaker 1: go through a different appointment process than an ordinary employee.
Speaker 1: They reached that decision by really focusing on do the
Speaker 1: administrative law judges have some kind of fun old decision
Speaker 1: making power and they found that they didn't. That the
Speaker 1: Commission can review any of their decisions. And it's really
Speaker 1: the five SEC commissioners who decide. The Tent Circuit out
Speaker 1: in Denver that came to the opposite conclusion, said, no,
Speaker 1: if you look at the importance of these judges, all
Speaker 1: of the decisions they make, and that this is really
Speaker 1: a trial like proceeding, that these are really judges that
Speaker 1: have great a great deal of authority enough to call
Speaker 1: them this inferior officer category. Inferior not meaning that they
Speaker 1: are anything less than important, but that they don't have
Speaker 1: to go through the Senate. But that here the Tent
Speaker 1: Circuit said no, no, no, they are inferior officers. They
Speaker 1: have enough authority. So it really comes down to I
Speaker 1: don't want to say it's a coin toss, but you've
Speaker 1: got to pick one or the other. And what we
Speaker 1: have now, of course, is a classic split between the
Speaker 1: federal circuits greg Many federal agencies rely on similar in
Speaker 1: house courts, So could what happens with the sec judges
Speaker 1: have implications for other agencies. It could, But the Supreme
Speaker 1: Court case, which is the seminal case on this issue,
Speaker 1: fried Tag, makes it clear that this is a case
Speaker 1: by case issue. So the dissenting judge in the Tenth
Speaker 1: Circuit um in in his dissent essentially says this is
Speaker 1: like opening Pandora's box. It could have catastrophic effects for
Speaker 1: all a ljs in different places, and the majority opinion
Speaker 1: and specifically the concurring opinion says that's overblown and it's
Speaker 1: not in front of us. We're not concerned with what
Speaker 1: some other litigant might try to litigate later in the future.
Speaker 1: We're concerned with whether or not the SEC A ljs
Speaker 1: are constitutionally appointed, and they decided, based on the fried
Speaker 1: Tag analysis of the Supreme Court some twenty five years ago,
Speaker 1: that they were not. So it could have implications for
Speaker 1: other agencies, but those implications were there regardless of what
Speaker 1: the tent circuits decided. There is this case fried Tag,
Speaker 1: which tells the courts how they have to decide whether
Speaker 1: an a l J is an inferior officer or not.
Speaker 1: So the risk is there regardless of what the tent
Speaker 1: circuit decided. We're talking about the tense Circuit Court of
Speaker 1: Appeals in Denver ruling that the use of in house
Speaker 1: judges by the SEC violates the Constitution's appointments clause. And
Speaker 1: that is contrary to a ruling in August by the
Speaker 1: Court of appeals for the d C Circuit. I've been
Speaker 1: talking with Gregory more Villo, founding partner of more villow LLLP,
Speaker 1: and Peter Henning, professor at Wayne State University Law School. Peter,
Speaker 1: I'd like you to go into a little more detail
Speaker 1: about what the SEC may do here, because you said
Speaker 1: that the UH the d C circuit case is already
Speaker 1: on on the road to having an on bank hearing
Speaker 1: or a request for it. Will the SEC have to
Speaker 1: make the same request in order to get the Denver
Speaker 1: case on track. I don't think they have to make
Speaker 1: that request in the tense circuit, although I expect they
Speaker 1: will if they don't hear anything from the d C circuit.
Speaker 1: And so really part of it for now is just
Speaker 1: a waiting game to see UM and then try to
Speaker 1: get one of those cases to the Supreme Court. That
Speaker 1: the real challenge for the SEC is that they have
Speaker 1: an easy fix here. They could go back and just
Speaker 1: reappoint the five administrative law judges and say, fine, we're
Speaker 1: picking them rather than having them go through the employment process.
Speaker 1: But then that might be seen as a concession that
Speaker 1: they were not properly appointed, and so SEC has a
Speaker 1: bit of a conundrum here as to you know, do
Speaker 1: you leave well enough alone hope Supreme Court rules in
Speaker 1: your favor, or do you try to solve it but
Speaker 1: then throw into doubt any other cases, in fact, cases
Speaker 1: that are now closed. That's really something that's going to
Speaker 1: also be on the SEC's plate. Now. Looking ahead, Greg,
Speaker 1: we have present elect Donald Trump coming into office, and
Speaker 1: we have Congressman Jeb Hencerling being among those who have
Speaker 1: already announced plans to rip up Dodd Frank, And of
Speaker 1: course the SEC started pumping up these hearings with with
Speaker 1: Dodd Frank in. Is that likely to have an effect
Speaker 1: on this? I don't know. I'm not sure that anybody
Speaker 1: is going to rush to judgment on this right away.
Speaker 1: There are many many issues that I think are more
Speaker 1: pressed for the United States, for the President, for the
Speaker 1: Congress as to whether or not the h A l
Speaker 1: J's have been constitutionally appointed. But I do believe that
Speaker 1: at some point within the next four years we will
Speaker 1: we will be in a position where Congress is debating
Speaker 1: whether Don Frank has continued viability, particularly as it applies
Speaker 1: to situations like this. So I expect some changes because
Speaker 1: I expect this to go to the Supreme Court. But
Speaker 1: I would expect that to happen before I would expect
Speaker 1: Don Frank to be repealed or or Congress to take
Speaker 1: on this a LJ Inferior Office officer issue, Peter. If
Speaker 1: it does go to the Supreme Court, is this a
Speaker 1: question of liberal versus conservative or is it a different
Speaker 1: kind of question? Well, that's a very good question, Um,
Speaker 1: because it doesn't divide up liberal conservative it is. This
Speaker 1: is really a a fairly technical issue. But one thing
Speaker 1: the court is going to pay attention to is, you know,
Speaker 1: as Greg said, the freight tag case says, let's take
Speaker 1: this on a case by case basis, how these judges operate.
Speaker 1: But of course, if everyone reads into opinions, how does
Speaker 1: this affect other areas? And the SEC has five judges
Speaker 1: but Social Security Administration has fifteen hundred judges. What is
Speaker 1: the court going to do when it figures this out.
Speaker 1: I don't think it's going to divide up so much
Speaker 1: liberal conservative as how much authority do we want to
Speaker 1: give to these types of judges and these administrative agencies?
Speaker 1: And Greg finally about thirty seconds, on a scale of
Speaker 1: one to ten, how big? How much damage has this caused?
Speaker 1: The SEC? I don't think this has caused very much
Speaker 1: damage to the SEC itself because there are at least
Speaker 1: four or five or other challenges to this specific issue
Speaker 1: out there floating through circuit courts. I have one myself
Speaker 1: that's going to the Fourth Circuit, So there are multiple
Speaker 1: defendants who are challenging these cases. Eventually, I believe this
Speaker 1: was going to end up in the Supreme Court regardless
Speaker 1: of what the ten Circuit did. Thank you both for
Speaker 1: being on Bloomberg Law. That's Gregory Moore Villow, founding partner
Speaker 1: of More Willow LLLP and Peter Henning, professor at Wayne
Speaker 1: State University Law School. Thanks you both. Thanks to you both.
Speaker 1: Coming up new legal arguments may allow some borrowers to
Speaker 1: discharge their student loans in bankruptcy. Although it's a very
Speaker 1: narrow opening, it's a new thing that's coming up in
Speaker 1: light of the trillion of dollars in student loans that
Speaker 1: are out there. We're going to be discussing that coming
Speaker 1: up on Bloomberg Law. I'm June Grossell. You're listening to
Speaker 1: Bloomberg Law. This is Bloomberg