WEBVTT - SEC Loses Case Over In-House Judges (Audio)

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<v Speaker 1>A major setback for the Securities and Exchange Commission tease

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<v Speaker 1>up a Supreme Court challenge over the use of administrative

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<v Speaker 1>law judges, a challenge that could have repercussions for many agencies.

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<v Speaker 1>The ten Circuit Court of Appeals in Denver has ruled

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<v Speaker 1>that the use of in house judges by the SEC

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<v Speaker 1>violates the Constitution's appointments clause, but in August, the Court

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<v Speaker 1>of Appeals for the d C Circuit ruled that the

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<v Speaker 1>SEC's use of in house judges was constitutional. A conflict

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<v Speaker 1>between the circuits is often a direct road to the

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<v Speaker 1>Supreme Court, but House Republicans may reintroduce legislation to allow

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<v Speaker 1>SEC defendants to choose federal judges or juries instead of

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<v Speaker 1>in house judges. My guests are Peter Henning, professor at

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<v Speaker 1>Wayne State University Law School and a former senior attorney

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<v Speaker 1>at the SEC, and Gregory Moore Ville, founding partner at

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<v Speaker 1>More villow LLLP, and the attorney who won the landmark

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<v Speaker 1>insider trading case U S v. Newman. Peter explained the

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<v Speaker 1>reasoning that had these appellate courts to come to different conclusions,

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<v Speaker 1>completely different conclusions. Well, the issue here is whether the

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<v Speaker 1>SEC's administrative law judges are what are called inferior officers.

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<v Speaker 1>The Constitution requires that an inferior officer be appointed either

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<v Speaker 1>by the President or by someone who Congress designates who

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<v Speaker 1>can appoint that person, and so you have to go

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<v Speaker 1>through a particular appointment process. If you're just an employee

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<v Speaker 1>like I was back long ago, then you're just hired

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<v Speaker 1>through the regular civil service process. The split here is

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<v Speaker 1>whether these judges are inferior officers do they qualify for

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<v Speaker 1>that position? And there's some history in the Supreme Court

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<v Speaker 1>about that, but it's really a pretty simple straightforward issue.

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<v Speaker 1>Are they or aren't they? Of course playing that out

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<v Speaker 1>will be the really difficult part. Greg The SEC has

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<v Speaker 1>been using administrative judges since shortly after it was created.

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<v Speaker 1>In why the controversy now, Well, the controversy stems from

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<v Speaker 1>the fact that most defendants don't believe it is an

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<v Speaker 1>inherently fair process. The SEC wins somewhere in the neighborhood

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<v Speaker 1>of of their cases that are brought in front of

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<v Speaker 1>an SEC a l J, whereas when they bring cases

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<v Speaker 1>in federal court there down and around the SEV mark.

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<v Speaker 1>So the difference between going to federal court and going

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<v Speaker 1>to have your case heard before in a l J

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<v Speaker 1>is a huge one in terms of that of whether

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<v Speaker 1>you can or can't win. And indeed there are some

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<v Speaker 1>a ljs who have never decided for anyone but the

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<v Speaker 1>SEC and two defendants look at it and they think

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<v Speaker 1>this is an unfair, inherently unfair process. That's how it

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<v Speaker 1>started this this kind of a challenge. There was a

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<v Speaker 1>first to due process challenge, and then it moved on

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<v Speaker 1>it morphed into this constitutional challenge. Peter, when you look

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<v Speaker 1>at the constitutional challenge, how did each of the courts

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<v Speaker 1>look at it in order to come to the opposite conclusion? Well,

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<v Speaker 1>the District of Columbia Circuit, which is really the pre

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<v Speaker 1>eminent court for administrative law matters. Uh, that court ruled

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<v Speaker 1>in August that the sec A l j's are not

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<v Speaker 1>these inferior officers. In other words, they don't have to

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<v Speaker 1>go through a different appointment process than an ordinary employee.

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<v Speaker 1>They reached that decision by really focusing on do the

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<v Speaker 1>administrative law judges have some kind of fun old decision

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<v Speaker 1>making power and they found that they didn't. That the

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<v Speaker 1>Commission can review any of their decisions. And it's really

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<v Speaker 1>the five SEC commissioners who decide. The Tent Circuit out

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<v Speaker 1>in Denver that came to the opposite conclusion, said, no,

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<v Speaker 1>if you look at the importance of these judges, all

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<v Speaker 1>of the decisions they make, and that this is really

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<v Speaker 1>a trial like proceeding, that these are really judges that

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<v Speaker 1>have great a great deal of authority enough to call

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<v Speaker 1>them this inferior officer category. Inferior not meaning that they

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<v Speaker 1>are anything less than important, but that they don't have

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<v Speaker 1>to go through the Senate. But that here the Tent

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<v Speaker 1>Circuit said no, no, no, they are inferior officers. They

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<v Speaker 1>have enough authority. So it really comes down to I

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<v Speaker 1>don't want to say it's a coin toss, but you've

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<v Speaker 1>got to pick one or the other. And what we

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<v Speaker 1>have now, of course, is a classic split between the

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<v Speaker 1>federal circuits greg Many federal agencies rely on similar in

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<v Speaker 1>house courts, So could what happens with the sec judges

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<v Speaker 1>have implications for other agencies. It could, But the Supreme

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<v Speaker 1>Court case, which is the seminal case on this issue,

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<v Speaker 1>fried Tag, makes it clear that this is a case

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<v Speaker 1>by case issue. So the dissenting judge in the Tenth

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<v Speaker 1>Circuit um in in his dissent essentially says this is

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<v Speaker 1>like opening Pandora's box. It could have catastrophic effects for

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<v Speaker 1>all a ljs in different places, and the majority opinion

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<v Speaker 1>and specifically the concurring opinion says that's overblown and it's

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<v Speaker 1>not in front of us. We're not concerned with what

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<v Speaker 1>some other litigant might try to litigate later in the future.

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<v Speaker 1>We're concerned with whether or not the SEC A ljs

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<v Speaker 1>are constitutionally appointed, and they decided, based on the fried

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<v Speaker 1>Tag analysis of the Supreme Court some twenty five years ago,

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<v Speaker 1>that they were not. So it could have implications for

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<v Speaker 1>other agencies, but those implications were there regardless of what

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<v Speaker 1>the tent circuits decided. There is this case fried Tag,

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<v Speaker 1>which tells the courts how they have to decide whether

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<v Speaker 1>an a l J is an inferior officer or not.

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<v Speaker 1>So the risk is there regardless of what the tent

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<v Speaker 1>circuit decided. We're talking about the tense Circuit Court of

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<v Speaker 1>Appeals in Denver ruling that the use of in house

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<v Speaker 1>judges by the SEC violates the Constitution's appointments clause. And

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<v Speaker 1>that is contrary to a ruling in August by the

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<v Speaker 1>Court of appeals for the d C Circuit. I've been

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<v Speaker 1>talking with Gregory more Villo, founding partner of more villow LLLP,

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<v Speaker 1>and Peter Henning, professor at Wayne State University Law School. Peter,

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<v Speaker 1>I'd like you to go into a little more detail

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<v Speaker 1>about what the SEC may do here, because you said

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<v Speaker 1>that the UH the d C circuit case is already

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<v Speaker 1>on on the road to having an on bank hearing

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<v Speaker 1>or a request for it. Will the SEC have to

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<v Speaker 1>make the same request in order to get the Denver

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<v Speaker 1>case on track. I don't think they have to make

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<v Speaker 1>that request in the tense circuit, although I expect they

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<v Speaker 1>will if they don't hear anything from the d C circuit.

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<v Speaker 1>And so really part of it for now is just

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<v Speaker 1>a waiting game to see UM and then try to

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<v Speaker 1>get one of those cases to the Supreme Court. That

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<v Speaker 1>the real challenge for the SEC is that they have

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<v Speaker 1>an easy fix here. They could go back and just

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<v Speaker 1>reappoint the five administrative law judges and say, fine, we're

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<v Speaker 1>picking them rather than having them go through the employment process.

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<v Speaker 1>But then that might be seen as a concession that

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<v Speaker 1>they were not properly appointed, and so SEC has a

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<v Speaker 1>bit of a conundrum here as to you know, do

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<v Speaker 1>you leave well enough alone hope Supreme Court rules in

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<v Speaker 1>your favor, or do you try to solve it but

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<v Speaker 1>then throw into doubt any other cases, in fact, cases

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<v Speaker 1>that are now closed. That's really something that's going to

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<v Speaker 1>also be on the SEC's plate. Now. Looking ahead, Greg,

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<v Speaker 1>we have present elect Donald Trump coming into office, and

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<v Speaker 1>we have Congressman Jeb Hencerling being among those who have

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<v Speaker 1>already announced plans to rip up Dodd Frank, And of

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<v Speaker 1>course the SEC started pumping up these hearings with with

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<v Speaker 1>Dodd Frank in. Is that likely to have an effect

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<v Speaker 1>on this? I don't know. I'm not sure that anybody

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<v Speaker 1>is going to rush to judgment on this right away.

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<v Speaker 1>There are many many issues that I think are more

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<v Speaker 1>pressed for the United States, for the President, for the

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<v Speaker 1>Congress as to whether or not the h A l

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<v Speaker 1>J's have been constitutionally appointed. But I do believe that

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<v Speaker 1>at some point within the next four years we will

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<v Speaker 1>we will be in a position where Congress is debating

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<v Speaker 1>whether Don Frank has continued viability, particularly as it applies

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<v Speaker 1>to situations like this. So I expect some changes because

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<v Speaker 1>I expect this to go to the Supreme Court. But

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<v Speaker 1>I would expect that to happen before I would expect

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<v Speaker 1>Don Frank to be repealed or or Congress to take

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<v Speaker 1>on this a LJ Inferior Office officer issue, Peter. If

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<v Speaker 1>it does go to the Supreme Court, is this a

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<v Speaker 1>question of liberal versus conservative or is it a different

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<v Speaker 1>kind of question? Well, that's a very good question, Um,

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<v Speaker 1>because it doesn't divide up liberal conservative it is. This

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<v Speaker 1>is really a a fairly technical issue. But one thing

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<v Speaker 1>the court is going to pay attention to is, you know,

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<v Speaker 1>as Greg said, the freight tag case says, let's take

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<v Speaker 1>this on a case by case basis, how these judges operate.

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<v Speaker 1>But of course, if everyone reads into opinions, how does

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<v Speaker 1>this affect other areas? And the SEC has five judges

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<v Speaker 1>but Social Security Administration has fifteen hundred judges. What is

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<v Speaker 1>the court going to do when it figures this out.

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<v Speaker 1>I don't think it's going to divide up so much

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<v Speaker 1>liberal conservative as how much authority do we want to

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<v Speaker 1>give to these types of judges and these administrative agencies?

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<v Speaker 1>And Greg finally about thirty seconds, on a scale of

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<v Speaker 1>one to ten, how big? How much damage has this caused?

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<v Speaker 1>The SEC? I don't think this has caused very much

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<v Speaker 1>damage to the SEC itself because there are at least

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<v Speaker 1>four or five or other challenges to this specific issue

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<v Speaker 1>out there floating through circuit courts. I have one myself

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<v Speaker 1>that's going to the Fourth Circuit, So there are multiple

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<v Speaker 1>defendants who are challenging these cases. Eventually, I believe this

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<v Speaker 1>was going to end up in the Supreme Court regardless

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<v Speaker 1>of what the ten Circuit did. Thank you both for

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<v Speaker 1>being on Bloomberg Law. That's Gregory Moore Villow, founding partner

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<v Speaker 1>of More Willow LLLP and Peter Henning, professor at Wayne

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<v Speaker 1>State University Law School. Thanks you both. Thanks to you both.

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<v Speaker 1>Coming up new legal arguments may allow some borrowers to

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<v Speaker 1>discharge their student loans in bankruptcy. Although it's a very

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<v Speaker 1>narrow opening, it's a new thing that's coming up in

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<v Speaker 1>light of the trillion of dollars in student loans that

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<v Speaker 1>are out there. We're going to be discussing that coming

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<v Speaker 1>up on Bloomberg Law. I'm June Grossell. You're listening to

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<v Speaker 1>Bloomberg Law. This is Bloomberg