1 00:00:00,120 --> 00:00:02,960 Speaker 1: For years, the Securities and Exchange Commission has been accused 2 00:00:03,000 --> 00:00:06,360 Speaker 1: of having a home court advantage, using in house judges 3 00:00:06,400 --> 00:00:10,280 Speaker 1: to decide cases and administrative proceedings rather than federal judges 4 00:00:10,320 --> 00:00:13,119 Speaker 1: and jury trials. A question that has been around for 5 00:00:13,280 --> 00:00:17,200 Speaker 1: years is whether the appointment of these administrative judges violates 6 00:00:17,239 --> 00:00:21,440 Speaker 1: the Constitution's appointments clause. That question may be answered by 7 00:00:21,480 --> 00:00:24,120 Speaker 1: the Supreme Court because the U. S. Court of Appeals 8 00:00:24,120 --> 00:00:26,840 Speaker 1: for the District of Columbia and the Court of Appeals 9 00:00:26,840 --> 00:00:30,200 Speaker 1: for the Tenth Circuit have come to different conclusions on 10 00:00:30,280 --> 00:00:33,640 Speaker 1: that important issue. Joining us is Peter Henning, a professor 11 00:00:33,680 --> 00:00:38,160 Speaker 1: at Wayne State University Law School and a former SEC attorney. Peter, 12 00:00:38,280 --> 00:00:41,640 Speaker 1: let's start with the long held belief by securities defense 13 00:00:41,640 --> 00:00:46,239 Speaker 1: attorneys that the SEC has the advantage bringing enforcement actions 14 00:00:46,280 --> 00:00:50,680 Speaker 1: before its own judges. Well, the complaint by the securities 15 00:00:50,720 --> 00:00:54,400 Speaker 1: defense bar has been that in these administrative proceedings they 16 00:00:54,440 --> 00:00:59,400 Speaker 1: don't have the right to depose witnesses, send subpoenas out 17 00:00:59,400 --> 00:01:03,920 Speaker 1: for document. Essentially, what they get is what the SEC 18 00:01:04,120 --> 00:01:07,920 Speaker 1: gathered in its investigation. Now, the SEC tinkered with its 19 00:01:08,000 --> 00:01:11,360 Speaker 1: rules a little bit last year and allows up to 20 00:01:11,520 --> 00:01:15,320 Speaker 1: three witnesses to be subpoenaed, but still you don't get 21 00:01:15,319 --> 00:01:17,880 Speaker 1: the broad discovery rights that you would get in a 22 00:01:17,920 --> 00:01:21,160 Speaker 1: federal district court case. And of course it is an 23 00:01:21,319 --> 00:01:25,640 Speaker 1: SEC hire the judge who's hired by the agency who's 24 00:01:25,640 --> 00:01:28,440 Speaker 1: going to make that decision. Then the case gets appealed 25 00:01:28,440 --> 00:01:31,959 Speaker 1: to the five full Commissioners who authorized the action. So 26 00:01:32,440 --> 00:01:34,880 Speaker 1: there have been claims that this gives the SEC just 27 00:01:35,000 --> 00:01:38,280 Speaker 1: too much of a home court advantage when it goes 28 00:01:38,319 --> 00:01:43,200 Speaker 1: with its own administrative proceeding rather than going into federal court. Well, 29 00:01:43,200 --> 00:01:45,959 Speaker 1: but the SEC doesn't always win these cases before the 30 00:01:45,959 --> 00:01:50,040 Speaker 1: administrative led judges, does it. No, it doesn't. In fact, 31 00:01:50,040 --> 00:01:52,800 Speaker 1: they've been a couple of cases where they haven't fared 32 00:01:52,920 --> 00:01:55,880 Speaker 1: quite as well. Um, there was an insider trading case, 33 00:01:56,160 --> 00:01:58,960 Speaker 1: type of case that would never have been brought in 34 00:01:59,040 --> 00:02:03,840 Speaker 1: an administrative seating before the Dodd Frank Act, in a 35 00:02:03,920 --> 00:02:06,440 Speaker 1: case against a defendant by the name of Charles Hill. 36 00:02:07,040 --> 00:02:11,079 Speaker 1: The SEC s a LJ. Administrative law judge sided completely 37 00:02:11,120 --> 00:02:13,880 Speaker 1: with Mr Hill and said there is not enough evidence 38 00:02:13,919 --> 00:02:16,840 Speaker 1: here to show any inside or trading, any tipping of 39 00:02:16,919 --> 00:02:20,200 Speaker 1: inside information, and so dismissed the charge and the SEC 40 00:02:20,400 --> 00:02:24,080 Speaker 1: let it pass um, and the SEC wins most of 41 00:02:24,120 --> 00:02:27,560 Speaker 1: its cases, whether it goes into an administrative proceeding or 42 00:02:28,040 --> 00:02:32,520 Speaker 1: federal district court. In so you wonder how much the 43 00:02:32,639 --> 00:02:36,200 Speaker 1: perception is actually the reality. But of course, you know, 44 00:02:36,240 --> 00:02:39,280 Speaker 1: once the perception takes hold, then it becomes a matter 45 00:02:39,400 --> 00:02:43,440 Speaker 1: of wrote recitation. The SEC gets a home court advantage 46 00:02:43,440 --> 00:02:46,800 Speaker 1: when it goes with an administrative proceeding. Peter explain the 47 00:02:46,840 --> 00:02:52,560 Speaker 1: constitutional issue about these administrative judges. Well, the the issue 48 00:02:52,600 --> 00:02:56,280 Speaker 1: comes down to a fairly obscure provision of the Constitution 49 00:02:56,360 --> 00:02:59,760 Speaker 1: called the Appointments Clause. That, um, you know, the president 50 00:02:59,800 --> 00:03:03,720 Speaker 1: has to select certain positions, cabinet officers, things like that, 51 00:03:04,040 --> 00:03:08,160 Speaker 1: which then go through the Senate. But also if someone 52 00:03:08,240 --> 00:03:11,160 Speaker 1: falls in the category of what's called an inferior officer, 53 00:03:11,919 --> 00:03:14,240 Speaker 1: that has to be appointed by the president, even though 54 00:03:14,280 --> 00:03:16,640 Speaker 1: the Senate doesn't get review of it has to be 55 00:03:16,639 --> 00:03:20,600 Speaker 1: appointed by the president. Where someone who the president appoints. 56 00:03:20,880 --> 00:03:25,359 Speaker 1: And the rationale for that is you need political accountability. 57 00:03:25,680 --> 00:03:28,839 Speaker 1: And of course the president is politically accountable. He's elected here, 58 00:03:28,880 --> 00:03:32,080 Speaker 1: she's elected every four years. So you want there to 59 00:03:32,120 --> 00:03:36,720 Speaker 1: be some accountability. You don't want Congress creating positions that 60 00:03:37,120 --> 00:03:41,520 Speaker 1: could be immune to presidential oversight. Well, the question is, 61 00:03:42,080 --> 00:03:45,960 Speaker 1: are these administrative law judges at the SEC and perhaps 62 00:03:45,960 --> 00:03:50,920 Speaker 1: other agencies? Are the administrative officers? Because these SEC judges 63 00:03:51,400 --> 00:03:54,480 Speaker 1: were simply hired like anyone else, Like I was. Just 64 00:03:54,760 --> 00:03:58,160 Speaker 1: you go through the normal personnel office, they decided to 65 00:03:58,200 --> 00:04:01,480 Speaker 1: hire you, and you get your job. Um, should the 66 00:04:01,520 --> 00:04:06,040 Speaker 1: President or the SEC commissioners have appointed these judges a 67 00:04:06,120 --> 00:04:10,280 Speaker 1: fairly technical point, but also a very important one because 68 00:04:10,320 --> 00:04:13,360 Speaker 1: if the officer, if the judge is not appointed properly, 69 00:04:13,840 --> 00:04:16,120 Speaker 1: then in fact the judge doesn't have any authority to 70 00:04:16,200 --> 00:04:18,760 Speaker 1: participate in a case. Well, I was going to say, 71 00:04:18,800 --> 00:04:22,800 Speaker 1: is it more form over substance because the SEC's internal 72 00:04:22,839 --> 00:04:26,160 Speaker 1: personnel office could choose the judges and then they could 73 00:04:26,160 --> 00:04:31,479 Speaker 1: be officially appointed by the SEC commissioners who review it. Sure, 74 00:04:31,560 --> 00:04:34,200 Speaker 1: And in fact, that's a pretty easy solution. If the 75 00:04:34,240 --> 00:04:37,920 Speaker 1: Supreme Court were to rule that these are inferior offices, 76 00:04:37,960 --> 00:04:40,960 Speaker 1: all the SEC commissioners have to do is then vote 77 00:04:41,000 --> 00:04:43,440 Speaker 1: to say, all right, well we will appoint I believe 78 00:04:43,480 --> 00:04:45,960 Speaker 1: there are six of them. We will appoint you all officially. 79 00:04:46,400 --> 00:04:49,920 Speaker 1: And that solves the problem for current cases that the 80 00:04:49,960 --> 00:04:53,680 Speaker 1: real rub here is going to be past cases. Um. 81 00:04:53,839 --> 00:04:57,000 Speaker 1: If for example, there's an order that someone is barred 82 00:04:57,080 --> 00:04:59,800 Speaker 1: from being an investment advisor for a period of years, 83 00:04:59,880 --> 00:05:03,520 Speaker 1: or perhaps even a permanent order, that case could have 84 00:05:03,640 --> 00:05:07,800 Speaker 1: to be reopened and relitigated. Um. And of course there 85 00:05:07,839 --> 00:05:12,640 Speaker 1: are probably hundreds, maybe thousands of those cases still floating around. 86 00:05:12,760 --> 00:05:17,040 Speaker 1: What if these judges weren't appointed properly, what does that 87 00:05:17,120 --> 00:05:20,359 Speaker 1: do to all those pass cases? Current cases are going 88 00:05:20,400 --> 00:05:23,119 Speaker 1: to be easy to deal with, but it's the pass 89 00:05:23,200 --> 00:05:25,880 Speaker 1: cases that I think are the concern. What do you 90 00:05:25,920 --> 00:05:30,320 Speaker 1: do with those? Peter? How likely are we to get 91 00:05:30,320 --> 00:05:33,120 Speaker 1: a resolution on this from the Supreme Court anytime soon? 92 00:05:34,320 --> 00:05:37,440 Speaker 1: I think the Supreme Court where they have to grant 93 00:05:37,520 --> 00:05:40,320 Speaker 1: cert in the case out of the d C Circuit 94 00:05:40,720 --> 00:05:44,520 Speaker 1: that's the one that's currently before them, simply because you 95 00:05:44,680 --> 00:05:49,120 Speaker 1: have the Tent Circuit decision saying no, these judges were 96 00:05:49,120 --> 00:05:53,719 Speaker 1: not appointed properly. And after that decision, then the SEC 97 00:05:53,920 --> 00:05:57,680 Speaker 1: issued in order staying all of its administrative proceedings if 98 00:05:57,720 --> 00:05:59,440 Speaker 1: it came out of one of the states, and the 99 00:05:59,480 --> 00:06:04,000 Speaker 1: Tents Circuit, which is headquartered in Denver, Colorado, so cases 100 00:06:04,040 --> 00:06:06,560 Speaker 1: from there can't go forward. Cases in the rest of 101 00:06:06,600 --> 00:06:09,400 Speaker 1: the country can that's the kind of circuit split that 102 00:06:09,480 --> 00:06:13,320 Speaker 1: the Supreme Court just has to step in and resolve. 103 00:06:13,440 --> 00:06:16,760 Speaker 1: So I would expect that they will grant sert um 104 00:06:16,839 --> 00:06:20,800 Speaker 1: in the d C circuit case. Raymond Lucia and Companies 105 00:06:21,360 --> 00:06:23,680 Speaker 1: is the case name, and I bet they will grant 106 00:06:23,720 --> 00:06:26,279 Speaker 1: it and then can decide it by the end of 107 00:06:26,320 --> 00:06:29,480 Speaker 1: the upcoming term, so by next June and finally get 108 00:06:29,520 --> 00:06:31,960 Speaker 1: some clarity on this. I guess the real issue is 109 00:06:32,440 --> 00:06:34,840 Speaker 1: if they rule against the SEC, what does that do 110 00:06:35,000 --> 00:06:40,200 Speaker 1: to other agencies? Peter in about forty seconds, Which side 111 00:06:40,279 --> 00:06:42,359 Speaker 1: do you of the issue do you think is correct? 112 00:06:43,800 --> 00:06:45,719 Speaker 1: I wish I could give an answer on that one. 113 00:06:45,760 --> 00:06:48,960 Speaker 1: I'm not going to pretend to be a constitutional scholar. Um. 114 00:06:49,000 --> 00:06:52,000 Speaker 1: This is one of those obscure little points in the 115 00:06:52,040 --> 00:06:56,280 Speaker 1: Constitution where you have case law that seems to indicate 116 00:06:56,400 --> 00:07:01,120 Speaker 1: these are inferior officers. But the Court can write pretty 117 00:07:01,200 --> 00:07:05,880 Speaker 1: much whatever it wants, understanding that any decision involving the 118 00:07:06,000 --> 00:07:09,760 Speaker 1: SEC is going to impact other federal agencies, and so 119 00:07:10,360 --> 00:07:12,640 Speaker 1: it has to look down the road and say how 120 00:07:12,720 --> 00:07:14,640 Speaker 1: much of an impact do we want to have? But 121 00:07:15,120 --> 00:07:17,760 Speaker 1: I'm not very good at making predictions. Oh, I think 122 00:07:17,800 --> 00:07:20,800 Speaker 1: you just did and sorry for putting you on the 123 00:07:20,800 --> 00:07:23,800 Speaker 1: spot all the time. That's Peter Henning, professor at Wayne 124 00:07:23,840 --> 00:07:26,840 Speaker 1: State University Law School. That's it for this edition of 125 00:07:26,840 --> 00:07:29,600 Speaker 1: Bloomberg Law. Thanks to our producer David Sutcherman and our 126 00:07:29,640 --> 00:07:31,440 Speaker 1: technical director Marx and Estauchi.