SEC wins latest round over how its judges are appointed

To match Special Report SEC/INVESTIGATIONS

By Sarah N. Lynch

WASHINGTON (Reuters) – A divided U.S. appeals court handed the U.S. Securities and Exchange Commission a victory on Monday over how it appoints its in-house judges in a decision that could pave the way for the Supreme Court to resolve the matter.

In a 5-5 split, a panel of 10 judges for the U.S. Court of Appeals for the District of Columbia Circuit effectively rejected a legal challenge by former radio talk show host Raymond Lucia, who had asked the court to review whether the SEC violated the U.S. Constitution when it appointed its administrative law judges.

Monday’s decision in the SEC’s favor is at odds with the Denver-based 10th U.S. Circuit Court of Appeals, which previously ruled that the SEC violated the Constitution in how its judges were appointed in a similar case.

The SEC has since halted pending in-house trials involving defendants with appeal rights to the 10th Circuit until the legal issues can be resolved.

“We look forward to the Supreme Court’s resolution of the conflict between the D.C. Circuit and the Tenth Circuit,” said Gibson Dunn & Crutcher attorney Mark Perry, who argued the case for Lucia.

An SEC spokeswoman declined to comment.

The SEC has faced mounting challenges in recent years to the constitutionality of how it appoints its in-house judges. At issue is whether administrative law judges are merely employees or “inferior officers” who wield significant decision-making authority covered by the Appointments Clause of the Constitution.

The agency argues that administrative law judges are only employees because their decisions are not final and still subject to SEC review. But critics say they are inferior officers because they have the power to impose fines and bar people from the industry.

Inferior officers under the Constitution must be appointed by the president, the head of a federal agency or by a court.

Lucia, who was known for his “Buckets of Money” investment strategy, was sued by the SEC for fraud in 2012. SEC Administrative Law Judge Cameron Elliot found him liable the next year, barred him from the industry and ordered him to pay $300,000.

Since then, Lucia has been appealing the case on the grounds that Elliot was improperly hired.

(Reporting by Sarah N. Lynch)