Ice Skating up Hill: Constitutional Challenges to SEC Administrative Proceedings

Journal of Business & Securities Law Volume 16 | Issue 1 Article 2 2016 Ice Skating up Hill: Constitutional Challenges to SEC Administrative Proceedings Thomas Glassman Follow this and additional works at: http://digitalcommons.law.msu.edu/jbsl Part of the Law Commons Recommended Citation Thomas Glassman, Ice Skating up Hill: Constitutional Challenges to SEC Administrative Proceedings, 16 J. Bus. & Sec. L. 47 (2016), Available at: http://digitalcommons.law.msu.edu/jbsl/vol16/iss1/2 This Article is brought to you for free and open access by Digital Commons at Michigan State University College of Law. It has been accepted for inclusion in Journal of Business & Securities Law by an authorized administrator of Digital Commons at Michigan State University College of Law. For more information, please contact . Glassman: Ice Skating up <em>Hill</em>: Constitutional Challenges to SEC Ad ICE SKATING UP HILL: CONSTITUTIONAL CHALLENGES TO SEC ADMINISTRATIVE PROCEEDINGS Thomas Glassman I. II. INTRODUCTION .......................................................................... 48 BACKGROUND ............................................................................ 50 A. The SEC’s authority: The first 50 years.................................. 50 B. SEC Authority Expanding: 1984 to today .............................. 51 C. The SEC and the administrative process................................. 52 i) The Differences between SEC Administrative Hearings and Federal Law ................................................. 55 III. REACTIONS TO DODD-FRANK ................................................ 56 A. Judge Rakoff: Administrative Creep......................................... 57 B. Andrew Ceresney Responds...................................................... 59 IV. CASES CHALLENGING THE ADMINISTRATIVE PROCEEDINGS USED BY THE SEC.......................................... 63 A. Constitutional Challenges in Federal Court. Step 1: Subject Matter Jurisdiction........................................................ 64 B. Constitutional Arguments .......................................................... 65 i) Due Process .......................................................................... 65 ii) Equal protection................................................................... 67 iii) Jury Trial Right................................................................... 68 iv) Separation of Powers .......................................................... 70 v) Non-Delegation Doctrine..................................................... 71 V. GUPTA, DUKA, AND HILL: WHERE COURTS CONSIDERED THE CONSTITUTIONAL CHALLENGES ................. 72 A. Gupta v. SEC .............................................................................. 72 B. Duka v. SEC ............................................................................... 74 C. Hill v. SEC.................................................................................. 75 VI. WHAT ARE THE IMPLICATIONS OF HILL? ............................ 78 A. What if the SEC ALJs are seen as inferior officers? ................ 79 B. SEC Options ............................................................................... 82 VII. CONCLUSION................................................................................ 83 Published by Digital Commons at Michigan State University College of Law, 2016 1 Journal of Business & Securities Law, Vol. 16 [2016], Iss. 1, Art. 2 48 Journal of Business & Securities Law [Vol. 16 Abstract Since the inception of the Dodd-Frank Act the Securities and Exchange Commission has come under fire for its increased use of administrative proceedings in adjudicating the agency’s enforcement actions. That criticism has come to several suits in federal court claiming constitutional challenges to the system generally, and most recently, the Administrative Law Judges themselves. Until June of 2015, when Hill v. SEC took place in federal court, the Government was unbeaten when arguing against these constitutional challenges. Hill, however, found that it was likely the SEC had hired their Administrative Law Judges unconstitutionally. The SEC Administrative Law Judges have progressively been given more power through Congressional legislation and the question became whether these judges were mere employees, or inferior officers under the executive branch. While I think it is likely that an appellate court would uphold such an interpretation, I do not think it will lead to less SEC administrative proceedings and could potentially cause financial harm to those with cases currently pending in such a proceeding. I. INTRODUCTION For a March, 2015 article entitled “SEC’s Admin Court Draws Fire From Every Angle,” author Stephanie Russell-Kraft contacted United States Securities and Exchange Commission (“SEC”) Spokesmen Judith Burns to ask if any of the numerous recent challenges to the SEC administrative proceedings has affected the agency’s strategies when filing new enforcement actions.1 Ms. Burns declined to comment, but instead referred the author to a November 2014 speech by SEC Enforcement Director Andrew Ceresney where he calls the agency’s use of administrative proceedings “eminently proper, appropriate and fair to respondents.” 2 After discussing the recent challenges, taking Mr. Ceresney at his word, Ms. Russell-Kraft ominously concludes that “[u]ntil a federal judge rules otherwise, it’s still the SEC’s game.” 3 1 Stephanie Russell-Kraft, SEC's Admin Court Draws Fire From Every Angle, LAW360 (MARCH 2, 2015, 3:29 PM ET) http://www.law360.com/articles/625254/sec-s-admin-court-draws-firefrom-every-angle. 2 Id. 3 Id. http://digitalcommons.law.msu.edu/jbsl/vol16/iss1/2 2 Glassman: Ice Skating up <em>Hill</em>: Constitutional Challenges to SEC Ad Fall] Ice Skating Up Hill 49 Just two months later, Judge Leigh Martin May of the United States District Court for the Northern District of Georgia, Atlanta Division, ruled in favor of Charles L. Hill’s preliminary injunction, which enjoined the SEC from proceeding with his “insider trading” in front of an SEC appointed Administrative Law Judge (“ALJ”). Judge May reasoned that because the ALJ was "not appropriately appointed” pursuant to Article II, Sec. 2, Cl. 2 of the United States Constitution (“The Appointments Clause”) “his appointment is likely unconstitutional in violation of the Appointments Clause.” 4 In attempting to keep the judge from hearing the case at all, the SEC argued that the public interest should be in its favor because it is “charged with protecting investors and maintaining the integrity of the securities markets,” but the court found that it is never “in the public interest for the Constitution to be violated.” 5 In this article, I try to put Hill in historical context by discussing prior caselaw and what it might mean for the SEC and respondents to Enforcement actions. I begin with the history of the SEC’s authority and its (...truncated)