He’s Baaaaaaaack .. Raymond J. Lucia Returns To Challenge SEC

04 Dec He’s Baaaaaaaack .. Raymond J. Lucia Returns To Challenge SEC

Posted at 18:39h in Securities Litigation & Regulation by

Raymond J. Lucia, who in 2017 challenged the constitutionality of the SEC’s process for appointing administrative law judges (“ALJs”), a challenge the Supreme Court ruled in his favor earlier this year, is back at it.  On November 28, 2018, Lucia filed a second case against the SEC in the Southern District of California (San Diego), alleging the SEC’s “fix” in response to the Supreme Court’s decision does not cure the underlying problem, namely, that the ALJs’ appointment remains unconstitutional as they are not subject to summary removal by the President or a principal officer, i.e., the head of a federal department or agency as required by cases interpreting the “take care” clause.  Specifically, Lucia complains that, even though the SEC has changed its procedure for appointing ALJs in accordance with an executive order signed by President Trump on July 10, 2018, they remain removable only through a process administered by the Merit Systems Protection Board (“MSPB”).

Whereas the prior challenge focused on the roles and responsibilities of ALJs, to establish how they properly should be appointed, the present challenge focuses on how they are removed, an issue on which Justice Breyer, alone, focused in his partial dissent in Lucia.   Relying on the Court’s 2010 ruling in Free Enterprise Fund v. Public Company Account Oversight Board, Justice Breyer first observed that the status of ALJs should not involve the constitution at all, as ALJs are creatures of statute.  Breyer reasoned that, in enacting the Administrative Procedure Act (“APA”) which created them, Congress intended ALJs to be independent of political influence.  This would eliminate the perception extant when the APA was enacted in 1946 that ALJs were susceptible to pressure to satisfy the heads of the departments and agencies in which they served rather than objectively deciding cases on the merits. Thus, through the APA, Congress made ALJs removable only for cause, which is to be determined by the MSPB.

Because they exercise substantial federal authority, however, and hence were deemed by the Supreme Court to be inferior officers, Lucia maintains that ALJs must be subject to direct removal by the principal officers by whom they were appointed.  This position is consistent with Article II’s imposition on the President the obligation to “take care that the laws be faithfully executed”; meaning the President must be able to remove any principal officer who fails in that regard, or direct any principal officer to remove any subordinate inferior officer who so fails.  As the Court in Free Enterprise noted: “[w]ithout a clear and effective chain of command, the public cannot ‘determine on whom the blame or the punishment of a pernicious measure, or series of pernicious measures ought really to fall.’”  130 S.Ct. 3138, citing A. Hamilton, The Federalist No. 72, p. 487 (J. Cooke ed. 1961).

In this regard, a process that limits an inferior officer’s removal to a contested proceeding to establish that good cause exists for such removal could frustrate the President’s timely fulfillment of his “take care” obligation.  Moreover, the fact that members of the MSPB are themselves removable only for good cause adds yet another layer insulating would-be rogue ALJs from accountability inasmuch as their failure to find good cause that the offending ALJ had not properly or consistently applied the law might justify their own removal, which would present a second hurdle to removing the offending rogue actor.  As the Court has stated: “[t]he diffusion of power carries with it a diffusion of accountability.”

Hence, Justice Breyer identified a direct conflict between Congress’ authority to establish agencies to aid the executive in the execution of his responsibilities and the take care clause’s requirement that he directly ensure proper administration of the law.  By moving from one end of the stick to another – from the appointment on the front end to removal on the back end – Lucia’s current  challenge may well lead to a reconciling of this bedeviling conflict.

Ron Wood

Ron Wood

Ron Wood is a partner with Brown White & Osborn LLP. A former Assistant Director in the SEC's Division of Enforcement, Executive Director in the Law Division at Morgan Stanley, and litigation partner with Proskauer LLP, he practices securities law with a focus on regulatory and enforcement matters. He also conducts internal investigations and complex commercial litigation.
Ron Wood

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