The US District Court for the Southern District of New York, in Duka v. SEC, 15 Civ. 357, has preliminarily enjoined the SEC from pursuing a pending administrative hearing against Barbara Duka, a former managing director at Standard & Poor’s Rating Services, after finding that Duka would be subject to irreparable harm by being forced to participate in the likely unconstitutional proceeding. 

The court found on August 12 that SEC administrative proceedings, like the one pending against Duka, are likely unconstitutional because SEC ALJs are not appropriately appointed under the Appointments Clause of Article II of the US Constitution.  SEC ALJs, the court reasoned, are inferior officers and, as a result, their appointment must be made by the President, courts of law, or department heads.  Currently, SEC ALJs are not so appointed. 

The Southern District followed the reasoning of US District Judge Leigh Martin May of the Northern District of Georgia, who was the first to block an SEC administrative proceeding on similar grounds in June.  Hill v. SEC, No. 1:15-CV-1801-LMM, 2015 (N.D. Ga. June 8, 2015) Earlier this month, Judge May issued a similar injunction in another case.  Gray Financial Group Inc. et al. v. SEC, 1:15-cv-00492 (N.D. Ga. Aug. 4, 2015).

Despite the mounting criticism, the SEC has refused to fix the way that ALJs are appointed.  For example, on August 3, the Southern District had given the SEC a week to cure any potential Appointments Clause violations before the court ruled on the preliminary injunction.  The SEC responded in a letter dated August 10 and refused to change the hiring process for SEC ALJs. 

This August 12 ruling represents a significant setback to the SEC’s enforcement strategy, which has included the increasing use of administrative proceedings as an alternative to litigating contested cases in federal court. Many view federal court as providing greater rights and protections to defendants.

Litigants can and should continue to raise challenges, including constitutional challenges, to this controversial forum.