On Monday, the United States District Court for the Northern District of Georgia took an unprecedented step when it preliminarily enjoined the Securities Exchange Commission from conducting an administrative proceeding brought against Charles Hill, Jr., finding a substantial likelihood that Mr. Hill will succeed on the merits of his claim that the SEC violated the Appointments Clause of Article II of the US Constitution by bringing the action before an SEC Administrative Law Judge appointed in a manner inconsistent with that Clause.
In Hill v. Securities and Exchange Commission, the district court agreed with Mr. Hill that SEC ALJs are inferior officers within the meaning of Article II and therefore must be appointed by the President, department heads or courts of law. SEC ALJs are appointed by the SEC’s Office of Administrative Law Judges, with input from the Chief Administrative Law Judge, human resource functions and the Office of Personnel Management. As a result, the district court found that the SEC ALJ’s appointment was likely unconstitutional. Hill had filed an action for declaratory relief and to enjoin the SEC after the SEC instituted civil administrative proceedings against him by way of an Order Instituting Cease-and-Desist Proceedings. The SEC contended that the district court did not have subject matter jurisdiction over Hill’s constitutional claims because there was exclusive jurisdiction in the administrative proceeding. The district court disagreed.
In recent years, since the Dodd-Frank Act first gave the SEC power to seek civil penalties against unregistered persons in administrative proceedings—which some say effectively denies such persons the right to a jury trial in federal court—the SEC has increasingly instituted such proceedings before its own ALJs instead of in federal court, and has enjoyed a nearly perfect success rate in its in-house forum. This is the first time a court has enjoined such a proceeding. Yet the court did not enjoin the proceeding based on Mr. Hill’s claim that he was denied his constitutional right to a jury trial (or for that matter on any basic concept that the deck simply might be stacked against a person where an action is brought by the SEC and decided by an SEC judge). Instead, it relied on the more technical argument that the ALJ’s appointment likely violated the Constitution’s Appointments Clause. What remains to be seen is whether a broader challenge to the fairness of the process can be successful, or whether the SEC can simply fix the problem by changing the way the ALJs are appointed (as the court noted is possible).