A US federal court in Atlanta ruled that an administrative enforcement proceeding by the Securities and Exchange Commission against Charles Hill is unconstitutional and enjoined it from proceeding. This is because the administrative law judge selected to hear the case was not appointed by the SEC commissioners themselves, but hired instead by the SEC’s Office of Administrative Law Judges. Thus, claimed the court, the ALJ’s selection violated the so-called “Appointments Clause” – Article II of the US Constitution. This Article requires all “inferior officers” of the US government to be appointed by the President, department heads or courts of law. Inferior officers, wrote the court, include “all agency officers including those whose functions are predominantly quasi judicial and quasi legislative” – such as ALJs. The SEC had filed a complaint against Mr. Hill related to his purchase and sale of shares of Radiant Systems, Inc. during June and July 2010 based on alleged insider information that Radiant would soon merge with NCR Corporation. Mr. Hill’s administrative enforcement proceeding had been scheduled to commence today (June 15, 2015). The court rejected the SEC’s argument that Mr. Hill was precluded from raising his claims in federal court until after the conclusion of his administrative proceeding and an appeal and decision by the SEC. The court said that “[p]laintiff’s constitutional claims are outside the SEC’s expertise,” and thus it had subject matter jurisdiction to hear Mr. Hill’s claim. Moreover, “requiring Plaintiff to pursue his constitutional claims following the SEC’s administrative process ‘could foreclose all meaningful judicial review’ of his constitutional claims,” said the court. Mr. Hill’s victory may be short-lived, however, as the court also noted that “the ALJ’s appointment could easily be cured by having the SEC Commissioners issue an appointment or preside over the matter themselves.” Late last year, a federal court in New York upheld the right of the SEC to bring an enforcement action before an ALJ as opposed to a federal court (Click here for details in the article, “SEC Okay to Prosecute Cases Before Administrative Tribunals Rather Than Federal Courts Says US Judge” in the December 14, 2014 edition of Bridging the Week.)

Legal Weeds: If upheld by appeals courts, including the Supreme Court, the Georgia court’s decision could raise important questions regarding the legitimacy of past decisions by both SEC and Commodity Futures Trading Commission ALJs. This constitutional argument could likely be next addressed by a federal court in New York. There, Lynn Tilton is currently seeking to enjoin the agency from proceeding with administrative enforcement proceeding against her and companies she owns and controls. The SEC alleged that, since 2003, the respondents misled investors about the declining value of assets in collateralized loan obligation funds they managed. (Click here for more details regarding this litigation in the article, “SEC Charges Investment Advisers and Owner of Misleading Investors in Funds Regarding the Poor Performance of Underlying Assets; Respondents Sue SEC Right Back” in the April 5, 2015 edition of Bridging the Week.)