Burr & Forman

09.13.2017   |   Blog Articles, SEC, Securities Litigation

5th Circuit Hints SEC ALJs Unconstitutional

In an Opinion highlighting the Circuit split over the constitutionality of SEC administrative law judges (“ALJs”), the Fifth Circuit recently stayed an FDIC civil-penalty and bar order against a Bank director, pending complete judicial review.

Petitioner Burgess is a bank director (and former officer) prosecuted administratively by the FDIC for improper expense practices and misuse of bank property.  An FDIC ALJ conducted the hearing and recommended civil penalties and a banking bar.  The FDIC largely adopted those findings and conclusions.  Burgess moved to stay implementation of the order pending judicial review by the 5th Circuit.

The Court held that Burgess demonstrated a “strong showing” of likelihood of success.  The Court noted the tension between the Supreme Court’s Freytag opinion holding that IRS ALJs are subject to the constitution’s Appointments Clause and the D.C. Circuit’s contrary holding regarding FDIC ALJs.  Compare Freytag v. Commissioner of Internal Revenue, 501 U.S. 868, 881-82 (1991) with Landry v. FDIC, 204 F. 3d 1125 (D.C. Cir. 2000).

The Court noted, though, that the Circuits were split on the same issue regarding SEC ALJs and that even the D.C. Circuit recently denied en banc review of the point by an evenly divided court.

Compare Raymond J. Lucia Cos., Inc. v. SEC, 832 F. 3d 277 (D.C. Cir. 2016)(SEC ALJs not “inferior officers”), reh’g denied, 2017 WL 2727019 (D.C. Cir. June 26, 2017)(equally divided court), with Bandimere v. SEC, 844 F. 3d 1168 (10th Cir. 2016)(SEC ALJs are inferior officers).  Lucia’s certiorari petition is pending before the Supreme Court.  Raymond J. Lucia v. SEC, No. 17-130 (S. Ct., filed July 21, 2017).

The opinion tips that the Fifth Circuit is likely to align with Bandimere and reject the SEC’s customary reliance on Landry.  It indicates this panel (at least) is likely to hold that both FDIC and SEC ALJs are “inferior officers” and the current administrative law regimes are unconstitutional under the Appointments Clause.

The opinion, Burgess v. FDIC, No. 17-60579 (Sept. 7, 2017) is here.

Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas and Louisiana. He has over 30 years’ experience representing financial institutions in litigation, regulatory and compliance matters.  See attorney profile. © 2017 by Thomas K. Potter, III (all rights reserved).

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