SEC Venue Selection: Avoiding Ground-Hog Day

The Supreme Court agreed to determine whether the SEC’s use of hearing officers is contrary to the Constitution’s Appointments Clause in an order entered in Raymond J. Lucia Companies v. SEC, No. 17-130 on Friday, January 12, 2018 . Both Petitioner Raymond J. Lucia Companies and the Solicitor General urged the High Court to hear the case and resolve the split in the circuits over the question. Much of the drama surrounding the question was eliminated last year when the Solicitor General agreed with Petitioner on the resolution of the issue. Following that agreement the SEC appointed its ALJs in accord with the Clause and ordered certain remedial steps. In re: Pending Administrative Proceedings, Order (Nov. 30, 2017)(“SEC Order”).

Yet the critical question that sparked the case now before the High Court, and other similar actions, will remain regardless of the Supreme Court’s ruling: venue selection for SEC enforcement actions. It was the SEC’s decision to move the bulk of its enforcement actions to its administrative tribunal from federal court that ignited the controversy now before the Supreme Court. The ultimate question here is thus not who will prevail in the Supreme Court but whether the SEC will address the question of venue selection. Ignoring the question condemns all to a rehash of the last several years — Ground Hog day where, like the film of that name, the parties relive the same saga each day over and over.


Raymond J. Lucia Companies is one of a series of cases brought against the Commission centered on the question of whether enforcement action should be litigated in federal district court or in an SEC administrative proceeding. The selection is often critical given the right to a jury, extensive discovery and rules of evidence governing the admissibility of evidence in district court compared to the no jury, circumscribed discovery and no real rules of evidence in the administrative forum. Yet in recent years the SEC has filed most of its enforcement actions in its administrative tribunals.

The initial cases challenging the SEC’s venue selection decisions focused largely on constitutional question involving equal protection and due process. Those cases were typically rejected by the courts which concluded at the SEC’s urging that they lacked jurisdiction. See, e.g. SEC. Jarkesy v. SEC, No. 14-5196 (D.C. Cir. Sept. 29, 2015); Bebo v. SEC, No. 15-1511 (7th Cir. Aug. 24, 2015). Two court, however, concluded that SEC ALJs were appointed in violation of the Constitution’s Appointment Clause. Hill v. SEC, No. 1:15-cv-1801, 2015 WL 4307088 (N.D. Ga. June 8, 2015) and Duka v. SEC, No. 15 Civ. 357,2015 WL 1943245 (S.D.N.Y. April 15, 2015). The Duka Court entered a preliminary injunction, giving the SEC an opportunity to resolve the issue. The question was not resolved. Eventually a split in the circuits evolved with the Tenth Circuit concluding that SEC ALJs should have been appointed in accord with the Appointments Clause and the DC Circuit adopting the opposite view. Bandimere v. SEC, 844 F. 3d 1168 (10th Cir. 2016), petition for cert. pending, No. 17-475 (filed Sept. 29, 2017); Raymond J. Lucia Companies v. SEC, 832 F. 3d 277 (D.C. Cir. 2017). The circuit split lead to the Supreme Court’s action last week.

The Solicitor General chose not to oppose the petition in Raymond J. Lucia Companies. Rather, as a Commission order entered on November 29, 2017 states “the Solicitor General agreed with the petitioners that the U.S. Supreme Court should decide whether administrative law judges of the Commission are inferior officers under the Appointments Clause . . . The Solicitor General took the position that the Commission administrative law judges are inferior officers for purposes of the Appointments Clause [contrary to the SEC’s position] but recommended that the Supreme Court appoint an amicus curiae to defend the contrary judgment of the Court of Appeals. . .” The Commission then essentially confessed error, stating “To put to rest any claim that administrative proceedings pending before, or presided over by, Commission administrative law judges violate the Appointments Clause, the Commission – in its capacity as head of a department – hereby ratifies the agency’s prior appointment . . .” of its ALJs. The Order went on to essentially direct each ALJ to reconsider pending proceedings now that they were properly appointed in accord with the Constitution. SEC Order at 1-3.

While the Supreme Court will presumably resolve the split in the circuits on the Appointments Clause question next term, the venue selection issue which underlies the case is not being addressed. This means that after years of litigation, and the expenditure of untold millions of dollars on both sides, the issue will remain. Stated differently, unless there is a resolution of the venue issue, or those being charged by the SEC just drop the venue question despite the enormous stakes involved, a replay of the last few years is about to begin – Ground Hog day.


A replay of the past venue litigation or even some variation of it is unnecessary and would be wasteful. The Commission has the opportunity to avoid it. The Commission has a new Chairman, new Commissioners, a revamped senior staff and an refocused enforcement division committed to the efficient use of resources. That can begin by avoiding Ground Hog Day.

To be sure, the statutes give the agency the discretion to pick the forum for its enforcement actions. The proper exercise of that discretion does not mean that the SEC should simply pick the venue best favors its case without any input from those about to be charged. To the contrary, such a process is little more than an exercise in stacking the deck which undermines the perception of fairness that sparked the initial round of suits.

Thoughtful groups such as the U.S. Chamber of Commerce have put forward proposals which, under certain circumstances, would permit Respondents charged in administrative proceedings to opt for a change of venue. Adopting that proposal, or a variation of it, would significantly enhance the fairness of the overall process. Alternatively, the Commission could, at a minimum, supplement the Wells Process and specifically request as part of a submission that the party address the question of venue when the case is potentially heading for litigation. That would at least give those about to litigate with the Commission an opportunity to have some input on the question in the same way in which they can address potential charges.

In the end the key to an effective SEC enforcement program is fundamental fairness. With limited resources the agency cannot investigate, much less litigate, every possible suit as it has long recognized. Rather, as an enforcement program of a regulator rather than a prosecutor, the Commission relies at least in part on the good will of gatekeepers and registrants and, to an extent, even the cooperation of those under investigation and charged. All of this is keyed to a perception of fairness. Enhancing that perception can avoid a repetition of the last few years. It can avoid Groundhog Day.

Tagged with: , ,