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Lucia v. Securities and Exchange Commission

United States Supreme Court

June 21, 2018

RAYMOND J. LUCIA, ET AL., PETITIONERS
v.
SECURITIES AND EXCHANGE COMMISSION

          Argued April 23, 2018

         CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT No. 17-130.

The Securities and Exchange Commission (SEC or Commission) has statutory authority to enforce the nation's securities laws. One way it can do so is by instituting an administrative proceeding against an alleged wrongdoer. Typically, the Commission delegates the task of presiding over such a proceeding to an administrative law judge (ALJ). The SEC currently has five ALJs. Other staff members, rather than the Commission proper, selected them all. An ALJ assigned to hear an SEC enforcement action has the "authority to do all things necessary and appropriate" to ensure a "fair and orderly" adversarial proceeding. 17 CFR §§201.111, 200.14(a). After a hearing ends, the ALJ issues an initial decision. The Commission can review that decision, but if it opts against review, it issues an order that the initial decision has become final. See §201.360(d). The initial decision is then "deemed the action of the Commission." 15 U.S.C. §78d-l(c).
The SEC charged petitioner Raymond Lucia with violating certain securities laws and assigned ALJ Cameron Elliot to adjudicate the case. Following a hearing, Judge Elliot issued an initial decision concluding that Lucia had violated the law and imposing sanctions. On appeal to the SEC, Lucia argued that the administrative proceeding was invalid because Judge Elliot had not been constitutionally appointed. According to Lucia, SEC ALJs are "Officers of the United States" and thus subject to the Appointments Clause. Under that Clause, only the President, "Courts of Law, " or "Heads of Departments" can appoint such "Officers." But none of those actors had made Judge Elliot an ALJ. The SEC and the Court of Appeals for the D. C. Circuit rejected Lucia's argument, holding that SEC ALJs are not "Officers of the United States, " but are instead mere employees- officials with lesser responsibilities who are not subject to the Appointments Clause.

         Held:

The Commission's ALJs are "Officers of the United States, " subject to the Appointments Clause. Pp. 5-13.
(a) This Court's decisions in United States v. Germaine, 99 U.S. 508, and Buckley v. Valeo, 424 U.S. 1, set out the basic framework for distinguishing between officers and employees. To qualify as an officer, rather than an employee, an individual must occupy a "continuing" position established by law, Germaine, 99 U.S., at 511, and must "exercis[e] significant authority pursuant to the laws of the United States, " Buckley, 424 U.S., at 126.
In Freytag v. Commissioner, 501 U.S. 868, the Court applied this framework to "special trial judges" (STJs) of the United States Tax Court. STJs could issue the final decision of the Tax Court in "comparatively narrow and minor matters." Id., at 873. In more major matters, they could preside over the hearing but could not issue a final decision. Instead, they were to "prepare proposed findings and an opinion" for a regular Tax Court judge to consider. Ibid. The proceeding challenged in Freytag was a major one. The losing parties argued on appeal that the STJ who presided over their hearing was not constitutionally appointed.
This Court held that STJs are officers. Citing Germaine, the Freytag Court first found that STJs hold a continuing office established by law. See 501 U.S., at 881. The Court then considered, as Buckley demands, the "significance" of the "authority" STJs wield. 501 U.S., at 881. The Government had argued that STJs are employees in all cases in which they could not enter a final decision. But the Court thought that the Government's focus on finality "ignore[d] the significance of the duties and discretion that [STJs] possess." Ibid. Describing the responsibilities involved in presiding over adversarial hearings, the Court said: STJs "take testimony, conduct trials, rule on the admissibility of evidence, and have the power to enforce compliance with discovery orders." Id., at 881-882. And the Court observed that "[i]n the course of carrying out these important functions, " STJs "exercise significant discretion." Id., at 882.
Freytags analysis decides this case. The Commission's ALJs, like the Tax Court's STJs, hold a continuing office established by law. SEC ALJs "receive[] a career appointment, " 5 CFR §930.204(a), to a position created by statute, see 5 U.S.C. §§556-557, 5372, 3105. And they exercise the same "significant discretion" when carrying out the same "important functions" as STJs do. Freytag, 501 U.S., at 882. Both sets of officials have all the authority needed to ensure fair and orderly adversarial hearings-indeed, nearly all the tools of federal trial judges. The Commission's ALJs, like the Tax Court's STJs, "take testimony, " "conduct trials, " "rule on the admissibility of evidence, " and "have the power to enforce compliance with discovery orders." Id., at 881-882. So point for point from Freytags list, SEC ALJs have equivalent duties and powers as STJs in conducting adversarial inquiries.
Moreover, at the close of those proceedings, SEC ALJs issue decisions much like that in Freytag. STJs prepare proposed findings and an opinion adjudicating charges and assessing tax liabilities. Similarly, the Commission's ALJs issue initial decisions containing factual findings, legal conclusions, and appropriate remedies. And what happens next reveals that the ALJ can play the more autonomous role. In a major Tax Court case, a regular Tax Court judge must always review an STJs opinion, and that opinion comes to nothing unless the regular judge adopts it. By contrast, the SEC can decide against reviewing an ALJ's decision, and when it does so the ALJ's decision itself "becomes final" and is "deemed the action of the Commission." 17 CFR §201.360(d)(2); 15 U.S.C. §78d-l(c). Pp. 5-11.
(b) Judge Elliot heard and decided Lucia's case without a constitutional appointment. "[O]ne who makes a timely challenge to the constitutional validity of the appointment of an officer who adjudicates his case" is entitled to relief. Ryder v. United States, 515 U.S. 177, 182. Lucia made just such a timely challenge. And the "appropriate" remedy for an adjudication tainted with an appointments violation is a new "hearing before a properly appointed" official. Id., at 183, 188. In this case, that official cannot be Judge Elliot, even if he has by now received a constitutional appointment. Having already both heard Lucia's case and issued an initial decision on the merits, he cannot be expected to consider the matter as though he had not adjudicated it before. To cure the constitutional error, another ALJ (or the Commission itself) must hold the new hearing. Pp. 12-13.

868 F.3d 1021, reversed and remanded.

          KAGAN, J., delivered the opinion of the Court, in which ROBERTS, C. J., and Kennedy, Thomas, Alito, and Gorsuch, JJ., joined.

          OPINION

          KAGAN, JUSTICE.

         The Appointments Clause of the Constitution lays out the permissible methods of appointing "Officers of the United States, " a class of government officials distinct from mere employees. Art. II, §2, cl. 2. This case requires us to decide whether administrative law judges (ALJs) of the Securities and Exchange Commission (SEC or Commission) qualify as such "Officers." In keeping with Frey-tag v. Commissioner, 501 U.S. 868 (1991), we hold that they do.

         I

         The SEC has statutory authority to enforce the nation's securities laws. One way it can do so is by instituting an administrative proceeding against an alleged wrongdoer. By law, the Commission may itself preside over such a proceeding. See 17 CFR §201.110 (2017). But the Commission also may, and typically does, delegate that task to an ALJ. See ibid.; 15 U.S.C. §78d-1(a). The SEC currently has five ALJs. Other staff members, rather than the Commission proper, selected them all. See App. to Pet. for Cert. 295a-297a.

         An ALJ assigned to hear an SEC enforcement action has extensive powers-the "authority to do all things necessary and appropriate to discharge his or her duties" and ensure a "fair and orderly" adversarial proceeding. §§201.111, 200.14(a). Those powers "include, but are not limited to, " supervising discovery; issuing, revoking, or modifying subpoenas; deciding motions; ruling on the admissibility of evidence; administering oaths; hearing and examining witnesses; generally "[r]egulating the course of" the proceeding and the "conduct of the parties and their counsel"; and imposing sanctions for "[c]ontemptuous conduct" or violations of procedural requirements. §§201.111, 201.180; see §§200.14(a), 201.230. As that list suggests, an SEC ALJ exercises authority "comparable to" that of a federal district judge conducting a bench trial. Butz v. Economou, 438 U.S. 478, 513 (1978).

         After a hearing ends, the ALJ issues an "initial decision." §201.360(a)(1). That decision must set out "findings and conclusions" about all "material issues of fact [and] law"; it also must include the "appropriate order, sanction, relief, or denial thereof." §201.360(b). The Commission can then review the ALJ's decision, either upon request or sua sponte. See §201.360(d)(1). But if it opts against review, the Commission "issue[s] an order that the [ALJ's] decision has become final." §201.360(d)(2). At that point, the initial decision is "deemed the action of the Commission." §78d-1(c).

         This case began when the SEC instituted an administrative proceeding against petitioner Raymond Lucia and his investment company. Lucia marketed a retirement savings strategy called "Buckets of Money." In the SEC's view, Lucia used misleading slideshow presentations to deceive prospective clients. The SEC charged Lucia under the Investment Advisers Act, §80b-l et seq., and assigned ALJ Cameron Elliot to adjudicate the case. After nine days of testimony and argument, Judge Elliot issued an initial decision concluding that Lucia had violated the Act and imposing sanctions, including civil penalties of $300, 000 and a lifetime bar from the investment industry. In his decision, Judge Elliot made factual findings about only one of the four ways the SEC thought Lucia's slideshow misled investors. The Commission thus remanded for factfinding on the other three claims, explaining that an ALJ's "personal experience with the witnesses" places him "in the best position to make findings of fact" and "resolve any conflicts in the evidence." App. to Pet. for Cert. 241a. Judge Elliot then made additional findings of deception and issued a revised initial decision, with the same sanctions. See id., at 118a.

         On appeal to the SEC, Lucia argued that the administrative proceeding was invalid because Judge Elliot had not been constitutionally appointed. According to Lucia, the Commission's ALJs are "Officers of the United States" and thus subject to the Appointments Clause. Under that Clause, Lucia noted, only the President, "Courts of Law, " or "Heads of Departments" can appoint "Officers." See Art. II, §2, cl. 2. And none of those actors had made Judge Elliot an ALJ. To be sure, the Commission itself counts as a "Head[] of Department[]." Ibid.; see Free Enterprise Fund v. Public Company Accounting Oversight Bd., 561 U.S. 477, 511-513 (2010). But the Commission had left the task of appointing ALJs, including Judge Elliot, to SEC staff members. See supra, at 1. As a result, Lucia contended, Judge Elliot lacked constitutional authority to do his job.

         The Commission rejected Lucia's argument. It held that the SEC's ALJs are not "Officers of the United States." Instead, they are "mere employees"-officials with lesser responsibilities who fall outside the Appointments Clause's ambit. App. to Pet. for Cert. 87a. The Commission reasoned that its ALJs do not "exercise significant authority independent of [its own] supervision." Id., at 88a. Because that is so (said the SEC), they need no special, high-level appointment. See id., at 86a.

         Lucia's claim fared no better in the Court of Appeals for the D. C. Circuit. A panel of that court seconded the Commission's view that SEC ALJs are employees rather than officers, and so are not subject to the Appointments Clause. See 832 F.3d 277, 283-289 (2016). Lucia then petitioned for rehearing en banc. The Court of Appeals granted that request and heard argument in the case. But the ten members of the en banc court divided evenly, resulting in a per curiam order denying Lucia's claim. See 868 F.3d 1021 (2017). That decision conflicted with one from the Court of Appeals for the Tenth Circuit. See Bandimere v. SEC, 844 F.3d 1168, 1179 (2016).

         Lucia asked us to resolve the split by deciding whether the Commission's ALJs are "Officers of the United States within the meaning of the Appointments Clause." Pet. for Cert. i. Up to that point, the Federal Government (as represented by the Department of Justice) had defended the Commission's position that SEC ALJs are employees, not officers. But in responding to Lucia's petition, the Government switched sides.[1] So when we granted the petition, 583 U.S. ___ (2018), we also appointed an amicus curiae to defend the judgment below.[2] We now reverse.

         II

         The sole question here is whether the Commission's ALJs are "Officers of the United States" or simply employees of the Federal Government. The Appointments Clause prescribes the exclusive means of appointing "Officers." Only the President, a court of law, or a head of department can do so. See Art. II, §2, cl. 2.[3] And as all parties agree, none of those actors appointed Judge Elliot before he heard Lucia's case; instead, SEC staff members gave him an ALJ slot. See Brief for Petitioners 15; Brief for United States 38; Brief for Court-Appointed Amicus Curiae 21. So if the Commission's ALJs are constitutional officers, Lucia raises a valid Appointments Clause claim. The only way to defeat his position is to show that those ALJs are not officers at all, but instead non-officer employees-part of the broad swath of "lesser functionaries" in the Government's workforce. Buckley v. Valeo, 424 U.S. 1, 126, n. 162 (1976) (per curiam). For if that is true, the Appointments Clause cares not a whit about who named them. See United States v. Germaine, 99 U.S. 508, 510 (1879).

         Two decisions set out this Court's basic framework for distinguishing between officers and employees. Germaine held that "civil surgeons" (doctors hired to perform various physical exams) were mere employees because their duties were "occasional or temporary" rather than "continuing and permanent." Id., at 511-512. Stressing "ideas of tenure [and] duration, " the Court there made clear that an individual must occupy a "continuing" position established by law to qualify as an officer. Id., at 511. Buckley then set out another requirement, central to this case. It determined that members of a federal commission were officers only after finding that they "exercis[ed] significant authority pursuant to the laws of the United States." 424 U.S., at 126. The inquiry thus focused on the extent of power an individual wields in carrying out his assigned functions.

         Both the amicus and the Government urge us to elaborate on Buckley's "significant authority" test, but another of our precedents makes that project unnecessary. The standard is no doubt framed in general terms, tempting advocates to add whatever glosses best suit their arguments. See Brief for Amicus Curiae 14 (contending that an individual wields "significant authority" when he has "(i) the power to bind the government or private parties (ii) in her own name rather than in the name of a superior officer"); Reply Brief for United States 2 (countering that an individual wields that authority when he has "the power to bind the government or third parties on significant matters" or to undertake other "important and distinctively sovereign functions"). And maybe one day we will see a need to refine or enhance the test Buckley set out so concisely. But that day is not this one, because in Freytag v. Commissioner, 501 U.S. 868 (1991), we applied the unadorned "significant authority" test to adjudicative officials who are near-carbon copies of the Commission's ALJs. As we now explain, our analysis there (sans any more detailed legal criteria) necessarily decides this case.

         The officials at issue in Freytag were the "special trial judges" (STJs) of the United States Tax Court. The authority of those judges depended on the significance of the tax dispute before them. In "comparatively narrow and minor matters, " they could both hear and definitively resolve a case for the Tax Court. Id., at 873. In more major matters, they could preside over the hearing, but could not issue the final decision; instead, they were to "prepare proposed findings and an opinion" for a regular Tax Court judge to consider. Ibid. The proceeding challenged in Freytag was a major one, involving $1.5 billion in alleged tax deficiencies. See id., at 871, n. 1. After conducting a 14-week trial, the STJ drafted a proposed decision in favor of the Government. A regular judge then adopted the STJ's work as the opinion of the Tax Court. See id., at 872. The losing parties argued on appeal that the STJ was not constitutionally appointed.

         This Court held that the Tax Court's STJs are officers, not mere employees. Citing Germaine, the Court first found that STJs hold a continuing office established by law. See 501 U.S., at 881. They serve on an ongoing, rather than a "temporary [or] episodic[, ] basis"; and their "duties, salary, and means of appointment" are all specified in the Tax Code. Ibid. The Court then considered, as Buckley demands, the "significance" of the "authority" STJs wield. 501 U.S., at 881. In addressing that issue, the Government had argued that STJs are employees, rather than officers, in all cases (like the one at issue) in which they could not "enter a final decision." Ibid. But the Court thought the Government's focus on finality "ignore[d] the significance of the duties and discretion that [STJs] possess." Ibid. Describing the responsibilities involved in presiding over adversarial hearings, the Court said: STJs "take testimony, conduct trials, rule on the admissibility of evidence, and have the power to enforce compliance with discovery orders." Id., at 881-882. And the Court observed that "[i]n the course of carrying out these important functions, the [STJs] exercise significant discretion." Id., at 882. That fact meant they were officers, even when their decisions were not final.[4]

         Freytag says everything necessary to decide this case. To begin, the Commission's ALJs, like the Tax Court's STJs, hold a continuing office established by law. See id., at 881. Indeed, everyone here-Lucia, the Government, and the amicus-agrees on that point. See Brief for Petitioners 21; Brief for United States 17-18, n. 3; Brief for Amicus Curiae 22, n. 7. Far from serving temporarily or episodically, SEC ALJs "receive[] a career appointment." 5 CFR ยง930.204(a) (2018). And that appointment is to a position created by statute, ...


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