Justice Kagan's succinct opinion in Lucia v. SEC sent shockwaves through the secretive world of administrative law judging and will have wide-ranging effects.
And, it has a surprise ending ordering a retrial: "And we add today one thing more. That official cannot be…(Cameron) Elliot, even if he has by now received (or receives sometime in the future) a constitutional appointment."
Disqualification of any lower court judge is exceedingly rare in appellate judging. That the Court not only names Cameron Elliot but states he "cannot be expected to consider the matter as though he had not adjudicated it before" is nearly unheard of. As Justice Breyer correctly notes in his concurrence, federal judges routinely rehear their reversed cases.
Kagan's Homage To Columbo
Fans of "Columbo," the vintage detective series starring the inimitable Peter Falk, may recall that the mystery was solved when he mentioned "just one more thing," the killer line that inevitably led to the big reveal.
Justice Kagan's "oh, and another thing" coda is key to understanding the case.
Lucia held 6-3 that SEC staff cannot appoint administrative law judges (ALJs), who must be appointed by the president or a politically accountable agency head.
Why does this matter? Your civil liberties are at stake in Lucia.
Americans today are ten times more likely to face trial before an ALJ than a federal judge. ALJ Elliot levied draconian penalties against Ray Lucia for a minor aspect of his sales pitch, newly found in his case to be a violation of the securities laws and banned him for life from his chosen profession.
Most people would think that a citizen so charged would be able to defend himself in a court of law with the protections of due process, rules of procedure and evidence, an independent judge and a right to a jury. Not so.
How Are ALJs Appointed?
Shockingly, for decades, no one knew how these administrative law judges were appointed. The modern administrative state empowers SEC to bring enforcement actions before ALJs appointed without expertise in securities law and hired outside of the merit system — inconvenient facts that SEC scandalously attempted to hide in earlier proceedings.
For many years, the SEC brought most of its cases in federal court, where defendants had full constitutional rights. Then in 2010, Dodd-Frank expanded the types of cases SEC could bring before ALJs, opening the door to easier judgments for SEC.
The SEC's success rate with ALJS — 86% — was substantially higher than that in court — 70%. One SEC ALJ was admonished for her lack of "loyalty" in not always ruling in the SEC's favor and resigned.
Rights Are Optional
As Philip Hamburger has argued, SEC's administrative "courts" make Americans' constitutional rights to a fair trial a mere "option," extinguishable by the government when that agency chooses to proceed before an ALJ.
The judge deciding your case reports to the prosecutor! What could possibly go wrong with that?
A lot, as it turned out for Mr. Lucia. Even though not one of his customers claimed losses, SEC decided that his sales pitch, one that had previously passed muster with FINRA, now violated the law. SEC assigned the case to ALJ Elliot who once boasted that "he had never ruled against the agency's enforcement division."
Under a rule ALJ Elliot "adopted," Mr. Lucia's sales pitch was now held to violate the securities law. Elliot banned Mr. Lucia for life from working in his chosen profession, barred him from communicating with anyone in the industry — including his own son — and levied over $300,000 in fines, citing "the substantial financial success" that Mr. Lucia and his company had supposedly "enjoyed at their clients' expense" — even though the record lacked any evidence of customer complaints or losses!
ALJ Elliot admitted that he had "never given less than a permanent bar" in a contested proceeding, revealing an impulse to punish all those who choose to defend themselves by banishing them from their livelihood.
Elliot also never heard evidence from witnesses favorable to Mr. Lucia. Why? Just before they were to testify, SEC served them with subpoenas. The subpoenas demanded production of all their financial records, in every format, from any source, over a five-year period.
Unsurprisingly, this intimidation worked, and they declined to appear on Mr. Lucia's behalf. The Sixth Amendment prevents such antics in federal court.
In a footnote that appears after the Court's brusque disqualification of ALJ Elliot, the Lucia majority also rejected SEC's last-ditch attempt to "ratify" the appointments of its five administrative law judges, none of whom were properly appointed.
The twin justifying fictions trotted out every time the legitimacy of the administrative state is questioned are agency independence and expertise. Courts are all too willing to ignore the troubling record that ALJs like Elliot, with his astonishing record of fealty to the agency that employs him, were not chosen by the merit system, possessed no expertise whatsoever, and preside over proceedings that deny Americans a fair trial.
Administrative Law 'Tyranny'
When an unappointed, unaccountable, inexpert and biased bureaucrat can make up the rules, apply them to a citizen charged by the agency that employs him, and act as judge in his case, we have what the Founders characterized as "the very definition of tyranny."
Why all the SEC obfuscation, prevarication, lack of transparency, strong-arming and gamesmanship? Deceit is the inevitable hallmark of tyranny, for who would admit of it?
No wonder Americans feel that the government is rigged. Administrative law judges are neither impartial nor expert — nor constitutional. The independence and expertise emperor has no clothes. Justice Kagan's terse order is evidence that the Court tacitly recognizes these infirmities.
(Author's note: NCLA, a public interest law firm founded by Philip Hamburger, submitted an amicus in Lucia v. SEC that put detailed evidence before the Court that the SEC judges had no prior securities background, were not appointed by the merit system, and operated under compelling institutional biases.)
Peggy Little serves as Senior Litigation Counsel at the New Civil Liberties Alliance; this article originally appeared in Investors Business Daily.