Georgia District Court Rules SEC's Use of Administrative Law Judges In Insider Trading Case "Likely Unconstitutional"

SEC

On June 8, in Hill v. Securities And Exchange Commission, Civ. Action No. 1:15-CV-1801-LMM, a Georgia federal judge ruled that the Securities and Exchange Commission’s use of an in-house Administrative Law Judge (“ALJ”) to preside over an insider-trading case was “likely unconstitutional.” In Hill, after a nearly two-year investigation, the Securities and Exchange Commission (“SEC”) served Charles Hill, a self-employed real estate developer who was not registered with the SEC, with an Order Instituting Cease-And-Desist Proceedings under Section 21C of the Securities Exchange Act of 1934 (“Exchange Act”), alleging liability for insider trading in violation of Section 14(e) of the Exchange Act and Rule 14e-3. The SEC alleged that Hill, using inside information he received, purchased and then sold a large quantity of Radiant Systems, Inc. stock, profiting approximately $744,000. In addition to the cease-and-desist order, the SEC sought a civil penalty and disgorgement from Mr. Hill. The SEC sought to collect the civil penalty through an administrative hearing using an in-house ALJ. Mr. Hill filed this action to challenge the SEC’s decision to use an administrative proceeding, and asked the Court to (i) declare the proceeding unconstitutional; and (ii) enjoin the proceeding from occurring until the Court issues its ruling. The Court granted, in part, and denied, in part, his request. After rejecting the SEC’s argument that the Court lacked subject matter jurisdiction over Mr. Hill’s constitutional claims, the Court rejected Mr. Hill’s arguments that the Dodd-Frank Act, which delegates to the SEC the power to choose between an administrative forum and a federal district court to adjudicate violations of the Exchange Act, constituted an unconstitutional delegation of legislative power, and that the SEC’s decision to prosecute claims against him administratively violated his Seventh Amendment right to a jury trial. However, the Court determined that the SEC’s manner of appointment of administrative judges likely violated the Appointments Clause, because those judges are “inferior officers” that the President or an agency head must appoint. Because the ALJ in this case had not been so appointed, the Court found that Mr. Hill had a likelihood of success on his claims, and entered a preliminary injunction enjoining the SEC administrative proceeding. The Court, however, noted that its decision “may seem unduly technical” because the SEC could easily cure the issue by having the SEC Commissioners appoint the ALJ, or by presiding over the matter themselves.