Reprinted with permission from the April 28, 2016 edition of the CorporateCounsel© 2016 ALM Media Properties, LLC.

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In an article published on April 28, 2016 by Corporate Counsel, Tom Potter discusses the U.S. Securities and Exchange Commission's (SEC) administrative procedures following the U.S. Supreme Court's decision to avoid weighing in on whether the SEC's proceedings are unconstitutional. Potter says the issue of SEC administrative procedures probably isn't ready for consideration yet in the court's view. He explains, "I just don't think it's a fully developed circuit split yet, and they're not going to take up the case until there is -- if they do then."

SCOTUS Declines to Review SEC In-House Courts - For Now.
by Thomas K. Potter, III

For the second time in a month, the U.S. Supreme Court has brushed aside pleas to weigh in on whether the U.S. Securities and Exchange Commission's administrative proceedings are unconstitutional. While the high court's denials are clearly a setback for the defense bar, experts say the legality of the SEC's inhouse courts hasn't been decided and challenges will continue.

On April 25, the high court denied a cert petition filed by Gordon Brent Pierce, a Canadian stock promoter alleged to have sold stock through offshore bank accounts. The denial comes a month after the court declined to hear the case of Laurie Bebo, the former CEO of an assisted living provider alleged to have falsified books, records and filings.

Both Pierce and Bebo appealed to the court based on the constitutional argument that SEC administrative law judges are "inferior officers" under Article II and therefore must be appointed by the president, courts of law or department heads. The judges are now appointed by the chief SEC ALJ, which Bebo and Pierce claim makes their work unconstitutional.

Defense attorney Thomas Potter III, a partner at Burr & Forman who was not involved in the Pierce and Bebo cases, says the issue of SEC administrative procedures probably isn't ready for consideration yet in the court's view. "I just don't think it's a fully developed circuit split yet, and they're not going to take up the case until there is-if they do then," he says.

Circuit courts have rebuffed attempts to bring claims against the SEC. Both the D.C. and Seventh circuits, the courts to which Pierce and Bebo, respectively, originally appealed their cases, have ruled that they don't have the proper jurisdiction to review challenges to the SEC's administrative procedures.

Two other appeals courts-the Eleventh and Second circuits-are still considering challenges to the constitutionality of ALJ appointments. If one of these courts breaks with the others, notes Potter, it would give the Supreme Court a good window to take up the issue. "That would open it up for sure," he says.

Judges in lower courts in both jurisdictions, U.S. District Judge Richard Berman in Manhattan and U.S. District Judge Leigh Martin May in Atlanta, have ruled that the SEC inhouse trials are likely unconstitutional.

SEC efforts to try alleged rulebreakers internally before inhouse judges have come under increased scrutiny since the DoddFrank Wall Street Reform and Consumer Protection Act widened use of the proceedings.

Such critics as billionaire and former SEC defendant Mark Cuban claim the process puts defendants at a disadvantage. A Wall Street Journal study published last year supported this conclusion, finding that the SEC beat defendants 90 percent of the time in these cases between October 2010 and March 2015.

The commission put out its own report that found no unfairness. But the agency has proposed procedural changes to administrative trials that could benefit defendants.

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