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Case number 15-1345, Raymond J. Lucia Companies, Inc.

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and Raymond J. Lucia Petitioners vs. Securities in the Exchange Commission.

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Mr. Perry for the petitioners.

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Mr. Frieda for Respondent SEC and Mr. Stern for Respondent DOJ.

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Good morning.

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Good morning, Your Honors.

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May it please the Court.

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Mark Perry for the petitioners.

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The Supreme Court has told us that an officer of the United States is one who exercises significant authority under the laws of the United States.

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The Supreme Court has also told us that that includes every judge, appellate judges and trial judges, and quasi-judicial officers, including commissioners and clerks.

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In fact, in the history of the Republic, the Supreme Court has never found that an adjudicative officer is not an officer of the United States.

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If that were the only case law we had, this case would be over now.

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The ALJs of the SEC, including ALJ Elliot, who issued the decision in this case, are officers of the United States.

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Faced with that reality, faced with the Supreme Court's clear and unequivocal declaration, including in Freytag and in Edmond, regarding judges whose decisions could not be final unless approved by some other officer,

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The SEC tries to fit itself within this court's decision in Landry, a narrow exception.

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In fact, the only appellate case in the history of the Republic to ever hold a judge who oversaw trial-level proceedings not to be an officer of the United States.

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Are you contending that Landry was wrongly decided?

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Your Honor, we do think that Landry was wrongly decided, but we are taking Landry at its word for purposes of this panel.

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And let me explain that in two steps.

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Landry misread Freight Tag as Judge Randolph pointed out in his concurrence, and if this court and this panel respectfully were to agree with the SEC here, we would take up the correctness of Landry's DMV court or the Supreme Court.

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However, Landry is a very limited case.

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In fact, the government

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When the Landry case itself went to the Supreme Court, the United States government, the Solicitor General told the Supreme Court, Landry is not a categorical rule.

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Landry does not apply to ALJs of any other agency.

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Landry applies only to the FDIC.

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And the importance of that for this case is that we are operating under a significantly different statutory structure.

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The key determinant in Landry, and this is a quote, Your Honor, from page 1133 of 204 of 3rd,

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was that the ALJs of the FDIC, quote, can never render the decision of the FDIC.

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Can never render the decision of the FDIC.

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Congress made a different determination in the Securities Exchange Act, the organic statute for the SEC.

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In that statute, and the citation is 15 USC 78D-1C,

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The court said, or excuse me, Congress said very clearly the SEC ALJs can render the final decision of the SEC.

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Here's the quote.

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So in your view, Congress having made that decision, whatever authority the commission may have with regard to its internal workings,

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could never change that fact.

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Yes, Your Honor, the Congress, having established the office of ALJ and reviewing it with the authority of an officer of the United States, the agency cannot take away that status, that constitutional competence, either by regulation or practice, because the Congress is the one given the power in Article 2 to establish inferior offices.

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So just hypothetically, if the Commission decided that it was going to review every case

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of an ALJ every initial decision and determine whether or not it would grant review.

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And this was a substantive review.

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Yes, Your Honor.

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And then the Commission issued an order saying we have determined after substantive review not to make any change or adjustment in the initial decision and therefore the initial decision comes final upon the issuance of our order.

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Would your position be that to the extent the commission was trying to, I don't know, tweak the statutory language, that that still would not change the nature of the finality and the significant authority exercised for purposes of the appointment clause?

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It would not change the office or the officer status as officers for this reason.

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Congress in the statute specifically specified 78D1B specifically specified that the SEC has discretionary review over ALJ decisions.

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If the SEC elects, as it did in your hypothetical, Judge Rogers, but not in the real world, I want to make clear that this is only a hypothetical.

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If the SEC elects to review every case, the statute still authorizes only discretionary review, except in a limited category of cases.

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just like in Freytag, and therefore the constitutional competence of the officer must be established by reference to the statutory scheme, not the SEC's practice.

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That's the importance of Congress establishing offices.

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And here, Congress went one step further.

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It adopted in the Exchange Act

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a distinction that was then later reflected in the APA, Section 556 and 557, between initial decisions and recommended decisions.

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The FDIC and Landry could only issue, the ALJs could only issue recommended decisions.

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Every single recommended decision must by law under the APA be reviewed by the agency, so that your hypothetical was in fact statutory in the FDIC context.

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In the SEC context, Congress specified following the initial decision route.

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And the importance of the initial decision is, as the APA and the Attorney General's manual both make clear, an initial decision becomes the decision of the agency by operation of law.

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No agency action is required.

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And again.

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But it becomes the decision of the commission.

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Right.

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And I guess my question is, you were pointing first to 78D

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one, saying that the ALJ can render the decision.

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But the ALJ can't.

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The only way the ALJ's decision becomes authoritative is if it is deemed the action of the commission.

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And we all know those members were duly appointed.

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Your Honor, that's not what 78-1C says.

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78-1C says,

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be deemed the action of the commission.

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Action of the commission.

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Yes, it shall be deemed the action of the commission.

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Whereas a recommended decision in the FDIC regime, that decision is never the action of the commission.

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The commission has to adopt another decision.

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So for example, where the SEC does not grant review, there's no petition of review when the SEC doesn't take to a sponsor review, which is 90% of cases, OK?

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90% of the SEC's cases.

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The SEC does not adopt as its own the ALJ's initial decision.

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It states that the ALJ's decision itself is final.

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The ALJ's decision is the decision of the agency.

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You can see that very clearly in the Horizon WIMBA decision we cited, page 30 of our brief, where the agency says, in so many words, and this is in every finality order, by the way.

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This is just one that we happen to pull up.

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the initial decision of the administrative law judge has become the final decision of the commission.

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So that the, to go back to the magic words of Landry, the ALJ has rendered the decision of the commission in a way that the FDICLJs never could, because that's the basic distinction between a recommended decision and an initial decision.

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Go ahead.

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Isn't that kind of semantics though?

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I mean, if I tell

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My son, you know, what do you think about, you know, whether we should, you know, go here or there for vacation?

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And he says, I want to go to X place.

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And I say, well, that's my decision, too.

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have I let him make the decision?

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Well, Your Honor, in your hypothetical, I think you have reviewed his decision, which the SEC does do in 10% of the cases.

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But in the case where you don't review that decision, you simply there's no no request for your review and you don't take it on your own.

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Your son's decision does become the family's decision, and that's one of the distinction.

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The evidence... But how have I reviewed it if all I say is issue my order that that's also my decision?

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But that's not what the order says, Your Honor.

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The order does not say that this is my decision.

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It says that the ALJ's decision has become the Commission's decision because the Commission has, quote, not chosen to review.

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So if I say to my son, your decision has become the family's decision, then it's not really...

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I agree with that.

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I agree with that.

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Your decision is the family's decision.

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Your son has made the decision.

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That's what we're trying to parse in this language and what Congress had in mind exactly, that is it the free-floating opportunity to review what is critical here, or is it the fact that the commission is imbued with that free-floating authority?

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It may not exercise it, except occasionally, but it always has that power.

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And so when it decides not to,

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In my non-substantive review example, it's still taking an action saying, this is the action of the commission.

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And in that respect, Your Honor, it is exactly the same as Edmund, which was the intermediate court of appellate review, which had a higher court that had a certiorari-like discretionary review.

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And the Supreme Court held, and the government admitted in that case,

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that most of the appellate court's decisions were final.

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Happens to this court too, by the way.

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But some get reviewed.

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That did not deprive those other decisions of finality, the fact that some higher agency may, in a small percentage of cases,

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elect for the review.

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And the Supreme Court said that was the division in Edmund between a principal officer and an inferior officer.

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That is, the ability of the higher court to review the intermediate court made it an inferior officer, not a principal officer.

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And now the government is turning that entirely on its head and saying the ability of the SEC to review, and by the way, these sua sponte reviews that it puts all its stock in, it is granted two or three times in the last several years.

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It's never done one in 2015, for example.

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This is not exactly an everyday event.

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It's saying that that makes these judges employees.

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Well, that can't be reconciled with Edmund, and that's not what the Supreme Court said in Landry.

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And again, excuse me, this court said in Landry.

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And the government made exactly that point in its brief in opposition to the Supreme Court.

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Footnote four, I would commend to this court the brief in opposition in Landry and the key, at page 12, footnote four, the government discusses Edmund in precisely the way I just did.

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and said that that was an inferior officer status.

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In this case, they say, well, the question of employees wasn't an issue in Edmund.

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Well, that's true, because the government conceded it, which only raises the question, why won't the government concede it here?

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What is it about this situation?

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Well, we'll have to ask them about what they think the breadth of the decision is.

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But I mean, the Supreme Court for Enterprise set to the side the majority opinion, you know, we're not talking here about ALJs.

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It's a big body of

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personnel and a tough issue.

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What do you make of the fact that the commission has to issue an order that a decision has become final?

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And they do that in every case.

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That's the thing that makes the ALJ decision authoritative is that the commission issues an order.

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First, Your Honor, that is what the Commission does by its regulation.

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It's not required by the statute.

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The statute says the ALJ's order is deemed the order of the Commission.

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So the ALJ is an opposed regulation.

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Second, I have three answers, of course.

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Second, that happens in every case after 42 days.

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There's 21 days to petition for review and 21 days for sua sponte.

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If after 42 days have passed, neither of those things has happened, then what the regulation says is the commission will issue a finality order.

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Not may, will.

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There's no discretion there.

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In fact, a petitioner could come and get a writ of mandamus to get the direction of one.

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So, and third.

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But that, I mean, in a way, that cuts the other way because it's the commission's understanding that under the statute,

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The commission is the final actor, and that the ALJ decision has to become the decision of the commission, and that therefore, one way or another, they have to take action to embrace it.

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Your Honor, they don't.

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And let me point you back to this key language in Horizon.

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This is two and a half.

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This is two and a half.

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Let's look at what the commission actually does.

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The commission says, quote, the commission has not chosen to review the decision.

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Where are you?

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In the Horizon Wimba finality order.

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But this is in every single finality order.

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This is the stock language of finality orders.

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The commission has not chosen to review.

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No, but the commission doesn't say.

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It doesn't say the commission has chosen not to review.

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It has made no decision.

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It has said it has not chosen to review.

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In other words, the time has gone by.

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And words are important.

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Third, my third point, the finality order, as you will see from the regulation and the orders themselves, only determines when the decision is final, not whether it is final.

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It becomes final by operation of law.

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That's 78D1C.

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The Commission has no authority to change that by regulation.

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What the regulation says is when the sanctions become effective in particular.

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And it says that in the regulation, and it says that in the finality order.

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The OLC, Judge Pillard, considered that precise point in respect to the Secretary of Education in his 1991 opinion, which we cite and the Justice Department doesn't address.

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And what the OLC said is that just puts a time on finality for purposes of review under the APA, among other things, and that is an administrative convenience that has nothing to do with the exercise of significant authority under the laws of the United States.

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And the OLC opined in that case that the Secretary of Education's ALJs

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operating under a scheme literally identical to this one, unlike the FDICs, were inferior officers and subject to the appointments clause.

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Can I ask you a question?

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Is there ever been an instance where an ALJ issues an order?

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The commission, for whatever reason, neglects to issue an order confirming however you want to term it.

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And then the commission has sought to enforce

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the ALJ's order against the party?

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We looked, Your Honor, and the answer is I don't know.

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You would have loved that case, right?

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Well, the database is only searchable, as far as we know, by finality order.

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So if there is no finality order, we can't get, we, from the public side, can't get to the underlying determination.

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The commission might know the answer to that.

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We do know of cases, however, where, contrary to the commission's brief, the ALJ has issued an initial decision, and the commission then denies review.

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There's a petition review that the commission has denied.

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One example is in Ray Bellows, for example.

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We don't cite it in our brief.

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I learned about it learning from this argument.

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But it's just not true that they grant review of every case, so that there are initial decisions that become final after a denial of review, and they happen exactly the same way.

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The finality order issues that says when it's final, not whether it's final.

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And the criticality of that distinction is this, to return to the APA, 556 and 557 in the Attorney General's manual, the Attorney General's manual, pages 82 to 83, which the government cites as authoritative, says that if the presiding officer makes an initial decision, it will become the agency's final decision.

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That's the definition of an initial decision.

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Whereas if it makes a recommended decision, which is the FDIC regime, the agency must always make a decision of its own.

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This is a very basic distinction in the APA.

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And Congress adopted the former route for the SEC.

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Judge Pillard, you noted the breadth of this problem.

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I would like to comment on that.

[00:17:09] Speaker 06:
We don't know the breadth of this problem.

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There's 278 odd ALJs in the federal system, not including the Social Security Administration.

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We don't know how many of them are unconstitutionally appointed.

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That information is totally opaque to the public.

[00:17:26] Speaker 03:
Why do you not count the ones in the social security industry?

[00:17:28] Speaker 06:
Well, there's 1,500 of them, too, and we don't know how they're appointed either.

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This is a clause designed to promote transparency, accountability, responsibility.

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And until this litigation started, the commission itself didn't know how the ALJs were appointed.

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And there are pleadings in the New York cases, for example, saying that they don't know how the chief administrative law judge was appointed.

[00:17:52] Speaker 06:
There happens to be an affidavit in the Timbervest case, which we cite in page 19 of our brief, that does say how A.L.J.

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Elliott was appointed.

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So that mystery has been resolved here.

[00:18:01] Speaker 03:
But this is- How can you address that?

[00:18:02] Speaker 03:
There's a curious structural question about administrative law judges as judges.

[00:18:09] Speaker 03:
And we do value transparency and accountability, but

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accountability for judges, not so much.

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And I know one of the questions I have for you is if you're right on this, then aren't we into questions about removability and the free enterprise issue, but how do we or do we

[00:18:30] Speaker 03:
factor in to our analysis of employee versus officer, the value of independence for adjudicative officers, or officials, I should say.

[00:18:39] Speaker 06:
Your Honor, the Commission has an independent judicial officer available in every case.

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It's called the District Courts of the United States.

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Those are truly independent officers.

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And this case could have been brought in an Article III court.

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If we get to the merits, if it had been brought in an Article III court, it would have been dismissed.

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Certainly, the science-based claims could not have survived.

[00:18:59] Speaker 06:
I mean, a district judge would not have put through this, yet my client is facing a lifetime bar because the SEC decided to bring it in its pet court, which is not independent in the same way as an Article III court.

[00:19:11] Speaker 06:
Congress authorized that, but Congress required also the commission to take responsibility for that.

[00:19:16] Speaker 06:
And this notion of independence is a very dangerous concept.

[00:19:20] Speaker 06:
There are two pieces to it.

[00:19:22] Speaker 06:
First, on the back end, if you will,

[00:19:25] Speaker 06:
Congress addressed independence of decision-making by putting in the removal restrictions in the Civil Service Act.

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They are not at issue in this case.

[00:19:33] Speaker 06:
May never be, but they're certainly not at issue in this case.

[00:19:35] Speaker 06:
On the front end, however, that is the appointment, Congress required the agency to take responsibility for its agencies.

[00:19:43] Speaker 06:
The APA itself says in section 3105, each agency shall appoint the ALJs.

[00:19:48] Speaker 06:
And in fact, when the Congress was considering what to do, it considered putting the appointment in the judicial conference

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and rejected that because it would violate the appointments clause, because these were constitutional officers who had to be appointed by the head of a department, not by somebody not listed in that clause of Article 2.

[00:20:06] Speaker 06:
So Congress already made that decision, Your Honor.

[00:20:09] Speaker 06:
And so the independence piece has two parts.

[00:20:11] Speaker 06:
It is at the front end and the back end.

[00:20:13] Speaker 06:
And on the front end, the Commission, with all respect, is selling a false independence.

[00:20:18] Speaker 06:
to the public, to respondents, and ultimately to this Court and the other Courts of Appeals, when it pretends that the ALGAs are somehow independent from it.

[00:20:27] Speaker 06:
They're not, and they should not be permitted to be.

[00:20:29] Speaker 06:
They are, as Section 78D1 says, delegated agents of the Commission.

[00:20:35] Speaker 06:
They are doing the job that the Commission itself could do, and the Commission has to own that.

[00:20:39] Speaker 06:
They are creatures of the Commission.

[00:20:41] Speaker 06:
And the Appointments Clause ensures

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that for everybody knows that these are not independent judicial officers.

[00:20:47] Speaker 06:
Again, they could go to district court and get an independent judge if they want that.

[00:20:50] Speaker 06:
They don't want an independent judge.

[00:20:52] Speaker 06:
They want their own judge.

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But if they want their own judge, they have to own him.

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They have to say, this is our judge.

[00:20:58] Speaker 06:
And that's what the Appointments Clause does.

[00:21:00] Speaker 06:
The framers were clear on that.

[00:21:01] Speaker 06:
I mean, that's the whole purpose of this structural protection against diffusion.

[00:21:05] Speaker 02:
Well, what I think we're trying to understand here is the appointments clause has been around for a long time and so have a lot of challenges.

[00:21:17] Speaker 02:
And is it Dodd-Frank that just so changes the nature of what's going on, that sort of brings this issue into focus as distinct from

[00:21:37] Speaker 02:
assistance to the commission having substantial authority, but now it's gone to the point where basically they're quasi federal district court judges.

[00:21:50] Speaker 06:
I think that's your... Your Honor, I think the practical answer to your question, Judge Rogers, is for many years, certainly in the SEC context, for many years the ALJs were used to make deregistration decisions, for example.

[00:22:02] Speaker 06:
Not contested enforcement actions, but

[00:22:06] Speaker 06:
administrative determinations regarding the registration of securities, and then the Commission either reviewed or didn't review those.

[00:22:13] Speaker 06:
And to this day, many ALJ decisions, in fact a majority of ALJ decisions in the SEC, involve that kind of thing.

[00:22:19] Speaker 06:
What has changed in recent years is two things, and they're related.

[00:22:23] Speaker 06:
One is the enforcement division has elected to bring many more cases before the ALJs rather than in district court.

[00:22:31] Speaker 06:
One can speculate on the reasons, you know, the Commission

[00:22:33] Speaker 04:
Sure.

[00:22:34] Speaker 06:
Loses a lot more cases in district court, frankly, than it does before it's ALJs.

[00:22:38] Speaker 06:
The other, and this is a related point, is that Congress has expanded in Dodd-Frank the authority of the agency to bring certain kinds of enforcement cases in its in-house court rather than in the district court.

[00:22:50] Speaker 06:
So we see more litigation of more significance to individuals.

[00:22:54] Speaker 06:
And again, Mr. Lucia, as an example, here's an individual who

[00:22:59] Speaker 06:
is brought up on charges of intentional fraud based on three words in a 122 word slideshow.

[00:23:07] Speaker 06:
I really do submit that if this case had been brought in district court, first, of course, it wouldn't have brought it in district court, and second, we would have had it dismissed.

[00:23:14] Speaker 06:
Instead, it received into a trial and a determination of liability and a sanction with a lifetime bar

[00:23:21] Speaker 06:
which is absolutely outrageous, unjustified, unlawful, and ultimately unconstitutional because the SEC wanted to proceed in its in-house court.

[00:23:30] Speaker 06:
So Judge Rogers, the reason the litigation has arisen of late is because of the more draconian penalties being imposed in these in-house actions where they should be brought in district court, even if they're authorized by Congress, I submit.

[00:23:43] Speaker 06:
But second, we've also lifted a little bit of this veil of opacity.

[00:23:48] Speaker 06:
The government has operated in great secrecy as to how these ALJs are appointed.

[00:23:52] Speaker 06:
It's not at all clear to people.

[00:23:54] Speaker 06:
If you look on the SEC's website, for example, until recently, it actually said that the ALJs were hearing officers.

[00:24:00] Speaker 06:
Officers.

[00:24:01] Speaker 06:
Of course, that's the same word that the Congress used in the Exchange Act.

[00:24:04] Speaker 06:
Officers of the Commission.

[00:24:05] Speaker 06:
The Commission now says that doesn't have any meaning, but I suggest that it does.

[00:24:09] Speaker 06:
Congress knows what the English language means.

[00:24:10] Speaker 02:
Let me just be clear what you're talking about in terms of appointment.

[00:24:14] Speaker 02:
I mean, I thought these were civil service.

[00:24:18] Speaker 02:
OPM, they're put on an OPM list and it says the agency can select from the list.

[00:24:27] Speaker 06:
It's a hybrid, Your Honor, to compromise the Congress reach.

[00:24:30] Speaker 02:
Well, I understand that, but I mean it's not opaque.

[00:24:33] Speaker 02:
And then the agency, however it decides to organize itself, draws from the list.

[00:24:42] Speaker 02:
and those people become ALJs.

[00:24:45] Speaker 06:
Yes, Your Honor, and the opacity is which entities within the agency do the actual appointment, whereas there should be no such opacity because the Appointments Clause tells us that it must be the head of department.

[00:24:57] Speaker 02:
All right, follow through just so I'm clear on this.

[00:24:59] Speaker 02:
You're a civil service employee.

[00:25:02] Speaker 02:
You're on the OPM list.

[00:25:04] Speaker 02:
The commission decides it needs two new hearing

[00:25:12] Speaker 06:
Officers.

[00:25:15] Speaker 02:
And two new assistants.

[00:25:16] Speaker 02:
And it has an office of hearing officers.

[00:25:21] Speaker 02:
And so the head of that office calls up OPM, gets two names.

[00:25:26] Speaker 02:
The people come over.

[00:25:27] Speaker 02:
They're interviewed, et cetera.

[00:25:30] Speaker 02:
And they're sworn in and given a caseload.

[00:25:35] Speaker 02:
I mean, there's nothing opaque about that.

[00:25:37] Speaker 02:
It's not these people are coming in at the dead of night.

[00:25:40] Speaker 02:
It's a process.

[00:25:41] Speaker 02:
There may still be this constitutional issue, and there may be some related constitutional issues that are not even in this case.

[00:25:49] Speaker 02:
But all we're dealing with is, as I understand it from reading Supreme Court as well as our cases, we're trying to look at what these people do for the commission and your

[00:26:05] Speaker 02:
slam dunk that I want to hear Mr. Stern talk about is Congress has already made the decision.

[00:26:11] Speaker 06:
Yes, sir.

[00:26:12] Speaker 02:
And there's nothing that the agency or the Commission can do through its regulatory scheme to change that.

[00:26:22] Speaker 06:
In brief, because Congress has invested the ALJs of the SEC

[00:26:29] Speaker 06:
in an SEC-specific provision that appears in the Exchange Act.

[00:26:32] Speaker 06:
So we don't know whether this applies to other agencies, but certainly in the Exchange Act, with significant authority under the United States, and authorize them to, quote, in the words of Landry, render the final decision of the agency, then they are officers.

[00:26:47] Speaker 03:
What is the authority that's so important?

[00:26:53] Speaker 03:
The commission has, one thing that seems striking to me is that the commission has authority to do full review of anything, of any ALJ that it wants, including fact finding.

[00:27:06] Speaker 03:
So there's a little bit of tension, actually, because on the one hand,

[00:27:10] Speaker 03:
some suggestion that the fact-finding is reviewed deferentially.

[00:27:16] Speaker 03:
On the other hand, if there's a fact-finding that, if I'm a commissioner, it's a fact-finding I don't like, I can just call that witness in and make it brand new.

[00:27:23] Speaker 03:
So it's not clear to me, in terms of authority, what authority these ALJs are exercising that isn't just the recommendatory authority that we see in Landry.

[00:27:36] Speaker 06:
I can answer that as usual, Judge Pillard in three steps.

[00:27:39] Speaker 06:
First, look at the statute, 78D1B, which says that the SEC's entire review, with the exception of a few categories of cases, is discretionary.

[00:27:50] Speaker 06:
So that everything the ALJ does can be fined.

[00:27:52] Speaker 03:
I don't buy that.

[00:27:53] Speaker 03:
I mean, you live in the world as a

[00:27:55] Speaker 03:
partner in a law firm, you review, you have a summer intern who writes something for you, and if it's beautiful and if you think it's great, you're just like, that's going right into the brief.

[00:28:06] Speaker 03:
But you are still the decision maker, and the commission can have spectacular ALJs that most of the work it's happy with.

[00:28:14] Speaker 03:
It doesn't make it less than the work of the commission.

[00:28:17] Speaker 06:
Your honor, I agree with that.

[00:28:18] Speaker 06:
It is the work of the commission, which is what the ALJs are authorized to do.

[00:28:22] Speaker 06:
I agree with that point.

[00:28:25] Speaker 06:
That is why they are officers.

[00:28:26] Speaker 06:
They are doing the commission's work.

[00:28:28] Speaker 03:
So you wouldn't distinguish between your authority and that of your summer intern?

[00:28:34] Speaker 06:
I mean, the statute makes the commission authoritative, not the ALJ.

[00:28:40] Speaker 06:
In your hypothetical,

[00:28:41] Speaker 06:
I am the principal officer and my colleagues at the table are the inferior officers.

[00:28:46] Speaker 06:
And we have employees, paralegals and secretaries and so forth who are employees.

[00:28:53] Speaker 06:
And the government works the same way, of course, and the Constitution sets it up that way.

[00:28:58] Speaker 06:
Which leads to an important point, Judge Piller, that I actually would like to come on to.

[00:29:02] Speaker 03:
So who other than the, I mean, why stop at paralegals?

[00:29:05] Speaker 03:
Paralegals are the last say on all kinds of blue book compliance and substantive checking.

[00:29:11] Speaker 06:
In the law firm, a partner's name has to be on every document.

[00:29:17] Speaker 06:
In the agency, the commission's name has to be on final documents.

[00:29:21] Speaker 06:
But who actually prepared that document under this statutory regime is the ALJ.

[00:29:26] Speaker 06:
It's not the commission, okay?

[00:29:28] Speaker 06:
In 90% of cases, the commission doesn't review them.

[00:29:30] Speaker 06:
It is the ALJ's decision itself that speaks for the commission.

[00:29:34] Speaker 03:
So what about FBI agents?

[00:29:37] Speaker 03:
There's a lot of people in the government that are doing important work that you're going to say have to be appointed pursuant to the Appointments Clause.

[00:29:43] Speaker 06:
There are a lot of officers in the government.

[00:29:46] Speaker 06:
Your Honor, we know we're dealing here in the adjudicatory capacity.

[00:29:50] Speaker 06:
The Supreme Court has never said that any judge is not an officer, and the Supreme Court has extended that to clerks.

[00:29:58] Speaker 03:
You're backing off a little bit.

[00:29:59] Speaker 03:
I'm actually really trying to probe the scope of your position.

[00:30:02] Speaker 06:
Yes, sir.

[00:30:03] Speaker 06:
So we know the test, significant authority in the laws of the United States.

[00:30:06] Speaker 06:
We know the standards, emolument, duration, and so forth from the Germaine case.

[00:30:11] Speaker 06:
We know the application in non-judicial capacities, Morrison v. Olson, for example, is a good one.

[00:30:18] Speaker 06:
We know that most clerks and prosecutors are officers of the United States.

[00:30:23] Speaker 06:
Absolutely.

[00:30:23] Speaker 03:
When they say clerks, I mean, those are the older cases from the 19th century, and a clerk is... Clerks who exercise discretionary function.

[00:30:28] Speaker 03:
It's a very different thing, a clerk.

[00:30:30] Speaker 06:
They're analogous to today's magistrate judges.

[00:30:32] Speaker 06:
What about my law clerks?

[00:30:34] Speaker 06:
I think your law clerks are more like the recommended Tory personnel in Landry.

[00:30:41] Speaker 06:
Why?

[00:30:42] Speaker 06:
Because nothing can go out under their name ever.

[00:30:46] Speaker 06:
Their name doesn't appear on any document, unlike an ALJ decision.

[00:30:49] Speaker 06:
They don't sign anything in their own name.

[00:30:51] Speaker 06:
They're in an advisory capacity to you.

[00:30:55] Speaker 06:
And everything comes out either under your name or more likely the court's name.

[00:30:59] Speaker 06:
ALJs are different.

[00:31:00] Speaker 06:
They come out under their own name.

[00:31:02] Speaker 06:
And again, that finality order, I really would like you to read in Horizon Wimber or any other.

[00:31:06] Speaker 06:
It doesn't say that we are adopting this order or something else.

[00:31:10] Speaker 06:
We are saying that that order is the order of the commission.

[00:31:13] Speaker 06:
You don't ever write a decision that says, for the reason my law clerk, Sally Smith, stated, affirmed or reversed.

[00:31:19] Speaker 06:
It just doesn't happen.

[00:31:20] Speaker 06:
Okay, so there's a distinction there of authorization that comes from the delegation provision.

[00:31:25] Speaker 03:
But those things aren't dictated by the statute, right?

[00:31:28] Speaker 03:
And so if the commission had a practice of not having the ALJ's names and having everything be under the names of commissioners and

[00:31:38] Speaker 03:
So, I mean, it's funny because we're sliding back and forth between formalism and substance.

[00:31:44] Speaker 03:
And I take your opening position to be, we really have to look at the statute because there's things that they've done in the regulations and those aren't part of the...

[00:31:55] Speaker 03:
sort of part of the operative facts or legal facts for purposes of deciding this issue, but now you're talking about things that really do flow from the regulations.

[00:32:04] Speaker 03:
So if they turned around and said, well, let's take those ALJ's names off, you know, it might be bad policy and inconsistent with the accountability that the Appointments Clause wants to achieve, but it would solve your problem about them being more like law clerks.

[00:32:19] Speaker 06:
That's not quite correct, Your Honor, because the statute also says nothing herein supersedes Section 556 and 557 of the APA.

[00:32:29] Speaker 06:
And 556 and 557 prescribe the routes by which hearings, on-the-record hearings, must be taken by agencies.

[00:32:36] Speaker 06:
Either the agency itself can take the evidence to make the decision, or it can delegate to an ALJ one of two paths, initial decision or recommended decision.

[00:32:47] Speaker 06:
the SEC has chosen, and the only place a regulation comes into play, so I'm gonna agree with you to this extent, is 17 CFR 200.30-9, by which the SEC has given a blanket delegation to its ALJs to make an initial decision in every case.

[00:33:06] Speaker 06:
No recommended decisions in the SEC, there is no such thing as the recommended decision route, which is another distinction between the SEC and the FDIC, because the FDIC was solely recommended, the SEC is solely initial.

[00:33:15] Speaker 06:
But having made that decision,

[00:33:19] Speaker 06:
which is suggested, by the way, by the Exchange Act itself, that that's what Congress expected.

[00:33:23] Speaker 06:
It opted into 556 and 557, 556 and 557 then statutorily prescribed.

[00:33:28] Speaker 06:
And let's read 557.

[00:33:29] Speaker 06:
I mean, the commission never quotes this language once, and the government has no answer to it.

[00:33:34] Speaker 06:
When the ALJ makes an initial decision, the decision becomes the decision of the agency without further proceedings.

[00:33:41] Speaker 06:
That's a direct quote from 5 USC, section 557b.

[00:33:44] Speaker 06:
Congress, again, has spoken to the finality

[00:33:48] Speaker 06:
of ALJ decisions when the initial decision route is adopted.

[00:33:53] Speaker 06:
The SEC has adopted the initial decision route, and it brings with it all that baggage, respectfully, that Congress has put on it.

[00:33:59] Speaker 06:
And the authority that Congress has imbued, the constitutional competence of these officers, I have perhaps overstayed my welcome.

[00:34:06] Speaker 02:
Well, who would like to hear from you on the merits, I think?

[00:34:10] Speaker 02:
I just wanted to ask you, I gather that other agencies or commissions are responding in various ways.

[00:34:18] Speaker 02:
to solve what they think may be the problem under the Appointments Clause.

[00:34:27] Speaker 02:
So that were that way to be ultimately approved by the Supreme Court, we would not have this sea change necessarily.

[00:34:42] Speaker 02:
But rather, it's the accountability that is the key factor here.

[00:34:48] Speaker 06:
The Iron Range brief informs us that at least one other agency, the FTC, has decided to appoint its ALJs to avoid the constitutional question.

[00:35:00] Speaker 06:
The SEC has not.

[00:35:01] Speaker 06:
Judge Berman in New York in the Duka case, in fact,

[00:35:05] Speaker 06:
order just too strong, where it instructed the SEC to start appointing its own, or suggested that if they did so, the litigation would become moot, and the SEC wrote a very polite letter that said, no, we're not gonna do that.

[00:35:16] Speaker 03:
Can they just fix it themselves?

[00:35:18] Speaker 03:
I mean, I thought that it was, you know, under the Appointments Clause, either appointment by the President with vice and consent of the Senate, or if Congress so authorizes,

[00:35:29] Speaker 03:
by head of department.

[00:35:30] Speaker 03:
And is it your view that without further legislation, that Congress has authorized the SEC to agency heads to appoint the ALJs?

[00:35:41] Speaker 06:
It's our view that in none of these litigations, including in this case, has the SEC ever identified any statutory prohibition or other requirement.

[00:35:49] Speaker 06:
What's your view, though?

[00:35:50] Speaker 06:
My view is that the Exchange Act and the APA together already contemplate this as being a constitutional office and already require the full commission to appoint the ALJs.

[00:36:00] Speaker 06:
It's already in the statute.

[00:36:01] Speaker 06:
They are just in plain, blatant, violent disagreement, disobedience, disobeying of the statute in the Constitution of the United States.

[00:36:10] Speaker 06:
Tell us how you really feel.

[00:36:14] Speaker 02:
All right.

[00:36:14] Speaker 02:
Let us hear from counsel.

[00:36:17] Speaker 02:
We have two counsel here.

[00:36:18] Speaker 06:
Did you want to hear from the merits of all this?

[00:36:21] Speaker 02:
I think we'll come back to that.

[00:36:22] Speaker 02:
Or do you want to hear it now?

[00:36:24] Speaker 03:
Are you going to come back in the second round?

[00:36:25] Speaker 02:
Yes, second round.

[00:36:26] Speaker 02:
OK.

[00:36:26] Speaker 02:
Yeah.

[00:36:27] Speaker 03:
Thank you.

[00:36:28] Speaker 02:
So let's hear from counsel from the Department of Justice.

[00:36:31] Speaker 02:
Then we'll come back.

[00:36:48] Speaker 02:
Sorry if I caught you on a wheres.

[00:37:00] Speaker 01:
Thank you, your honor.

[00:37:01] Speaker 01:
I'm Mark Stern from the Justice Department.

[00:37:04] Speaker 01:
I'm not entirely sure where to begin.

[00:37:10] Speaker 02:
Well, let's begin with the statute, all right, where Congress seems to have made a

[00:37:17] Speaker 02:
Fairly plain statement.

[00:37:22] Speaker 02:
And your response in part is, well, the commission has this process of this final order and that changes everything.

[00:37:33] Speaker 01:
That's our response in part, but

[00:37:36] Speaker 01:
I think that looking at statute 78D1, we're talking that this is the general sort of delegation provision.

[00:37:46] Speaker 01:
This is not a ALJ specific provision.

[00:37:49] Speaker 01:
This is talking about the general authority of the commission to delegate and see what it says.

[00:37:57] Speaker 01:
And this is just a universal provision that says, if the right to exercise review is declined,

[00:38:06] Speaker 01:
The assumption is you can delegate, you can take back.

[00:38:11] Speaker 01:
This is all within your power.

[00:38:13] Speaker 01:
It doesn't say anything about anything.

[00:38:20] Speaker 01:
The Commission, in this case, in its opinion, explicitly says none of its decisions become final merely because of the lapse of time.

[00:38:31] Speaker 01:
And that, we think, is 100% consistent with what this statute says.

[00:38:36] Speaker 02:
Well, you say that, but I mean even in its regulations it says, you know, if the time passes.

[00:38:41] Speaker 01:
Oh, and untimely, sure.

[00:38:43] Speaker 01:
Yeah.

[00:38:44] Speaker 01:
But, I mean, that's true, you know, that's true across the board.

[00:38:47] Speaker 01:
Yeah.

[00:38:48] Speaker 01:
I mean, there's nothing sort of, you know, odd about that.

[00:38:52] Speaker 02:
Well, I was trying to think of, and this may be a poor analogy, but Rule 58, the final order requirement.

[00:38:59] Speaker 02:
So the district court has ruled

[00:39:02] Speaker 02:
It's issued a full opinion.

[00:39:03] Speaker 02:
It's granted the motion for summary judgment, let's say.

[00:39:07] Speaker 02:
But then Rule 58 says, no, you've got to issue a separate order.

[00:39:12] Speaker 02:
As I understand Rule 58, it's really an administrative, it's more than an administrative convenience.

[00:39:18] Speaker 02:
To the extent it alerts everyone when the time for appeal starts to run.

[00:39:26] Speaker 02:
And it avoids a lot of problems and questions that came up before the rule, presumably.

[00:39:32] Speaker 02:
Well, I don't know much about this final order that the commission has identified, but it seems to be somewhat like that.

[00:39:42] Speaker 02:
Do we have any background on this order other than what has been provided to us in the briefs?

[00:39:50] Speaker 01:
I mean, what's in the record is simply the commission's decision.

[00:39:53] Speaker 01:
And to the extent the commission discusses it.

[00:39:56] Speaker 01:
And what the commission has made plain is that if he

[00:40:03] Speaker 01:
is sort of a request for review, it grants it, and it can undertake a review, and it did so at the outset of this case, before any appeal was taken, it remanded for further fact-finding.

[00:40:19] Speaker 01:
And the commission, my understanding is what there is is there's a screening process, and it's the screening process that enables the commission to determine when it wants to engage in plenary review.

[00:40:31] Speaker 01:
Obviously, it doesn't engage in plenary review in any way.

[00:40:37] Speaker 01:
decision about what to do.

[00:40:39] Speaker 01:
And the point is, as far as formalism is concerned, the final decision has to be the decision of the Commission, which is something that in a different context is court-observed in the JARCASI decision.

[00:40:53] Speaker 03:
What's the big deal?

[00:40:56] Speaker 03:
Why doesn't the Commission just say, yes, these are our appointees?

[00:41:00] Speaker 01:
I mean, I think first that the Commission, we don't think the Commission is required to, but

[00:41:06] Speaker 01:
The Your Honor referred to the fact that there are other constitutional issues that follow from the appointment, whether from the officer question and indeed in the timber vest, the

[00:41:28] Speaker 01:
circuit, there is exclusively a separation of powers removal issue being raised, so that to the extent that some district court judges have sort of seem to have taken the view that, you know, why don't you just bring all this mess to an end by just appointing the judges, that's not, you know, going to happen.

[00:41:52] Speaker 01:
You know, these challenges are not going away.

[00:41:58] Speaker 03:
But I guess I'm asking that, so in addition to the removal question, are there other things that you've identified that we should be aware of that hinge on the status of an ALJ as an employee or as an inferior officer?

[00:42:13] Speaker 01:
I think it's primarily the general category of removal, separation of powers, issues that are pending in the timber vest case, and they've been asserted in other cases as well.

[00:42:30] Speaker 01:
So while it looks on the surface as though, OK, SEC, you don't have to, but why don't you

[00:42:44] Speaker 01:
our misery on this, that isn't going to work.

[00:42:49] Speaker 01:
I just think that's an important thing.

[00:42:50] Speaker 01:
The implications, potentially, not saying that if they were held to be officers that we would have a constitutional removal problem, but there is certainly the argument that there is one.

[00:43:14] Speaker 01:
these various challenges.

[00:43:17] Speaker 03:
Mr. Perry makes a point that I had also noticed in preparing for today that it's a little odd that the, whether a decision is subject to someone else's review and approval before it's authoritative

[00:43:31] Speaker 03:
is a factor at the line between inferior and principal officers and Landry and I think Tucker and our cases say it's also a factor at the line between employee and inferior officer.

[00:43:45] Speaker 03:
Can you help me out?

[00:43:46] Speaker 03:
Is there something anomalous about that or is that just totally comprehensible?

[00:43:52] Speaker 01:
I mean, Supreme Court Edmund says that the significant authority point is not the line between

[00:44:00] Speaker 01:
principal officer and an inferior officer.

[00:44:04] Speaker 01:
It's the line between an officer and a non-officer.

[00:44:08] Speaker 01:
As this court observed in Landry, the data points for determining who is an officer, for that matter who is a principal officer, are few and far between.

[00:44:23] Speaker 01:
I guess I want to make two points.

[00:44:26] Speaker 01:
One, I think that the attempts to distinguish Landry while they're heroic are not, I think, valid ones.

[00:44:36] Speaker 02:
What about the APA?

[00:44:39] Speaker 01:
The APA makes this distinction, too.

[00:44:51] Speaker 01:
If the, in both cases, whether you have a recommended decision or if you have an initial decision, the agency retains the full power

[00:45:13] Speaker 01:
on Mr. Perry was reading from says well it will become final if nobody appeals I mean the so what the SEC has done is to say like I'm not like

[00:45:27] Speaker 01:
I'm not sort of giving up my right to review, decline to review, so that by the lapse of time, your decisions become final.

[00:45:39] Speaker 01:
That's not the way it works.

[00:45:40] Speaker 01:
And there is no, as far as I can see, there is no practical decision.

[00:45:57] Speaker 01:
regulations in Land Free, Judge Williams looked to the FDIC regulations to determine what was going on.

[00:46:06] Speaker 01:
If you look at the FDIC statute, it doesn't talk about, you know, the general provision doesn't talk about ALJ.

[00:46:19] Speaker 01:
that the FDIC was actually implementing a statute.

[00:46:24] Speaker 01:
And while there's a lot of formalism that goes into an appointments clause challenge, we think that this works at both the formal level because you have a final decision of the SEC, not of an ALJ, and it certainly works in terms of what actually happens.

[00:46:45] Speaker 01:
We think that not only is this case not meaningful distinguishable from Landry, but we also think Landry was correctly decided that it's not just a question of, well, we sort of got lucky with one decision and we're trying to hang on to it.

[00:47:02] Speaker 01:
I think what Landry recognizes is that ALJs are not the equivalent of Article I judges.

[00:47:13] Speaker 01:
whole administrative process in which you have an agency that...

[00:47:22] Speaker 01:
can determine when to bring a lawsuit, can determine when to, can rather determine when to initiate an investigation, can determine when to initiate an administrative proceeding, and then at the other end exercises full and plenary authority about the outcome and can reject everything that the ALJ does.

[00:47:42] Speaker 01:
Mr. Perry describes that as owning.

[00:47:45] Speaker 01:
the ALJ.

[00:47:46] Speaker 01:
I mean, to some extent you can't have it both ways.

[00:47:50] Speaker 01:
The final, I think there is an implicit recognition that Congress wanted there to be an independent hearing that takes place, but the ultimate authority and the power to reject everything that happens

[00:48:15] Speaker 01:
it is subject to judicial review.

[00:48:17] Speaker 01:
And that's when the whole judicial review starts.

[00:48:21] Speaker 01:
We're not talking about the ALJs being judicial officers.

[00:48:27] Speaker 01:
In all this, I do want to emphasize we're not in any way suggesting that ALJs aren't crucial.

[00:48:33] Speaker 01:
The ALJs are.

[00:48:34] Speaker 01:
They perform an incredibly important function.

[00:48:37] Speaker 01:
But that doesn't mean that they are

[00:48:43] Speaker 01:
in accordance with the Appointments Clause.

[00:48:47] Speaker 03:
Do you have numbers, do Mr. Perry's numbers correct, that there are some 1,500 Social Security ALJs, and I thought he said somewhere up to 250 other ALJs?

[00:49:00] Speaker 01:
I think those numbers are roughly, I mean that sounded right to me, I'd have to double check.

[00:49:06] Speaker 03:
And do you know how many other agencies have ALJs that are

[00:49:12] Speaker 03:
in pari materia with those of the commission?

[00:49:17] Speaker 03:
Where they're not appointed by the agency head?

[00:49:19] Speaker 01:
I don't think that most of them are appointed by agency heads.

[00:49:26] Speaker 01:
I would have to verify that, though.

[00:49:28] Speaker 01:
I'm not sure.

[00:49:29] Speaker 01:
But it's now my understanding that they are necessarily appointed by agency heads.

[00:49:37] Speaker 01:
There's sort of a kind of the statute, by the way, sort of refers to like being appointed by the agency.

[00:49:44] Speaker 01:
And there is also a sort of kind of discrepancy between agency and department.

[00:49:52] Speaker 01:
And you could be the head of an agency and not be the head of a department.

[00:49:57] Speaker 01:
So there's an oddity there.

[00:49:59] Speaker 02:
Yeah, is the department's position then that

[00:50:04] Speaker 02:
The statutory language about the initial decision being final is not to be taken at face value.

[00:50:16] Speaker 02:
What I'm trying to understand is I hear all this chatter about there are all kinds of problems.

[00:50:21] Speaker 02:
The numbers are great.

[00:50:23] Speaker 02:
And it may cause a re-evaluation

[00:50:29] Speaker 02:
consideration of a lot of different issues.

[00:50:32] Speaker 02:
But the only issue before us at this moment, as counsel says in his brief, I think, you know, it's a narrow issue.

[00:50:38] Speaker 02:
I realize it's not as narrow as he suggests, but I just need to be clear that when we're looking at these Supreme Court cases telling us what we're supposed to look at,

[00:50:49] Speaker 01:
I don't think there's any Supreme Court case that suggests that ALJs are inferior officers.

[00:50:59] Speaker 01:
I mean, Free Enterprise made quite clear, obviously didn't decide that they weren't, but made quite clear that the court has not suggested that they are.

[00:51:07] Speaker 01:
And the cases involving Article I judges, we think Article I court judges are sort of in a very different sort of position.

[00:51:18] Speaker 01:
I mean, these guys, you know, like

[00:51:19] Speaker 01:
issue like exercise the full you know power

[00:51:29] Speaker 01:
those intermediate court judges could firm criminal sentences of 25 years, and their judgments could become final unless there is discretionary review in the Armed Forces Court of Appeals.

[00:51:47] Speaker 01:
But that's entirely discretionary.

[00:51:51] Speaker 01:
So their decision could become final.

[00:51:54] Speaker 01:
And if it became final, it was their decision.

[00:51:57] Speaker 01:
It didn't become the decision of somebody else.

[00:52:00] Speaker 02:
So are you suggesting that historically, when the Appointments Clause was considered, it was talking about the key actors in the executive branch as distinct from

[00:52:20] Speaker 02:
the functions of persons in the executive branch.

[00:52:28] Speaker 02:
I'm just trying to understand where you're drawing the line because every line you draw I can come back with a comment and say either a statute or the functions of the people fall in line with what the Supreme Court has been saying.

[00:52:45] Speaker 01:
I think when you have a

[00:52:48] Speaker 01:
employee, our characterization of it, if you have an employee who issues a decision that becomes the decision of somebody else and it has to do that.

[00:53:03] Speaker 02:
Well that's, sorry to disturb, but I mean that's the FDIC, it's a recommended decision.

[00:53:11] Speaker 02:
Now you're in a situation where it is the initial to become

[00:53:17] Speaker 02:
the Commission's decision for the passage of time.

[00:53:20] Speaker 01:
Well, no, it isn't the passage.

[00:53:23] Speaker 01:
I mean, the SEC makes very clear that that is not what happens.

[00:53:27] Speaker 01:
And what the FDIC was going to do, I mean, the, you know, the AL, look, the FDIC statute makes clear that the ALJ can recommend the summary disposition, you know, the FDIC sort of

[00:53:41] Speaker 01:
can just like sort of go, yes, summary disposition is appropriate.

[00:53:44] Speaker 02:
So you see Congress drawing no distinction as to recommended and initial decisions.

[00:53:51] Speaker 01:
I'm saying that in the context of what is said in the two statutes between about from the FDIC statute and the ALJ statute, the fact that there is a

[00:54:04] Speaker 01:
The fact that it says we'll become the action of the commission if the FCC declines sort of to like exercise review doesn't make it constitutionally different than the FDIC statute.

[00:54:21] Speaker 02:
So that's enough of a hook you're saying to cut off the appointment clause

[00:54:29] Speaker 02:
I'm just trying to understand the sort of analysis here.

[00:54:35] Speaker 02:
That's why I'm pressing you.

[00:54:37] Speaker 01:
No, and I understand that and I'm sort of trying to, it's not easy, but I think that

[00:54:44] Speaker 01:
the way that the two statutes in the FDIC case and the SEC case don't tell you that you're looking in totally different directions and what you need in both cases is a determination of how the agency acts.

[00:55:03] Speaker 01:
So when Mr. Perry says as well,

[00:55:07] Speaker 01:
them initial decisions, and having chosen to call them initial decisions, that sort of ends the game.

[00:55:15] Speaker 01:
And what we say is, no, you have to look what did the SEC actually mean.

[00:55:20] Speaker 01:
I mean, the terms like initial decision and recommended decision do have significance, but if you look at the Attorney General, on the Attorney General Manual, Mr. Perry was signing, it goes, in making this decision, whether following an initial or recommended decision,

[00:55:37] Speaker 01:
the agency is in no way bound by the decision of its subordinate officer.

[00:55:41] Speaker 01:
It retains complete freedom of decision as though it had heard the evidence itself.

[00:55:47] Speaker 01:
And yeah, there can be sort of, I'm not saying that these things never have distinctions, but they don't have meaningful distinctions here.

[00:55:54] Speaker 03:
I think his, I mean, you're right before this panel, that's his position.

[00:55:57] Speaker 03:
I think his position is more ambitious, though, that he would seek to have

[00:56:02] Speaker 03:
Landry overruled and say that in either case there's this is significant governmental authority and That Landry was wrong.

[00:56:11] Speaker 01:
You know that is that is definitely the position in our position Obviously is that not only does this case?

[00:56:19] Speaker 01:
that Landry was right, because Frytag, which dealt with an Article I court and a judge in an Article I court and a judge who was conceded by the United States to be an officer for all sorts of purposes, that that case doesn't tell you that administrative law judges who operate within

[00:56:49] Speaker 01:
a very different kind of system who are not, who don't have the powers of judges, who are exercising delegated authority only, where that authority can be withdrawn at any time, and whose decisions, what final decisions, are those of the agency, that that is not something the Landry, rather the Freitag, does not tell you that those persons are constitutionally inferior,

[00:57:20] Speaker 04:
Do you know the answer to the question of whether there's been an instance in which an ALJ decision, for whatever reason, the Commission never issued an order confirming it or adopting it, however you want to phrase that, but yet the Commission sought to enforce that order?

[00:57:47] Speaker 01:
decision in this case makes pretty clear what it like things is supposed to happen which is like absolutely not what your honor was describing if there's I can't say you know with certainty that there's never been such a case but I'm certainly not aware of one maybe we can ask counsel for the SEC thank you

[00:58:18] Speaker 05:
I wasn't entirely sure I was going to get a chance to come up here.

[00:58:38] Speaker 05:
May it please the court?

[00:58:40] Speaker 02:
I guess I should say for the record, I don't know why not.

[00:58:45] Speaker 05:
OK.

[00:58:47] Speaker 05:
Well?

[00:58:48] Speaker 02:
We're not barring counsel from making their arguments to the court.

[00:58:52] Speaker 05:
Well, sure.

[00:58:53] Speaker 05:
I feel a little bit like the undercard, though.

[00:58:57] Speaker 05:
No, you're the main event.

[00:58:58] Speaker 05:
Yeah, OK.

[00:59:00] Speaker 05:
All right, well then.

[00:59:00] Speaker 02:
Moving along.

[00:59:03] Speaker 05:
Sure.

[00:59:03] Speaker 05:
Your Honor.

[00:59:04] Speaker 02:
Do you have an answer to Judge Wilkins' question?

[00:59:07] Speaker 05:
The one about whether there has ever been an order that has been issued that there is no finality order issued and goes into effect without one.

[00:59:17] Speaker 05:
That question?

[00:59:18] Speaker 05:
Yes.

[00:59:19] Speaker 05:
I'm not trying to misstate that.

[00:59:22] Speaker 05:
Is that the actual question?

[00:59:23] Speaker 04:
The question is, without what you're calling a finality order, has the commission sought to enforce an order of an ALG and a so-called initial order?

[00:59:35] Speaker 05:
Okay, not in the initial decision realm, as far as I'm aware of.

[00:59:40] Speaker 05:
This is dealt with a little bit in the brief where there was a practice of some ALJs to issue default judgments.

[00:59:48] Speaker 05:
The Commission on Alchemy Ventures undertook that and rejected that practice.

[00:59:54] Speaker 05:
So there may be or may have been one or two instances in which a default judgment was then enforced, but that is no longer happening, and that was corrected in the Alchemy Ventures decision.

[01:00:04] Speaker 04:
The commission did not vacate all of those prior default judgments, right?

[01:00:10] Speaker 05:
In the Alchemy Ventures, I don't believe it did, no.

[01:00:13] Speaker 04:
So doesn't that tell us something?

[01:00:18] Speaker 04:
I mean, why would the commission vacate those or seek to confirm those if it thought that it had to somehow mean otherwise?

[01:00:33] Speaker 04:
What force or effect did those default judgments have?

[01:00:38] Speaker 05:
Well, I think, I mean, I can't speak to why the commission didn't do what it did, but in the Alchemy Ventures decision, which was the one before it, it rejected the practice, which was not widespread from my understanding.

[01:00:53] Speaker 05:
And as I said, I don't know how many of them were issued.

[01:00:56] Speaker 05:
It was not a large number, and I don't know

[01:01:00] Speaker 05:
I mean, I'm assuming that the question could have been raised in the district court action if there was an attempt to enforce, but these were, as I said, default judgments, so.

[01:01:10] Speaker 05:
And as I said, the practice has been changed.

[01:01:12] Speaker 04:
Let me just ask another factual question, and I just want to make sure I understand the practice.

[01:01:19] Speaker 04:
Is there a difference in the procedure for approving an enforcement action going forward when the enforcement action is brought before the ALJ versus when it's brought before U.S.

[01:01:39] Speaker 04:
District Court judges?

[01:01:43] Speaker 05:
Either action has to be authorized by the commission itself.

[01:01:46] Speaker 04:
So there has to be a commission vote in either case?

[01:01:48] Speaker 05:
Yes.

[01:01:50] Speaker 05:
And go ahead.

[01:01:52] Speaker 04:
So is there any other, is there any difference in the procedure?

[01:01:59] Speaker 05:
No, there is no difference in procedure.

[01:02:01] Speaker 05:
And in this case, in fact, despite what's been argued today, this is exactly the type of case that could have been brought before Dodd-Frank, as well as after Mr. Lucia is a registered investment advisor.

[01:02:16] Speaker 05:
And we've had authority to bring administrative proceedings against such people since, I believe,

[01:02:23] Speaker 05:
I mean, it's been a very long time, or at least we could bring this certain remedies against the Remedies Act.

[01:02:31] Speaker 05:
So this is not a dot.

[01:02:32] Speaker 05:
This is not a creature of the Dodd-Frank expansion of the Commission's authority to bring APs against unregistered individuals.

[01:02:47] Speaker 04:
So how do you answer the statutory

[01:02:50] Speaker 04:
argument about 78 D1C.

[01:02:55] Speaker 05:
I thought Mr. Stern did a fantastic job on that question.

[01:03:02] Speaker 05:
I agree entirely with him.

[01:03:05] Speaker 05:
I think the statute has been implemented by the SEC.

[01:03:09] Speaker 05:
I would note also that

[01:03:11] Speaker 05:
The exchange act preceded the APA and so the notion that 78D1 implements the APA provisions or distinctions between, I don't think it, it doesn't say anything about initial versus recommended, but the notion that it was having this in mind, I don't think can bear, it bears any weight.

[01:03:34] Speaker 04:
And do you think that this is a circumstance, well, I mean, you're arguing that we should, I guess, in that sense, you know, constitutional avoidance to the extent that there's a interpretation of the statute that would avoid the constitutional, that you would adjust to adopt that interpretation, right?

[01:03:57] Speaker 05:
If that were, that is certainly something that the court could do, and it's well within its authority to do.

[01:04:04] Speaker 05:
I feel like I'm speaking out of my turn to tell the court how to handle if it perceives a problem.

[01:04:13] Speaker 05:
I don't think that a different interpretation would be necessary of the statute, because as Mr. Stern pointed out, I don't think it bears the significance that counsel gives it.

[01:04:25] Speaker 05:
But that is a option for the court, I believe.

[01:04:33] Speaker 04:
this morning about that issue or whether there's any type of chevron type difference to the agency with respect to how to interpret the statute, how the regulations fit with the statute.

[01:04:48] Speaker 04:
Your brother council has said emphatically that, you know, the regulations obviously can't trump the statute and that we really shouldn't

[01:04:57] Speaker 04:
look at the regulations and how things work in practice so much as just what Congress has authorized by statute.

[01:05:06] Speaker 04:
And it seems that we may need to think about some of these other statutory constructions and administrative law principles here in determining how to construe this provision.

[01:05:24] Speaker 05:
Well, I would say, again, I repeat the argument that to the extent that this court handled this issue in Landry, it looked to the regulations from the FDIC.

[01:05:35] Speaker 05:
And they are substantially identical to the SEC's dealing with initial decisions.

[01:05:43] Speaker 05:
And so as Your Honor pointed out, it seems a bit of a semantic game to note that just because one agency calls it initial and one calls it recommended,

[01:05:53] Speaker 05:
yet they treat them the same when they go through the process, meaning that all of the authority is left with the agency itself.

[01:06:01] Speaker 05:
I think that interpretation is entitled to a measure of deference.

[01:06:12] Speaker 02:
All right.

[01:06:13] Speaker 02:
All right.

[01:06:13] Speaker 02:
Let me switch everybody around.

[01:06:15] Speaker 02:
I'm sorry about this.

[01:06:16] Speaker 05:
Okay.

[01:06:17] Speaker 05:
It's okay here.

[01:06:18] Speaker 02:
All right.

[01:06:18] Speaker 02:
So now, Mr Perry, do you want to speak on merits for a moment and then we'll call you back.

[01:06:24] Speaker 02:
Okay.

[01:06:24] Speaker 07:
Thank you.

[01:06:31] Speaker 06:
May I make three quick points in rebuttal in the appointments closer owner?

[01:06:34] Speaker 06:
Or have you heard enough?

[01:06:36] Speaker 06:
Thank you, Your Honor.

[01:06:38] Speaker 06:
Judge Wilkins, I encourage you to read the Outcoming Ventures opinion.

[01:06:42] Speaker 06:
You asked about ALJ orders without finality decisions.

[01:06:46] Speaker 06:
Here's what the Commission said, I'm quoting just after footnote 34.

[01:06:50] Speaker 06:
Although we have concluded that law judges should issue initial decisions going forward, that conclusion does not disturb existing default orders, nor limit the Division's ability to seek judicial enforcement of those orders.

[01:07:04] Speaker 06:
So the commission itself has ruled that the ALJ may issue default orders and cease and desist orders that are enforceable in federal court with no further action from the commission.

[01:07:14] Speaker 06:
It has so-called disapproved the practice, but nothing in the statute or regulations prohibits it.

[01:07:18] Speaker 06:
So that's, and read the decision.

[01:07:20] Speaker 06:
It talks about all these provisions we're talking about in a way very different than my friends here are telling this court today, and that's a commission decision.

[01:07:26] Speaker 04:
I'm curious as to why that was only in a footnote of your opinion.

[01:07:30] Speaker 06:
Yes.

[01:07:30] Speaker 06:
Your Honor, they, uh,

[01:07:32] Speaker 06:
Footnotes as in Supreme Court cases, footnotes sometimes have the most important bits.

[01:07:37] Speaker 06:
Second, Mr. Stern suggested that ALJs are not officers in general.

[01:07:42] Speaker 06:
I would point the court to pages 881 and 882 of Freytag, which says these are the categories of a judge being an officer.

[01:07:50] Speaker 06:
The office is established by law.

[01:07:52] Speaker 06:
The means of appointment are specified by statute.

[01:07:54] Speaker 06:
They perform more than ministerial tasks.

[01:07:56] Speaker 06:
They take testimony, conduct trials, rule on the admissibility of evidence, and have the power to enforce compliance with discovery orders.

[01:08:04] Speaker 06:
period.

[01:08:05] Speaker 06:
End of paragraph, end of discussion.

[01:08:07] Speaker 06:
Those are the powers that make a judge an officer and the LJs of the SEC exercise each and every one of those powers, your honor, except the authority to enforce discovery.

[01:08:17] Speaker 06:
That's not that's not correct.

[01:08:18] Speaker 06:
They don't have contempt sanctions, contempt power.

[01:08:21] Speaker 06:
But they can bar an attorney from practicing in front of the agency, exclude a witness from the proceedings, take evidentiary sanctions.

[01:08:28] Speaker 06:
So they do have the power to enforce discovery orders.

[01:08:30] Speaker 06:
It's just not the contempt power.

[01:08:31] Speaker 06:
And there's nothing magic about the contempt power, Judge Pillard.

[01:08:34] Speaker 06:
The clerks in Hennan and the commissioners in all red explicitly did not have the contempt power that was reserved for judges, but they were held to be officers.

[01:08:43] Speaker 06:
So contempt cannot be the magic line.

[01:08:46] Speaker 06:
Actual implementation and semantic games, my friends have said, I'll give you the actual implementation.

[01:08:53] Speaker 06:
In the FDIC regime, 0% of ALJ decisions were the final decision of the agency.

[01:08:59] Speaker 06:
In the SEC regime, 90% of ALJ decisions are the final decision of the agency.

[01:09:04] Speaker 06:
You will note that neither of my friends challenged our statistics, which we found from the SEC's own website.

[01:09:09] Speaker 06:
That's actual implementation.

[01:09:10] Speaker 06:
That's not a semantic difference.

[01:09:12] Speaker 06:
That's the difference between an initial decision under the APA and a recommended decision under the APA.

[01:09:17] Speaker 06:
Finally, on the Appointments Clause,

[01:09:20] Speaker 06:
as to removal, this court should not respectfully distort the Constitution of the United States, which requires these officers to be called what they are, officers, and appointed pursuant to the clause because of some downstream effect that's not present in this case and may never be raised.

[01:09:37] Speaker 06:
The only question here is, are they officers?

[01:09:40] Speaker 06:
Freytag says yes.

[01:09:41] Speaker 06:
Edmund says yes.

[01:09:42] Speaker 06:
And what we've heard here today respectfully says nothing otherwise.

[01:09:47] Speaker 06:
All right.

[01:09:48] Speaker 06:
On the merits.

[01:09:52] Speaker 06:
My client, Mr. Lucia, is subject to a lifetime bar from the industry for presenting a 122-page slideshow demonstration to prospective investors.

[01:10:05] Speaker 06:
The presented and retirement strategy that the Commission has never challenged, in fact in footnote five of its opinion, to return to the footnote of Judge Wilkins, it expressly agrees that there's no challenge to the strategy itself.

[01:10:17] Speaker 06:
There's no challenge to the presentation of the actual strategy, which is the bulk of the presentation.

[01:10:22] Speaker 06:
The only challenge was to the two so-called backtest scenarios presented for the 1966 and 77.

[01:10:28] Speaker 06:
And the commission has really distilled this down to two points in this court.

[01:10:33] Speaker 06:
First is the use of assumed rates of inflation, 3%, and rates of return on REIT investments, REIT investments, of 7%.

[01:10:42] Speaker 06:
There's no dispute that these assumptions were expressly disclosed.

[01:10:46] Speaker 06:
That's JA2434.

[01:10:48] Speaker 06:
There's no dispute that these assumptions were reasonable.

[01:10:50] Speaker 06:
That's JA309, note 37.

[01:10:53] Speaker 06:
What the commission said is that the fact that they were disclosed and reasonable didn't matter.

[01:11:01] Speaker 06:
I'm going to quote the language.

[01:11:03] Speaker 06:
Irrelevant because, quote, backtests use historical and not assumed data.

[01:11:10] Speaker 06:
That's JA309.

[01:11:12] Speaker 06:
Well, as the dissenting commissioners pointed out, the only dissent in 2015 from a commission decision, the commission just made that up.

[01:11:21] Speaker 06:
There was no definition of back test, there's no prohibition against using assumptions, and that's just wrong.

[01:11:28] Speaker 06:
Yet it was the sole basis for the liability determination in this case.

[01:11:31] Speaker 06:
The commission then comes back in its opinion when we made this challenge in the petition for review and says this, this is page 325, quote, Our finding of liability does not hinge on Lucia's use of the word backtest.

[01:11:44] Speaker 06:
Lucia made numerous other statements suggesting that the slides reflected historical results, end quote.

[01:11:50] Speaker 06:
Now, there's no citation for that proposition because it's false.

[01:11:52] Speaker 06:
There is no such representation.

[01:11:54] Speaker 06:
In fact, these slides said that these were hypothetical assumed or not actual results in rates of return 87 times.

[01:12:04] Speaker 06:
So for the commission to say that it didn't turn on back test is an exercise in circularity.

[01:12:10] Speaker 06:
The commission then took that.

[01:12:12] Speaker 03:
But I think what they're saying, just to sort of press you on that, is

[01:12:16] Speaker 03:
even if the word back test had never been used, when someone who's advertising his approach says, this is a great approach, if you had been using it in the 73 market or the difficult conditions of the 66 market, you would have succeeded, and let me show you how, that there's an assumption there that everything that's material about those markets would be reflected in the test.

[01:12:42] Speaker 03:
Otherwise, it doesn't actually prove the point that the man has said

[01:12:46] Speaker 03:
He's proven.

[01:12:48] Speaker 03:
So it's not so much about, you know, do we define vectors or not?

[01:12:52] Speaker 03:
We're using historical examples.

[01:12:54] Speaker 03:
He didn't say, imagine a situation with the kinds of stock market numbers that we had in 73 or 66, and then these other, you know, bunch of assumptions.

[01:13:09] Speaker 03:
Let's just take that as our hypothetical and look at how well we do.

[01:13:12] Speaker 03:
He refers to that because it's powerful.

[01:13:15] Speaker 03:
for people who have lived through that period of time.

[01:13:18] Speaker 06:
Judge Pillard, here is where context matters.

[01:13:22] Speaker 06:
The main part of the presentation, which is at JA 2380 to JA 2434, which is the description of the four scenarios, the four hypothetical couples.

[01:13:34] Speaker 06:
which goes along and uses the same set of assumptions for each of them on a hypothetical 12-year period, okay?

[01:13:41] Speaker 06:
And it winds up at JA2434, excuse me, at JA2434.

[01:13:49] Speaker 06:
2428, I apologize, I misspoke, with the overview of all the 50 or so pages that had come before and the summary of what happened, okay?

[01:13:57] Speaker 06:
Then what Mr. LeChia did, and this is very clear from the webinar which is transcribed and is in the joint appendix at page 2577, he then says, well, okay, those are four hypotheticals.

[01:14:09] Speaker 06:
What would have happened in the stock market scenarios of 66 and 73?

[01:14:15] Speaker 06:
And he keeps the other assumptions the same.

[01:14:17] Speaker 06:
For example, 3% assumed inflation had been used for all the four hypotheticals.

[01:14:21] Speaker 06:
He carries that over because he's trying to make an apples to apples comparison, except he puts in the actual stock market returns for the 66th period and the 73 period.

[01:14:30] Speaker 06:
That's what's changed.

[01:14:32] Speaker 06:
And it says that right on the slide.

[01:14:34] Speaker 06:
I mean, this again is not an admission 2434.

[01:14:37] Speaker 06:
The following examples are based on actual market returns for bonds and stocks.

[01:14:42] Speaker 06:
Reit returns are based on a 7% return, and inflation is based on 3%.

[01:14:45] Speaker 06:
So the assumptions are disclosed.

[01:14:48] Speaker 06:
And so all he's doing in these two examples, Judge Pillard, is taking those four hypotheticals that the Commission has never challenged and using stock market returns for those periods plugged in with the other numbers.

[01:15:00] Speaker 06:
He's never saying this is a full historical analysis.

[01:15:03] Speaker 06:
The Commission has to take that word backtest to bring that in.

[01:15:08] Speaker 06:
And that's in fact the basis of the science are finding here They have accused charged convicted and punished this man for intentional securities fraud Intentionally misleading investors and here's the science analysis.

[01:15:20] Speaker 06:
This is page 325.

[01:15:22] Speaker 06:
Mr. Lucia Quote knew or must have known that using hypothetical data in the back tests would not reflect historical results and

[01:15:34] Speaker 06:
We can all agree with that, Your Honor.

[01:15:36] Speaker 06:
But that's not science or that's not deliberate or reckless action designed to mislead investors, because it said right in the presentation, I'm using pretend results.

[01:15:47] Speaker 06:
In fact, he said in the webinar, let's pretend inflation is 3%.

[01:15:51] Speaker 06:
We know it was more than that, but we're going to pretend it's 3%.

[01:15:54] Speaker 06:
And then the commission convicts him of intentional fraud for using a 3% rate.

[01:16:00] Speaker 06:
That's just not the way the securities laws work.

[01:16:02] Speaker 03:
He said let's pretend with respect to one of his other three hypotheticals.

[01:16:07] Speaker 03:
He didn't say that with respect to these historical ones, right?

[01:16:10] Speaker 03:
Your Honor, the 3% inflation is used for all of them.

[01:16:13] Speaker 03:
I know, but when he's talking about whether it's

[01:16:16] Speaker 03:
historically accurate or not, he doesn't have a disclaimer there.

[01:16:20] Speaker 06:
Historically accurate, he does, your honor.

[01:16:22] Speaker 06:
2434 says the rate of, he's using 3%.

[01:16:25] Speaker 06:
The ALJ made a finding at JA 122 that no reasonable investor would have thought inflation was actually 3%, constant every year.

[01:16:34] Speaker 06:
That's a finding in the record that the commission just ignored.

[01:16:39] Speaker 06:
So that, you know, that's where it is.

[01:16:41] Speaker 03:
But what an unsophisticated investor think precisely because it's not constant, OK, they're averaging it out for what that period is, when in fact it's radically different from what it was.

[01:16:52] Speaker 03:
And so what is the point?

[01:16:53] Speaker 03:
I guess if you step back one more step, what is the point of somebody who's advertising his investment strategy using historical data in part, if he's not actually trying to communicate to people, if the same thing that happened then were to happen to you

[01:17:11] Speaker 03:
You know, this is the scariest part of the market in these people's lives.

[01:17:14] Speaker 03:
If that were to happen again, and you used my strategy, this is how you would come out.

[01:17:20] Speaker 03:
And there are actual numbers there.

[01:17:22] Speaker 03:
And if these are so out of line, how is that not misleading?

[01:17:29] Speaker 06:
First, the strategy is not any particular investment.

[01:17:34] Speaker 06:
It's a bucketizing by order of risk and withdrawal according to risk.

[01:17:38] Speaker 06:
So that we have three buckets.

[01:17:39] Speaker 06:
You take down the least riskiest, the middle riskiest, and the most riskiest.

[01:17:42] Speaker 06:
And re-bucketize.

[01:17:44] Speaker 06:
Well, let's not re-bucketize in a minute, but that's the basic strategy is that.

[01:17:47] Speaker 06:
not challenge it as a strategy.

[01:17:49] Speaker 06:
And what he's saying in the historical test is, how do those stand up to the stock market changes of those periods?

[01:17:56] Speaker 06:
And while we keep everything else the same, because he's trying to present an analysis that goes across.

[01:18:01] Speaker 06:
As to the re-bucketizing point, it is on one slide, JA 2428, at the bottom.

[01:18:09] Speaker 06:
At the end of his hypotheticals, which ran for 12-year cycles, it says, and re-bucketized for 12 years.

[01:18:15] Speaker 06:
He's never again mentioned in that context.

[01:18:17] Speaker 06:
The webinar confirms.

[01:18:18] Speaker 03:
But these hypotheticals ran for people's entire retirement.

[01:18:21] Speaker 03:
They went through cycles.

[01:18:22] Speaker 03:
Yes, your honor.

[01:18:23] Speaker 06:
And so what Mr. Lucia explains in the webinar, this is a page 2556 to 57.

[01:18:30] Speaker 06:
He also explained this more at trial at JA 1611, 1612.

[01:18:36] Speaker 06:
But the webinar, I think, is more telling.

[01:18:38] Speaker 06:
is that when you get to the end of the third bucket, or into the third bucket, re-bucketizing is a more sophisticated approach that you would discuss with your financial advisor.

[01:18:46] Speaker 06:
And what he testified to his trial is, we're now 12 years into it, we don't know.

[01:18:50] Speaker 06:
We're gonna have to then look in current economic environments and see what's going on.

[01:18:54] Speaker 03:
Maybe it's how to re-bucketize, but whether to re-bucketize, I mean, he's saying again and again, I would never fail to diversify.

[01:19:02] Speaker 03:
I would never have everything in stocks.

[01:19:04] Speaker 03:
I would never spend for my current needs out of the stock market.

[01:19:08] Speaker 03:
I would never do that.

[01:19:08] Speaker 03:
That's much more dominant as a message than when you're gonna re-bucketize and figure out how much to put in which of those three buckets, talk to your advisor.

[01:19:17] Speaker 06:
Judge Piller, he said that once, not again and again.

[01:19:20] Speaker 06:
He said that once, not in the presentation.

[01:19:22] Speaker 06:
not in the webinar.

[01:19:24] Speaker 06:
He said that in an email newsletter to existing clients who already had plans in place.

[01:19:29] Speaker 03:
Which is the that that you're referring to?

[01:19:31] Speaker 06:
I would never put 100% in stocks.

[01:19:33] Speaker 06:
That did not happen in these presentations.

[01:19:37] Speaker 06:
It sounds like it from the brief and from the commission's opinion.

[01:19:40] Speaker 06:
That was a separate communication to a separate set of actual clients commenting on market events.

[01:19:46] Speaker 06:
That was not part of the presentation that's being charged, and it was not part of the strategy because what Mr. Lecce had testified to, and this is not contradicted,

[01:19:54] Speaker 06:
is that when you're initially setting up the strategy at the beginning of retirement, you would never put 100% of stocks, because you need the least risky to draw down income for the first several years.

[01:20:04] Speaker 06:
But that later, after 12 years or whatever, you would have to relook at it, see what the current economic environments are, and that he was not ever making any comment about that.

[01:20:13] Speaker 06:
Certainly, you could disagree with the investment advice, but is it intentional fraud?

[01:20:19] Speaker 06:
Is he deliberately, recklessly misleading investors by not re-bucatizing when nothing in here says he would re-bucatize?

[01:20:26] Speaker 06:
And certainly, it doesn't.

[01:20:28] Speaker 06:
It's clear what's going on.

[01:20:30] Speaker 06:
It's not certainly a science-based fraud.

[01:20:35] Speaker 06:
Can you imagine bringing up something like this in district court and saying, this presentation, you should go to jail for this?

[01:20:42] Speaker 06:
That's not going to happen, Your Honor.

[01:20:44] Speaker 06:
And finally, the lifetime bar here is punitive.

[01:20:47] Speaker 06:
This is imposing on what is at most a negligent presentation.

[01:20:55] Speaker 06:
That is a not quite

[01:20:57] Speaker 06:
you know, dot every i across every t kind of thing.

[01:20:59] Speaker 06:
He made the assumptions, should he have said assumption 89 times instead of 87 times?

[01:21:04] Speaker 06:
I guess that's the commission's argument.

[01:21:06] Speaker 03:
No, I think it's, I mean, you know, it's much more you can say, oh, these are all assumptions and these are not real people.

[01:21:11] Speaker 03:
I mean, that's the most salient way in which there are assumptions to the ordinary listener.

[01:21:15] Speaker 06:
But the entire presentation was hypothetical, Your Honor.

[01:21:19] Speaker 03:
Exactly.

[01:21:20] Speaker 06:
That cuts the other way, though.

[01:21:21] Speaker 06:
It does not, Your Honor, because there was no representation that this was a real-world scenario.

[01:21:26] Speaker 06:
In fact, there's 40-some statements that this is not a real-world scenario.

[01:21:31] Speaker 06:
There's nothing wrong with using hypothetical scenarios to show how different approaches will apply to each other.

[01:21:38] Speaker 03:
And what about the third claim that even given the universe as Mr. Lucia would have it, that

[01:21:45] Speaker 03:
The results of the 1973 example, even with Mr. Lucia's assumptions, could not be replicated.

[01:21:53] Speaker 06:
Well, Your Honor, again, that's the books and records violation that was first not charged and later dropped, so they're trying to make that into a fraud claim.

[01:22:03] Speaker 06:
It's part of this appeal, is it not?

[01:22:06] Speaker 06:
Your Honor, it's an appeal is they cannot hold him liable for something that wasn't in the order instituting proceedings.

[01:22:11] Speaker 06:
I think that's our first argument, is they have violated due process and administrative procedure by bringing that up.

[01:22:17] Speaker 06:
Second... And we definitely will ask them about that, but from your perspective... Under the Commission's view, the error was in the, you know,

[01:22:25] Speaker 06:
understated the results.

[01:22:27] Speaker 06:
When they read the numbers, they came out with a higher number.

[01:22:30] Speaker 06:
And third, it doesn't matter for these persons.

[01:22:32] Speaker 03:
They came out with, or I think it was your expert came out a million short.

[01:22:38] Speaker 06:
Yes, and their expert came out higher.

[01:22:40] Speaker 06:
But that's not in the record, is it?

[01:22:42] Speaker 06:
It is in the record, Your Honor, and the Commission, in its opinion, says it doesn't matter if it's higher or lower, it was just wrong.

[01:22:47] Speaker 06:
Well, Your Honor, it does matter if it's higher or lower.

[01:22:49] Speaker 06:
When you're talking about imposing a lifetime bar on an individual, it matters which way the error ran and how the error was made.

[01:22:56] Speaker 06:
This was, again, a failure to keep records.

[01:22:59] Speaker 06:
We acknowledge that.

[01:22:59] Speaker 06:
We acknowledge at the time.

[01:23:00] Speaker 06:
But the books and records violation isn't even in the case anymore.

[01:23:03] Speaker 06:
And certainly, this 1973 nonsense wasn't even charged in the order instituting proceedings.

[01:23:09] Speaker 02:
All right.

[01:23:09] Speaker 02:
Why don't we hear from Calvin?

[01:23:10] Speaker 02:
Thank you, Your Honor.

[01:23:23] Speaker 05:
May it please the Court.

[01:23:25] Speaker 05:
I had a quick comment regarding the Alchemy Ventures matter, and then I would get to any questions the panel may have on the merits.

[01:23:34] Speaker 05:
As this Court recognized in Tucker, even an employee can issue final decisions that are not necessarily, that would not necessarily make them an officer, and this is what we argued in our brief in response to the Alchemy Ventures footnote.

[01:23:46] Speaker 05:
Understand that alchemy dealt with only default orders where no litigants stood up to defend, and the commission has said that even in those cases, initial decisions are subject to commission review, or that initial decisions subject to commission review are not required.

[01:24:01] Speaker 05:
So regardless, the default orders are limited to the same sense as Tucker.

[01:24:06] Speaker 05:
So I just wanted to remind the court about this precedent in Tucker.

[01:24:11] Speaker 04:
Regarding the police can make orders that are enforceable by a U.S.

[01:24:15] Speaker 04:
District Court judge.

[01:24:22] Speaker 04:
Again, this.

[01:24:25] Speaker 04:
Because wouldn't one of those default orders be enforceable by a U.S.

[01:24:30] Speaker 04:
district court yet?

[01:24:31] Speaker 05:
If the judgment were enforceable in court, it would have to be subject to the court's discretion and jurisdiction in order to determine whether or not there's a basis for it and the person has the opportunity, as in any other default scenario, to come forth with their explanations for why default was entered or they allowed default to be entered.

[01:24:51] Speaker 04:
Okay, well that goes to like the merits of whether the order was, you know, the fault could be set aside, but assuming there's no defense on all of that, you're saying that an employee of the SEC can't issue an order that is enforceable by a federal U.S.

[01:25:14] Speaker 04:
District Court judge.

[01:25:16] Speaker 05:
I'm saying that under the rationale under Tucker that a that as alchemy you know outlined the

[01:25:29] Speaker 05:
When you're talking about a default judgment, you could issue final decisions that will not necessarily make them an officer.

[01:25:37] Speaker 05:
Whether or not, I mean, the practice is no longer in effect.

[01:25:42] Speaker 04:
There's decisions, and there's decisions that are enforceable by Article 3 judge.

[01:25:53] Speaker 04:
So you're saying that the decision that's enforceable by an article three judge can be rendered by someone who is an employee as opposed to an officer.

[01:26:09] Speaker 05:
I'm saying that we're consistent with Tucker that doesn't make them an officer.

[01:26:14] Speaker 05:
And if the court wants to probe this further, I feel like I'm getting far afield from my area of expertise, and I'd invite Mr. Stern back up here.

[01:26:24] Speaker 05:
Or we could have additional briefing on it.

[01:26:26] Speaker 03:
Why don't we switch?

[01:26:27] Speaker 03:
Oops, sorry.

[01:26:28] Speaker 03:
Are we asking about the merits?

[01:26:29] Speaker 03:
I'm trying to get there.

[01:26:30] Speaker 03:
Yeah, yeah, yeah.

[01:26:31] Speaker 03:
So I wanted to ask you about the question about whether the 93 example was not charged and whether that's consistent with due process to even have that

[01:26:43] Speaker 03:
as part of the mix.

[01:26:45] Speaker 05:
Okay, well, you mean the 703 back test?

[01:26:48] Speaker 05:
The fact that Ms.

[01:26:49] Speaker 05:
Lucia had no basis for it and pulled the number out of thin air?

[01:26:54] Speaker 05:
That is absolutely encompassed by our allegations because in the OIP, we challenged him with issuing the back test with no reasonable basis.

[01:27:04] Speaker 05:
And so therefore, he showed up at the hearing and we learned during the discovery process that he had no documentation for it.

[01:27:12] Speaker 05:
And so he testified regarding this.

[01:27:13] Speaker 05:
So there's no notice

[01:27:15] Speaker 05:
concerned because the issue was fleshed out both he was put on notice in the OIP and then it was fleshed out during the hearing itself and so and it's clear in the evidence in the record that he couldn't support it and they don't challenge the Commission's finding that that was a reckless act.

[01:27:33] Speaker 03:
What about their contention that it comes out actually to the investor's advantage that they understated the benefits of their strategy in that historical context?

[01:27:43] Speaker 05:
Yeah, I mean, I think this is just another instance in which Mr. Lucia wasn't doing what he was saying he was doing.

[01:27:48] Speaker 05:
I mean, they're complaining

[01:27:51] Speaker 05:
two different findings here, two different misleading aspects of the presentation.

[01:27:57] Speaker 05:
One is that if you actually run a historical analysis using historical data, as the expert testimony reveals and is pretty clear on, you run out of money in 1986.

[01:28:08] Speaker 05:
So his claim that you have $1.4 million

[01:28:13] Speaker 05:
even though he can't support it in 1994, is just false for that reason alone.

[01:28:20] Speaker 05:
But then when you get to his numbers and he comes to the hearing and says, well, wait, I ran a different set of assumptions for this, his own expert still couldn't come up with the number.

[01:28:31] Speaker 05:
And so if you run that out, but you have to use, again, assumptions that don't apply in the real world, well then, according to a spreadsheet he gave to the staff, and that's what they're referring to in that footnote,

[01:28:43] Speaker 05:
It comes out with a different number, but those numbers aren't clearly ones that are used in order to run anything because they don't come up with the number he came up with.

[01:28:51] Speaker 05:
So it's very, it's a very confusing area of the record.

[01:28:56] Speaker 05:
And I think all the commission was saying was that he's pulling the number out of thin air and they don't contest that's reckless.

[01:29:05] Speaker 05:
You know, and I wanted to just focus the court again on the two questions that he asked investors, or I'm sorry, they're not investors, they're potential clients, prospective clients, people who he's trying to pitch his retirement strategy to.

[01:29:20] Speaker 05:
And those questions were, what would have happened

[01:29:24] Speaker 05:
if he retired in 1966.

[01:29:27] Speaker 05:
And what could the buckets of money approach survive the bear market of 73, 74?

[01:29:34] Speaker 05:
Those are historical questions which require historical analysis in order to determine and to give an accurate answer.

[01:29:42] Speaker 05:
And when you do give

[01:29:43] Speaker 05:
use the data that is historical, you end up with a result that is far different than the one he was telling the potential clients he was trying to lure to invest with him.

[01:29:54] Speaker 03:
So because these people are unsophisticated, the fact that he puts on a slide, here's my assumption, 3% inflation, 7% yield from REITs, doesn't matter.

[01:30:08] Speaker 05:
I mean, it's not just the lack of sophistication, Your Honor.

[01:30:12] Speaker 05:
What it is, is that

[01:30:14] Speaker 05:
he has a fiduciary duty to a potential client as well as a current client.

[01:30:21] Speaker 05:
And that duty means that somebody listening in that is assured that he's going to speak honestly, he's going to recommend courses of actions that it has a reasonable basis to do.

[01:30:32] Speaker 05:
And by intentionally rigging these numbers, I mean, the 3% inflation rate

[01:30:39] Speaker 05:
had a dramatic effect on the results because not only is it an understated rate of what actually happened or occurred during this period, but as he would know, and as he can see that he did know, the high inflation rates will drive up T-bills.

[01:30:54] Speaker 05:
Well, he used actual T-bill rates in fact during his numbers.

[01:30:58] Speaker 05:
Well, when you do that,

[01:31:00] Speaker 05:
And the expert testimony is clear on this.

[01:31:02] Speaker 05:
When you do that, he didn't have the benefit of the high T-bill rates, but he had none of the downside of the high inflation rates.

[01:31:09] Speaker 05:
And so that, as I said, had a dramatic impact on the end result.

[01:31:13] Speaker 05:
The same thing with failure to re-bucketize.

[01:31:17] Speaker 05:
His strategy was all about avoiding the market volatility that he laid out earlier in the presentation.

[01:31:24] Speaker 05:
That was the whole reason why he invented these other

[01:31:29] Speaker 05:
couples who were investors who the high rowing Henderson's he called them and who put a hundred percent in the stock market.

[01:31:37] Speaker 03:
Although his position is that at least in this court is that is talking about three different approaches to the first 12 years and he does bucket ties for the first 12 years and say let's

[01:31:48] Speaker 03:
the conservative, then the medium, then the more risky, and so he's doing something different just with respect to the 12 years and then saying, oh, from there on in details.

[01:32:01] Speaker 05:
Right, well, two answers to that, not three, but two, and that is that in regards to the 66 back test, I mean, you have 37 years.

[01:32:12] Speaker 05:
that he's running the numbers because his result is 2003.

[01:32:16] Speaker 05:
So if my quick math is 27 minus 12 is 15 years, I think it is, that he has his retirees who are getting older invested 100% in the stock market.

[01:32:29] Speaker 05:
And he said, I would never, ever

[01:32:32] Speaker 05:
the advice somebody would have 100% of their savings in the stock market.

[01:32:36] Speaker 03:
Turns out that was a pretty good time to be in the stock market.

[01:32:38] Speaker 05:
Yeah.

[01:32:39] Speaker 05:
Well, that's another thing.

[01:32:40] Speaker 05:
Another aspect of the presentation of his assumptions, one thing that it did was that putting all this money in the stock market, it just happened to be exactly when the stock market

[01:32:53] Speaker 05:
far outpaced T-bills and even the read rates that he was relying on.

[01:32:58] Speaker 05:
So, you know, there is absolute evidence of science here.

[01:33:02] Speaker 05:
This is at least reckless conduct.

[01:33:05] Speaker 05:
You know, and I think that the Commission's chosen remedy is justified in these circumstances.

[01:33:12] Speaker 03:
If one were to disagree with you on any of the three bases, would it be, behoop us to send it back to the commission because you look at the conduct overall and it's hard to say whether the same remedy would be awarded.

[01:33:30] Speaker 05:
I would love to have a way of answering that question without saying that a remand wouldn't be necessary, but I think that's true.

[01:33:38] Speaker 05:
I think if you look at our opinion, the commission identified the three bases for the ways that this presentation was misleading.

[01:33:48] Speaker 05:
I firmly believe that substantial evidence supports all of those bases.

[01:33:52] Speaker 05:
But if the court were to disagree, I do think that a remand would be necessary to determine whether or not the sanctions should remain.

[01:34:02] Speaker 02:
Anything further?

[01:34:02] Speaker 02:
No.

[01:34:03] Speaker 02:
Thank you.

[01:34:04] Speaker 05:
Thank you.

[01:34:06] Speaker 02:
All right.

[01:34:07] Speaker 02:
Are we all settled?

[01:34:09] Speaker 02:
Good.

[01:34:09] Speaker 02:
We'll take the case under advisement.