SEC loses appeal in case challenging administrative law judges

By Nate Raymond

(Reuters) - A federal appeals court on Wednesday rejected the U.S. Securities and Exchange Commission's request that it reconsider a ruling holding that its in-house administrative judges are not constitutionally appointed.

The 10th U.S. Circuit Court of Appeals in Denver declined to rehear the case of Colorado businessman David Bandimere, which led to a major setback for the SEC amid attacks by defendants who question its administrative court system's fairness.

While a majority of judges voted against having the full court hear the case, two dissented, including Circuit Judge Carlos Lucero, who said the case presents "numerous questions of constitutional importance."

Lucero said the three-judge panel's December ruling "presents a threat of disruption throughout our government" and could affect other agencies that, like the SEC, utilize administrative law judges.

"That the Supreme Court may ultimately review this case does not relieve us of our independent obligation to rehear it," he wrote.

The decision came after the U.S. Court of Appeals for the District of Columbia Circuit in February said that it would rehear a case in which a three-judge panel last year upheld the SEC's use of in-house judges.

The Supreme Court often reviews matters where circuit courts are split.

Bandimere's lawyer, David Zisser, said he was pleased with the decision. Representatives for the SEC did not respond to requests for comment.

Administrative law judges are independent from the agencies where they work. Their employing agency can seek their removal, but the Merit Systems Protection Board must review such a move.

Following the 2010 Dodd-Frank financial reform law's passage, the SEC relied increasingly on its own judges to oversee cases. Critics call the fast-tracked in-house court unfair to defendants, some of whom have challenged the system in court.

The SEC accused Bandimere of acting as an unregistered broker from 2006 to 2010 in making sales of securities in two entities that enabled Ponzi schemes. He denied wrongdoing.

Administrative Law Judge Cameron Elliot in 2013 found Bandimere liable for violating securities laws, barred him from associating with any broker, dealer or investment adviser and ordered him to pay nearly $1.03 million.

In December's ruling, U.S. Circuit Judge Scott Matheson said Elliot and the SEC's other administrative judges held their offices in violation of the U.S. Constitution's appointments clause.

Matheson said the SEC's judges were not employees but "inferior officers" who had not, as required, been appointed by the president, a court or a department head.

The case is Bandimere v. U.S. Securities and Exchange Commission, 10th U.S. Circuit Court of Appeals, No. 15-9586.

(Reporting by Nate Raymond in Boston; Editing by Jonathan Oatis)