Bandimere v. U.S. Sec. & Exch. Comm'n

• Decision Date: 27 December 2016
• Docket Number: No. 15-9586,15-9586
• Citation: 844 F.3d 1168
• Parties: David F. Bandimere, Petitioner, v. United States Securities and Exchange Commission, Respondent. Ironridge Global IV, Ltd ; Ironridge Global Partners, LLC, Amici Curiae.
• Court: U.S. Court of Appeals — Tenth Circuit

844 F.3d 1168

David F. Bandimere, Petitioner,

v. United States Securities and Exchange Commission, Respondent.Ironridge Global IV, Ltd ; Ironridge Global Partners, LLC, Amici Curiae.

No. 15-9586

United States Court of Appeals, Tenth Circuit.

Filed December 27, 2016

David A. Zisser, Jones & Keller P.C., Denver, Colorado, appearing for Petitioner.

Lisa K. Helvin, Senior Counsel, Securities and Exchange Commission, Washington, DC, and Mark B. Stern, Attorney, Appellate Staff Civil Division, United States Department of Justice, Washington, DC (Benjamin C. Mizer, Principal Deputy Assistant Attorney General; Beth S. Brinkmann, Deputy Assistant Attorney General; Mark R. Freeman, Melissa N. Patterson, Megan Barbero, Daniel Aguilar, and Tyce R. Walters, Attorneys, Appellate Staff, Civil Division, United States Department of Justice, Washington, DC; Anne K. Small, General Counsel; Michael A. Conley, Solicitor; and Dominick V. Freda, Senior Litigation Counsel, Securities and Exchange Commission, Washington, DC, with them on the brief), appearing for Respondent.

Paul D. Clement, Jeffrey M. Harris, and Christopher G. Michel, Bancroft PLLC, Washington, DC, filed an amicus curiae brief for Ironridge Global Partners, LLC.

Before BRISCOE, MCKAY, and MATHESON, Circuit Judges.

Opinion

MATHESON, Circuit Judge.

When the Framers drafted the Appointments Clause of the United States Constitution in 1787, the notion of administrative law judges ("ALJs") presiding at securities law enforcement hearings could not have been contemplated. Nor could an executive branch made up of more than 4 million people,¹ most of them employees. Some of them are "Officers of the United States," including principal and inferior officers, who must be appointed under the Appointments Clause. U.S. Const. art. II, § 2, cl. 2. In this case we consider whether the five ALJs working for the Securities and Exchange Commission ("SEC") are employees or inferior officers.

Based on Freytag v. Commissioner of Internal Revenue , 501 U.S. 868, 111 S.Ct. 2631, 115 L.Ed.2d 764 (1991), we conclude the SEC ALJ who presided over an administrative enforcement action against Petitioner David Bandimere was an inferior officer. Because the SEC ALJ was not constitutionally appointed, he held his office in violation of the Appointments Clause. Exercising jurisdiction under 15 U.S.C. §§ 77i(a) and 78y(a)(1), we grant Mr. Bandimere's petition for review.

I. BACKGROUND

The SEC is a federal agency with authority to bring enforcement actions for violations of federal securities laws. 15 U.S.C. §§ 77h-1, 78d, 78o , 78u-3. An enforcement action may be brought as a civil action in federal court or as an administrative action before an ALJ. In 2012, the SEC brought an administrative action against Mr. Bandimere, a Colorado businessman, alleging he violated various securities laws. An SEC ALJ presided over a trial-like hearing. The ALJ's initial decision concluded Mr. Bandimere was liable, barred him from the securities industry, ordered him to cease and desist from violating securities laws, imposed civil penalties, and ordered disgorgement. David F. Bandimere, SEC Release No. 507, 2013 WL 5553898, at *61-84 (ALJ Oct. 8, 2013).

The SEC reviewed the initial decision and reached a similar result in a separate opinion. David F. Bandimere, SEC Release No. 9972, 2015 WL 6575665 (Oct. 29, 2015). During the SEC's review, the agency addressed Mr. Bandimere's argument that the ALJ was an inferior officer who had not been appointed under the Appointments Clause. Id. at *19. The SEC conceded the ALJ had not been constitutionally appointed, but rejected Mr. Bandimere's argument because, in its view, the ALJ was not an inferior officer. Id. at *19–21.

Mr. Bandimere filed a petition for review with this court under 15 U.S.C. §§ 77i(a) and 78y(a)(1), which allow an aggrieved party to obtain review of an SEC order in any circuit court where the party "resides or has his principal place of business." In his petition, Mr. Bandimere raised his Appointments Clause argument and challenged the SEC's conclusions regarding securities fraud liability and sanctions.²

II. DISCUSSION

The SEC rejected Mr. Bandimere's argument that the ALJ presided over his hearing in violation of the Appointments Clause. We review the agency's conclusion on this constitutional issue de novo. Hill v. Nat'l Transp. Safety Bd. , 886 F.2d 1275, 1278 (10th Cir. 1989). We first explain why we must address Mr. Bandimere's constitutional argument and then address its merits.

A. Constitutional Avoidance

Federal courts avoid unnecessary adjudication of constitutional issues. City of Mesquite v. Aladdin's Castle, Inc. , 455 U.S. 283, 294, 102 S.Ct. 1070, 71 L.Ed.2d 152 (1982). Here, we must consider the Appointments Clause issue.

In its opinion, the SEC concluded Mr. Bandimere committed two securities fraud violations and two securities registration violations.³ In his petition for review, Mr. Bandimere challenges the SEC's findings of securities fraud liability as arbitrary and capricious, but he does not challenge the registration violations on these non-constitutional grounds. He attacks the SEC's opinion as a whole, however, including both his securities fraud and registration liability, based on the Appointments Clause.⁴ Because the sole argument attacking his registration liability is constitutional, we cannot avoid the Appointments Clause question. And because resolving this question relieves Mr. Bandimere of all liability, we need not address his remaining arguments on securities fraud liability.

B. Appointments Clause Overview

The Appointments Clause states:

[The President] shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.

U.S. Const. art. II, § 2, cl. 2.

The Appointments Clause embodies both separation of powers and checks and balances. Ryder v. United States , 515 U.S. 177, 182, 115 S.Ct. 2031, 132 L.Ed.2d 136 (1995) ("The Clause is a bulwark against one branch aggrandizing its power at the expense of another branch....").⁵ By defining unique roles for each branch in appointing officers, the Clause separates power. It also checks and balances the appointment authority of each branch by providing (1) the President may appoint principal officers only with Senate approval and (2) Congress may confer appointment power over inferior officers to the President, courts, or department heads but may not itself make appointments.⁶

The Appointments Clause also promotes public accountability by identifying the public officials who appoint officers. Edmond v. United States , 520 U.S. 651, 660, 117 S.Ct. 1573, 137 L.Ed.2d 917 (1997). And it prevents the diffusion of that power by restricting it to specific public officials. Ryder , 515 U.S. at 182, 115 S.Ct. 2031 ; Freytag , 501 U.S. at 878, 883, 111 S.Ct. 2631. "The Framers understood ... that by limiting the appointment power, they could ensure that those who wielded it were accountable to political force and the will of the people." Freytag , 501 U.S. at 884, 111 S.Ct. 2631.

C. Inferior Officers and Freytag

1. Inferior Officers and the Supreme Court

The Supreme Court has defined an officer generally as "any appointee exercising significant authority pursuant to the laws of the United States." Buckley v. Valeo , 424 U.S. 1, 126, 96 S.Ct. 612, 46 L.Ed.2d 659 (1976) (per curiam). The term "inferior officer" "connotes a relationship with some higher ranking officer or officers below the President: Whether one is an 'inferior' officer depends on whether he has a superior." Edmond , 520 U.S. at 662, 117 S.Ct. 1573.⁷

This description of "inferior" may aid in understanding the distinction between principal and inferior officers. But we are concerned here with the distinction between inferior officers and employees. Like inferior officers, employees—or "lesser functionaries"—are subordinates. Buckley , 424 U.S. at 126 n.162, 96 S.Ct. 612.

Justice Breyer has provided this summary of the different ways the Supreme Court has described inferior officers:

Consider the [Supreme] Court's definitions: Inferior officers are, inter alia , (1) those charged with "the administration and enforcement of the public law," Buckley , 424 U.S. at 139 ; (2) those granted "significant authority," id. at 126 ; (3) those with "responsibility for conducting civil litigation in the courts of the United States," id. at 140 ; and (4) those "who can be said to hold an office," United States v. Germaine , 99 U.S. 508, 510 (1879), that has been created either by "regulations" or by "statute," United States v. Mouat , 124 U.S. 303, 307–08 [8 S.Ct. 505, 31 L.Ed. 463] (1888).

Free Enter. Fund v. PCAOB , 561 U.S. 477, 539, 130 S.Ct. 3138, 177 L.Ed.2d 706 (2010) (Breyer, J., dissenting) (citation style altered and some citations omitted).

The list below contains examples of inferior officers drawn from Supreme Court cases spanning more than 150 years:

• a district court clerk, In re Hennen , 38 U.S. (13 Pet.) 230, 258, 10 L.Ed. 138 (1839) ;• an "assistant-surgeon," United States v. Moore , 95 U.S. 760, 762, 24 L.Ed. 588 (1877) ;

• "thousands of clerks in the Departments of the Treasury, Interior, and the othe[r]" departments, Germaine , 99 U.S. at 511 (1878) ;

• an election supervisor, Ex parte Siebold, 100 U.S. 371, 397–98, 25 L.Ed. 717 (1879) ;

• a federal marshal, id. at 397 ;

• a "cadet engineer" appointed by the Secretary of the Navy, United States v. Perkins , 116 U.S. 483, 484-85, 6 S.Ct. 449, 29 L.Ed. 700 (1886) ;

• a "commissioner of the circuit court," United States v. Allred , 155 U.S. 591, 594–96, 15 S.Ct. 231, 39 L.Ed.

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