Harding Advisory LLC v. SEC, No. 17-1070, SEC-3-15574 (D.C. Cir. Sept. 19, 2018)
A three-judge panel of the D.C. Circuit set aside an SEC decision and order, and remanded the case for a new hearing. The case involved claims against investment adviser Wing Chau and his company, Harding Advisory LLC (Harding). The administrative law judge (ALJ) assigned to adjudicate the case found that Chau and Harding violated Section 17(a) of the Securities Act and Section 206 of the Investment Advisers Act by committing fraud in connection with the management of certain collateralized debt obligations, and imposed penalties. On review, the commission upheld the ALJ’s decision and imposed additional fines and disgorgement. Chau appealed to the D.C. Circuit. The Court of Appeals ordered a stay pending the U.S. Supreme Court’s decision in Lucia v. Securities and Exchange Commission, 138 S. Ct. 2044 (2018), which challenged the appointment of the ALJ who adjudicated the case as constitutionally invalid.
On June 21, 2018, in its decision in Lucia, the Supreme Court held that ALJs are “Officers of the United States” and thus subject to the Appointments Clause of the U.S. Constitution. The Court further held that if a party makes a timely constitutional challenge to the appointment of the ALJ who adjudicates his or her case, the party is entitled to relief. In the case of an adjudication tainted by an Appointments Clause violation, the appropriate relief is a new hearing before a properly appointed official.
Following the decision in Lucia, the SEC moved to remand Chau’s case to the commission for a new hearing. Chau opposed, arguing that under Lucia, the commission’s order could not be affirmed or modified but rather must be set aside. Chau reasoned that the Supreme Court’s mention in Lucia of “remand” as a remedy for an Appointments Clause violation was merely dicta that carried no weight.
The D.C. Circuit issued an order setting aside the commission’s decision and remanding Chau’s case to the SEC for a new hearing before a different ALJ or before the commission, in accordance with Lucia. The circuit court rejected Chau’s argument that the case could not be remanded. Quoting language from its decision in Sierra Club v. EPA, 322 F.3d 718 (D.C. Cir. 2003), the court emphasized that “carefully considered language of the Supreme Court, even if technically dictum, generally must be treated as authoritative.”
On November 30, 2017, while this case was pending, the SEC announced that it ratified the appointments of its ALJs in order to settle the question of whether the hiring process for those judges violates the Appointments Clause.