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Appeals court rules SEC in-house courts violates U.S. Constitution

The 10th U.S. Circuit Court of Appeals in Denver dealt a setback to the SEC's use of in-house courts by ruling Tuesday that the administrative law judge hiring process violates the U.S. Constitution.

The decision is the second by an appeals court to weigh in on the constitutional question, following an Aug. 9 decision by the District of Columbia Circuit, which upheld the Securities and Exchange Commission's use of administrative law judges. The Washington court is now considering a petition for en banc rehearing of the case.

Other challenges have been rebuffed before addressing the constitutional question or are still awaiting rulings in other circuits.

An SEC spokesman said the agency is reviewing the opinion in David F. Bandimere vs. U.S. Securities and Exchange Commission.

Writing for the majority, Judge Scott M. Matheson Jr. said: “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,” of the Constitution.

In his dissent, Senior Judge Monroe G. McKay said he worries “that it has effectively rendered invalid thousands of administrative actions,” raising the prospect of having the Supreme Court intervene in what is now a circuit split. “The probable consequences are too troublesome to risk without a clear mandate from the Supreme Court,” Mr. McKay wrote.

Mr. Bandimere's attorney, David A. Zisser of Jones & Keller, said in an interview that until the Supreme Court weighs in, “the ruling is only binding in the 10th Circuit.”