Late last month, the SEC issued an order detailing how it would proceed with administrative actions pending before the SEC in light of the Supreme Court’s recent ruling in Lucia v. S.E.C., No. 17-130, which found that the SEC’s Administrative Law Judges (“ALJs”) must be appointed by the SEC Commissioners, not the SEC staff, as had been done previously. Shortly after the Supreme Court’s decision in Lucia, the SEC stayed any pending administrative proceedings.

The SEC’s order lifted the stay and reiterated that the Commission approved of all of the ALJs’ appointments as its own. The order then explained that the SEC would permit any respondent with a proceeding pending before an ALJ or before the Commission on an appeal from an ALJ decision to be provided with an opportunity for a new hearing before an ALJ who did not previously participate in the manner. The order explained that the new ALJ, “shall not give weight to or otherwise presume the correctness of any prior opinions, orders, or rulings issued in the matter.” New assignments must be made prior to September 21, 2018.

The SEC’s order addresses the Supreme Court’s concern in Lucia’s case that on remand, the ALJ who conducted the initial hearing could not be expected to consider the matter as though he had not adjudicated it before in a new hearing, even after receiving a constitutionally valid appointment. The order, however, is silent about any relief for respondents with non-pending cases that were previously decided by an ALJ without a constitutionally valid appointment.


On June 21, the Supreme Court issued its opinion in Lucia v. S.E.C., reversing sanctions ordered by an Administrative Law Judge (“ALJ”) appointed by SEC staff and not the SEC Commissioner. ALJs are tasked with presiding over SEC enforcement proceedings, and the Court held that they must be appointed by the Commissioner and not staff because ALJs are “Officers of the United States” within the meaning of the Article II, Section 2, Clause 2 of the United States Constitution (“Appointments Clause”).

The SEC is authorized by statute to institute administrative proceedings against alleged wrongdoers, and the Commission itself is permitted to preside over the proceedings. 17 CFR § 201.110 (2017). The Commission is also authorized by statute to delegate administrative proceedings to ALJs and has done so. See 15 U.S.C. § 78d-1(a). ALJs possess significant powers over discovery, motion practice, the admissibility of evidence and testimony, and generally regulating the course of proceedings, including the ability to impose sanctions. 17 CFR §§ 201.111, 201.180, 200.14(a), 201.230. At the conclusion of administrative proceedings, ALJs issue an “initial decision,” setting out “findings and conclusions” about all “material issues of fact [and] law,” including an “appropriate order, sanction, relief, or denial thereof.” Id. at §§ 201.360(a)(1), 201.360(b), 201.360(d)(1). After the “initial decision,” the SEC can either review and modify the decision or, without review, “issue an order that the [ALJ’s] decision has become final.” Id. at § 201.360(d)(2).

In Lucia, the SEC initiated an administrative proceeding against Raymond Lucia, charging Lucia and his investment company with violating the Investment Advisers Act for misleading clients into investing an a retirement saving strategy called “Buckets of Money.” The SEC assigned the case to ALJ Cameron Elliot, who determined Lucia should be sanctioned, charged $300,000 in civil penalties, and banned from the investment industry for life.

The Appointments Clause states that all “Officers of the United States, whose Appointments are not herein otherwise provided for . . . [may be appointed by] the President alone, [by] the Courts of Law, or [by] the Heads of Departments.” Central to the Court’s decision was the characterization of ALJs as “officers” rather than mere “employees.” Lucia argued that Judge Elliot was an “Officer of the United States” and was not duly appointed by a “Head of Department,” namely, the SEC Commissioner. After the D.C. Circuit rejected his argument, he appealed to the Supreme Court to resolve the emerging circuit split. See Bandimere v. SEC, 844 F.3d 1168, 1179 (2016).

Justice Kagan spoke for the Court, penning an opinion that largely tracked the Court’s Appointments Clause jurisprudence. The Court commented that its opinion in Freytag v. Commissioner, 501 U.S. 868, 873 (1991), “says everything necessary to decide this case.” Freytag held that “special trial judges” (STJs) of the United States Tax Court were “Officers of the United States” after applying the “significant authority” test articulated in Buckley v. Valeo, 424 U.S. 1 (1976). See also United States v. Germaine, 99 U.S. 508 (1879).

Reviewing the facts, the Court determined that ALJs exercise “significant discretion” when carrying out “important functions” including “all of the authority needed to ensure fair and orderly adversarial hearings—indeed, nearly all the tools of federal trial judges.” The Court reversed the judgement of the Court of Appeals, ordered a new hearing before a “properly appointed” official, and determined that Judge Elliot could not hear the case because he could not be expected to consider the matter as though he had not adjudicated it before.

Interestingly, in footnote 6, the Court commented that while the present case was moving through the courts, the SEC issued an order “ratifying] the prior appointments of its ALJs.” The Court found “no reason to address that issue” because “[t]he SEC may decide to conduct Lucia’s rehearing itself” or “it may assign the hearing to an ALJ who has received a constitutional appointment independent of the ratification.” This leaves open the question of whether the SEC’s ratification was effective to retroactively protect rulings from constitutional attack or whether the ratification simply authorized ALJ proceedings moving forward.


The Supreme Court has ruled in Digital Realty Trust, Inc. v. Somers that certain protections afforded to whistleblowers under the Dodd-Frank Act do not apply if the employee reports possible violations of the securities laws internally but not to the SEC. The Dodd-Frank Act prohibits employers from discharging, demoting, suspending, threatening, harassing, or discriminating against a “whistleblower” who engages in certain protected activity. 15 U.S.C. § 78u-6(h)(1)(A). The Dodd-Frank Act defines “whistleblower” as any individual who provides information relating to a violation of the securities laws to the SEC. Id. § 78u-6(a)(6). Inconsistently, however, one of the three enumerated protected activities in section 78u-6(h)(1)(A) is a catchall provision that protects individuals who make disclosures that are required or protected under certain laws, including the Sarbanes-Oxley Act, which itself covers reporting possible wrongdoing internally.

Somers was employed by Digital Realty Trust, and he alleged that Digital Realty Trust fired him shortly after he reported possible securities law violations to senior management. Somers did not, however, make any report to the SEC before he was terminated. Somers sued Digital Realty Trust alleging a whistleblower retaliation claim under the Dodd-Frank Act. The district court denied Digital Realty Trust’s motion to dismiss, in which it argued that Somers was not a whistleblower under the Dodd-Frank Act because he did not report any suspected securities laws violations to the SEC. The Ninth Circuit affirmed in an interlocutory appeal, and the Supreme Court granted certiorari to resolve a circuit split on the issue. See Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620, 630 (5th Cir. 2013); Berman v. NEO@OGILVY LLC, 801 F.3d 145, 155 (2d Cir. 2013).

The Supreme Court reversed the Ninth Circuit, holding that the anti-retaliation provision in the Dodd-Frank Act does not extend to an individual who does not report the suspected securities law violations to the SEC. For the Supreme Court the question was fairly easy: “When a statute includes an explicit definition, we must follow that definition,” and this “resolves the question before us.” Somers, slip. op. at 9. The Supreme Court also explained that the Dodd-Frank Act has a separate provision that protects an employee providing information to the Consumer Financial Protection Bureau, or his or her employer, and courts presume Congress acts intentionally when it includes language in one section of a statute but omits it from another section. Regarding the alleged inconsistency concerning the third enumerated protected activity identified above, the Supreme Court explained that under its plain-text reading, the statute protects employees who report both internally and to the SEC, but are retaliated against solely because of the internal reporting. This protects employees who would otherwise not be protected under the first two enumerated provisions. Additionally, the Supreme Court’s ruling is consistent with the Dodd-Frank Act’s intended purpose of encouraging individuals to report possible securities violations to the SEC and its corresponding whistleblower bounty program.


Securities class action filings in federal court were up 44% in 2017, according to a report just released by National Economic Research Associates (“NERA”) entitled, “Recent Trends in Securities Class Action Litigation: 2017 Full-Year Review.” In 2017, plaintiffs filed 432 new federal securities class actions, which is a 44% increase from the 300 new federal securities class actions filed in 2016. The 432 new federal securities class action filings are the most since 2001, and this is the third straight year that the number of federal securities class actions has increased. The 432 new federal securities class action suits involved approximately 8.2% of publicly traded companies, nearly double the rate seen in 2014.

Of those 432 new class actions filed in 2017, twenty were filed in district courts located within the Fifth Circuit, three more than were filed in the Fifth Circuit in 2016. This accounted for approximately 5% of the nationwide securities class actions. Although the Fifth Circuit saw slightly increased numbers in 2017, the circuits with the most filings continue to be the Second (97 new filings in 2017), the Ninth (89 new filings in 2017), and the Third (85 new filings in 2017). Filings in the Third Circuit more than doubled from 2016, with the majority of the new filings being merger-objection filings. Nationwide, federal merger-objection filings more than doubled for the second consecutive year and accounted for 46% of the new filings. This increase may be the result of the Delaware Court of Chancery’s In re Trulia, Inc. Stockholder Litigation decision, which changed the standard for approval of disclosure only settlements in Delaware, driving these lawsuits into federal court. Outside of the merger-objection context, the most frequently asserted claim was a 10b-5 claim, which was asserted in 47% of the new filings.

In 2017, the health care (26%), technology (14%), and financial services (13%) sectors continued to be the three most frequently targeted industries for newly filed securities class action lawsuits. Foreign-based companies were the subject of 55 new securities class actions, a 25% increase over flings against foreign-based companies in 2016. Whether the upward trend of federal securities class action filings will continue into 2018 likely depends on whether merger-objection cases continue to be filed in federal court in increasing numbers.

The full NERA report may be found at here.


The U.S. Supreme Court granted certiorari in Raymond J. Lucia Companies, Inc. v. SEC, No. 17-130, agreeing to review the D.C. Circuit’s 2016 decision that the SEC’s administrative forum’s use of Administrative Law Judges (“ALJs”)—who are not directly appointed by the President or the SEC commissioners—does not violate the Constitution’s Appointments Clause. In doing so, the Court will resolve a circuit split between the D.C. Circuit and the Tenth Circuit, which ruled in Bandimere v. SEC, 844 F.3d 1168 (10th Cir. 2016), that the ALJs are subject to the Appointments Clause. The case will turn on whether the SEC’s ALJs qualify as “inferior Officers” and thus must be appointed by the President, a head of department, or a court, or if the ALJs are merely employees who may be appointed like any other governmental agency employee. In determining that the ALJs were employees, the D.C. Circuit relied heavily on the fact that an ALJ’s initial decision only becomes a final decision when the SEC issues a finality order, and that the SEC must issue a finality order (either through issuing a new decision after a de novo review of the ALJ’s initial decision or by issuing an order advising that it has declined to grant review) in every case.

In November, the Justice Department filed a brief with the U.S. Supreme Court in which it reversed course and argued that the ALJs are subject to the Appointments Clause and that it would not be defending the D.C. Circuit’s decision. The U.S. Supreme Court has invited an outside lawyer to serve as amicus curiae and defend the D.C. Circuit’s decision. In response to the Justice Department’s new position on the matter, the SEC issued an order saying that the Commission, through the commissioners, ratified the prior appointment of the ALJs. While that action may remedy the problem for new cases moving forward, it is unclear what impact it may have on prior decisions. The date for oral argument has not yet been set.


Gonzalez v. Gonzalez
Dallas Court of Appeals, No. 05-16-00238-CV (August 22, 2017) Justices Bridges, Lang-Miers, and Evans (Opinion, linked here)

In stockholder derivative cases, (A) the “individual shareholder steps into the shoes of the corporation.” In re Crown Castle Int’l Corp., 247 S.W.3d 349, 355 (Tex. App.—Houston [14th Dist.] 2008, orig. proceeding). And therefore (B), the “stockholder has no greater right in a stockholder’s derivative suit” than the corporation in whose right he is suing. Henger v. Sale, 365 S.W.2d 335, 339 (Tex. 1963). Right? Well, not exactly, says the Dallas Court of Appeals.

In Gonzalez, two stockholders of a corporation brought suit derivatively against a manager. The trial court granted summary judgment for defendant, because the corporation itself was barred from asserting those claims, having forfeited its charter, and therefore plaintiffs lacked standing to pursue the claims derivatively. The Dallas Court of Appeals reversed. The Court agreed that the corporation itself “no longer has the legal right to assert its causes of action in court,” because of the forfeiture of its charter. See TEX. TAX CODE § 171.252(1). But, it said, “when a corporation forfeits its privileges, title to its assets, including its causes of action, is birfurcated; legal title remains with the corporation and the beneficial interest is vested in its shareholders.” In that situation, the Court continued, “the shareholders holding beneficial title to the claims may assert the corporation’s causes of action as the corporation’s representatives” to protect their (the shareholders’) beneficial rights—i.e., the shareholders can step out of the shoes of the corporation and pursue such claims even if the corporation cannot.

Not addressed in the Dallas Court’s opinion or the briefing was the recent decision of the Fort Worth Court of Appeals in Carter v. Harvey, 2017 WL 2813936 (Tex. App.—Ft. Worth June 29, 2017, no pet.). There, the Fort Worth Court affirmed summary judgment dismissing derivative claims with respect to a corporation that had been dissolved for more than three years. Section 11.356 of the Business Organizations Code provides that a corporation can prosecute or defend claims only until the third anniversary of the entity’s termination. Because the claims in Carter were lodged after that third anniversary, the Fort Worth Court held they were barred not only for the corporation, but also if asserted by someone purporting to sue derivatively. “Because [claimant] derivatively stands in the shoes of” the dissolved corporation, the Court said, “he cannot bring a … claim that [the corporation] could not bring.”

Perhaps we will see one or both of these cases at the next level.


Bruce Collins received the honor of being named by Best Lawyers© 2018 as the Litigation – Securities “Lawyer of the Year” for Dallas. Based on peer-review surveys, the legal guide designates a single lawyer per practice specialty in each geographic region. Honorees received high praise for legal prowess, integrity, and professionalism. Along with being recognized for his Securities Litigation practice, Bruce was also named in the 24th Edition of The Best Lawyers in America© 2018 for his work in Commercial Litigation and Litigation – Regulatory Enforcement (SEC, Telecom, Energy). Fifteen additional Carrington Coleman attorneys were selected by their peers for their excellence in 22 different practice areas. Click to view the complete list.