Timbervest, LLC v. Securities & Exchange Commission

The administrative state has ballooned in size and power—essentially having become its own branch of government—and Cato has now filed a brief saying enough is enough. The Securities and Exchange Commission, no longer content with just regulating securities, has accused a company called Timbervest of fraudulently taking undisclosed real‐​estate commissions. Timbervest was found liable by an SEC administrative law judge (“ALJ”), but even without getting into the merits of the allegations, there are several problems with this  prosecution inquisition. First, ALJs are executive‐​branch officers who nonetheless are insulated from removal by the president. Yet Article II of the Constitution, to ensure democratic accountability, vests the president with power over the executive branch—including over quasi‐​judicial officers like territorial judges—and requires that he “take care that the laws be faithfully executed.” The relevant statute here prevents the president from doing just that by having three levels of officials between the president and the SEC’s ALJs, each of whom can only be removed for cause. Second, the SEC picked the ALJ who heard this case, even though the Supreme Court has held that there is a reasonable fear of bias when “a man chooses the judge in his own cause.” This problem has become so systemic that a former SEC ALJ felt compelled to speak publicly about how ALJs were pressured to rule in the agency’s favor. Third, there is a real problem with this matter being in an administrative forum at all. After all, this is real‐​estate fraud case, of a sort that courts—real courts—have heard since the Founding. Congress can assign new statutory rights that didn’t previously exist for adjudication in an administrative forum (for example, Social Security disability claims), but it can’t take away long‐​held freedoms without the due process that that only the judiciary can provide. Here the SEC permanently banned Timbervest’s owners from associating with any investment advisers. The Supreme Court has recognized the right of association for the advancement of ideas as a protected First Amendment right, which is not something that can be taken away without at least a jury trial. If the SEC wants to try this case, it needs to do it in a proper Article III proceeding. Accountability, impartiality, and the right to a day in court before constitutional rights are taken away: is that too much to ask? We hope that the U.S. Court of Appeals for the D.C. Circuit, the court charged with reviewing most administrative‐​agency actions, agrees that it’s not.