November 30, 2023

SEC v. Jarkesy

“Conservative Supreme Court justices on Wednesday seemed open to a challenge to how the Securities and Exchange Commission fights fraud… A majority of the nine-member court suggested that people accused of fraud by the SEC should have the right to have their cases decided by a jury in federal court, instead of by the SEC’s in-house administrative law judges…

“Last year, a divided panel of the New Orleans-based 5th U.S. Circuit Court of Appeals ruled in favor of Jarkesy and his Patriot28 investment adviser group on three issues. It found that the SEC’s case against him, resulting in a $300,000 civil fine and the repayment of $680,000 in allegedly ill-gotten gains, should have been heard in a federal court instead of before one of the SEC’s administrative law judges.” AP News

See past issues

From the Left

The left is worried that the Court will limit the SEC’s ability to punish misbehavior.

“The SEC was created as an independent agency in 1934, after the financial crash of 1929, to thwart the sort of market manipulation that preceded the Great Depression; Congress has granted it additional powers over the years to continue protecting financial markets… Requiring Congress to legislate in response to every new fraud some crook might dream up would not be a good use of its time. And there’s no reason to think that delegating authority to police markets runs afoul of the Constitution…

“The consequences of Jarkesy’s success would be disastrous, especially for the American economy. The SEC enforces the basic rules that make stock markets work. Without it, stock issuers and dealers would lie—with disastrous results. One needs only to examine the rampant fraud, contagion, and meltdown in crypto markets last year to see what an unregulated securities market looks like…

“More generally, if Congress cannot delegate to agencies, it cannot govern. Congress could never and has never written rules specific enough to anticipate all eventualities. This is why Congress delegated power to the SEC in the first place.”

Noah Rosenblum, The Atlantic

“The federal government employs nearly 2,000 administrative law judges, in addition to about 650 non-Article III judges who hear immigration cases. Meanwhile, there are fewer than 900 Article III judges authorized by law. So, if the United States suddenly loses its ability to bring cases in administrative forums, the entire federal system will lose the overwhelming majority of its capacity to adjudicate cases — forcing litigants to wait years before an Article III judge has the time to take up their case…

“But even the Court’s GOP-appointed majority appeared uninterested in the kind of sweeping, society-restructuring attack on US state capacity contemplated by the Fifth Circuit. The bottom line is that the federal government is likely to lose some of its ability to try certain cases before expert judges, but that Jarkesy is unlikely to end in catastrophe.”

Ian Millhiser, Vox

"Checks on bureaucratic overreach are important, but they already exist and are proving effective. Agencies must undertake an extended notice-and-comment period before finalizing any new rules. Courts can — and do — overturn agency decisions and vacate rules that are found to be arbitrary or capricious. And many government agencies are led by bipartisan commissions that serve staggered terms. A court ruling that strips administrators of any autonomy and flexibility would unnecessarily paralyze government. That would be a disservice to American citizens."

Editorial Board, Bloomerg

From the Right

The right urges the Court to limit the SEC’s ability to levy penalties without going through federal court.

The right urges the Court to limit the SEC’s ability to levy penalties without going through federal court.

Dated But Relevant: “The Securities and Exchange Commission acts as rulemaker, prosecutor and judge for America’s securities laws…

“The Constitution vests legislative power in Congress, executive power in the president, and judicial power in the federal courts. But today the executive branch does most of the legislating and adjudication in the federal government, while, paradoxically, administrative agencies beyond the control of the president (or anyone else) wield much of the executive power.”

Mario Loyola, Wall Street Journal

“Administrative tribunals let SEC prosecutors present hearsay evidence and unauthenticated documents that would be inadmissible in a traditional federal court. Defendants also enjoy fewer procedural protections including the tools of legal discovery. No surprise, then, that the SEC wins almost all cases it charges in-house. At the time of hedge-fund founder George Jarkesy’s administrative trial in 2014, the SEC had a 100% in-house victory rate versus 61% in federal court in 200 contested cases…

“[These] administrative tribunals resemble those that the British government used to punish colonists and religious dissidents before the revolution… The Declaration of Independence cited the denial of ‘the benefits of trial by jury’ as one of the colonists’ chief grievances. The Founders pushed to enshrine the right in the Constitution to prevent the new Congress from creating special forums to adjudicate civil penalties

“A jury trial in federal court ensures due process for defendants and protects against abuses of enforcement power. Underscoring this point, SEC enforcement staff were found in Mr. Jarkesy’s case and dozens of others to have improperly accessed privileged legal memos of agency lawyers involved in adjudicating their cases.”

Editorial Board, Wall Street Journal

“Many targets of SEC enforcement quickly settle cases that the SEC assigns not to a regular court with a neutral judge but to its in-house tribunals. This practice is analogous to prosecutors overcharging defendants to coerce them into plea bargains…

“[Jarkesy] is defending the nation’s constitutional structure against unaccountable agencies operating as a fourth branch of government. Jarkesy is asking the Supreme Court to demonstrate, for the benefit of everyone but administrative state bureaucrats, something that Alexander Hamilton said (in Federalist 78) would be required to defend the Constitution against depredations by the elected branches: an ‘uncommon portion of fortitude.’”

George F. Will, Washington Post

A libertarian's take

Jarkesy is unquestionably an important case, but it's a bit much to suggest it challenges ‘the legitimacy of the modern federal government.’… Should Jarkesy win on one or more of his claims (and I think it is likely he will prevail on at least one), this will require significant changes in the operations of some federal agencies. In particular, regulatory agencies that enforce their regulatory edicts before agency adjudicators will have to make changes…  

“What those changes are, and how far-reaching the consequences of these changes will be, depends on which challenges succeed, but little in the case implicates (let alone threatens) the ability of agencies to issue regulations and enforce those regulations in federal court. Indeed, the core of Jarkesy's case is that agencies should be required to enforce their rules in federal court, not that they cannot issue rules or seek to have them enforced.”
Jonathan H. Adler, Volokh Conspiracy

On the bright side...

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