Securities Litigation

On June 20, 2023, the Supreme Court granted certiorari to review three questions about the Securities and Exchange Commission’s (SEC’s) administrative courts:

1. Do they violate the 7th Amendment’s right to jury trial of actions then known at common-law, rather than “public rights”?
2. Do they violate the non-delegation doctrine by enabling statutes giving the SEC discretion to choose to bring enforcement actions in its administrative courts or Article III courts?
3. Do the two levels of “for cause” removal protection for SEC ALJs violate Article II by protecting them from Presidential removal?

SEC v. Jarkesy, No. 22-859 (U.S. June 30, 2023). A year ago May, the Fifth Circuit answered “yes” on those questions and held the SEC’s administrative courts unconstitutional. Jarkesy v. SEC, 34 F.4th 446, reh’g denied, 51 F.4th 644 (CA5 2022).

The SEC’s cert petition and appendix is here: https://www.supremecourt.gov/DocketPDF/22/22-859/256566/20230308164750050_Jarkesy.pet%20Final.pdf

The case may settle challenges to the SEC’s administrative citadel that have been percolating for decades, and has ramifications for administrative review regimes across many federal agencies.

Jarkesy’s Odyssey

In 2013, the SEC began investigating Jarkesy and his investment-advisory firm, bringing administrative enforcement proceedings.

In January 2014, Jarkesy filed suit in the District Court for the District of Colubia to enjoin the administrative proceedings. The District Court held it lacked jurisdiction due to the statutory scheme enabling SEC administrative enforcement actions. Jarkesy v. SEC, 48 F. Supp. 3d 32 (D.D.C. June 10, 2014).

But while that challenge was pending, the SEC’s enforcement process continued: After 12 hearing days in early 2014, the ALJ found Jarkesy had made misrepresentations in connection with his investmente fund, rejected his constitutional challenges and imposed sanctions including disgorgement, monetary penalties and an industry bar. Initial Decision, AP File No. 3-15255 (Oct. 17, 2014), Cert. Petition at 155a. Jarkesy appealed to the SEC.

In the meantime, the DC Circuit affirmed Jarkesy’s inability to challenge the proceedings initially and directly in the federal courts; instead, under the SEC’s statutory regime, Jarkesy coulds resort to the Courts only after the SEC’s determination of his administrative appeal. Jarkesy v. SEC, 803 F.3d 9 (CADC June 10, 2015). On that appeal, but six years later the SEC modified the disgorgement amount, but otherwise affirmed. AP File No. 3-15255 (Sept. 4, 2020), Cert. Petition at 71a. Jarkesy appealed to his “home circuit,” the Fifth Circuit Court of Appeals.

In the meantime, in Lucia v. SEC, 568 U.S., 138 S. Ct. 2044, 201 L. Ed. 2d. 464 (June 21, 2018), the Supreme Court held that SEC ALJs were constitutional Officers subject to the appointments clause of Article II, Section 2, Clause 2, rather than mere employees of the SEC.

The Fifth Circuit panel agreed with Jarkesy, holding that the SEC administrative enforcement regime was unconstitutional by (a) depriving him of his 7th Amendment jury right over fraud claims known at common-law and not “public rights,” (b) by delegating the SEC unfettered discretion to bring enforcement proceedings in its administrative tribunals or in the Courts, and without an “intelligible principal” for exercising that discretion, Congress violated the Non-delegation Clause of Article I, Section 1; and (c) because SEC ALJs enjoy two levels of “for cause” protection and cannot be removed by the President, they violate the Appointments Clause of Article II, Section 2. Jarkesy v. SEC, 34 F.4th 446, reh’g denied, 51 F.4th 644 (2022).

The SEC sought review from the Supreme Court, filing its cert petition in March 2023, supra. Shortly thereafter, the Supreme Court held that Respondents in SEC and FTC actions in fact could directly challenge the constitutionality of those administrative enforcement proceedings in federal court – thus, superseding the DC Circuit’s contrary holding in Jarkesy. Axon Enter. v. FTC, 143 S. Ct. 890 (2023) (affirming Cochran v. United States SEC, 20 F.4th 194 (5th Cir. Tex., Dec. 13, 2021)).