THE ADMINISTRATIVE STATE IN DECLINE
As King Kong discovered, the 800-pound gorilla does not always prevail. The US Securities and Exchange Commission (SEC) – the 800-pound gorilla that regulates the securities industry and the capital markets – recently found that out in Jarkesy v. SEC.
Jarkesy
In 2013, the SEC brought an in-house enforcement case against George R. Jarkesy, Jr. and his investment advisory firm, Patriot28 LLC. The respondents were charged with inflating the valuation of two hedge funds in order to increase the fees they received. An in-house SEC administrative law judge (ALJ) found them liable and ordered Jarkesy barred from the securities industry, Jarkesy and Patriot28 to pay a $300,000 civil penalty and Patriot28 to disgorge approximately $685,000 plus interest. Those determinations were affirmed by the SEC itself, but the respondents thereafter sought to overturn them in the Fifth Circuit Court of Appeals.
In its 18 May 2022 decision, a Fifth Circuit panel (by a two-to-one vote) vacated the SEC’s decision. Although the Dodd-Frank Act allows the SEC to bring securities fraud actions for money damages either before an in-house ALJ (without a jury) or before an Article III judge in federal court, the Court of Appeals found the SEC’s in-house proceeding violated the Constitution for three reasons. First, that denying Jarkesy his Seventh Amendment right to a jury trial was unconstitutional. Second, that Congress’s authorising the SEC to elect in which forum to proceed without any guidance was an unconstitutional delegation. Finally, that the SEC’s ALJs are unconstitutionally insulated from presidential oversight (in violation of the Constitution’s “Take Care Clause”).
Oct-Dec 2022 issue
Cohen & Gresser LLP