Summary
The Fifth Circuit held that the SEC’s in-house adjudication of securities-fraud claims seeking civil penalties violated the petitioners’ Seventh Amendment right to a jury trial. The court also held that Congress unconstitutionally delegated legislative power to the SEC and that statutory removal restrictions for SEC administrative law judges violated Article II. The court granted the petition for review, vacated the SEC’s decision, and remanded.
Topics
Practice areas
Questions Presented
- Whether the SEC's in-house adjudication of a securities-fraud enforcement action seeking civil penalties violated Petitioners' Seventh Amendment right to a jury trial.
- Whether Congress unconstitutionally delegated legislative power to the SEC by authorizing it to choose between agency adjudication and an Article III court without providing an intelligible principle.
- Whether statutory removal protections for SEC administrative law judges violated Article II's Take Care Clause and separation-of-powers principles.
- Whether the SEC proceedings violated Petitioners' equal protection or due process rights through bias, prejudgment, or other constitutional defects.
Holdings
- The SEC's enforcement action seeking civil penalties was analogous to a traditional common-law fraud and debt action, and the public-rights doctrine did not permit Congress to assign the adjudication of those claims to an agency without a jury. Petitioners therefore had a Seventh Amendment right to a jury trial on the facts underlying the SEC's fraud-liability determination.
- Congress unconstitutionally delegated legislative power to the SEC by giving it unfettered discretion to choose whether to bring securities-fraud enforcement actions for monetary penalties in an Article III court or in an agency proceeding, without providing an intelligible principle to guide that choice.
- The statutory removal restrictions for SEC administrative law judges violated Article II because SEC ALJs are inferior officers exercising substantial executive functions and are protected by at least two layers of for-cause removal restrictions.
Key quotations
“Because the agency proceedings below were unconstitutional, we GRANT the petition for review, VACATE the decision of the SEC, and REMAND for further proceedings consistent with this opinion.” (opinion p. 2)
“Under the Seventh Amendment, both as originally understood and as interpreted by the Supreme Court, the jury-trial right applies to the penalties action the SEC brought in this case.” (opinion p. 9)
“If the intelligible principle standard means anything, it must mean that a total absence of guidance is impermissible under the Constitution.” (opinion p. 24)
“Thus, SEC ALJs are sufficiently insulated from removal that the President cannot take care that the laws are faithfully executed.” (opinion p. 30)
Factual background
Jarkesy established two hedge funds, with Patriot28 serving as investment adviser; the funds had more than 100 investors and approximately $24 million in assets. The SEC alleged that Petitioners misrepresented the funds' prime broker and auditor, investment parameters and safeguards, and asset values used to calculate investor fees. The SEC sought civil penalties and equitable remedies, and the Commission ultimately ordered Jarkesy and Patriot28 to pay a $300,000 civil penalty and nearly $685,000 in disgorgement, while also imposing industry bars on Jarkesy.
Procedural history
The SEC brought an enforcement action against Jarkesy and Patriot28 in an agency proceeding. An SEC administrative law judge found them liable, and the Commission affirmed after Petitioners raised constitutional objections. Earlier, the District Court for the District of Columbia and the D.C. Circuit denied Petitioners' effort to enjoin the agency proceeding, concluding that review had to await a final SEC order. The Fifth Circuit granted the petition for review, vacated the SEC decision, and remanded.
Remand instructions
The petition for review was granted, the SEC's decision was vacated, and the matter was remanded for further proceedings consistent with the opinion.