- The Fifth Circuit Court of Appeal has ruled that the use of in-house judges by the Securities and Exchange Commission (SEC) to hear cases is unconstitutional.
- The appeals court ruled that all defendants are entitled to a jury trial when hit with SEC charges
- The ruling will impact companies targeted by SEC action
The Fifth Circuit Court of Appeal has ruled that the use of in-house judges by the Securities and Exchange Commission (SEC) to hear cases is unconstitutional. The ruling came via a case the SEC had pursued against hedge fund manager George Jarkesy Jr. which the SEC initially won, but the Fifth Circuit ruled yesterday that the legal system violated a hedge fund manager’s constitutional right to a jury trial in federal court. The move essentially strips the SEC of the ability to enforce its own rules and awards in a move described as “nihilistic” by one legal reporter.
Seventh Amendment “Guarantees” SEC Targets Jury Trial
Jarkesy Jr. founded two hedge funds with around $24 million in assets and brought in Patriot28 LLC as an investment adviser. The SEC began investigating when it uncovered suggestions of alleged misrepresentation of investment parameters and safeguards and overvalued assets to increase the fees they could charge.
Jarkesy Jr and Patriot28 argued that Congress unconstitutionally delegated its power to the SEC when it allowed the agency to choose whether to pursue enforcement cases in federal courts or internally, arguing that the The Seventh Amendment “guarantees” them a jury trial.
The Fifth Circuit agreed with this claim, stating that, “Congress, or an agency acting pursuant to congressional authorization, cannot assign the adjudication of such claims to an agency because such claims do not concern public rights alone.”
“Beyond Radical” Decision
When the news broke, it wasn’t the act of the SEC being castrated that caused so much shock as the fact that, in the words of one commenter, “Two judges from the nihilistic wing of the Federalist Society just saw an opportunity to blow things up, so they took it.” Slate senior reporter Mark Joseph Stern echoed this, choosing not to mince his words:
The 5th Circuit just dismantled the SEC’s power to enforce securities law. This decision is beyond radical. It is nihilistic. https://t.co/6X46t2f4vY
— Mark Joseph Stern (@mjs_DC) May 18, 2022
The only dissenting judge, Eugene Davis, argued that the two judges that made the majority had misread a Supreme Court decision on public versus private rights in the case and that the SEC’s ability to pick its forum is similar to prosecutors’ ability to choose the charges they bring.
The ruling will have ramifications for cryptocurrency companies targeted by the SEC, which could well have their cases heard in a full federal jury trial setting rather than by a single SEC judge. This could work in their favor, as federal judges may not agree with the SEC’s stance on some issues.
Ironically, the SEC has itself been accused of unconstitutional activity recently in its attempt to redefine what an exchange is.