In a landmark argument recently, a hedge fund manager levelled a challenge against the constitutionality of administrative law judges overseeing securities fraud actions. The allegation is that these presiding judges, appointed directly by regulators, are unsuitable for deciding penalty-carrying cases, as these necessitate a constitutionally-guaranteed jury trial.
These arguments were laid out before the US Supreme Court by George Jarkesy, the respondent in this case. His stance indicates that the exemption of defendants from facing fraud allegations in federal court and instead, being subjected to administrative tribunals by the Securities and Exchange Commission (SEC) is unconstitutional.
The undertaking of securities fraud claims by the SEC via its own administrative tribunals was a power granted to the SEC by the Dodd-Frank Act. However, the constitutionality of this delegation of authority and the practices around it are now in question.
For a more in-depth look into how the SEC’s power to police markets is being legally challenged, click here.
The arguments presented in Jarkesy’s brief support the ruling of the Fifth Circuit, which also stood against the use of administrative law judges (ALJs).
The push against the use of administratively appointed judges and the emerging debates around it shows a clear need for the legal field and the financial industry to reevaluate their established guidelines and practices concerning securities fraud suits.
A deeper perspective on the full issue can be found in the original article here.