The enforcement mechanism used by the Securities and Exchange Commission (SEC) may be at risk, as the US Supreme Court justices appeared receptive to proscribing the use of administrative law judges to arbitrate securities fraud cases. This development occurred during the argument in SEC v. Jarkesy last November.
The case SEC v. Jarkesy is a result of an SEC civil enforcement action against George Jarkesy Jr., who is the defendant in a suit alleging securities fraud violation. Jarkesy was found liable in an administrative proceeding, mandated to pay $300,000 in fines, and ordered to relinquish nearly $700,000 of wrongfully acquired profits. However, the ruling was overruled in the U.S. Court of Appeals for the Fifth Circuit, resulting in backing Jarkesy in three independent constitutional challenges to the SEC’s enforcement authority.
Principal Deputy Solicitor General Brian Fletcher, speaking on behalf of the SEC, argued against the cases being classified as “suits at common law”—the requisites for applying the Seventh Amendment jury-trial right. He made the case that these proceedings involve issues of public interest and hence are outside of the Seventh Amendment. This viewpoint was contested by Counsel for Jarkesy, S. Michael McColloch, arguing the contrary by reasoning with elements consistency to that of common-law fraud.
If the court decides in Jarkesy’s favor, the decision can become momentous. Increased scrutiny of administrative law judges may have led the SEC and other agencies to take enforcement actions to Article III courts instead of administrative proceedings. Yet, the implementation of non-jury monetary penalty proceedings remains a leading method of enactment. Agencies’ lack of ability to continue such processes could significantly increase their caseload in the already-filled to capacity Article III courts.
The impact may also directly result in less enforcement overall. Therefore, if the Fifth Circuit gets upheld – even partially – by the court, it could significantly change administrative law dynamics that have been in place for over the past half-century – and significantly revise how federal law gets enforced.
Learn further about the case Securities and Exchange Commission v. Jarkesy.
Authored by Jeremiah Williams and Rory Skowron.