SEC v. Jarkesy Petitioners Tell SCOTUS to Uphold 5th Circuit

The U.S. Supreme Court shouldn’t grant certiorari in administrative law case SEC v. Jarkesy because the SEC and the U.S. solicitor general produced scant evidence the 5th U.S. Circuit Court of Appeals ruling should be overturned, said the respondents in a brief Tuesday. The case could have implications for federal agencies that use administrative law judges, including the FCC, attorneys and academics told us. “Pity the president who resolves to fire an ALJ and quickly encounters these multiple barriers that make it all but impossible to command his own subordinates,” said the respondent brief.

The case concerns an SEC enforcement action against George Jarkesy and investment firm Patriot28 over securities violations by their hedge funds. In 2013 the SEC brought an administrative proceeding against Jarkesy, which ended up in front of an SEC ALJ while Jarkesy challenged the matter in court. The SEC eventually ruled against Jarkesy, but the 5th Circuit vacated, ruling it was unconstitutional for the SEC to have discretion over whether enforcement matters are adjudicated in front of its ALJ, that imposing civil penalties in agency hearings with no jury violated the 7th Amendment, and that ALJs are unconstitutionally difficult for the president to remove.

The 5th Circuit’s ruling is “highly consequential, calling into question longstanding practices at the SEC and many other agencies,” said the petitioners in their March petition asking SCOTUS to grant cert (see 2211030063). The respondents urged SCOTUS Tuesday to uphold the 5th Circuit and deny cert, but they also acknowledged the case has wide-ranging implications. “The Respondents cannot credibly dispute that the impact of the decision goes beyond the parties to the case and the jurisdictional confines of the Fifth Circuit, potentially affecting the operations of multiple agencies across the ever-expanding administrative state,” said Tuesday’s brief. “Jarkesy acknowledges that such factors often lead the Court to grant certiorari, whether or not a circuit split exists or the issues have thoroughly percolated through the lower courts.” The lack of a circuit split at the moment means the court may not take the case up, said Linda Jellum, administrative law professor at the University of Idaho College of Law. Though the case has ramifications for many agencies in the federal government, that's often true for cases involving aspects of administrative law and agency action, she said.

If SCOTUS doesn’t grant cert for SEC v. Jarkesy, agencies can expect to see the arguments raised by the 5th Circuit ruling in any future enforcement matter involving ALJs, said Jellum. At the FCC, Standard General unsuccessfully raised the argument against ALJ constitutionality before both the agency’s ALJ and at the D.C. Circuit (see 2303280072). FCC rules allow commissioners as well as ALJs to conduct administrative hearings, which would mean the agency could continue with hearings in the face of constitutional questions about ALJs, the FCC Enforcement Bureau said.

The unconstitutional delegation of power to the SEC left Jarkesy “charged with traditional fraud and put to trial before a captive agency judge sitting unconstitutionally, with no right to a jury, and no way to escape to court,” the respondents said Tuesday. “The SEC is unable to properly cite a single precedent or policy rationale” that undermines the 5th Circuit’s ruling, the respondents said. The SEC and solicitor general argued a long line of precedent and prior court rulings have upheld Congress’ power to entrust federal agencies to adjudicate and assign civil penalties for new statutory obligations, and said the agency’s discretion over where to hold hearings is an exercise of “classic executive power,” comparable to the power of a prosecutor. This matter doesn’t concern criminal law, and ignores cases where SCOTUS said the discretion to assign claims for adjudication belongs to Congress, the respondents said.

SEC arguments that the removal process for ALJs is flexible and thus isn’t an unconstitutional protection should be ignored, the respondents said. The Merit Systems Protection Board, the body that oversees ALJs, has historically refused to terminate them, the brief said. “It is widely recognized that the SEC virtually always wins in its own home courts,” said the brief. When Jarkesy’s ALJ case was heard in 2014, “the agency had, over the last 200 contested cases, compiled an in-house win rate of exactly 100%, contrasted with a less pristine 61% success rate over the same time period in Article III courts, where juries are employed,” the brief said.