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SEC Petitions Supreme Court to Decide Authority of Administrative Law Courts

The Securities and Exchange Commission filed a petition late last week requesting that the Supreme Court review a decision by the Fifth Circuit that ruled the commission’s in-house courts were unconstitutional.

The SEC petitioned the high court to hear a review the Fifth Circuits ruling in SEC v. Jarkesy, a May 2022 decision in which a three-judge panel ruled, in a 2-1 decision, that George R. Jarkesy Jr. and his advisory firm Patriot28 LLC, had been deprived of their constitutional right to a jury trial because the SEC pursued its fraud case in an administrative proceeding rather than in federal court. The court’s decision released Jarkesy and Patriot28 from a nearly $1 million SEC judgment.

Jarkesy and Patriot28 sought review of the decision by an SEC administrative law court that ruled they had purposefully made material misstatements and omissions to fund investors through marketing materials, financial statements, and monthly account statements.

The majority opinion of the three-judge Fifth Circuit panel that heard the appeal agreed with the challenge and held that the petitioners were deprived of their Seventh Amendment right to a jury trial.

According to the group, the SEC has admitted this breach occurred in two adjudicatory matters, SEC v. Michelle Cochran and Jarkesy v. SEC, both major cases challenging the constitutionality of the SEC’s administrative proceedings, as well as other, undisclosed cases.

The SEC seeks decisions from the Supreme Court for the following:

1. Whether statutory provisions that empower the SEC to initiate and adjudicate administrative enforcement proceedings seeking civil penalties violate the Seventh Amendment.

2. Whether statutory provisions that authorize the SEC to choose to enforce the securities laws through an agency adjudication instead of filing a district court action violate the non-delegation doctrine.

3. Whether Congress violated Article II by granting for-cause removal protection to administrative law judges in agencies whose heads enjoy for-cause removal protection.

Regarding the specific case of Jarkesy v. SEC, the government watchdog believes the Supreme Court needs to choose whether administrative law judges are unconstitutionally protected from removal since the U.S. president doesn’t have direct authority to fire them.

The agency argues that administrative law judges have “purely adjudicatory functions.”  This would mean the scale of the president’s authority over them is different from other executive officers.

The high court has already heard arguments this term in Cochran v. SEC, a case with similar implications. A ruling in the Cochran case could be handed down at any time.

The pending Cochran decision, or a future ruling should the court grant certiorari in the Jarkesy case, could have far-reaching implications in regards to the use of administrative law judges throughout the federal bureaucracy. More than 30 administrative agencies currently rely on ALJs.

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