ABA, trade groups file amicus brief in SEC agency enforcement proceedings challenge

Administrative Law
Securities and Exchange Commission v. Jarkesy
Date: Oct. 18, 2023

Issue: Whether the Securities and Exchange Commission (SEC)’s administrative enforcement proceedings are unconstitutional.

Case Summary: ABA and a group of trade associations (Amici) filed an amicus brief urging the U.S. Supreme Court to affirm a Fifth Circuit decision holding that the SEC’s administrative enforcement proceedings are unconstitutional.

In 2007 and 2009, George Jarkesy established two hedge funds and selected Patriot28 as his investment adviser. The funds brought in over 100 investors and held approximately $24 million in assets. In 2011, the SEC investigated Jarkesy and Patriot28’s investment activities. The SEC instituted an administrative enforcement action against Jarkesy and Patriot28 before an administrative law judge (ALJ). The SEC alleged Jarkesy and Patriot28 mismanaged their hedge funds and committed securities fraud under the Securities Act of 1933, the Exchange Act, and the Investment Advisers Act of 1940. The ALJ concluded Jarkesy committed securities fraud. Jarkesy sought SEC review of that decision. While the commission’s review was pending, the U.S. Supreme Court ruled in Lucia v. SEC that SEC ALJ’s were not properly appointed under the U.S. Constitution. After Lucia, the SEC affirmed the ALJ’s decision, and having exhausted administrative remedies, Jarkesy filed for review in the Fifth Circuit.

In a 2-1 decision, a Fifth Circuit panel found the SEC’s administrative enforcement against Jarkesy to be unconstitutional. The Fifth Circuit determined: Jarkesy and Patriot28 were deprived of their constitutional right to a jury trial; Congress unconstitutionally delegated legislative power to the SEC; and statutory removal restrictions on SEC ALJs violated Article III of the U.S. Constitution.

Amici filed a brief supporting Jarkesy, making several arguments. First, Amici argued that affirming the Fifth Circuit’s holding would promote fair enforcement of federal banking laws against banks and their directors, officers, and employees. Amici asserted the Seventh Amendment and Article III were important checks and balances against government overreach. According to Amici, the absence of checks and balances has been more problematic in recent years as banking regulators develop innovative strategies to shield their enforcement practices from accountability, judicial review, and public exposure.

Second, Amici argued the Seventh Amendment and Article III were important checks and balances against conflicted decisionmakers. Amici emphasized that a central purpose of the Seventh Amendment was to install juries as a check against “expert” decisionmakers who would otherwise wield authority over the affairs of everyday Americans. However, Amici claimed modern enforcement proceedings at banking agencies have come to be defined by conflicted decisionmakers with significant authority to strip disfavored litigants of their property and liberty. Amici also detailed that regulator bias has become an issue that extends to examiners of administrative proceedings and ALJ’s.

Additionally, Amici claimed the Seventh Amendment and Article III ensured the provision of due process and fairness of procedure. Amici explained that the framers of the Constitution understood that an important advantage of proceedings in court, and of jury trials in particular, would be to ensure that litigants were afforded due process and the guarantees of fair and orderly procedures. Additionally, Amici contended that the Seventh Amendment imposes a baseline requirement that the procedures used in jury trials “do not interfere with the performance of that which was the jury’s essential function at the time of the amendment’s adoption.” Amici emphasized that if the Fifth Circuit’s decision were reversed, regulated parties would be forced to endure proceedings that are fundamentally different in kind from those that the Framers viewed as fair and adequate.

Finally, Amici argued unfair enforcement proceedings are a disincentive for talented personnel to work in the banking industry. Amici claimed banks and bankers know that enforcement proceedings would heavily favor the agency and would be expensive, lengthy, and damaging to their reputations. In effect, Amici explained many talented professionals view the specter of banking agencies’ enforcement proceedings as a disincentive to work in the banking industry or serve on bank boards at all.

Bottom Line: Oral argument is scheduled for Nov. 29, 2023.

Documents: Brief