backOn May 18, 2022, in Jarkesy v. SEC, No. 20-61007 (5th Cir. May 18, 2022), a divided panel of the Fifth Circuit vacated an SEC order imposing civil penalties on a hedge fund manager and related investment advisor for committing securities fraud. Although not involving auditors, the decision is generally relevant to SEC enforcement proceedings. The court held that the hearing before an SEC administrative law judge (ALJ) violated the petitioners’ constitutional rights in three ways.
First, the Fifth Circuit held that the administrative hearing violated petitioners’ Seventh Amendment right to a jury trial because the SEC’s action seeking civil penalties for securities fraud was a type of traditional legal claim that arose “at common law,” rather than an action to vindicate a public right. Second, the panel held that Congress unconstitutionally delegated legislative power to the SEC in a provision of the Dodd-Frank Act that gave the agency unfettered discretion to bring a securities fraud action for monetary penalties in federal court or within the agency, without any intelligible principle to guide that choice of forum. Finally, the Fifth Circuit held that the two layers of for-cause removal protection afforded to SEC ALJs violates the Take Care Clause of the Constitution, because ALJs are inferior officers and the President must have sufficient control over the performance of their functions, but the court did not decide whether this infirmity alone would be a sufficient basis for vacating the SEC’s order.
The SEC is represented by the Department of Justice and the Securities & Exchange Commission. George Jarkesy and Patriot28, L.L.C. are represented by S. Michael McColloch, P.L.L.C. and Karen Cook, P.L.L.C. The order is attached.
