SEC Argues for Use of In-House Judges to Enforce Public Rights

The Securities and Exchange Commission should be allowed to adjudicate matters involving public rights using in-house administrative law judges, Solicitor General Elizabeth Prelogar said in a brief urging the US Supreme Court to reverse an appellate court decision.

The US Court of Appeals for the Fifth Circuit wrongly declared a federal statute invalid, rejected longstanding practice and contradicted or misapplied Supreme Court precedent in ruling against the commission’s use of ALJs, she said in the reply brief filed Monday.

Respondent George Jarkesy hasn’t demonstrated that Congress violated the Seventh Amendment guarantee of a trial by jury in authorizing the SEC to adjudicate securities violations and impose civil penalties, the agency argued, noting that the amendment poses no barrier to agency adjudication of public rights matters.

“The SEC actions at issue here fall within the heartland of the public-rights doctrine,” Prelogar said in the brief. “Respondents’ contrary arguments are foreclosed by more than a century of this Court’s precedent.”

Jarkesy, an adviser and hedge fund manager, had argued in a high court filing last month that the judges appointed by regulators like the SEC are unfit to preside over securities fraud actions, which require a jury trial.

The SEC initially sued him and his advisory firm Patriot28 LLC, alleging securities law violations stemming from auditing practices and investment strategies they misrepresented to investors. After more than a decade, the commission ultimately imposed a $300,000 penalty and disgorgement on Jarkesy and Patriot28, as well as an industry bar.

5th Circuit Remand

On appeal, the Fifth Circuit in May 2022 set aside and remanded the matter to SEC, holding that the defendants were wrongly denied trial by jury and that the agency’s practice of using ALJs violated the nondelegation doctrine, the separation of powers doctrine, and the US Constitution’s Take Care Clause.

The respondents barely address and fail to justify the Fifth Circuit’s nondelegation holding, Prelogar said in the government’s reply brief. They fail to dispute that deciding which available enforcement mechanism to pursue in any case is an executive function, or that Congress used its legislative power to authorize the SEC to bring agency or federal enforcement actions in securities cases, she said.

The removal protection that ALJs have is also not unconstitutional, because precedent shows that Congress may require a showing of cause before any department head removes an inferior officer, the SEC argued. The Merit Systems Protection Board’s role determining whether good cause supports removing an ALJ is a matter of maintaining the fairness of agency adjudications, Prelogar said in the brief.

The justices are set to hear oral argument in the case on Nov. 29.

S. Michael McColloch and Karen Lundskow Cook, who practice in Dallas, represent Jarkesy. They didn’t immediately respond to requests for comment.

The case is SEC v. Jarkesy, SCOTUS, No. 22-859, 11/13/23.