Supremes will consider constitutionality of ALJ proceedings

By Rodney F. Tonkovic, J.D.

In its final order list of the term, the Supreme Court has granted certiorari for the SEC's challenge to a decision that could upend its enforcement regime. The Fifth Circuit held that SEC in-house proceedings are unconstitutional based on the Seventh Amendment and the nondelegation doctrine. The SEC's petition argues that this holding is not only inconsistent with longstanding precedent, but it may also have significant adverse effects over a host of federal statutes empowering agencies to conduct adjudications seeking civil penalties. The Court also declined to hear a cross-petition by Jarkesy arguing that circuit courts lacked jurisdiction to remand his case back to the Commission (Jarkesy v. SEC, June 30, 2023).

In March 2013, the Commission charged hedge fund manager George R. Jarkesy with defrauding investors and steering fees to a broker-dealer. Jarkesy challenged the proceeding in the D.C. district court, which dismissed the complaint for lack of subject matter jurisdiction. On appeal in 2015, the D.C. Circuit agreed, concluding that Thunder Basin and its progeny foreclosed district court jurisdiction. Jarkesy must wait until the proceeding culminates in a resolution against him, the court said, in an opinion joined by now-Justice Kavanaugh.

Time marched on, and in 2020 the Commission affirmed the ALJ's finding that Jarkesy committed fraud. The Commission imposed penalties and disgorgement totaling almost $1 million, along with barring Jarkesy from the securities industry and from participating in penny stock offerings. Jarkesy then brought his challenge to the federal court.

In May 2022, a 2-1 Fifth Circuit panel vacated and remanded the decision against Jarkesy. The panel held that the administrative proceedings suffered from three independent constitutional defects, the first two of which each provided a standalone basis for vacating the SEC’s decision:

1. The petitioners were deprived of their constitutional right to a jury trial;
2. Congress unconstitutionally delegated legislative power to the SEC by failing to provide an intelligible principle to guide its exercise of that power; and
3. The statutory removal restrictions on SEC ALJs violate Article II by depriving the President of adequate control.

A majority of the Fifth Circuit denied the SEC a rehearing en banc. The dissenting judges argued that the panel's opinion was incorrectly decided and deviated from "over eighty years of settled precedent." The dissent also noted the "massive" impacts on the affected statutes and on agency adjudication in general.

SEC v. Jarkesy. In March 2023, the SEC filed the petition that the Court will hear in its next term. The SEC argued that the Court should reverse each of the circuit court's holdings because each calls into question longstanding practices at the SEC and other agencies.

1. In holding that Congress violated the Seventh Amendment by authorizing the SEC to bring administrative proceedings seeking civil penalties, the court's reasoning was flawed because Congress may assign a matter involving public rights to an agency even where the Seventh Amendment would require a jury in a federal court.
2. Regarding the nondelegation doctrine, the decision whether and where to pursue an enforcement action involves the execution rather than the making of law, and the Court has never suggested otherwise.
3. SEC ALJs perform adjudicative functions, and the power of the President to remove quasi-judicial officers can be limited.

In its reply brief, the Commission reiterated these arguments and underscored the strong presumption in favor of certiorari when a court of appeals strikes down an Act of Congress. The brief also noted that the Commission has acknowledged deficiencies in certain administrative adjudications, but that there was no indication that any respondent, including Jarkesy, had been affected. Plus, the SEC's order dismissing certain proceedings does not encompass Jarkesy, since a final order has been entered. There is, therefore, no obstacle to the Court's review, the Commission said.

Jarkesy's cross-petition. In the same order list, the Court declined to hear Jarkesy's cross-petition asserting that the Fifth Circuit lacked authority to remand his case to the Commission. Styled as a conditional cross petition, the petition asked the Court to address whether circuit courts may remand a petition for review back to an agency. In Jarkesy's case, the Fifth Circuit granted the petition for review, vacated the SEC's decision, and remanded for further proceedings. This leaves open the possibility of further proceedings before the SEC, which Jarkesy claimed is beyond the scope of the applicable Exchange Act jurisdictional provision.

Jarkesy argued that the Exchange Act sets out the jurisdiction of federal appeals courts hearing petitions for review. Specifically, Section 25(a)(3) allows a court to: (1) affirm or modify; (2) enforce; or (3) set aside the Commission’s order in whole or in part, but Jarkesy argued, does not confer jurisdiction to remand.

The petitions are Nos. 22-859 and 22-991.