By John Filar Atwood
Elon Musk and Mark Cuban are among a group of businesspersons and investor advocates that have filed an amicus brief in SEC v. Jarkesy in support of Jarkesy’s argument that administrative proceedings are essentially in-house courts. They believe that the SEC’s use of unconstitutionally insulated administrative law judges (ALJs), its exercise of legislative power in choosing the forum for its litigation without guiding principles, and its refusal to allow defendants the opportunity to litigate before a jury raise concern about the administrative proceeding process. The amici urged the Supreme Court to uphold the Fifth Circuit’s finding that the Seventh Amendment forbids the adjudication of the Securities Acts’ anti-fraud provisions in jury-less administrative proceedings (SEC v. Jarkesy, October 12, 2023).
In addition to Musk and Cuban, the amici include Phillip Goldstein, Nelson Obus, Manouch Moshayedi, and the Investor Choice Advocates Network. Each of Cuban, Obus, and Moshayedi have successfully defended, through jury trials, against insider trading charges brought by the SEC.
The amici argued that, unlike defendants in federal court, respondents in SEC administrative proceedings are not afforded the right to a jury trial or the protections of the federal rules of evidence and procedure. Instead, in administrative proceedings the SEC is the sole fact finder and determines a respondent’s liability and punishment. In their view, administrative proceedings contravene the protections guaranteed to litigants by the Constitution, lead to unequal and unjust results, weaken the faith in public institutions such as the SEC, and deprive the market of the type of critical information the SEC claims in other contexts must be disclosed.
Right to a trial. The amici stated that the SEC’s claim that the Fifth Circuit was incorrect in holding that the SEC’s administrative proceedings violate the Seventh Amendment’s guarantee of a jury trial is undercut by the SEC’s positions in previous cases.
They cited SEC v. Seghers in which the SEC alleged violations of the Investment Advisers Act’s antifraud provisions. A jury found Seghers liable for fraud because he knowingly caused three hedge funds that he founded to overstate the value of investors’ interests in those funds. The amici pointed out that on appeal, the Fifth Circuit found that the SEC had presented sufficient evidence for the jury to find Seghers liable, and no one—not the SEC, Seghers, or the Fifth Circuit—suggested that the jury was incapable of determining liability, that a jury would be incompatible with the required fact-finding function, or that an SEC administrative law judge would have brought some required level of expertise to bear on such a finding.
They noted that Jarkesy was accused of the same conduct alleged in Seghers—violating the antifraud provisions of the Investment Advisers Act in connection with fund valuation representations—but the SEC elected to bring the case in its own administrative proceeding before an ALJ. In so doing, they argued, the SEC denied Jarkesy the same constitutional protection of a right to a jury determination of liability that the SEC conceded was owed to the defendant in Seghers.
Forum shopping. The amici next argued that a reversal of the Fifth Circuit’s ruling would lead to forum shopping and unequal protection of the law. They acknowledged that it is not impermissible for a party to seek a forum it believes may be more sympathetic to its case. However, they believe that when a government agency selects a forum that deprives a defendant of constitutional protections afforded to other similarly situated defendants, such disparate outcomes are not permissible under the Constitution’s Equal Protection Clause.
In support of their argument, they cited Gupta v. SEC wherein the SEC brought an administrative proceeding against one individual despite having filed federal court actions against other individuals and entities based on related allegations. The court denied the SEC’s motion to dismiss Gupta’s complaint challenging the administrative proceedings on Equal Protection grounds, noting that “[a] funny thing happened on the way to this forum. On March 1, 2011, the Securities and Exchange Commission . . . decided it preferred its home turf.”
In Gupta, the court found that the selective prosecution/equal protection claim will turn entirely on extrinsic evidence of whether the SEC’s decision to treat Gupta differently from the other defendants was irrational, arbitrary, and discriminatory. The amici noted that, as in Gupta, the SEC provided no principled reason to deny Jarkesy a jury trial when Seghers received one when facing similar claims.
Erosion of public trust. The amici stated that the unequal application of constitutional principles made possible by forum shopping erodes faith in public institutions by undermining the appearance of fairness. They said that the SEC has implicitly acknowledged that no rules or guidelines govern its choice on whether to proceed before its own ALJs or an appointed federal judge. Rather, it can pick and choose the judicial forum and arbiter based on what it views as an exercise of prosecutorial discretion.
Without appropriate restrictions or guidance on the SEC’s prosecutorial discretion, the agency’s funneling of select cases to its own administrative proceedings and away from federal courts creates the perception of selective prosecution and deck-stacking that undermines faith in public institutions, the amici argued. Regardless of the SEC’s motivation for moving away from federal court, the public perception remains that the administrative process is biased compared to results in federal jury trials. The Commission’s high victory percentage for administrative action appeals, which are decided by its own commissioners, only compounds the perception. The amici stated.
Concealed information. The amici’s final argument was that the SEC’s use of administrative proceedings conceals information from the market. They held that the agency requires transparency and full disclosure from public companies, but then denies the public access to administrative proceedings.
They noted that juries serve a critical role as fact finders and pointed to the Supreme Court’s ruling in Beacon Theatres, Inc. v. Westover, in which it said that “maintenance of the jury as a fact-finding body is of such importance and occupies so firm a place in our history and jurisprudence that any seeming curtailment of the right to a jury trial should be scrutinized with the utmost care.”
The amici said that by shielding its enforcement actions from the scrutiny of juries, the SEC is preventing the investing public from learning important information that would never come to light in an administrative proceeding. The SEC’s insistence on administrative proceedings when federal court juries are readily available runs contrary to the agency’s mission and harms the very investors and markets the SEC is charged with protecting, they concluded.
The case is No. 22-859.