Court Fields Bevy of SEC Challenges

In SEC v. Jarkesy, the Supreme Court grapples with three distinct challenges to SEC enforcement with wide-reaching administrative law implications: whether enforcement by the SEC violates the Seventh Amendment, whether such enforcement violates the nondelegation doctrine, and whether Congress violated Article II in granting for-cause removal protection to administrative law judges (ALJs) whose heads also enjoy similar protection.

George Jarkesy, who founded and served as the investment advisor for two hedge funds, allegedly misrepresented material information to brokers and investors. In 2013, the SEC initiated administrative proceedings against Jarkesy and assigned the case to an ALJ, who found that Jarkesy violated securities laws. The SEC affirmed those findings, imposed fines, barred Jarkesy from engaging in further activity within the securities industry, and ordered disgorgement of ill-gotten gains.

Jarkesy appealed to the Fifth Circuit, which vacated the SEC’s decision, finding broadly that (1) Congress had violated the Seventh Amendment by authorizing the SEC to pursue specific administrative proceedings seeking civil penalties, (2) Congress had inappropriately delegated legislative authority to the SEC by granting the agency broad discretion to choose whether to seek civil remedies through administrative proceedings, and (3) the statutory limitations on the removal of the SEC’s ALJs violated Article III.

Oral argument focused on the first question under the Seventh Amendment. The SEC argued that because the administrative proceedings involved the enforcement of public rights, the proceedings complied with Article III and the Seventh Amendment imposes no independent barrier to adjudication. Jarkesy countered that the so-called “public rights” doctrine, which permits agencies to adjudicate “public rights” without a jury, should be abolished, as it denies citizens their right to a trial by jury.

During argument, distinct perspectives emerged. Justice Thomas questioned whether the public rights doctrine would apply at all if this case instead involved private rights, such as personal property. Justice Gorsuch questioned whether accepting the government’s position would mean that Congress could dispense with the Seventh Amendment right to a jury trial just by granting an agency adjudicatory rights over the action. Justices Sotomayor, Kagan, and Jackson seemed firmly entrenched in upholding precedent supporting the public rights doctrine. Justice Alito probed the definition of a suit and whether administrative proceedings such as the SEC action in this case were properly governed by the Seventh Amendment or Article III. Chief Justice Roberts and Justice Barrett raised hypotheticals questioning why certain actions could be brought in federal courts versus administrative forums, and probed the limits of the parties’ arguments. Justice Kavanaugh’s questions focused on the potential burden to the dockets of the federal courts if all administrative actions had to be brought in federal court. 

The case was argued on November 29, 2023. A decision is expected later in the term. Stay tuned for Dykema’s client alert discussing the Court’s opinion.

For more information, please contact Chantel Febus, James Azadian, Christopher Sakauye, McKenna Crisp, Monika Harris, or Puja Valera.