The Next Supreme Court Landmark

The Supreme Court showed again this year it is willing to police the excesses of the administrative state, and on Friday it teed up another case for next term: a potentially landmark challenge to the Securities and Exchange Commission’s internal tribunals.

SEC v. Jarkesy began a decade ago as a garden-variety securities fraud enforcement action. The SEC charged hedge-fund founder George Jarkesy and an investment adviser in its administrative court. An administrative law judge (ALJ) ruled against them. The SEC commissioners affirmed the ruling, ordered them to pay a penalty, and barred Mr. Jarkesy from the securities industry.

Mr. Jarkesy argues that a provision in the Dodd-Frank Act allowing the SEC to adjudicate enforcement actions and seek civil penalties in its in-house courts violates his Seventh Amendment right to a trial by jury. Before Dodd-Frank, the SEC had to litigate fraud claims in Article III federal courts where defendants enjoy more procedural rights.

He also says Congress improperly delegated to the SEC unreviewable power to choose whether to bring charges either in its in-house or federal court. The SEC has increasingly chosen the former because it has a home-court advantage. At the time of Mr. Jarkesy’s trial in 2014, the agency had won 100% of 200 contested cases compared to 61% in federal courts.

The SEC is part of the executive branch whose powers are defined by Article II of the Constitution. Mr. Jarkesy claims that the multiple layers of for-cause tenure protections for ALJs violate Article II’s imperative that the President “take care that the laws be faithfully executed.” The Supreme Court has interpreted this to mean that Presidents must have power over officers’ appointment and removal. All of these features of the SEC’s in-house courts violate defendants’ due process rights.

The fundamental constitutional problem is that the SEC combines enforcement and judicial power, acting as prosecutor, judge and jury. This constitutional danger was underscored last month by the SEC’s disclosure that its enforcement staff had improperly gained access to information intended for commission officials who were adjudicating cases. This included information about Mr. Jarkesy.

The Fifth Circuit Court of Appeals ruled for Mr. Jarkesy on all counts last May. The Justice Department has appealed and contends that the Fifth Circuit ignored Supreme Court precedent. But the rulings it cites don’t bear directly on Mr. Jarkesy’s claims, which build on the Court’s 7-2 Lucia v. SEC (2018) decision requiring ALJs to be appointed by SEC commissioners.

The Justices have ruled in several recent cases against administrative agencies for overstepping their authority and violating the separation of powers. This is another opportunity to bolster individual liberty against an oppressive administrative state.