34 F.4th 446 (5th Cir. 2022)
In 2011, the Securities and Exchange Commission launched an investigation into the investing activities of George R. Jarkesy, Jr., and Patriot28, L.L.C., which Jarkesy had established as investment adviser to two hedge funds that attracted over 100 investors and held approximately $24 million in assets.1
A couple of years later, the SEC initiated an administrative enforcement action against Petitioners, alleging that they committed securities fraud under the Securities Act, the Securities Exchange Act, and the Advisers Act by misrepresenting the identity of the funds' prime broker and auditor, misrepresenting the funds' investment parameters and safeguards, and overvaluing the funds' assets to increase advisory fees.2
Petitioners filed suit in the U.S. District Court for the District of Columbia seeking to enjoin the agency proceedings on constitutional grounds, but the district court dismissed for lack of jurisdiction, and the D.C. Circuit affirmed, requiring Petitioners to proceed through the administrative process and seek review in a court of appeals if necessary.3
An SEC administrative law judge conducted an evidentiary hearing and found Petitioners liable for securities fraud.4 While Petitioners' appeal to the Commission was pending, the Supreme Court decided Lucia v. SEC, leading the SEC to assign the matter to a properly appointed ALJ; Petitioners waived a new hearing and proceeded on their existing petition.5
The Commission affirmed the liability findings, imposed a $300,000 civil penalty, ordered Patriot28 to disgorge nearly $685,000, and barred Jarkesy from various securities industry activities.6 Petitioners then filed a petition for review in the Fifth Circuit.7
Whether the SEC's in-house adjudication of securities fraud claims seeking civil penalties violates the Seventh Amendment right to a jury trial?8
The Seventh Amendment preserves the right to jury trial in suits at common law where legal remedies such as civil penalties are sought.9 Congress may assign public rights to agency adjudication without a jury.10 Claims are not public rights when they are analogous to common-law fraud actions.11 The statutory scheme permits district court proceedings with juries.12 Jury trials would not dismantle the scheme.13
Yes. The SEC initiated an administrative enforcement action against Jarkesy and Patriot28 alleging securities fraud through misrepresentations of the prime broker and auditor, investment parameters, and asset valuations to increase fees, and sought a $300,000 civil penalty plus disgorgement and industry bars.14 These claims echo traditional common-law fraud and debt actions for which juries were required at the time of the Seventh Amendment's adoption.15 The securities statutes create no new cause of action unknown to the common law.16 The SEC routinely brings parallel actions in Article III courts where juries are available.17 The seven-year administrative timeline shows no incompatibility with jury trials.18
Therefore the in-house adjudication without a jury violated the Seventh Amendment.19
The SEC's in-house adjudication of the securities fraud claims violated Petitioners' Seventh Amendment right to a jury trial.20
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Judge Davis dissents because the SEC's enforcement action qualifies as a public right under Atlas Roofing.21 Atlas Roofing permits agency adjudication without a jury when the government sues in its sovereign capacity to enforce public rights created by statute.22 Oil States reaffirmed this definition of public rights from Crowell.23
Granfinanciera does not abrogate Atlas Roofing when the government is the plaintiff.24 Historical practice is not decisive under Oil States.25 The securities statutes' resemblance to common-law fraud does not convert the action into a private right requiring a jury.26
The SEC may impose civil penalties even if no harm resulted.27 Federal courts' prior handling of securities claims does not foreclose agency adjudication today.28 Thus Judge Davis would hold that the Seventh Amendment does not prohibit the administrative forum.29
Whether Congress unconstitutionally delegated legislative power to the SEC by authorizing it to choose between administrative and judicial forums for enforcement actions without providing an intelligible principle?30
Article I vests all legislative power in Congress.31 When Congress grants an agency the power to alter legal rights and duties by choosing the forum for adjudication, that grant is legislative in character.32 An intelligible principle must guide the agency's discretion.33 A total absence of guidance renders the delegation unconstitutional.34
Yes. Through Dodd-Frank section 929P(a) Congress gave the SEC unfettered discretion to bring securities-fraud enforcement actions seeking penalties either in an Article III court or in its own administrative tribunal.35 The SEC exercised that power by choosing the in-house forum against Jarkesy and Patriot28.36 Congress supplied no statutory standard, policy, or rule directing how the SEC should decide between the two forums in any given case.37
Because the delegation therefore lacked any intelligible principle, it unconstitutionally transferred legislative power to the executive branch.38
Congress unconstitutionally delegated legislative power to the SEC by authorizing it to choose the enforcement forum without providing an intelligible principle.39
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Judge Davis dissents because Congress fulfilled its legislative duty by establishing that enforcement actions may be brought in either forum.40 He relies on Crowell for the proposition that the mode of determining public rights cases is completely within congressional control.41 The SEC's forum-selection authority is analogous to prosecutorial discretion upheld in Batchelder.42
Batchelder confirms that authorizing choice between two statutes with different penalties does not violate the nondelegation doctrine.43 The district court in Hill reached the same conclusion for SEC forum selection.44 Chadha does not control because it addressed legislative veto rather than executive forum choice.45
Thus Judge Davis would hold that Congress properly delegated power to the executive branch to make the forum choice.46
Whether statutory removal restrictions on SEC administrative law judges violate the Take Care Clause of Article II?47
Article II requires that the President be able to exercise sufficient control over officers who execute the laws.48 Two layers of for-cause removal protection insulating inferior officers from presidential oversight violate the Take Care Clause when the officers perform substantial executive functions.49
Yes. SEC ALJs are inferior officers who exercise substantial authority in enforcement proceedings by controlling evidence, ruling on motions, and issuing initial decisions that can become final.50 The statute permits their removal only for good cause determined by the Merit Systems Protection Board after a hearing.51 Both SEC Commissioners and MSPB members are themselves removable by the President only for inefficiency, neglect of duty, or malfeasance.52
These dual layers of for-cause protection prevent the President from adequately supervising the ALJs' performance of executive functions in the proceeding against Jarkesy and Patriot28, violating Article II.53
The statutory removal restrictions on SEC administrative law judges violate the Take Care Clause of Article II.54
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Judge Davis dissents because SEC ALJs perform solely adjudicative functions comparable to those of a federal district judge.55 They issue only recommendatory decisions subject to de novo Commission review.56 Free Enterprise Fund expressly left open whether multiple layers of protection are permissible for such adjudicative officers.57
The functional analysis required by Morrison and Free Enterprise supports the constitutionality of the protections here.58 Lucia confirms that ALJs exercise authority comparable to a federal district judge conducting a bench trial.59 Decker Coal upheld similar protections for adjudicative ALJs.60
Invalidating the protections would undermine the ALJs' ability to exercise independent judgment.61 Thus Judge Davis would hold that the removal restrictions do not violate Article II.62