SEC v. Jarkesy: The Right to Trial and Before Whom?

By: Ronald W. Chapman II

“JAR-KOOSEY”?

When Chief Justice Roberts announced the Jarkesy case, we braced for a rocky start. Did he just say ‘Jar-koosey’.

Justice Kavanaugh’s preferred beverage cooler?

It was swiftly clarified by Jarkesy’s counsel: ‘Jark-eh-sey’ but only after over an hour of debate about the word “suit” and invocation of the almighty “Webster”.

Who IMHO is ripe for a 702 challenge, not an actual person but the union of two publishing companies and hardly an expert. I digress.

Given my background as a federal criminal defense attorney, one might assume I’d naturally support former hedge fund trader George Jarkesy in his heroic fight against the “administrative state”. Nah, he goes too far.

Sure, the younger me, fresh out of law school, certainly would have. However, the more seasoned me understands that our world’s complexity doesn’t warrant federal judicial intervention in every dispute between an individual and the government.

My colleague Matthew Pelcowitz and I penned an Amicus Brief for the largest group of Federal Administrative Law Judges in the U.S. We argue for the vital role of federal agencies, their expertise, and their ability to expediently settle disputes. Today’s intricate societal and governmental interactions are far removed from those of 50 years ago.

This complexity extends to areas like crypto regulation, bank regulation, prescription drugs, and food labeling—areas where the skills of federal administrative agencies are essential for public safety. Criticisms of their execution should be addressed directly to these agencies, not by discarding the entire system.

This Whole Court Administrative Tribunal is Out of Order!

The heart of Jarkesy’s SEC challenge, lies in his $300k fine for securities ‘fraud‘ and the order to return nearly $685,000 for misleading investors. This decision, made by an administrative law judge and approved by the SEC, bypasses a court ruling.

Jarkesy’s battle is not just against the verdict but the entire administrative process or, more broadly, the ‘administrative state’. His challenge emerges amid Donald Trump’s campaign, propelled by the Heritage Foundation’s agenda to dismantle the Administrative process.

The case emerged from the Supreme Court’s most controversial feeder, the 5th Circuit Court of Appeals. The 5th Circuit, taking a stance many viewed as radical, sided with Jarkesy setting the stage for a vigorous SCOTUS challenge.

A key issue for the Supreme Court is whether the SEC can impose a $300k fine in an administrative proceeding instead of a jury trial, a question central to defining the 7th Amendment’s scope.

The 7th Amendment guarantees our right to a jury trial, but the Solicitor General argues this only applies in a court of law. This perspective troubled Justice Barrett, who questioned why the case’s location should dictate this right. Unfortunately, a comprehensive answer was cut short by the Court’s oral argument word count leader, Justice Jackson (currently averaging 1,300).

Despite the Solicitor General’s compelling arguments, the conservative majority of the Court seemed skeptical of the government’s power to delegate judicial responsibilities to its employees. The tone of the conservative majority suggests a need to consider the severity of the punishment in determining the right to a jury trial.

Interestingly, the Solicitor General’s strongest point was about congressional authority to delegate administrative processes to agencies—a topic that only surfaced after 44 minutes of oral argument. Instead, the justices were sidetracked on the debate between public and private rights and the meaning of the 7th Amendment’s use of the word “suit”.

Justice Kagan questioned whether Congress’s decision, post-Depression and other crises, to empower administrative agencies should be respected. Indeed, Jarkesy’s argument is built off of an amalgamation of cases namely in bankruptcy cases to suggest that new statutory causes of action cannot be brought in administrative cases. Historically, we have respected Congressional delegation of such matters and trusted that Congress acts in the best interest of the public in deciding what to delegate.

This process was governed by the guardrails of the constitution which are not specific enough as to parse out which rights may be handled administratively and which may require court intervention.

Here, the court is signaling a more expansive view of the 7th Amendment and the fate of administrative courts now rests on horse trading between Gorsuch, Roberts and Cavanaugh. I think we may see a new test or at least an expansion of the “public” and “private” rights test.

The Future of Federal Administrative Law Judges?

The second, somewhat overshadowed issue is whether Federal Administrative Law Judges can be protected from presidential removal. Jarkesy argues against Congress’s power to shield these judges, emphasizing their role in agencies like the SEC.

A change in administration could lead to a sweeping removal of Federal Administrative Law Judges, much like the traditional turnover of U.S. Attorneys. But instead of a replacement of the traditional political head of a department – Jarkesy seeks replacement of its independent fact-finders.

This could disrupt administrative courts, accelerate the revolving door between agencies and businesses, and destabilize the consistency of agency decisions.

The workhorses of our finely tuned system stripped of removal protection are subject to political influence. Thousands of Federal Administrative Law Judges tuned in to read the tea leaves on whether a new administration means a new job for them.

Oral arguments gave them little – a sign that this Court will not go so far as to disrupt removal protections for Judges. More attention would have been paid and is certainly due.

While reforms are indeed necessary, dismantling the system is not the solution. The challenges we face require a nuanced approach, balancing the need for efficiency and expertise against the rights and protections afforded to individuals.