SEC v. Jarkesy

Following a 2011 fraud investigation, the Securities and Exchange Commission (SEC) brought an administrative enforcement action against hedge-fund owner George Jarkesy, Jr., and his investment advisor, Patriot28. An administrative law judge (ALJ) found that Jarkesy and Patriot28 had violated the securities laws by making fraudulent misrepresentations to induce investment in Jarkesy’s hedge funds. The SEC Commissioners affirmed this finding on appeal, and it issued an order barring Jarkesy from certain professional activities and imposing monetary penalties on Jarkesy and Patriot28.

Jarkesy and Patriot28 filed a petition for review of the SEC’s order in a federal appeals court, making several arguments. The court of appeals accepted both arguments and vacated the SEC’s order. The SEC sought and was granted Supreme Court review on three issues: whether the statute impermissibly delegated legislative power to the executive branch by giving the SEC a choice as to whether to bring a given enforcement action in an administrative proceeding or in court, whether a statutory provision barring the Commissioners from removing an ALJ without good cause impermissibly impinged on the President’s authority because the Commissioners themselves could be removed by the President only for cause, and whether the Seventh Amendment entitled Jarkesy to a jury trial because the agency sought civil penalties.

Addressing the first two issues, Public Citizen filed an amicus brief urging the Supreme Court to reverse the decision of the court of appeals. First, the brief explained that the statute does not delegate legislative power because the SEC exercises executive power when it chooses whether to pursue a given enforcement action in a judicial or administrative forum. A case-specific determination regarding the proper forum for a particular set of charges, after all, is not a determination about regulated parties’ substantive legal duties but rather a determination about how best to enforce legal duties that Congress imposed. Second, the brief explained that for-cause removal protection for the SEC’s ALJs does not violate the Constitution. Longstanding Supreme Court precedent holds that executive adjudicators like ALJs are entitled to a degree of independence from the President and that executive officers who, again like ALJs, lack policymaking authority can also be protected against at-will removal without violating the separation of powers. Free Enterprise Fund, on which Jarkesy relies, does not control; indeed, that decision explicitly denied that its holding applied to ALJs. Finally, even if the removal provision posed a constitutional problem, the proper remedy would be to hold the protection unenforceable but not to vacate the ALJ’s initial decision—let alone to vacate the final SEC order that was issued by the Commissioners.

In June 2024, the Court issued a decision in favor of Jarkesy. Without addressing the two issues addressed in our brief, the Court held that the Seventh Amendment entitles the defendant to a jury trial when the SEC seeks civil penalties for securities fraud.