A divided federal appeals court on Wednesday questioned the way the Securities and Exchange Commission tracks some enforcement actions, saying its administrative procedures can violate an accused’s constitutional rights.
The US Circuit Court of Appeals for the Fifth Circuit ruled 2-1 that the SEC violated a hedge fund manager’s Seventh Amendment right to a jury trial when allowing an internal judge to rule on a civil fraud case. Such administrative procedures are common among regulators, who use them to decide some enforcement actions.
The ruling by the Fifth Circuit — one of the most conservative federal circuit courts in the country — is another legal challenge to the SEC’s increasing reliance on administrative judges in lieu of filing civil lawsuits in federal courts. But for now, the ruling’s effect is limited to federal courts in the court’s jurisdiction, which covers Texas, Louisiana and Mississippi.
“The Seventh Amendment guarantees petitioners a jury trial because the SEC’s enforcement actions are similar to traditional legal processes that carry the right to a jury trial,” District Judge Jennifer Walker Elrod wrote in the majority opinion.
Judge Elrod, who was appointed to the court by former President George W. Bush, said the SEC does not have the authority to bring such a case to administrative court because it is not just about “public rights.”
The majority view is that the internal judge’s verdict against George Jarkesy in a securities fraud case should be overturned and sent back to regulators. The court said the SEC must act in accordance with the appeals court’s decision and likely require the case to be retried in federal court.
In a dissenting opinion, Justice W. Eugene Davis wrote that the majority misinterpreted the Supreme Court’s definition of what constitutes “public rights.” Judge Davis said Congress allows agencies to try cases before internal judges when it comes to “public rights” such as protecting investors and “advancing the public interest.”
An SEC spokesman said the agency was “reviewing the decision to determine appropriate next steps.”
This month the Supreme Court said it would pick up another Fifth Circuit ruling raising a challenge to another aspect of the SEC’s administrative process. In 2018, the Supreme Court ruled 7-2 that SEC administrative judges had been unconstitutionally appointed to office.
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