A divided federal appeals court on Wednesday wrinkled the way the Securities and Exchange Commission is pursuing some enforcement actions by declaring its administrative proceedings could violate a defendant’s constitutional rights.
The US Court of Appeals for the Fifth Circuit has ruled in a 2-1 decision that the SEC violated a hedge fund manager’s Seventh Amendment right to a jury trial when it allowed an internal judge to rule a civil fraud case. Such administrative procedures are common among regulatory authorities, who use them to decide on certain enforcement actions.
The ruling of the Fifth Circuit — one of the country’s most conservative federal appeals courts — is another legal challenge to the SEC’s growing reliance on administrative judges, rather than filing civil complaints in federal court. But for now, the ruling’s impact 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 action is akin to traditional lawsuits that have the right to a jury trial,” Circuit 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 had no authority to take such a case to an administrative court because it wasn’t just about “public rights.”
Majority opinion said the House Judge ruling against George Jarkesy in a securities fraud case should be dropped and returned to regulators. The court said the SEC must act in accordance with the appeals court’s ruling, which would presumably require the case to be re-filed in federal court.
In a dissenting opinion, Judge W. Eugene Davis wrote that the majority has misinterpreted the Supreme Court’s definition of what “public rights” are. Judge Davis said Congress allows agencies to litigate cases before internal judges when it comes to “public rights” such as protecting investors and “promoting public interests.”
An SEC spokesperson said the agency was “assessing the decision to determine appropriate next steps.”
This month, the Supreme Court said it would include a new Fifth Circuit ruling that exposed another aspect of the SEC’s administrative process. In 2018, the Supreme Court ruled with a 7-2 that administrative judges at the SEC had been appointed to office in an unconstitutional manner.