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This past week, the Fifth Circuit Court of Appeals issued a long-overdue blockbuster opinion in Jarkesy v. SEC (2022), which attacks the very foundations of the modern administrative state of which I have long been critical. At issue in that case was a challenge to what is now standard procedure under the 2010 Dodd-Frank Act which allows, as Mario Loyola noted, the United States Securities and Exchange Commission (SEC) to act as “prosecutor, judge, and jury” in major cases that come before it. Why? Because the SEC commissioners: (1) formulate the charges; (2) then appoint an administrative judge on an ad hoc basis to hear the charges, inside the SEC and under SEC procedures; and (3) finally, execute and enforce any punishment. The SEC does this all without any judicial oversight until the appeal stage. This process is designed to exhaust defendants faced with heavy charges, which happened as recently as 2018 in Lucia v. SEC. There, the accused won the right to a new trial before another stacked panel inside the SEC after years of litigation, which, exhausted from the ordeal, he settled on unfavorable terms two years later.
George Jarkesy also faces serious charges and onerous sanctions. The SEC alleged that Jarkesy misrepresented who served as prime broker and auditor, misstated two hedge funds’ “investment parameters and safeguards,” and overvalued firm assets in order to inflate his own fees. The serious sanctions included a civil penalty of $300,000, disgorgement of $685,000 in ill-gotten gains, and a set of prohibitions against engaging in certain industry activities, including associating with brokers, dealers, and advisers, offering penny stocks, and serving as a director or investment adviser to any securities-related firms.
To my mind, the correct response is to hold that the use of these SEC procedures was a flagrant violation of the Due Process Clause of the Fifth Amendment, which reads: “No person shall . . . be deprived of life, liberty, or property, without due process of law.” That clause guards against all abuses by the United States, including all legislative, executive, judicial, and administrative procedures by or in the SEC. The level of protection “due” in litigated cases must ensure that the tribunal be free not only of bias but also of the appearance of bias. Those minimal conditions cannot be satisfied when the SEC flouts the principle of the separation of powers by giving the agency full run of the show.