Nine years ago, George Jarkesy faced a hefty fine of $450,000. He was accused by a Securities and Exchange Commission (SEC) judge of deceiving investors by filling hedge funds with penny stocks endorsed by his manipulative boss, and concealing the resulting losses. However, Jarkesy did not accept these allegations and has since fought against them. In a significant move, his attorneys are now set to present his case to the U.S. Supreme Court. If successful, this challenge could disrupt the operations of federal agencies that have held sway for over seven decades.
Jarkesy’s case represents a means for industry groups discontent with the powers wielded by federal agencies to express their concerns. A plethora of industries including antitrust, energy, labor, and, most notably, the stock market, could feel the impact of the outcome. Ronald Levin, an administrative law professor at Washington University in St. Louis, acknowledges that “many business groups desire to contest the SEC’s internal proceedings.” Following the expansion of SEC powers under the Dodd-Frank Act after the 2008 financial crisis, the agency has achieved commendable success in prosecuting cases through its own administrative law judges. Such success has understandably raised eyebrows within the business community.
Prominent figures from various sectors have come forward to support Jarkesy in his Supreme Court battle against the SEC judges. The Business Roundtable, libertarian organizations such as Americans for Prosperity funded by the Koch family, and high-profile business personalities including Mark Cuban and Elon Musk are among those backing Jarkesy’s cause. Musk and Cuban argue that “the current structure of the SEC’s administrative proceedings leads to disparate outcomes for defendants, undermines public trust in institutions, and restricts access to valuable market information.”
While Jarkesy’s particular fraud case is just one of many brought before the SEC’s administrative law judges each year, its significance is undeniable. In the last fiscal year alone, the agency initiated around 230 cases in regular federal courts, alongside over 550 administrative proceedings. Internal judges assigned to various federal agencies collectively handle hundreds of thousands of cases, underscored by the magnitude of the impact this case could have on these agencies and their operations.
In a controversial turn of events, the SEC’s administrative courts faced scrutiny in the Jarkesy case. The U.S. Court of Appeals for the Fifth Circuit, based in New Orleans, declared these courts unconstitutional, overturning a previous ruling and ordering Jarkesy’s business to cease fraudulent activities. Now, the Supreme Court is set to examine the constitutional validity of SEC administrative courts through three key viewpoints. Legal experts, including those from Washington University, argue against the Fifth Circuit’s ruling, highlighting potential consequences if the Supreme Court upholds it.
The Role of Regular Federal Courts and Juries
One argument presented by the Fifth Circuit posits that only regular federal courts or juries should assess monetary penalties. However, administrative courts have long fulfilled this role without issue. Levin from Washington University emphasizes the burden that would be placed on federal district courts if such cases were redirected. Even if the Supreme Court supports this viewpoint, the SEC would still have the ability to internally handle cease-and-desist cases.
Administrative Agencies’ Choice of Venue
The Fifth Circuit’s second contention revolves around the choice of venue for administrative agencies. They argue that agencies should not have the freedom to decide whether a case is handled internally or in a regular court. Levin refers to this theory as “adventurous” and notes that it has garnered little support from legal commentators. The question of where these cases should be tried is far from settled.
The Power of Administrative Law Judges
Regarding the job protection of administrative law judges, Levin urges caution among Jarkesy’s backers. He emphasizes that this protection primarily benefits the business community. Independent judges serve as a safeguard against bureaucratic capture, particularly when the SEC tightens its grip on the business sector.
The future of SEC administrative courts now rests in the hands of the Supreme Court, as it weighs the arguments brought forth by legal scholars and stakeholders. While the outcome remains uncertain, one thing is clear: this case has reignited the ongoing discussion surrounding the role and constitutionality of administrative courts.
