Fifth Circuit used SEC case to declare open season on agencies


A panel of the Fifth Circuit Court of Appeals issued a ruling this week that would significantly change the way the U.S. Securities and Exchange Commission (SEC) pursues cases.

This would require the agency to litigate certain cases in federal courts rather than through its internal arbitration process. This could slow down the trial process, involve a jury with far less expertise in this area of ​​the law, and raise the possibility that the cases will attract conservative, anti-regulatory judges hostile to the SEC.

But more important than the court’s decision to curtail this aspect of the SEC’s power — which has prompted bona fide arguments against it — is one of the ways the panel has done so. The Fifth Circuit took the opportunity to fire a shot through the arc of the administrative state with an argument that experts widely agree is dubious at best.

It came in the form of an invocation of “non-delegation,” a theory that has largely lain dormant since the 1930s, when it was deployed against FDR’s New Deal. He argues that Congress cannot outsource its legislative power to other entities, and it’s an idea that has been resurrected by the right-wing anti-agency and anti-regulation movement.

Receive TPM in your inbox, twice a week.

Your subscription could not be registered. Try Again.
Your subscription was successful.

If this part of the ruling is upheld and disseminated through other court rulings, it would cast doubt on a major aspect of how federal agencies enforce regulations and could completely overwhelm the federal court system with cases previously left behind. agencies to judge themselves.

“It’s a clickbait,” Fordham University Law School professor Jed Shugerman told TPM. “They added this second part on non-delegation to get more attention from libertarians and conservatives in the Federalist Society. It’s a bit of a workhorse for Gorsuch, so maybe they were even trying to get the Supreme Court’s attention.

The case

The central question of the case, Jarkesy vs. SECis whether the hedge fund manager concerned is entitled to a jury trial.

The SEC filed an administrative action against George Jarkesy, accusing him of fraud. The SEC official, known as an “Administrative Law Judge” (ALJ), convicted him, fining him a combined approximately $1 million and barring him from participating in the industry again. Jarkesy appealed to SEC commissioners, who upheld the ALJ’s finding. Then he appealed to the Fifth Circuit, claiming the agency’s entire arbitration method was unconstitutional. This case has been going on for almost 10 years.

The Fifth Circuit agreed with Jarkesy and concluded that the 7th Amendment entitled him to a jury trial.


The ruling appears to apply only to a certain, though still important, subset of cases filed by the SEC.

“The majority of SEC administrative enforcement actions don’t seek financial penalties — they seek other types of remedies, such as banning you for life from participating in the securities industry,” said Alex Platt, associate professor at the University of Kentucky School of Law. . “If they had brought this exact case against this exact defendant and just left out the financial penalties, there would have been no problem with the 7th Amendment.”

Additionally, the agency’s ability to litigate these cases internally is relatively new. Congress gave the agency the power to sue securities fraud for monetary penalties internally — not just in federal courts, as it had done until then — in 2010 through of the Dodd-Frank Act.

Ever since Congress gave the SEC this power, there have been legitimate arguments about its constitutionality.

“Critics believe the SEC has home-court advantage before its own judges,” Jim Park, a UCLA law school professor, told TPM. “Some may say that ALJs have a narrower or more biased view than an independent federal judge.”

“It is feared that this will make any administration judge, jury and executioner,” Shugerman added.

And there have also been ideologically motivated arguments. Opponents of the administrative state and its regulatory power often file constitutional challenges against agency procedures, as a right-wing legal group did in a similar lawsuit against the SEC that the Supreme Court decided to take up this week. The organization’s slogan? “Protecting Americans from the Administrative State.”

It’s important to note that much of the federal government operates similarly to the SEC, amplifying a significant but perhaps not apocalyptic reduction in agency power to potential threat at all levels.

Tackling non-delegation

The Fifth Circuit doesn’t bother to limit its decision to cases like Jarkesy’s. Instead, he slams a non-delegation argument that, at best, can be read as a hunt for federal agencies. At worst, it is a decision that would throw much of the administrative state’s enforcement machinery into utter disarray and flood the federal court system with highly technical cases.

The legitimate concern about congressional delegation of power to agencies is that the people who make them up are unelected and somewhat insulated from democratic accountability. But that’s how well our system works – democratically elected legislators give agencies fairly broad powers and leave it up to agencies, staffed by professionals and subject matter experts, to translate that into specific rules and regulations. Libertarian-minded conservatives often argue that the agencies take the regulatory power given to them by Congress and, in their rule-making and enforcement, go well beyond what Congress intended.

Here there is no ambiguity. Congress has given the SEC discretion to pursue such cases internally, rather than in federal court, if it chooses. But still, because Congress does not specify how the agency should choose the forum for litigation, the Fifth Circuit concludes that this is somehow an unconstitutional delegation of power.

“Even the SEC agrees that Congress has given it sole authority and absolute discretion to decide whether to bring securities fraud lawsuits within the agency rather than in a US court. Article III,” reads the Fifth Circuit opinion. “Congress has said nothing at all indicating how the SEC should make that call in a given case. If the standard of intelligible principle means anything, it must mean that a complete lack of guidance is constitutionally impermissible. .

It’s an absurd decision when held against the way prosecutors normally operate.

“It sounds like what prosecutors and enforcement officials do all the time,” Platt said. “The DOJ often makes decisions like ‘should we proceed in the Eastern District of Virginia or the Southern District of New York?'”

“If confirmed, it could raise many questions about many prosecutorial discretion practices: Federal prosecutors could often charge someone with 12 different offenses and exercise discretion over which ones to charge,” he said. -he adds. “And what covers this discretion? Nothing! It’s just their expertise as prosecutors, their job to protect the public. Once you start looking at prosecutorial discretion as a non-delegation issue, I don’t know where it stops.

This also poses the problem of expertise. The ALJs within the agencies are very familiar with these areas of law and are therefore well equipped to hear cases of great procedural complexity. Throwing all those cases in federal court means suddenly generalist judges can be faced with a flood of cases on everything from securities intricacies to bankruptcy intricacies to pollution regulations.

Our legal infrastructure is simply not designed for the federal judiciary to suddenly take on the agency workload.

This case does not begin as a black-and-white example of the baseless hostility of right-wing justice to the administrative state. But the Fifth Circuit is losing all benefit of the doubt with an extremely flimsy non-delegation argument that logistically would weaken agency enforcement with a federal court system disabled by the influx of complicated cases. .

And in an environment where anti-administrative state actors are practically salivating at the complacency of the ultra-conservative Supreme Court, it’s a hint of where things are headed, a rallying cry to others in the legal world of right now is the time to throw non-delegation arguments at the wall and see what sticks.

“I don’t think the 7th Amendment arguments are crazy,” Shugerman said. “But it’s just unprecedented to go this far in so many areas of the federal government that rely on ALJs and depend on efficiency and expertise.”


Comments are closed.