The use of the SEC’s in-house judge violates the rights of the accused, the appellate court says

A split panel of the federal appeals court on Wednesday cast a wrinkle in how the Securities and Exchange Commission prosecutes certain enforcement actions claiming its administrative proceedings may violate a defendant’s constitutional rights.

The United States Court of Appeals for the Fifth Circuit, in a 2-1 decision, ruled that the SEC violated the Seventh Amendment right to a hedge fund manager’s jury trial when it let an internal judge decide a civil fraud case. Such administrative procedures are common among regulatory agencies, which use them to decide certain enforcement actions.

The Fifth Circuit ruling – one of the nation’s most conservative federal appeals courts – is another legal challenge to the SEC’s growing reliance on administrative law judges, rather than filing civil complaints in a federal court. But for now, the ruling’s impact is limited to federal courts within the court’s jurisdiction, which covers Texas, Louisiana and Mississippi.

“The 7th Amendment grants signatories a jury trial because the SEC enforcement action is similar to traditional lawsuits that give the right to jury trial,” wrote district judge Jennifer Walker Elrod in the majority opinion. .

Judge Elrod, who was named to court by former President George W. Bush, said the SEC did not have the authority to bring such a case to an administrative court because it was not solely about “public rights.”

The majority opinion said the domestic judge’s ruling against George Jarkesy in a securities fraud case should be vacated and returned to the regulator. The court said the SEC must act in accordance with the appeals court’s ruling, allegedly requesting the case be referred to federal court.

In a dissenting opinion, Judge W. Eugene Davis wrote that the majority misinterpreted the Supreme Court’s definition of what constitutes “public rights”. Judge Davis said Congress allows litigation agencies before domestic courts if it involves “public rights”, such as investor protection and “strengthening public interests.”

A SEC spokesperson said the agency was “evaluating the decision to determine the appropriate next steps.”

This month, the Supreme Court said it would adopt another Fifth Circuit ruling raised a challenge to a different aspect of the administrative process of the SEC. in 2018, the Supreme Court ruled 7-2 that the administrative law judges at the SEC had been unconstitutional appointed to office.