In Jarkesy v. Securities and Exchange Commission, Case No. 3-15255, a panel of the U.S. Court of Appeals for the Fifth Circuit ruled on May 18, 2022, in a 2-1 decision that the U.S. Securities and Exchange Commission (“SEC”) may no longer use its own administrative proceedings framework to enforce SEC securities fraud cases. Instead, the SEC must bring such actions in federal district courts where respondents may exercise their rights to civil jury. This is a stunning development for the SEC because the case finally recognizes that the SEC should not be acting as both prosecutor and jury in securities fraud cases nor require respondents to exhaust their administrative remedies before having their day in court.
In Jarkesy, the SEC brought administrative enforcement proceedings against the respondents alleging securities fraud. From the inception of the matter, however, respondents challenged the SEC’s right to bring such a matter administratively because it deprived them of their rights to civil jury. The administrative law judge ruled against respondents as did the SEC upon review and ordered respondents to cease and desist from committing further violations, pay a civil penalty of $300,000, and to disgorge nearly $685,000 in alleged ill-gotten gains.
“The case finally recognizes that the SEC should not be acting as both prosecutor and jury in securities fraud cases nor require respondents to exhaust their administrative remedies before having their day in court.”
On appeal, the 5th Circuit vacated the SEC’s judgment and held that the SEC’s administrative proceedings were unconstitutional for at least two reasons: (1) respondents were deprived of their Seventh Amendment right to civil jury; and (2) Congress unconstitutionally delegated legislative power to the SEC by failing to give the SEC an intelligible principle by which it could determine what matters it could use its administrative proceedings framework and what matters it was required to file suit in federal district courts. It remains to be seen whether the SEC will request a rehearing before the entire panel of the Fifth Circuit or seek redress from the U.S. Supreme Court, and whether other circuits of the U.S. Court of Appeals will follow suit. But as of now, the SEC should no longer use its own administrative enforcement proceedings in securities fraud cases.
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