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The Fifth Circuit Court of Appeals ruling in Jarkesy v. Securities and Exchange Comm'n is a potential blockbuster. In 2020, the Securities and Exchange Commission (SEC) held that George Jarkesy had engaged in misrepresentation in certain public statements, thereby committing securities fraud. The SEC ordered Jarkesy to cease and desist and to pay a civil penalty. In addition, the agency barred him from certain securities industry activities.

Jarkesy petitioned for review of the SEC's decision. In that petition, he did not challenge the agency's substantive decisions. Instead, he argued that the decision was unconstitutional for three reasons: Jarkesy had a right to a trial by jury, rather than an administrative decision; the decision flowed from an improper delegation of legislative authority to the SEC; and because the administrative law judge (ALJ) who rendered the initial decision was unconstitutionally protected from removal except for cause.

The Fifth Circuit agreed with Jarkesy on each point. This is perhaps not a surprise when the majority opinion favorably cites former President Ronald Reagan's "Nine Most Terrifying Words in the English Language": I'm from the government, and I'm here to help. The court's opinion was written by Judge Jennifer Walker Elrod, a George W. Bush appointee, and was joined by Judge Andrew Oldham, a Donald Trump appointee — both long-standing members of the Federalist Society. Judge W. Eugene Davis, a Reagan appointee, dissented.

The U.S. Supreme Court has never found an agency's administrative enforcement to be subject to the Seventh Amendment's right to a jury trial. Indeed, in Atlas Roofing Co. v. Occupational Safety & Health Review Comm'n, the Court unanimously rejected such a claim. It said, "At least in cases in which 'public rights' are being litigated, e.g., cases in which the Government sues in its sovereign capacity to enforce public rights created by statutes within the power of Congress to enact the Seventh Amendment does not prohibit Congress from assigning the factfinding function and initial adjudication to an administrative forum with which the jury would be incompatible." The Fifth Circuit had to acknowledge this, but it claimed that the SEC was not enforcing "public rights" when it proceeded against Jarkesy for securities violations.

Why not? Because "fraud prosecutions were regularly brought in English courts at common law." Moreover, "[c]ommon law courts have heard fraud actions for centuries, even actions brought by the government for fines." In short, the Fifth Circuit appears to believe that this history establishes that actions against fraud are necessarily only private rights. However, the fact that fraud cases were historically brought in court does not establish that the government was not pursuing public rights when it instituted actions in court, including "actions brought by the government for fines." That historically public rights might have been enforced in a court of law does not preclude Congress from subsequently determining that those public rights may also be enforced initially through administrative adjudication.

"Congress," the Fifth Circuit said, "cannot convert any sort of action into a 'public right' simply by finding a public purpose for it and codifying it in federal statutory law." That might be true, but it begs reality to suggest that the federal government's sovereign interest in the integrity of its securities markets and Congress's Article I power to regulate the national securities markets are insufficient to establish real public rights against fraud in those markets. Such an interest and power justify the creation of public rights against securities fraud in addition to whatever private rights those defrauded may have.

The Fifth Circuit also cited Tull v. United States. There, the Supreme Court had held that in an action to obtain a civil penalty for violating the Clean Water Act, there was a right to a jury trial on the issue of liability because it "was a type of remedy at common law that could only be enforced in courts of law." However, the actual assessment of the civil penalty did not require a jury because there was no common law antecedent for assessing a penalty. Consequently, the Fifth Circuit concluded, because fraud was an action that would historically be brought in a court of law, a defendant in a civil fraud case likewise had a right to a jury trial.

A major problem with this analysis is that the Tull case involved agency enforcement in a court, not an administrative enforcement action. Because the case had been brought in court, the only question under the Seventh Amendment is whether this type of action is one that historically has been tried in courts of law. If so, then a jury is required by the Seventh Amendment.

But this simply does not address what is required when it is not a case in a court of law. That turns on whether the case involves public rights. Clearly, enforcing the Clean Water Act's requirements by seeking a civil penalty for violations of the act is enforcing public rights. However, the Court in Tull never mentions public rights because they are irrelevant to whether a jury is required in a case in court. Had the U.S. Environmental Protection Agency (EPA) utilized its administrative enforcement mechanism (see 33 U.S.C. § 1319(g)), there would have been no right to a jury trial because it would have been enforcing public rights.

The above addresses the Seventh Amendment claim. The actual effect of the requirement for a jury trial on SEC enforcement can be overstated because prior to the Dodd-Frank Act, the SEC could only bring civil penalty actions in court and before a jury. Moreover, it is not clear when such a requirement would apply outside of a securities fraud context, in light of the court's reliance on the history of actions at law for fraud. For example, it would not appear to affect administrative civil penalty actions brought by EPA, the Occupational Safety and Health Administration, or the Federal Aviation Administration, to name a few agencies with administrative civil penalty authority.

Nevertheless, the Seventh Amendment issue was just one of three fatal arrows the Fifth Circuit shot at the SEC. The court's decision regarding the delegation of authority to bring an action administratively or judicially would remain if the SEC only sought injunctive relief. Thus, the SEC could not bring an injunctive enforcement action anywhere.

The final arrow, the protection of ALJs from removal except for cause, would under existing precedents simply allow the SEC, as well as all other multi-member agencies, to remove their ALJs at will. Perhaps the SEC and other agencies would even like that, although it is not clear why defendants like Jarkesy would. Perhaps it's because it would suggest that the entire concept of administrative enforcement would violate due process.