Fifth Circuit Guts Securities Enforcement Based on Seventh Amendment Argument
The U.S. Court of Appeals for the Fifth Circuit has bucked 88 years of precedent in holding that the Securities and Exchange Commission cannot use administrative law judges in securities fraud cases because it violates the Seventh Amendment right to a jury trial.
The Seventh Amendment guarantees the right to a trial by jury “[i]n Suits at common law, where the value in controversy shall exceed twenty dollars.” However, Congress can assign certain actions to agencies and circumvent the jury trial right when the proceeding focuses on “public rights.” And SCOTUS has held that public rights are those “so closely integrated into a public regulatory scheme as to be a matter appropriate for agency resolution.”
While that sounds like securities regulation, the 2-1 majority on the Fifth Circuit panel didn’t see it that way.
Background
In 2011, the SEC launched an investigation into investing activities by hedge fund manager George Jarkesy, Jr. and his investment advisor, Patriot28, LLC. When the agency brought an enforcement action for securities fraud a few years later, Jarkesy and Patriot28 filed for an injunction in federal district court in D.C.
They argued that the SEC lacked the authority to discipline them and that the Seventh Amendment requires a jury trial for such actions. The district court and the U.S. Court of Appeals for the D.C. Circuit didn’t buy it. But it seems the Fifth Circuit was ready to blow up the whole infrastructure of securities enforcement in the name of originalism (or some version of it).
The Opinion
The majority reached its decision through an originalist framework. “Fraud prosecutions were regularly brought in English courts at common law,” Judge Jennifer Walker Elrod wrote for the majority. And further, she writes, Supreme court precedent requires courts to define “Suits at common law” according to what common law claims existed in 1789 when the Bill of Rights passed in Congress.
Judge Elrod also provides a bit of history, noting Thomas Jefferson’s description of juries as “the only anchor, ever yet imagined by man, by which a government can be held to the principles of its constitution.”
The majority concluded that fraud actions have played out in common-law courts for centuries, including fraud actions brought by the government. They say the government’s involvement in a suit is not enough to trigger the public rights doctrine and offered the opinion that “purely private suits for securities fraud…would serve to discourage and remedy fraudulent behavior in securities markets.”
“And even more pointedly,” Judge Elrod writes, “the Supreme Court has held that actions seeking civil penalties are akin to special types of actions in debt from early in our nation’s history.”
Further, the majority held that Congress could not give the SEC “unfettered authority” over whether to enforce its rules in federal court or within the agency. This “alternative holding” focused on the delegation of legislative power, concluding that although Congress can decide to assign disputes to someone other than the courts, it cannot give that power to an agency.
Interestingly, the majority brings up the Supreme Court’s 2018 decision that concluded the executive branch must appoint administrative law judges through the same process as Article III judges. However, they don’t seem to connect that this likely makes ALJs qualified to handle a bench trial. And that’s not the only issue here, according to the dissent written by Judge Eugene Davis.
The Dissent
Judge Davis’s dissent relies heavily on the Supreme Court’s holding in Atlas Roofing v. OSHA, an opinion also featured in the Fifth Circuit’s majority decision. But, the judges differ in their interpretation of what the Supreme Court meant by “public rights.” The dissent points to the Supreme Court’s description of public rights cases as those “in which the Government sues in its sovereign capacity to enforce public rights created by statutes within the power of Congress to enact.”
The dissent provides a straightforward run-down of Supreme Court decisions that followed Atlas Roofing. Judge Davis concludes that SEC enforcement actions are cases of public rights because the SEC is in charge of making the rules on securities trading in the United States. So, it follows that the agency would call the shots in enforcing those rules.
The majority seems to think this is a slippery slope and takes this argument to the extreme, arguing that under the dissent’s rule, “[w]hen the federal government sues, no jury is required.” However, as the dissent points out, the Supreme Court found that public rights were at play in Granfinanciera v. Nordberg, a dispute that was brought neither by nor against the federal government. So it’s hard to see why the majority took such a hard-line stance on this issue – especially when it could turn a whole regulatory scheme on its head.
Plus, it’s unlikely that Thomas Jefferson or anyone working on the Bill of Rights ever contemplated insider trading or credit-default swaps.
At this point, we can only imagine what the practical result of this ruling will be. Will the executive branch need to appoint more judges to handle the current SEC caseload? Will the SEC downshift to only filing enforcement actions against the most flagrant rule-breakers? Or will the Supreme Court overturn this ruling as pseudo-originalist nonsense?
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