34 F.4th 446
5th Cir.2022Background
- Petitioners George R. Jarkesy Jr. and Patriot28 operated hedge funds; the SEC investigated and brought an in‑agency enforcement action alleging securities fraud (misrepresentations, overvaluation, fee extraction).
- Petitioners sought injunctive relief in district court, which (and the D.C. Circuit on appeal) declined jurisdiction and required exhaustion of agency review.
- An SEC ALJ found liability; the Commission affirmed, imposing a cease‑and‑desist order, a $300,000 civil penalty, disgorgement (~$685,000), and industry bars against Jarkesy.
- Petitioners raised constitutional objections (Seventh Amendment jury right, nondelegation/forum choice, ALJ removal protections, bias/due process); the Commission rejected them; Petitioners petitioned the Fifth Circuit.
- The Fifth Circuit held the agency proceedings unconstitutional for three independent reasons (Seventh Amendment, nondelegation re: forum choice, and Article II removal protections), vacated the SEC’s order, and remanded for further proceedings.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| 1) Seventh Amendment: May SEC adjudicate penalties in‑house without jury? | Jarkesy: SEC seeks civil penalties analogous to common‑law actions in debt/fraud → Seventh Amendment jury right applies to liability facts. | SEC: Enforcement vindicates public rights; public‑rights doctrine permits non‑Article III, nonjury adjudication. | Held: Jury right applies. SEC’s penalties action is akin to common‑law legal claims; public‑rights doctrine does not cover this enforcement; agency adjudication violated the Seventh Amendment. |
| 2) Nondelegation / forum choice: Did Congress unconstitutionally delegate legislative power by letting SEC choose Article III court vs. agency forum without standards? | Jarkesy: Dodd‑Frank lets SEC unilaterally decide who gets Article III process → legislative power improperly delegated without an intelligible principle. | SEC: Forum choice is prosecutorial/executive discretion (not legislative); Congress permissibly authorized agency enforcement choices. | Held: Delegation invalid. Granting SEC unfettered authority to select forum is legislative in effect and lacks an intelligible principle; unconstitutional. |
| 3) Article II / ALJ removal protections: Do statutory for‑cause protections for SEC ALJs violate the President’s Take Care/Removal powers? | Jarkesy: ALJs are inferior officers with substantial executive functions; two layers of for‑cause protection insulate them from Presidential control → violates Article II. | SEC: ALJs perform adjudicative/recommendatory functions; protections are compatible with Article II and Free Enterprise Fund’s caveats. | Held: Removal protections unconstitutional. Two layers of for‑cause removal protection for SEC ALJs impede Presidential authority under the Take Care Clause. |
| 4) Remedy | Jarkesy: Vacate SEC order and remand for proceedings consistent with constitutional requirements. | SEC: Defend administrative judgment and procedures. | Held: Court granted review, vacated the SEC decision, and remanded for further proceedings consistent with the opinion. |
Key Cases Cited
- Lucia v. SEC, 138 S. Ct. 2044 (2018) (SEC ALJs are officers under the Appointments Clause)
- Tull v. United States, 481 U.S. 412 (1987) (Seventh Amendment jury right applies to actions seeking civil penalties)
- Atlas Roofing Co. v. Occupational Safety & Health Review Comm’n, 430 U.S. 442 (1977) (public‑rights doctrine permits administrative factfinding when the government enforces statutory public rights)
- Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989) (distinguishes public and private rights for Seventh Amendment analysis)
- Oil States Energy Servs., LLC v. Greene’s Energy Grp., LLC, 138 S. Ct. 1365 (2018) (public‑rights doctrine and Congress’s latitude to assign certain adjudications to agencies)
- Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 561 U.S. 477 (2010) (two‑layer for‑cause removal protections can violate Article II)
- Panama Refining Co. v. Ryan, 293 U.S. 388 (1935) (statute invalid where Congress provided no guiding standard for delegated power)
- Mistretta v. United States, 488 U.S. 361 (1989) (intelligible‑principle standard for permissible delegation)
- Crowell v. Benson, 285 U.S. 22 (1932) (definition of public rights and Congressional control over modes of adjudication)
- Myers v. United States, 272 U.S. 52 (1926) (Presidential removal authority relevant to faithful execution of laws)