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SEC v. Jarkesy

Following a 2011 fraud investigation, the Securities and Exchange Commission (SEC) brought an administrative enforcement action against hedge-fund owner George Jarkesy, Jr., and his investment advisor, Patriot28. An administrative law judge (ALJ) found that Jarkesy and Patriot28 had violated the securities laws by making fraudulent misrepresentations to induce investment in Jarkesy’s hedge funds. The SEC Commissioners affirmed this finding on appeal, and it issued an order barring Jarkesy from certain professional activities and imposing monetary penalties on Jarkesy and Patriot28.

Jarkesy and Patriot28 filed a petition for review of the SEC’s order in a federal appeals court. As relevant, the petition argued that two aspects of the statutory scheme establishing the SEC’s administrative enforcement powers violated constitutional separation-of-powers principles. First, the petition argued that the statute impermissibly delegated legislative power to the executive branch by giving the SEC a choice as to whether to bring a given enforcement action in an administrative proceeding or in court. Second, citing Free Enterprise Fund v. Public Company Accounting Oversight Board, the petition argued that a statutory provision barring the Commissioners from removing an ALJ without good cause impermissibly impinged on the President’s authority because the Commissioners themselves could be removed by the President only for cause. The court of appeals accepted both arguments and vacated the SEC’s order. The SEC sought and was granted Supreme Court review.

Public Citizen filed an amicus brief urging the Supreme Court to reverse the decision of the court of appeals. The brief explains that the statute does not delegate legislative power because the SEC exercises executive power when it chooses whether to pursue a given enforcement action in a judicial or administrative forum. A case-specific determination regarding the proper forum for a particular set of charges, after all, is not a determination about regulated parties’ substantive legal duties but rather a determination about how best to enforce legal duties that Congress imposed. The brief also explains that for-cause removal protection for the SEC’s ALJs does not violate the Constitution. Longstanding Supreme Court precedent holds that executive adjudicators like ALJs are entitled to a degree of independence from the President and that executive officers who, again like ALJs, lack policymaking authority can also be protected against at-will removal without violating the separation of powers. Free Enterprise Fund, on which Jarkesy relies, does not control; indeed, that decision explicitly denied that its holding applied to ALJs. Finally, even if the removal provision posed a constitutional problem, the proper remedy would be to hold the protection unenforceable but not to vacate the ALJ’s initial decision—let alone to vacate the final SEC order that was issued by the Commissioners.