American Civics 101 teaches us that there are three branches of the American government: Executive, Legislative and Judicial. However, that clean, elegant division started to go awry in the early 20th century (some would place the problems even earlier) with the creation of the Federal Reserve and the vast expansion of the administrative state under the New Deal.
One blow to that traditional tripartite division of federal powers was the creation of administrative courts for independent agencies. Yesterday, the Fifth Circuit Court of Appeals (which includes Texas) ruled such courts were unconstitutional.
The Securities and Exchange Commission’s in-house judges violate the U.S. Constitution by denying fraud defendants their right to a jury trial and acting without necessary guidance from Congress, the 5th U.S. Circuit Court of Appeals ruled on Wednesday.
The court ruled 2-1 in favor of hedge fund manager George Jarkesy Jr and investment advisor Patriot28 LLC, overturning an SEC administrative law judge’s determination that they committed securities fraud.
A spokesperson for the SEC and counsel for the petitioners did not immediately respond to a request for comment on Wednesday.
The Dodd-Frank Act, which Congress passed after the 2008 financial crisis, expanded the SEC’s ability to seek penalties in its administrative proceedings.
In the ruling Wednesday, the majority said that because seeking penalties is akin to debt collection, which is a private right, the defendants were entitled to a jury trial.
The SEC had argued that it was acting to protect investors and enforce public rights found in the securities laws.
The majority also found that SEC judges, known as administrative law judges, lack authority under the Constitution because Congress did not provide guidance on when the SEC should bring cases in-house instead of in a court.
U.S. Circuit Court Jennifer Walker Elrod, joined by Circuit Court Judge Andrew Oldham, penned the majority opinion.
This is a long overdue trimming of the unelected administrative state and a restoration of the division of responsibilities between the three branches that forms part of the Constitution’s vital system of checks and balances. However, given the potentially far-reaching effects of the decision, expect first an en banc hearing of the Fifth Circuit, and then an appeal to the Supreme Court.
Tags: Andrew Oldham, bureaucrats, Dodd-Frank, Fifth Circuit Court of Appeals, Jennifer Walker Elrod, New Deal, Regulation, SEC, Texas
Reading the opinion, I think it is even broader than that. I think that declares virtually all ALJs as unconstitutional, in all departments.
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Assume the Supreme Court stamps its imprimatur on this decision. In order for this ruling to stick, Congress must design a new system. Is it as simple as simply transferring executive agencies to the judicial branch? Thus in the SEC example, there would be a prosecutor who investigates and charges according to SEC statutes. (Can they just exist as statutory law or do the statutes need to be converted into criminal/civil/tort law?) And judges who specialize in, for instance, financial and security law? And defense attorneys who specialize in SEC statutory law? (As you can tell, IANAL, just trying yo think through the consequences and likely outcomes…)
[…] an opinion out of the Fifth Circuit aimed at the Securities and Exchange Commission (SEC). The case was the SEC denying fraud defendants the right to a jury trial, acting without the necessary guidance from congress. Dodd Frank passed after the 2008 […]