SEC Administrative Proceedings: Back to the Supreme Court

The SEC and Respondents in administrative proceedings may start to believe they are caught in time travel – back to the future. Four years ago the U.S. Supreme Court decided Lucia v. SEC, 138 S.Ct. 2044 (2018). There the High Court concluded that the Commission violated the Appointment Clause of the U.S. Constitution when retaining Administrative Law Judges. The Commission undertook a series of steps to reform its proceedings. Most thought the questions regarding administrative proceedings were resolved.

Nevertheless, parties named as respondents in Commission administrative proceedings continued to present various challenges to the use of such proceedings. Typically, those were tied to claims based on the right to a jury trial or if certain delegations of power were properly done. Generally, the challenges were rejected.

One case in which the challenges were successful is Jaresy v. SEC, No. 20-61007 (5th Cir. Decided May 18, 2022). There an investment adviser named as a respondent in a Commission administrative proceeding was found liable for defrauding over 100 investors. Prior to any determination in the administrative proceeding Respondent sought unsuccessfully to enjoin the proceedings in the district court for DC. The challenges were rejected. Subsequently, Mr. Jarkesy appealed to the Circuit Court which also rejected his claims. Jarkesy v. SEC, 48 F. Supp. 3d 32 (D.D.C. 2014) aff’d, 803 F. 3d 9 (D.C. Cir. 2015).

Following a hearing before the administrative law judge Mr. Jarkesy was found liable. On appeal, however, the Fifth Circuit reversed and remanded the case. The Circuit Court concluded that the hedge fund manager had been denied the right to a jury trial and that there had been an unconstitutional delegation of authority in the appointment process. The case was remanded for further proceedings.

When, and in fact if, those proceedings will take place is now an open question. Just prior to Mr. Jaresy’s victory, the Supreme Court issued an order in another case involving similar questions, Cochran v. SEC, No. 19-10396 (Decided December 13, 2021). That case also involved challenges to the use of administrative proceedings by the Commission. In Cochran the Fifth Circuit concluded that the Exchange Act did not strip district courts of jurisdiction to hear certain constitutional claims regarding the propriety of those proceedings. In an order dated May 16, 2022 the High Court agreed to hear the case. Now the fate of Messrs. Jaresy and Cochran are linked along with those of other Respondents in current Commission administrative proceeds. All will have to await the ruling of the High Court next term to determine their fate.

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