Every 1L lecture has that kid who raises their hand and poses some wacky hypo and asks if this brain nugget that they’ve come up with for the first time actually upends 250 years of collected jurisprudence on the subject that they didn’t actually read about for today’s class.
That kid is now on the Fifth Circuit.
Fresh off telling private companies employees are enjoined from enforcing any rule if an employee even asserts that it’s religious, and attempting to insert itself at the head of the Department of Defense, the Fifth Circuit Mental Gymnastics Squad offered up another perfect 10 with Jarkesy v. SEC.
The Fifth Circuit gutted the Securities and Exchange Commission yesterday, deciding that the Seventh Amendment demands that the SEC can’t use Administrative Law Judges and must send every minor securities infraction to an Article III court to get dragged through a jury trial.
Because Thomas Jefferson never thought about credit-default swaps.
On the one hand, because the crux of the majority opinion is that SEC enforcement is like criminal fraud despite not actually being criminal fraud, I guess we can go ahead and flood the court system with a bunch of new ticky-tack infractions that require speedy jury trials! Let Biden appoint the 100 new judges needed to make that nightmare work.
On the other hand, the more likely outcome would be an end to all but the most egregious securities enforcement actions, which is… less than ideal.
Someone on Twitter replied to this case with “But seriously, force SEC to litigate real cases in real courts with real juries. I am hard pressed to understand why that is such a bad thing….” which translates to “tell me you don’t understand how law works without saying you don’t understand how law works.”
Stepping back, this is an altogether ridiculous case with an even more ridiculous result. Basically, a lot of relatively small potatoes investment shenanigans — the case is worth $300K in penalties and $685K of disgorgement — landed the petitioners in trouble with the SEC. In a move that borders on sovereign citizen territory, they complained that the SEC had no authority to discipline them and demanded a jury trial because “Seventh Amendment something something.” The D.C. Circuit rolled its eyes at this, but the Fifth Circuit is here for it.
Except there’s no reason why the Seventh Amendment would require a jury trial for all securities law infringements. Instead, there’s a long-standing distinction between private rights and public rights and the justice system has over and over affirmed that public rights — like the SEC’s enforcement of its rules — amount to public rights that do not require jury trials.
Here… let the dissent sum up the legal landscape:
Consistent with the above cases, our sister circuits routinely hold that an enforcement action by the Government for violations of a federal statute or regulation is a “public right” that Congress may assign to an agency for adjudication without offending the Seventh Amendment. For example, the Eleventh Circuit relied solely on Atlas Roofing when it rejected a Seventh Amendment challenge to administrative adjudication of an SEC enforcement action and declared “it is well-established that the Seventh Amendment does not require a jury trial in administrative proceedings designed to adjudicate statutory ‘public rights.’”
I’m struggling to imagine the panel sitting down over this one.
Judge Davis: Welp, this seems pretty clear cut. Tons of precedent squarely on the issue from the Supreme Court on down.
Judge Elrod: Hm. OR… and hear me out here… the entire infrastructure of securities enforcement in America violates the Bill of Rights.
Judge Oldham: Intriguing!
Judge Davis: So your theory here is that you, today, have come up with something that the SEC and the entire federal judiciary completely just missed for the last 88 years?
Judge Elrod: Pretty much.
Judge Oldham: I’m so in.
The dissent is just page after page of actual legal precedent detailing why this makes no sense outside of a 7th grade civics class grasp of jury trials, explaining that penalizing rule violations is criminal-ish isn’t really the standard:
Because the SEC’s enforcement action is a “public right,” the Seventh Amendment does not prohibit Congress from assigning its adjudication to an administrative forum that lacks a jury. As discussed below, the fact that the securities statutes at issue resemble (but are not identical to) common-law fraud does not change this result. It also makes no difference that federal courts have decided claims under the securities statutes for decades.
The SEC defines what people must do to continue legally trading stuff and it’s the right institution to resolve if those are getting breached. ALJ adjudication exists because most of these cases aren’t “crimes” but rules infractions tied to the regulation of the market — a market that processes bazillions of transactions around the clock. Between the zany rewriting of the Seventh Amendment and some messy originalist nonsense about congressional non-delegation, the majority concludes that the SEC is reduced to the white-collar wing of the DOJ and that would grind enforcement to a halt.
The majority opinion even cites the kerfuffle where the Supreme Court said some ALJs were improperly appointed and required matters to be reassigned! One might think that amounts to pretty compelling evidence that the Supreme Court knows that ALJs are legit!
There might have been some opinion that would give these petitioners a day in court without gutting the SEC, but that’s not what the Fifth Circuit cobbled together because that wouldn’t be the point. These cases are just jumping off points to throw haymakers at the entire order of functional government by obviating actual laws and replacing them with 18th century fan fiction. Seriously, what is the value of a federal clerkship with these people? Like, what about actual LAW are they learning here? I wouldn’t hire a white-collar defense lawyer who spent a year “researching” this superficial tripe.
When Jones-Day-associate-cum-federal-judge Kathryn Mizelle used her Middle District of Florida perch to strike down the mask mandate, she flexed her newfound medical knowhow not with a scalpel, but with a bazooka — playing semantic games until she arrived at the result that the CDC never has the legal authority to keep people from spreading disease. Now the Fifth Circuit does a little violence to the definition of criminal law and spins that into saying the SEC can’t do most securities law enforcement in this country.
Welcome to the next several decades. Unless maybe Biden does appoint those 100 judges to cover the new securities infraction docket emergency! But that seems far too much like common sense to become reality.
You can read the whole opinion here.
Joe Patrice is a senior editor at Above the Law and co-host of Thinking Like A Lawyer. Feel free to email any tips, questions, or comments. Follow him on Twitter if you’re interested in law, politics, and a healthy dose of college sports news. Joe also serves as a Managing Director at RPN Executive Search.
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