The Supreme Court’s momentous decision in SEC v. Jarkesy provides us with a rare glimpse into the murky realm of administrative adjudication. Despite there being more than 55 administrative law courts (ALCs) scattered across the sea of federal agencies, only a handful have arisen to the Supreme Court’s attention this century. The biggest repeat offender has been the Securities and Exchange Commission’s (SEC) ALC.

We’ve seen private litigants like Raymond Lucia, Michelle Cochran, and now George Jarkesy wage uphill, high stakes legal battles to obtain a fair trial against the SEC. Overcoming immense odds within the agency’s in-house tribunal, these individuals shouldered immense legal costs and overcame burdensome time constraints.

By withstanding the SEC’s unfair system of adjudication, they were able to successfully present their matters before Article III courts and ultimately win on the merits before the U.S. Supreme Court. The Court ruled 6-3 in Jarkesy that the SEC must provide for access to a jury trial whenever the agency imposes civil monetary penalties.

Why has the SEC been uniquely problematic within the federal bureaucracy’s network of adjudication? One of the primary reasons pertains to how the SEC enjoys a hidden set of advantages when adjudicating matters in-house. These built-in advantages can be perceived as special regulatory constraints the SEC imposes on the administrative process, diminishing the likelihood that private parties will have the opportunity to petition their disputes before an Article III court.

Follow-on Enforcement

Perhaps the most notable adjudicatory advantage is the SEC’s “follow-on” enforcement proceedings. A follow-on case is a form of layered adjudication where the administrative law judge (ALJ) deems it necessary to schedule a second case against the respondent after already rendering an initial decision against them. The Dodd-Frank Act of 2010 empowers the SEC to impose collateral bars as a prospective remedy to prevent future harm to the investor public.

Follow-on cases are often proposed by attorneys from the SEC’s Enforcement Division as recommendations to the ALJ, seeking to further penalize the prosecuted party. These requests usually ask for a permanent bar on the individual being prosecuted, which prevents them from practicing in the securities industry.

The rationale for follow-on requests is an administrative concern to prevent future misdeeds by the prosecuted party. According to former SEC attorney Russ Ryan, “the SEC must weigh factors such as the nature of misconduct, the wrongdoer’s degree of intentionality, and the likelihood of repetition.”

Follow-on proceedings enable the SEC’s ALJs to exercise broader discretion in adjudication by arguing that a bar or suspension is a necessary means of serving the public interest. The SEC rarely decides otherwise; my research has found that ALJs have upheld every follow-on proceeding in favor of the Division of Enforcement over the previous ten years. Disbarring or suspending an individual in a separate case only heightens the financial burden for the respondent. It also imposes additional public pressure on the litigant to appear again before the SEC when his or her fate is already sealed.

George Jarkesy was subject to a follow-on proceeding while simultaneously challenging the SEC in an Article III court. Jarkesy was named a respondent to a follow-on proceeding in 2013 and 2014, and his attempt to have his case heard before an Article III court began in [year?].

Forced appeals

Another unique tool that the SEC wields in adjudication is what I call “forced appeals.” This is where SEC Commissioners unilaterally decide whether to appeal an ALJ decision to themselves, absent the intentions of the private party or the SEC’s attorneys. So even if the SEC’s enforcement team lost a case and decides not to appeal, the Commissioners can intervene, override their discretion, and take up the case anyway. This enables the SEC to more easily overturn a rare ALJ initial decision rendered against the agency.

Only the National Labor Relations Board (NLRB) has similar power. The National Labor Relations Act allows the Board’s clerk to review draft ALJ opinions and send them to the Board members for revisions. The SEC and NLRB’s ability to interfere in ALJ decision-making underscores the lack of judicial independence in agency tribunals. In an actual Article III court, an appeals judge would never possess the authority to appeal a case from a lower court in the same jurisdiction. Appeals must be triggered by one of the parties to the case, not by an uninvolved judge.

Excessive penalties & disgorgements

The SEC enjoys a special advantage in extracting excessive civil monetary penalties and disgorgements among federal agencies. The agency has been spotlighted for imposing a record-breaking $6.4 billion in monetary penalties on financial market actors in 2022 alone. Part of this advantage is attributed to the Dodd-Frank Act, which emboldens the SEC to impose higher fees upon financial actors suspected of fraud. This was on full display in the Jarkesy case, where George Jarkesy and his investment firm Patriot28 were accused of securities fraud by the SEC and slapped with a hefty civil monetary penalty of $300,000 under a Dodd-Frank provision.

Dodd-Frank also empowers the SEC to manage a broad range of its enforcement actions completely in-house, diverting them away from traditional Article III courts. As Justice Neil Gorsuch’s concurring opinion in Jarkesy states, “with the passage of the Dodd Frank Act, Congress gave the SEC an alternative to court proceedings. Now, the agency could funnel cases like Mr. Jarkesy’s through its own ‘adjudicatory system.’” The Supreme Court corrected this by ensuring that a large subset of SEC enforcement actions—namely those involving civil monetary penalties—can no longer be adjudicated in its ALC. “Jarkesy and Patriot28 are entitled to a jury trial in an Article III court,” according to Chief Justice Roberts’s majority opinion. While the Court stopped short of addressing the entirety of the SEC’s venue selection power, the agency no longer reserves any discretion over where can enforce its monetary penalties because of Jarkesy.

Prior to the Jarkesy ruling, in-house adjudication provided an easy way for the SEC to impose the most severe civil monetary penalties. The SEC also has the unique ability to take disgorgements from those found guilty of investment fraud.

Disgorgement serves as an equitable remedy, enabling the SEC to establish an equivalence fee that it can extract from guilty market actors. The amount disgorged is used to restore what was lost due to market fraud or theft. Unlike civil monetary penalties, which comprise a tiered set of costs that can exceed the financial value of the wrongdoing, the SEC cannot disgorge more than what was originally taken.

In Kokesh v. SEC, the Supreme Court classified disgorgement as a remedy unique to the SEC, which must be imposed on violators of securities laws within five years of the claim. In Jarkesy, the SEC sought to disgorge $680,000 from Patriot28—officials believed this to be the amount of ill-gotten financial gains, but this belief was based on fact-finding by an ALJ rather than by an impartial jury.

Both the Fifth Circuit’s and the Supreme Court’s rulings in Jarkesy restored the jury trial right only for fraud matters that involve civil penalties and not civil remedies. Thus, the SEC can continue to seek disgorgements from private parties through its ALC.

While the SEC wins an average of 90% of its cases when managed in-house, it only wins 69% when in federal court. Unlike the SEC’s ALJs, Article III judges do not simply greenlight excessive disgorgements imposed on private litigants. Rather, in Kokesh, they limited the scope of the remedy to any net profits gained as a result of the fraudulent activity, whereas the SEC’s ALJs wanted to allow disgorgements exceeding that amount. Similarly, in Jarkesy, the Court limited the SEC’s civil penalty cases to Article III courts with jury access.

Tripartite ALC Network

One final advantage the SEC’s ALC enjoys over and above what other agencies do is its linked network of self-regulatory organizations adjudicating an array of financial matters. The SEC, the Financial Industry Regulatory Authority (FINRA), and the Public Accounting Oversight Board (PCAOB) form a triangular network of regulators of the financial industry. FINRA adjudicates many private disputes among self-regulatory exchanges and their member firms within its own quasi-judicial forum. This helps reduce the caseload burden for the SEC’s ALJs.

If a litigant is dissatisfied with the outcome of their case, they can appeal it to FINRA’s National Adjudication Council (NAC), which is overseen by a body of judge-like appeal officers. The SEC comes into focus whenever a litigant possesses the immense resources and determination to appeal their NAC case all the way up to the SEC’s Commissioners, who reserve the final say in all adjudicatory matters.

Thus, some litigants face two layers of FINRA officers before they even have the chance to petition the SEC. Similarly, if the matter pertains to the PCAOB’s jurisdiction, litigants must first adjudicate before a PCAOB panel prior to appealing the case up to the SEC Commissioners. Like FINRA, the PCAOB can terminate professional licenses and pursue other heavy-handed enforcement actions against regulated firms. However, as a result of Jarkesy, FINRA and PCAOB will now need to process their monetary sanctions before an Article III court.

While Jarkesy’s case did not involve FINRA or the PCAOB, it is worth highlighting the extra layer of difficulty that many face when adjudicating matters in the SEC’s ALC network. Only the most well-financed and determined litigants are even capable of taking their cases all the way up the ladder to the SEC Commissioners, who most likely will defer to the expert judgments of FINRA or PCAOB, as recently seen in the Frank Black and Southeast Investments matter.

Closing

The Supreme Court’s important decision in SEC v. Jarkesy provides a rare glimpse into the nature of federal administrative law courts. This blog post uncovers many of the SEC’s built-in advantages. The Court struck down one of these advantages by requiring impartial jury trials to review penalties triggered by SEC enforcement. Transparency is desperately needed when assessing the true extent of power that agencies like the SEC reserve in adjudication. The Court’s Jarkesy decision represents a major blow to the SEC’s hidden advantage in assessing monetary penalties, while restoring the Constitution’s guarantee of jury trials in civil matters.

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