Fifth Circuit Guts Securities Enforcement Based on Seventh Amendment Argument

The U.S. Court of Appeals for the Fifth Circuit has bucked 88 years of precedent by ruling that Securities and Exchange Commission cannot employ judges from the administrative law field in instances of securities fraud because it is in violation of the Seventh Amendment right to a jury trial.

The Seventh Amendment guarantees the right to trial by jury “[i]n Common law suits in cases where the worth of the dispute exceeds 20 dollars.” But, Congress can assign certain acts to the agencies, and thereby override the right to trial by jury where the case is focused specifically on “public rights.” Additionally, SCOTUS has ruled that”public rights” are “so deeply integrated in an existing public regulatory framework in order to be that is appropriate for agency decision-making.”

Although it sounds like a regulation for securities However, the majority of 2-1 members of the Fifth Circuit panel didn’t see the issue that way.

Background

In the year 2011 in 2011, the SEC initiated an investigation into investments made by the hedge fund administrator George Jarkesy, Jr. and his advisor to investments, Patriot28, LLC. The agency instituted an enforcement case for securities fraud just a few years after, Jarkesy and Patriot28 filed for an injunction before the federal district courts in D.C.

They claimed that the SEC was not able to discipline them , and their rights under the Seventh Amendment requires a jury of trial in the case. The district court as well as the U.S. Court of Appeals of the D.C. Circuit didn’t buy it. However, it appears that to be that the Fifth Circuit was ready to destroy the entire system of security enforcement to promote originality (or the equivalent).

The Opinion

The majority of the judges reached their decision by utilizing an initialist structure. “Fraud prosecutions were routinely filed by English courts under common law” the judge Jennifer Walker Elrod wrote for the majority. Further, she wrote that Supreme court precedent demands courts to establish “Suits under common law” in accordance with what the common law claimed were in place in the year that it was the time that the Bill of Rights passed in Congress.

Judge Elrod offers a little of historical context, citing the words of Thomas Jefferson about juries as “the the only anchor thought of by mankind, through which the government of a country will be held to the principles set forth in the Constitution.”

The majority agreed that fraud instances have been fought through common law courts for centuries as well as fraud lawsuits that are brought by the federal government. The government’s participation in a lawsuit isn’t sufficient to activate the doctrine of public rights and they concluded that “purely private lawsuits to remedy securities fraud…would help to deter and stop fraudulent conduct on the securities market.”

“And perhaps more importantly,” Judge Elrod writes, “the Supreme Court has decided that actions seeking civil penalties fall within the same category as particular types of the beginning of the nation’s history.”

The majority also decided that Congress cannot grant the SEC “unfettered powers” in deciding whether it should apply its rules to the federal courts or within the agency. The “alternative ruling” was focused on the delegation of legislative authority, concluding that, while Congress may decide to delegate cases to someone else than courts, it is not able to grant the authority to an agency.

The majority of the court is referring to the Supreme Court’s ruling of 2018 in which the executive branch has to appoint administrative law judges by the same procedure in the same manner as Article III judges. They don’t appear to couple the two, which could make ALJs competent to conduct the bench trials. This isn’t the only concern, as stated in the opinion of the judge Eugene Davis.

The Dissent

Judge Davis’ dissent is based extensively on the Supreme Court’s decision on Atlas Roofing v. OSHA which that was also a part of the majority decision of the Fifth Circuit. The judges are however divergent in the interpretation they give to the meaning of what is meant by what the Supreme Court meant by “public rights.” In the dissent, the court cites the Supreme Court’s definition of”public rights” cases as ones “in where the Government is sued as a sovereign authority to protect public rights established in statutes under the power of Congress to adopt.”

The dissent gives a clear overview of Supreme Court decisions that followed Atlas Roofing. Judge Davis states the SEC enforcement actions are instances of rights for the public, since the SEC is the agency responsible for creating the regulations for securities trading within the United States. This means that it is the agency that calls the shots when it comes to enforcing these laws.

A majority of the justices believe it’s an unsteady slope, and they take this argument to its extreme. They argue that according to the dissent’s rules, “[w]hen the federal government decides to sue, no jury necessary.” But, as the dissident’s argument points out it was there was a case where the Supreme Court found that public rights were in play with respect to Granfinanciera the case of Granfinanciera v. Nordberg, a case that was not brought in the name of neither against nor by Federal government. Therefore, it’s difficult to comprehend the reason why the majority took harsh stances on this question, particularly when it has the potential to turn a system of regulation upside down.

Furthermore, it’s highly likely to think that Thomas Jefferson or anyone working on the Bill of Rights ever contemplated trades in insiders or swaps for credit defaults.

As of now, we are left to speculate on what the real-world implications of this decision will be. Do the executive branch require to hire more judges in order to oversee the current SEC cases? Do the SEC reduce its focus to taking enforcement action against the most flagrant violators of rules? Will it be the case that the Supreme Court overturn this ruling to be a pseudo-originalist hoax?

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