## Facts

- George R. Jarkesy, Jr. established two hedge funds and selected Patriot28, L.L.C. as the funds’ investment adviser.
- The funds attracted more than 100 investors and held about $24 million in assets.
- In 2013, the Securities and Exchange Commission (SEC) began an administrative enforcement action alleging that Jarkesy and Patriot28 committed securities fraud.
- The SEC alleged they misrepresented information about the funds and overstated the value of certain assets, which allegedly affected fees and investor decisions.
- After an evidentiary hearing, an SEC administrative law judge (ALJ) found that Jarkesy and Patriot28 violated federal securities antifraud provisions and related statutes.
- The SEC, acting as the Commission, affirmed the ALJ’s findings and remedies.
- The SEC ordered Jarkesy and Patriot28 to cease and desist from further securities-law violations and imposed a $300,000 civil penalty.
- The SEC also ordered Patriot28 to disgorge roughly $685,000 and imposed industry-related bars limiting Jarkesy’s ability to participate in certain securities activities.
- Jarkesy and Patriot28 petitioned the United States Court of Appeals for the Fifth Circuit for review of the SEC’s final order, raising constitutional challenges to the administrative forum and the ALJ structure.

## Issues

1. Whether adjudicating the SEC’s securities-fraud action seeking civil penalties in an administrative proceeding, rather than before a jury in an Article III court, violated the Seventh Amendment.
2. Whether Congress violated Article I by giving the SEC effectively unlimited discretion to choose between bringing certain enforcement actions in federal court or in-house administrative adjudication.
3. Whether statutory for-cause removal protections applicable to SEC ALJs violated Article II by limiting presidential control over officers who exercise significant executive authority.

## Decision

- The Fifth Circuit granted the petition for review, vacated the SEC’s final decision, and remanded for further proceedings consistent with its opinion.
- The court held the Seventh Amendment was violated because the SEC pursued a claim analogous to common-law fraud and sought civil penalties, a form of legal relief that triggers the jury-trial right.
- The court held Congress unconstitutionally delegated legislative power by authorizing the SEC to decide, without an intelligible principle, whether to proceed in federal court or through agency adjudication when seeking civil penalties.
- The court held the statutory removal scheme for SEC ALJs violated Article II because ALJs were insulated by multiple layers of for-cause protection that restricted presidential oversight.

## Legal Principles

- The Seventh Amendment preserves the right to a jury trial in suits at common law; courts examine both (1) the historical analogue (law vs. equity) and (2) the nature of the remedy sought, with remedies often carrying substantial weight.
- A government enforcement action seeking civil penalties for alleged fraud is treated as legal in character and comparable to traditional fraud actions tried to juries.
- The “public rights” doctrine does not permit assigning to an agency, without a jury, adjudication of claims that closely resemble traditional common-law causes of action and seek punitive monetary sanctions.
- Under Article I’s nondelegation doctrine, Congress must supply an intelligible principle to guide an agency’s exercise of delegated authority; a statute that leaves an agency free to choose the forum for enforcement without meaningful direction can violate that requirement when the choice affects core constitutional protections.
- Under Article II, the President must retain adequate control to ensure faithful execution of the laws; multiple layers of for-cause protection that prevent effective presidential supervision over adjudicators exercising significant authority can be unconstitutional.

## Conclusion

The Fifth Circuit vacated the SEC’s administrative order against Jarkesy and Patriot28, holding that the SEC’s in-house adjudication seeking civil penalties denied the respondents a Seventh Amendment jury trial, that Congress improperly delegated legislative power by giving the SEC unguided forum-selection authority, and that the statutory removal protections insulating SEC ALJs violated Article II.


Jarkesy v. Securities and Exchange Commission, 34 F.4th 446 (2022)