Supreme Court tackles administrative power battle in Jarkesy

George Jarkesy is a man of varied talents: a hedge-fund manager, a radio talk-show host, and an aspiring blues musician whose distaste for the nation's 44th president once inspired him to write a song he called, "Bad Obama Blues." In 2013, the SEC brought an enforcement action that added another line to Jarkesy's resume: proven fraudster. Now a decade later, Jarkesy's case is one of a trio of matters on the Supreme Court's docket pitting the Court's conservative supermajority against the modern administrative state. At stake is not just the SEC's power to enforce federal securities law in administrative proceedings, but decades of precedent empowering Congress to delegate its authority to the federal bureaucracy.

Jarkesy joins two other cases set for oral argument this term that challenge the powers of administrative agencies. Community Financial Services Association takes aim at the Consumer Financial Protection Bureau, a longtime target of conservative lawmakers. And Loper Bright Enterprises involves a challenge to the Federal Maritime Agency's power to compel fishermen to pay for monitors to enforce overfishing regulations. The Loper fishermen ask the Court to overturn decades-old precedent in Chevron, which requires judges to defer to federal agency interpretations of U.S. law.

The clash between the Supreme Court's conservative justices and the executive powers has long been brewing. Jarkesy comes on the heels of two blockbuster Supreme Court cases, both of which curtailed executive power: West Virginia v. EPA, which made it tougher for the EPA to address climate change; and Biden v. Nebraska, which struck down the Biden Administration's student-loan forgiveness program. In both cases, the Supreme Court held that the Executive Branch had exceeded its constitutional ambit.

These cases have set the stage for Jarkesy. In 2007 and 2009, Jarkesy launched two hedge funds that attracted 120 investors and managed $24 million in assets. The SEC alleged that Jarkesy deceived investors by claiming KPMG was the funds' auditor (it wasn't) and that Deutsche Bank served as the funds' prime broker (it didn't). The SEC also alleged that Jarkesy had misrepresented the funds' investment strategy and overvalued its holdings. Rather than file in federal court, the SEC instituted an administrative proceeding before an Administrative Law Judge (ALJ), who ruled that Jarkesy had indeed violated several federal securities laws. The ALJ ordered Jarkesy to pay a $300,000 civil penalty and $685,000 in disgorgement. It also banned Jarkesy from working as a director or officer of a public company and barred him from working in the securities industry ever again.

Jarkesy then sought review in the Fifth Circuit, where a divided panel vacated the SEC's decision. Writing for the 2-1 majority was Judge Jennifer Walker Elrod, a George W. Bush-appointee who just weeks earlier wrote the opinion in Alliance for Hippocratic Medicine v. FDA, which found that the FDA had misjudged the dangers associated with the abortion pill mifepristone. In Jarkesy, Judge Elrod, joined by Judge Andrew Oldham, a Trump appointee, held that Congress violated Jarkesy's Seventh Amendment right to a jury trial by permitting the SEC to bring actions for civil penalties before an ALJ. The Fifth Circuit also ruled that Congress improperly delegated legislative power to the SEC by giving the SEC the discretion to choose whether to pursue civil penalties in federal court or in an administrative proceeding. For good measure, the Fifth Circuit held that the statutory restrictions on removing the ALJs violated Article II's Take Care Clause because it deprived the President of the ability to fire ALJs for poor performance. The Fifth Circuit did not decide whether this latter ground was enough to vacate the SEC's order, however.

The Fifth Circuit's opinion runs into strong precedential headwinds. The Supreme Court has long held that Congress may assign claims involving "public rights" for adjudication by administrative tribunals. As the Court explained in Atlas Roofing Co. v. Occupational Safety Comm'n, 430 U.S. 442 (1977) and Granfinanciera, S. A. v. Nordberg, 492 U.S. 33 (1989), while such "public rights" may arise in different contexts, they are invariably implicated when the federal government itself is a litigant. The SEC rightly points out that "a long and unbroken line of decisions" have relied on the public-rights doctrine to fend off Seventh Amendment challenges to administrative adjudications.

The Fifth Circuit's response - in addition to misconstruing the doctrine's two-part test - was the rhetorical equivalent of pearl-clutching. Invoking Ronald Reagan, the Fifth Circuit decried what it called the doctrine's "not-so-far-removed consequence" -- that is, "[w]hen the federal government sues, no jury is required" - as a "runner-up in the competition for the 'Nine Most Terrifying Words in the English Language.'" Yet none other than Justice Scalia, himself a Reagan appointee, used similar words in his Granfinanciera concurrence, when he acknowledged that public rights are those arising "between the government and others."

The Fifth Circuit's next holding invokes the so-called nondelegation doctrine, which prohibits Congress from delegating legislative power to an administrative agency without an "intelligible principle" by which to exercise that power. The doctrine is not without controversy among legal scholars. Indeed, only twice in its history has the Supreme Court found the requisite "intelligible principle" lacking. Both cases were in 1935, when on Black Monday the Supreme Court's "nine old men" announced rulings invalidating parts of FDR's New Deal legislation. In more modern cases, the Court has felt far less qualified to second-guess Congress on the degree of policy judgment that should be afforded to federal agencies executing or applying the law. As Justice Taft explained, the limits of delegation should be "fixed according to common sense" and the "inherent necessities" of governance. In a sign of the federal judiciary's rightward shift, this same view was expressed in an opinion written by Justice Scalia in 1989. Pragmatism, it seems, is no longer in vogue.

On the other hand, the "intelligible principle" that guided the SEC's discretion in Jarkesy is difficult to discern. SEC policy documents list the criteria it uses to select adjudicative fora but identify no limits on the Commission's discretion. Perhaps for this reason, the SEC's brief does not argue that Congress provided any intelligible principle; it instead contends that no intelligible principle was needed because the SEC is exercising executive power, not legislative power. The decision whether to bring enforcement proceedings in an administrative or judicial forum, the SEC says, is a classic exercise of prosecutorial discretion.

It is here the SEC's footing is most tenuous. Prosecutorial discretion allows prosecutors to decide whether to bring charges, and what charges to bring, but rarely permits prosecutors to select the procedural safeguards given to the accused. In SEC administrative proceedings, not only do respondents have no right to a jury trial, discovery is severely restricted, depositions are limited, and the hearings proceed on an accelerated schedule, often after the SEC has taken years to build its case. SEC prosecutors and ALJs are all SEC employees, and initial appeals from SEC rulings are to the Commission, the same body that authorized the enforcement action in the first place. To be sure, the SEC is far from the only agency with an in-house court where the rights of the defendants may differ from rights available in federal court. But to characterize the choice between adjudicative fora as a matter of prosecutorial discretion - rather than an exercise of properly delegated legislative power - only plays into critics' claims that the SEC runs for the shelter of its home court whenever it brings cases with limited jury appeal. It may also lead the Court to conclude that the SEC must be reined in by some intelligible principle, if for no other reason than to avoid the perception of Kafakesque adjudications that tilt the playing field in the SEC's favor.

Jarkesky will ultimately serve as a test of how far the Court's conservative justices are willing to go in reining in administrative power, and how fast. The majority may very well reserve its fire for Loper, which gives them the long-awaited opportunity to dismantle Chevron. If Justice Thomas's tepid reaction to respondents' arguments in Community Financial Services was any indication, the Court will do just that and resist the temptation to adopt the Fifth Circuit's reasoning in Jarkesy. But if the Court instead affirms Jarkesy, it may be fans of stare decisis who are singing the blues.