Since 2010, the Securities and Exchange Commission has enjoyed the authority to pursue monetary penalties before its own in-house courts. In the recent decision of Jarkesy v. Securities and Exchange Commission, 34 F.4th 446 (5th Cir. 2022), the Fifth Circuit significantly undercut—if not eliminated—the SEC’s ability to adjudicate such actions. The decision held the Commission’s administrative-enforcement regime to be unconstitutional in no fewer than three distinct ways, effectively hobbling the agency’s use of ALJs, along with all their attendant advantages.

The Fifth Circuit’s Decision

The case began as a run-of-the-mill administrative proceeding brought by the SEC against George Jarkesy and an entity called Patriot28, an investment adviser to two hedge funds. After an evidentiary hearing, an SEC ALJ found that Jarkesy and Patriot28 had committed securities fraud. The Commission affirmed, rejecting the respondents’ arguments that the proceeding violated their constitutional rights and ordering them to cease and desist from further violations and to pay a civil penalty of $300,000. The SEC also ordered Patriot 28 to disgorge nearly $685,000 and barred Jarkesy from participating in securities-industry activities.