SEC in-house judges violate right to jury trial, appeals court rules

  • 5th Circuit overturned SEC finding against hedge fund manager and advisor
  • Split court said defendants in securities fraud cases involving penalties have the right to a jury trial

(Reuters) - The Securities and Exchange Commission's in-house judges violate the U.S. Constitution by denying fraud defendants their right to a jury trial and acting without necessary guidance from Congress, the 5th U.S. Circuit Court of Appeals ruled on Wednesday.

The court ruled 2-1 in favor of hedge fund manager George Jarkesy Jr and investment advisor Patriot28 LLC, overturning an SEC administrative law judge's determination that they committed securities fraud.

A spokesperson for the SEC and counsel for the petitioners did not immediately respond to a request for comment on Wednesday.

The Dodd-Frank Act, which Congress passed after the 2008 financial crisis, expanded the SEC's ability to seek penalties in its administrative proceedings.

In the ruling Wednesday, the majority said that because seeking penalties is akin to debt collection, which is a private right, the defendants were entitled to a jury trial.

The SEC had argued that it was acting to protect investors and enforce public rights found in the securities laws.

The majority also found that SEC judges, known as administrative law judges, lack authority under the Constitution because Congress did not provide guidance on when the SEC should bring cases in-house instead of in a court.

U.S. Circuit Court Jennifer Walker Elrod, joined by Circuit Court Judge Andrew Oldham, penned the majority opinion.

The seal of the U.S. Securities and Exchange Commission hangs on the wall at SEC headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst

Circuit Court Judge Eugene Davis dissented, saying the majority had misread the Supreme Court's decisions on public versus private rights. He said the SEC's ability to pick its forum is similar to prosecutors' ability to choose the charges they bring.

Davis also split from the majority's holding that SEC judges are unconstitutionally protected from being fired.

The ruling comes two days after the U.S. Supreme Court agreed to review a 5th Circuit decision against the SEC in another case challenging the agency's in-house tribunal.

The case is Jarkesy v. SEC, 5th U.S. Circuit Court of Appeals, No. 20-61007.

For the SEC: Daniel Aguilar of the U.S. Department of Justice

For Jarkesy: Michael McColloch

Read More:

U.S. Supreme Court to hear SEC bid to avoid challenge to in-house judges

Our Standards: The Thomson Reuters Trust Principles.

Thomson Reuters

Jody Godoy reports on banking and securities law. Reach her at