Ruling in securities case could mean limits on regulators

NEW ORLEANS (AP) — A divided federal appeals court panel in New Orleans has vacated stiff financial penalties imposed on a hedge fund manager by the Securities and Exchange Commission, ruling that he was unconstitutionally denied a jury trial by the agency.

This week’s 2-1 ruling by a panel of the 5th U.S. Circuit Court of Appeals said the case against George R. Jarkesy should have been heard in a federal court instead of before one of the SEC’s administrative law judges. It also said Congress unconstitutionally granted the SEC “unfettered authority” to decide whether the case should be tried in a court of law or handled within the executive branch agency. And it said laws shielding the commission’s administrative law judges from being fired by the president are unconstitutional.

The ruling, which divided three Republican-appointed judges on the court, could have far-reaching implications on the use of administrative law judges and the power of regulatory agencies. According to the University of Pennsylvania’s Penn Program on Regulation, there are nearly 2,000 administrative law judges employed by 28 federal government agencies.

Wednesday’s opinion appears designed to give the Supreme Court an avenue to revisit issues involving he power of executive branch regulators, said a Tulane University Law School professor.

“It’s going to draw attention because there is this broader conversation that the Supreme Court is having about the extent to which Congress can delegate powers to these sort of agencies,” said Onnig Dombalagian, in an interview Friday.

According to the court record, Jarkesy and an investment adviser group known as Patriot28 appealed after the commission, acting on the findings of an administrative judge, ordered penalties including a $300,000 civil fine and the repayment of $680,000 in allegedly ill-gotten gains.

“Under the Seventh Amendment, both as originally understood and as interpreted by the Supreme Court, the jury-trial right applies to the penalties action the SEC brought in this case,” Judge Jennifer Walker Elrod wrote for the majority. A nominee of President George W. Bush, she was joined by Judge Andrew Oldham, nominated by Donald Trump.

Dissenting was Eugene Davis, a nominee of President Ronald Reagan, who said law and Supreme Court precedent hold that the type of case at issue, involving a federal regulatory scheme, was appropriate for the SEC to rule on.

The SEC press office did not immediately respond to a request for comment Friday.

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