from Hacker News

5th Circuit Court Finds SEC Enforcement Unconstitutional [pdf]

by jjitz on 5/18/22, 11:59 PM with 170 comments

• by rayiner on 5/19/22, 12:50 AM

  The gist of the decision is that the SEC’s imposition of civil penalties and disgorgement violated defendants’ seventh amendment right to a jury trial. Under the seventh amendment, you have a right to a jury trial for any claim that would have been an action at law in the courts of England at the time of the founding, prior to the merger of law and equity.[1] There is an additional principle that so called “public rights,” like Social Security benefits or FCC licenses, need not be adjudicated by a real court (under Article III of the Constitution) but can be adjudicated by the executive branch. The theory is that public benefits are discretionary so the executive branch can decide how to dish them out. So you end up with administrative agencies having internal adjudicating bodies that look very much like courts, but which are not in fact courts.

  Ordering a party to disgorge gains from fraud is of course not a “public right” but a quintessential legal proceeding that should be brought in a real court.

  There’s a lot of things administrative agencies do that probably aren’t Constitutional and violate the separation of powers. Executive branch quasi-courts adjudicating claims like fraud is the tip of the iceberg. The Supreme Court upheld these statutes in the mid-20th century under the shadow of FDR’s threat of court packing. The Reagan-era Supreme Court was not inclined to roll those decisions back, but I think you will see the current Supreme Court being much more active on that front.

  [1] Law courts are the courts we usually think of, with juries. They are the only courts that can award damages. Courts of equity are like the Delaware chancery court—they can award certain equitable relief such as recission of a contract. Today most states and the federal system invest legal and equitable powers in the same courts, but the right to a jury trial arose in England when those courts were distinct.

• by junar on 5/19/22, 12:44 AM

  I think a news article would be an easier read than the entire 54-page opinion.

  https://www.reuters.com/legal/government/sec-in-house-judges...

  This particular article also links to a copy of the opinion.

• by Animats on 5/19/22, 1:52 AM

  This will probably end up being worse for financial-services people who violate the Securities Act. The SEC by itself can't send someone to jail. If they have to go to court, though, the SEC may as well get the Justice Department to bring criminal charges. The court can send people to jail for up to 20 years for violating the Securities Act of 1939.

  Until now, the SEC seldom bothered. But if they have to prove their case in court, they may as well go all the way and go for a jail term.

• by paxys on 5/19/22, 12:44 AM

  Sets an interesting precedent for literally every other federal body that "acts as prosecutor and judge" while skipping the judicial system. Should everyone fighting an immigration or deportation case be able to request a jury trial? What about the military? Labor violations? EPA fines?

• by Scubabear68 on 5/19/22, 12:53 AM

  This reminds me (in somewhat the opposite direction) of the circular processes at the Federal Energy Regulatory Commission (FERC), which has broad powers over interstate electricity, hydro, and natural gas pipelines.

  Unlike the SEC that goes after industry, FERC has frustrated thousands as a rubber stamp for industry and aggressive granting of eminent domain.

  These agencies are in desperate need of balance with the courts.

• by gweinberg on 5/19/22, 12:52 AM

  Based on the summary, the title is backwards-ass wrong. The courts ruled that the SEC is effectively acting as legislative, judicial, and executive government, and the executive (enforcement) part is the only one that isn't unconstitutional for them.

• by animal_spirits on 5/19/22, 12:40 AM

  I wish these could be automatically outlined and navigated like my code can be :(

• by incomingpain on 5/19/22, 12:03 PM

  I have been waiting for this for months! Complete collapse of the US stock markets to follow.

  The important factor here is that the SEC isn't doing their job. If 2009 is of any indication, that was just the tip of the iceberg. They are meaninglessly issuing tiny fines that big funds are simply paying. Eventually the fines would amount to enough money that it doesn't hurt their bottom line but does engage the lawyers.

  Now it's the wild west. Feel free to commit whatever securities crimes you wish. SEC is basically not going to punish you.

  Sucks to be the gamestop folks. They basically just lost their infinite money.

• by vmception on 5/19/22, 12:55 AM

  I have an axe to grind against the entire concept of ALJ's, and these guys are grinding that axe, so this makes me giddy.

• by gzer0 on 5/19/22, 1:07 AM

  Summary:

    * SEC's in-house judges violate U.S. Constitution by denying fraud defendants their right to a jury trial and acting without necessary guidance from Congress
  
    * 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.
  
    * Davis also split from the majority's holding that SEC judges are unconstitutionally protected from being fired.
  

  One thing to note is that SEC judges are considered ALJs (administrative law judges) and are "Inferior Officers of the United States”[2] within the meaning of the Constitution’s Appointments Clause [1].

  Currently, ALJs can only be removed for cause, and the only people who can remove them are SEC Commissioners and Merit Systems Protection Board members [3].

  [1] https://www.gibsondunn.com/supreme-court-rules-that-sec-aljs...

  [2] https://en.wikipedia.org/wiki/Administrative_law_judge

  [3] https://nclalegal.org/2021/01/u-s-supreme-court-will-not-hea...

• by 29athrowaway on 5/19/22, 12:52 AM

  That's a nice font.

• by rickreynoldssf on 5/19/22, 12:46 AM

  TLDR?

• by troelsSteegin on 5/19/22, 12:52 AM

  "The Supreme Court is, no doubt, the nation’s most powerful court. But the 5th Circuit, the federal appeals court that covers Louisiana, Mississippi and Texas, is staking out a claim to be the most dangerous — the least wedded to respecting precedent or following an orderly judicial process. The 5th is arguably the most conservative among the country’s dozen appeals courts." - https://www.washingtonpost.com/opinions/2021/08/31/5th-circu...

• by vmception on 5/19/22, 1:03 AM

  > In keeping with Founding conceptions of separation of powers, the Supreme Court has made clear that Congress cannot “delegate to the Courts, or to any other tribunals, powers which are strictly and exclusively legislative.”

  I love this. I hope this trend catches on, I can't wait to gut these bloated agencies and force Congress to get back to work at the risk of a completely paralyzed society if they don't.

  Any supreme court ruling, and court ruling, and any agency ruling or even from the White House, that acts as a Super Legislature instead of some other rationale, is going to get gutted, no matter how old or "settled" the case masquerades to be. Find a different rationale to reach the same desired goal, or rely on Congress, or the government cant be involved.