SEC internal judges violate right to jury trial, appeals court rules

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

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  • 5th Circuit reversed SEC ruling against hedge fund manager and adviser
  • Split court says defendants in securities fraud cases involving penalties have the right to a jury trial

(Reuters) – The Securities and Exchange Commission’s internal judges are violating the U.S. Constitution by denying fraud defendants their right to a jury trial and by acting without the necessary guidance from Congress, the 5th U.S. Court of Appeals ruled on Wednesday. United States.

The tribunal dominated 2-1 in favor of hedge fund manager George Jarkesy Jr and investment adviser Patriot28 LLC, reversing an SEC administrative judge’s ruling that they had committed securities fraud.

An SEC spokesperson and the petitioners’ attorney did not immediately respond to a request for comment Wednesday.

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

In Wednesday’s ruling, the majority said that because seeking sanctions 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 set out in securities laws.

The majority also found that SEC judges, known as administrative law judges, lacked authority under the Constitution because Congress had failed to provide guidance on when the SEC should take cases internally rather than in court.

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

Circuit Court Judge Eugene Davis dissented, saying the majority misinterpreted Supreme Court rulings on public versus private rights. He said the SEC’s ability to choose its forum is similar to the ability of prosecutors to choose the charges they bring.

Davis also diverged from the majority position that SEC judges are unconstitutionally protected from dismissal.

The ruling comes two days after the U.S. Supreme Court agreed to review a 5th Circuit ruling against the SEC in another case challenging the agency’s internal court.

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

For the SEC: Daniel Aguilar of the US Department of Justice

For Jarkesy: Michael McColloch

Read more:

U.S. Supreme Court to hear SEC bid to avoid challenging domestic judges

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