Constitutional thunder off the fifth circuit

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New Orleans Fifth Circuit Court of Appeals.


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That rumble you hear in the distance is that the federal courts are working to restore the proper understanding of the separation of powers to the Constitution. The latest legal bombshell is a ruling issued last week by the Fifth Circuit Court of Appeals (based in Louisiana) against the Securities and Exchange Commission.

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The case involves hedge fund founder George Jarkesy and an investment adviser, and it goes to the heart of the question of whether the Constitution still protects individual liberty. In 2013, the SEC charged the couple with securities fraud for allegedly inflating the value of the fund’s assets. The agency said the higher valuation allowed them to earn higher management fees.

Mr. Jarkesy was not allowed to defend himself in court under Article III of the Constitution. Instead, the case went to an SEC administrative law judge, who ruled against Mr. Jarkesy and his business partner. The commissioners then upheld the decision and ordered them to pay a civil penalty and return the allegedly ill-gotten gains. The commission barred Mr. Jarkesy from the securities industry.

Merits aside, the constitutional problem is that the SEC acted as prosecutor, judge and jury. The Dodd-Frank Act allows the SEC to decide whether to bring charges in its own court or in federal court. The agency usually chooses the former, as do other agencies such as the Federal Trade Commission.

Enter the fifth circuit, held at Jarkesy vs. SEC that the SEC courts, as currently structured, violate the Seventh Amendment right to trial by jury. As Judge Jennifer Walker Elrod explained for the majority of the 2-to-1 panel, the jury guarantee applies to all “common law” suits, as they were understood at the time of the founding. This includes prosecutions for fraud.

The Fifth Circuit also ruled that Congress’s delegation of legislative power to the SEC to decide where to take anti-fraud actions violates the Constitution’s separation of powers. Congress can give agencies discretion to decide which cases to bring, Judge Elrod noted, but it cannot give them free rein to decide their judicial forum.

She cites in particular the dissent of Judge Neil Gorsuch in Gundy vs USA (2019) in which he stated that the Supreme Court should revisit its doctrine of non-delegation which gave too much leeway to the executive to exercise legislative functions. Two new conservative judges have joined the Court since Gundy and can accept their colleague’s invitation.

It’s getting better. The Fifth Circuit found that job protections for administrative law judges violate the constitutional imperative that the president “see that the laws are faithfully executed.” The Supreme Court has interpreted this to mean that a president must have power over the appointment and removal of officers.

Yet SEC judges can only be removed by the five SEC commissioners if the government’s Merit Systems Protection Board (MSPB) finds cause. Commissioners and members of the MSPB can only be removed by the President for cause. SEC judges are protected from presidential impeachment by two layers of reasoned protection. This violates the law of the Court Free Enterprise Fund (2010) previous.

All this is a blow for the SEC, but it is a boon for the proper understanding of the Constitution. The agency is not used to losing cases since defendants often settle to avoid the expense and hassle of litigation. Kudos to Mr. Jarkesy for fighting back. The Biden administration could seek an en banc review of the panel’s decision, but Judge Elrod’s opinion is strong and unlikely to be overturned by the full Fifth Circuit.

The ruling only applies to the SEC, but it could spur similar challenges against other independent agencies. Some conservative justices have hinted they would like to overturn the Court’s misguided ruling Humphrey’s Executor (1935) precedent that upheld the limitations of the president’s ability to remove members of bipartisan independent agencies. The Biden administration will have to decide whether it wants to take that risk by appealing to the Supreme Court.

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High Court watchers are concerned these days with impending rulings on social issues, particularly abortion and gun rights. But the movement to rein in the runaway administrative state is arguably more important in constraining government and protecting freedom. This is a core project of the conservative judicial movement, and the Fifth Circuit judgment shows the thunder coming from the judicial provinces.

Journal editorial report: The best and worst of the week from Kim Strassel, Mary O’Grady and Dan Henninger. Images: Getty Images Composition: Mark Kelly

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Appeared in the May 23, 2022 print edition as “Constitutional Thunder Out of Louisiana”.

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