GOVERNMENT AT WORK: When Your SEC Prosecutor Is Your Judge, Scandals Surely Follow.
Two recent federal appeals court cases involving the US Securities and Exchange Commission have rocked the world of administrative law. They also have shown that it’s time to restore the separation of prosecutorial and adjudicative powers, say New Civil Liberties Alliance’s Peggy Little and Kara Rollins.
“Agencies that combine enforcement and adjudication—as many do—are unconstitutional. But convenient for the government,” law blogger Glenn Harlan Reynolds posted earlier this year. For those who follow SEC enforcement, particularly adjudication by in-house administrative law judges, two recent cases from the US Court of Appeals for the Fifth Circuit may change all that.
Michelle Cochran, a Texas CPA who quit her small accounting firm in 2013, was blindsided in 2016 by SEC charges of violating federal accounting standards for what are commonly called paperwork violations. She opposed the claims, pointing out that none of her audits ever had to be restated, and no clients or shareholders ever complained or alleged any harm. Because the relevant audits occurred at least three years prior to the hearing, she had no control over them and no way to verify whether they were complete.
Despite acknowledging her difficult working conditions, the SEC ALJ ruled against her, imposing a $22,500 fine and a five-year industry bar. That initial decision was vacated in 2018 following the US Supreme Court’s decision in another SEC case holding that her ALJ had not been constitutionally appointed. Rather than endure a second rehearing before a new SEC ALJ who still enjoyed unconstitutional multiple tenure protections, Cochran sued in federal district court. That court denied jurisdiction, prompting Cochran to appeal and eventually an en banc rehearing before the Fifth Circuit.
Cochran v. SEC, decided in December 2021, broke ranks with nearly a decade of circuit court decisions across six circuits. Those previous decisions had illogically—and counter to clear Supreme Court precedent—required enforcement targets, seeking to raise these constitutional challenges, to first undergo unconstitutional administrative proceedings before reaching a federal court competent to rule on the constitutional questions. The full circuit court held 9-7 that these constitutional challenges could and should be brought in federal courts before enforcement targets had to endure administrative proceedings. Because the decision created a circuit split, the Supreme Court will hear Cochran next fall.
The second case, Jarkesy v. SEC, involved administrative claims that George Jarkesy, a radio host who managed two hedge funds, had committed securities fraud by allegedly misrepresenting the funds’ investment parameters, safeguards, valuations, fees, and management. Jarkesy came to the Fifth Circuit after going through the full administrative mill, a process that took seven years. After Jarkesy had endured his administrative proceeding, a Fifth Circuit panel held in May 2022 that those proceedings must be vacated because they denied him his constitutional right to a jury trial, and unconstitutionally delegated legislative power to the SEC to decide who gets to be tried in a real court and who must endure the ALJ system. Finally, Jarkesy held that SEC ALJs are unconstitutionally protected from removal in violation of the Take Care Cause of Article II of the Constitution, the same question on which Cochran seeks a judicial decision.
The two cases have rocked the world of administrative law. But Michelle Cochran and George Jarkesy have another thing in common that has received remarkably little to no media attention.
I’ve always thought that this sort of thing is unconstitutional. I’m glad the NCLA — reminder, I’m on their board of advisors — is finally getting something done about it.