Economy

May 18, 2022
4:32 PM EDT
Last Updated a day ago

SEC in-house judges violate right to jury trial, appeals court rules

By Jody Godoy
2 minute read

Summary
• 5th Circuit overturned SEC finding against hedge fund manager and advisor
• Split court said defendants in securities fraud cases involving penalties have the right to a jury trial

(Reuters) - The Securities and Exchange Commission's in-house judges violate the U.S. Constitution by denying fraud defendants their right to a jury trial and acting without necessary guidance from Congress, the 5th U.S. Circuit Court of Appeals ruled on Wednesday. ...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. ... A spokesperson for the SEC and counsel for the petitioners did not immediately respond to a request for comment on Wednesday.

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

In the ruling Wednesday, the majority said that because seeking penalties 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 found in the securities laws.

The majority also found that SEC judges, known as administrative law judges, lack authority under the Constitution because Congress did not provide guidance on when the SEC should bring cases in-house instead of in a court. ... U.S. Circuit Court Jennifer Walker Elrod, joined by Circuit Court Judge Andrew Oldham, penned the majority opinion.

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