5th Circ. Will Rehear In-House Courts Challenge, At The Request of the SEC

On May 18, 2022, in Jarkesy et al. v. U.S. Securities and Exchange Commission, case number 20-61007, a divided panel ruled that the U.S. Securities and Exchange Commission’s system of in-house courts was unconstitutional. Since that decision was issued, the SEC and Biden administration have pushed for a rehearing. 

Attorneys for the government filed a petition seeking en banc review on July 1. The decision handed down in May held that the SEC had violated hedge fund manager George R. Jarkesy Jr.'s constitutional right to a jury trial with its in-house adjudication of a securities fraud action against him and his advisory firm, Patriot28 LLC. In its’ decision, the panel majority ruled that the proceedings relied on unconstitutionally delegated legislative power and were overseen by an unconstitutionally removal-protected administrative law judge. The decision vacated a nearly $1 million judgment.

The petition for rehearing argues that the U.S. Supreme Court has long accepted the legitimacy of administrative adjudication and enforcement without juries for violations of certain areas of law, including federal securities laws. It further stated that the ruling conflicts with not only the Supreme Court, but also with other decisions of this court and other courts of appeals, and therefore should be reconsidered. The petition also addressed concern with the panel majority's holding that the SEC's in-house judges have unconstitutional removal protection, pointing out that this directly contradicts the Ninth Circuit's recent endorsement of similar protections for in-house judges at the U.S. Department of Labor.