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US Securities and Exchange Commission

SEC Pauses Action Against Marcum Partner as Supreme Court Weighs Administrative Judge Constitutionality

Bill Flook  Editor, Accounting and Compliance Alert

· 5 minute read

Bill Flook  Editor, Accounting and Compliance Alert

· 5 minute read

The SEC on Aug. 7, 2023, indefinitely postponed its administrative action against a Marcum LLP partner while the Supreme Court weighs the constitutionality of the commission’s use of in-house judges. Alan Markowitz sued in late May to halt the enforcement proceedings, invoking the same arguments set to be considered in SEC v. Jarkesy.

The commission initiated the proceedings against Markowitz in February, stemming from his work as engagement partner on audits of FTE Network Inc., whose former CEO and CFO were charged in 2021 with a “multi-year, multi-faceted accounting fraud.” (See SEC Says Marcum Partner Ignored ‘Red Flags’ During Audits, Violated PCAOB Standards in the March 2, 2023, edition of Accounting & Compliance Alert.)

Markowitz is challenging those proceedings in the Southern District of New York (SDNY) in a complaint that casts the action as a violation of his Seventh Amendment right to a jury trial. He also argued the appointment and removal of the administrative law judge (ALJ) overseeing the case is insulated from control by the president in violation of Article II, and cast the commission’s “unfettered discretion” in choosing between administrative tribunals and federal courts as an unconstitutional delegation of legislative power.

Those three core arguments align closely with the holdings in the May 2022 Jarkesyopinion by Fifth Circuit judge Jennifer Walker Elrod. In that decision, a divided Fifth Circuit panel used much the same reasoning to vacate a commission judgment against hedge fund manager George Jarkesy and investment adviser Patriot28 LLC. The Supreme Court in late June agreed to review the decision. (See Supreme Court to Hear SEC Administrative Judges Case in the July 5, 2023, edition of ACA.)

The SEC’s Division of Enforcement has said it is in the public interest to stay the proceedings against Markowitz pending the resolution of Jarkesy at the Supreme Court because his complaint seeks relief from the proceedings and “raises the same constitutional challenges that are now before the Supreme Court in Jarkesy,” the SEC stated in it Aug. 7 order.

 

This article originally appeared in the August 9, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.

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