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US Securities and Exchange Commission

Supreme Court Grants Solicitor General More Time on Potential Jarkesy Petition

Bill Flook  Editor, Accounting and Compliance Alert

Bill Flook  Editor, Accounting and Compliance Alert

The U.S. Supreme Court on January 6, 2023, granted U.S. Solicitor General Elizabeth Prelogar a nearly month-long extension to appeal the Fifth Circuit’s May 2022 decision in Jarkesy v. SEC, a closely watched ruling that undermined the SEC’s use of administrative proceedings.

The solicitor general has not yet determined whether to file a petition in the case , according to a filing the day before by Prelogar, who wrote that additional time is needed “to continue consultation within the government and to assess the legal and practical impact of the court of appeals’ ruling.”

The original deadline to file the petition was January 19. Justice Samuel Alito granted the extension to February 17.

The Fifth Circuit in October 2022 denied the SEC’s petition for a rehearing en-banc, which left in place the decision of the divided three-judge panel. That decision vacated an SEC judgment against hedge fund manager George Jarkesy and investment adviser Patriot 28 LLC, laying out a three-pronged criticism of the commission’s use of tribunals overseen by administrative law judges (ALJs).

Fifth Circuit Judge Jennifer Walker Elrod, writing for the majority in the May opinion, concluded that petitioners had a right to a jury trial under the Seventh Amendment for actions where the SEC seeks monetary penalties; Congress failed to articulate an “intelligible principle” when it delegated the power to the commission to choose whether it brings cases before its own ALJs or in district court; and removal restrictions on ALJs violate Article II of the Constitution, which dictates the president must “take care that the laws be faithfully executed.” (See Beyond Jarkesy, SEC Administrative Proceedings Face Attacks on Multiple Fronts in the June 17, 2022, edition of Accounting & Compliance Alert

The commission has shifted away from litigated administrative proceedings in favor of bringing charges of fraud and other securities law violations in U.S. district court. Nevertheless, observers and the commission itself have warned the Jarkesy decision could have broader consequences across the federal government’s administrative enforcement apparatus. The SEC, in its petition for a Fifth Circuit en banc rehearing, had argued the panel’s decision “nullifies provisions Congress determined necessary to enforce the securities laws and calls into question adjudication within the Executive Branch more broadly.”

In October, ten Fifth Circuit judges voted against en banc rehearing, while six judges voted in favor. Five those six judges issued a dissent, written by Judge Catharina Haynes, criticizing Elrod’s Jarkesy opinion.

“Beyond its massive impacts on the directly involved statutes, the opinion’s potential application to agency adjudication more broadly raises questions of exceptional importance,” Haynes wrote.

 

This article originally appeared in the January 10, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.

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