Constitutional Thunder Out of the Fifth Circuit

Fifth Court of Appeals in New Orleans.


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The rumbling you hear in the distance is that the federal courts are working to re-establish a proper understanding of the Constitution’s separation of powers. The latest legal case is a decision last week by the Fifth Circuit Court of Appeals (based in Louisiana) against the Securities and Exchange Commission.


The case involves hedge fund founder George Jarkesy and an investment advisor, and it comes to the heart of whether the Constitution still protects individual liberties. In 2013, the SEC charged the couple with securities fraud for allegedly inflating the value of fund assets. The agency says the higher valuation allows it to earn higher management fees.

Mr. Jarkesy is not authorized to defend himself in court under Article III of the Constitution. Instead, the case was brought before an SEC administrative law judge, who ruled against Mr. Jarkesy and his business partner. The commissioners then affirmed the decision and ordered them to pay a civil penalty and allegedly profited illegally. The commission banned Mr. Jarkesy from the securities industry.

The merits of the case aside, the constitutional issue was that the SEC acted as prosecutor, judge, and jury. The Dodd-Frank Act allows the SEC to decide whether to bring charges in federal court or in its own court. This agency often chooses the former, as do other agencies such as the Federal Trade Commission.

Entering the Fifth Round, held in Jakesy v. SEC that the SEC courts, as they are structured, violate the Seventh Amendment’s right to trial by jury. As Judge Jennifer Walker Elrod explained to the 2-1 panel majority, the jury guarantee applies to all “common law” cases, as understood at the time of its incorporation. This includes prosecuting fraud.

Fifth Street also ruled that congressional authorization of the legislative power to the SEC to decide where to take fraudulent enforcement actions violates the Constitution’s separation of powers. Judge Elrod noted that Congress could give prosecutors full discretion over what cases to bring, but could not give them the freedom to decide their judicial forum.

Notably, she cites Justice Neil Gorsuch’s dissent in Gundy v. US (2019), in which he said that the Supreme Court should reconsider its doctrine of non-regulation, which has spent too much time on the executive branch carrying out legislative functions. Two new Conservative Judges have joined the Court since then Gundy and may be willing to accept invitations from colleagues.

It gets better. Line Five finds that safeguards for the job of administrative law judges violate the constitutional mandate that the President is “concerned that the laws are faithfully enforced.” The Supreme Court has interpreted this to mean that the President must have authority over the appointment and dismissal of officers.

However, the SEC judges can only be removed by the five SEC commissioners if the government’s Compensation Systems Protection Board (MSPB) finds the cause. Commissioners and MSPB members can only be removed by the Chairman for cause. The SEC judges are insulated from removing the President by two layers of defense for cause. This violates the Court Free Enterprise Fund (2010) precedent.

All of this is a blow to the SEC, but it’s a boon for a proper understanding of the Constitution. The agency is not used to losing cases because defendants often settle to avoid the expense and complexity of litigation. Credit to Mr. Jarkesy for fighting back. The Biden administration could request a review of the panel’s decision, but Judge Elrod’s opinion is sound and is unlikely to be overturned by a full 5th Round.

The ruling only applies to the SEC, but it could encourage similar challenges against other independent agencies. Some conservative Judges have hinted that they want to overturn the Court’s error Humphrey’s heir (1935) precedent highlights the limitations of the President’s ability to remove members of bipartisan independent agencies. The Biden administration will have to decide if it wants to take that risk by appealing to the Supreme Court.


Today’s Supreme Court followers are preoccupied with looming decisions on social issues, particularly abortion and gun rights. But the movement to contain the fugitive administrative state is arguably more important for constraining government and protecting freedoms. This is an essential project of the conservative judicial movement, and the Fifth Round ruling shows that thunder is coming from the judicial provinces.

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