In this episode, co-host Michael Dawson is joined by Noah Rosenblum, an assistant professor of law at NYU and former WilmerHale summer associate, to discuss the Supreme Court's decision in Securities and Exchange Commission v. Jarkesy. The case concerns whether the SEC has the authority to seek civil penalties against an individual before an administrative law judge rather than before an Article III-appointed judge and a jury of the individual's peers. As a result of the Court's decision, the SEC may no longer rely on its administrative forum to seek civil penalties for alleged violations of securities laws.
Dawson and Rosenblum give a timeline of events that led up to the Supreme Court case, with Rosenblum breaking down how the majority and dissenting opinions diverge. Leveraging his background as a legal historian, Rosenblum provides historical context and explains how applying a traditional Constitutional interpretation to the case increases its complexity. Dawson and Rosenblum also discuss the long-term impact this case could have, highlighting how the final ruling leaves many unanswered questions that could pose challenges in interpreting future decisions.
This episode is the latest installment of our miniseries examining notable decisions recently issued by the US Supreme Court. Previous episodes covering this year's term looked at the decisions in Cantero v. Bank of America and Alexander v. South Carolina State Conference of the NAACP.
Related Resources:
- The Supreme Court Won't Stop Dismantling the Government's Power (The Atlantic)
- Supreme Court Limits SEC Administrative Proceedings (WilmerHale)
- SCOTUSblog: Securities and Exchange Commission v. Jarkesy
Transcript
Felicia Ellsworth: Welcome to “In the Public Interest” from WilmerHale, an international law firm at the intersection of government, technology and business. Thank you for joining us. I'm Felicia Ellsworth.
Michael Dawson: And I'm Michael Dawson. Today's episode is the latest installment in our second annual Supreme Court miniseries, where we dive into the most hotly contested decisions coming out of the Supreme Court this term and discuss the implications of the Court's rulings going forward. On today's installment of our Supreme Court miniseries, we're going to talk about a case with widespread importance to our system of administrative law, Securities and Exchange Commission v. Jarkesy. This case concerns whether Congress has the authority to give the SEC the power to bring a proceeding against an individual for securities fraud and to proceed before an administrative law judge rather than before a Article III-appointed judge and a jury of the individual's peers. With me today to discuss that case is Noah Rosenblum, an assistant professor of law at NYU. Noah, thank you so much for joining us today.
Noah Rosenblum: Thank you for having me.
Michael Dawson: So what do you teach at New York University?
Noah Rosenblum: I'm a legal historian by training and I work on the history of presidential control of the administrative state. So, I teach classes in constitutional law, I teach the basic course on legislation and the regulatory state, and when they let me, I teach a bunch of legal history.
Michael Dawson: That sounds like the perfect combination of skills to discuss today's case.
Noah Rosenblum: When the Fifth Circuit issued Jarkesy, it felt like it was written just for me.
Michael Dawson: Now I know you've written about it in The Atlantic but tell me a little bit about how your students have reacted to this case.
Noah Rosenblum: It's a perfect teaching tool because while it starts with a relatively obscure technical question, it touches on all the major themes that come up in an administrative law class. Part of what I like so much about the case is that it shows how really big questions like how a democratic government should organize itself or what kinds of powers can Congress delegate to an agency that gets students really excited cash out in the nitty gritty of a really particular dispute and really technical doctrine.
Michael Dawson: Before we plunge in, I understand you were a summer associate at WilmerHale. How was your summer? Do you have any particular memories?
Noah Rosenblum: It was a fantastic time. It was my one experience in private practice, and I still think back on it very fondly. I worked on a wide range of cases, and I remain in touch with some of the lawyers I met that summer. I continue to see their names on briefs before the Supreme Court and in appellate courts all the time as a teacher.
Michael Dawson: Ah, nice. All right, let's talk about the case. Who is Mr. Jarkesy? And why was he investigated by the SEC?
Noah Rosenblum: So according to the findings that the SEC administrative judge made, George Jarkesy was a talk radio host who opened an investment firm. In the process of running that firm, he made several misrepresentations. In particular, he inflated the value of assets under management, which meant that he paid himself higher fees. He made false statements about exactly what the firm was going to invest in and how it was going to be audited. So, as I wrote about in The Atlantic, and as I told my students, this is a kind of a garden variety securities fraud—somebody opens a hedge fund and uses their platform to raise a lot of money under pretenses that later don't pan out.
Michael Dawson: So what did the SEC do about it?
Noah Rosenblum: The SEC investigated Mr. Jarkesy and then they issued two sets of sanctions that sure looked kind of equitable. They forced him to disgorge his ill-gotten gains. They banned him from participating in the securities industry. But as is relevant to the cases that progressed, they also fined him, I think $300,000, for his conduct, and it was those fines that he ended up disputing.
Michael Dawson: Let's unpack that a little bit. So, when you say “they,” whom do you mean?
Noah Rosenblum: So, this gets us into why this became an administrative law case. So, under the Dodd-Frank Act, the SEC has a choice about how to proceed when it wants to sanction somebody for this kind of conduct. It could just file a civil lawsuit against them in federal court and sue them the way that you might sue anybody in what looks like an enforcement proceeding. The SEC chose not to do that. Instead, the SEC took advantage of this provision in Dodd-Frank that allowed it to pursue sanctions by proceeding through an internal administrative process. So, under that kind of a procedure, they brought charges in front of an administrative law judge—that's somebody who's inside the agency, not a presidentially appointed and Senate-confirmed Article III judge—you get an appeal from that administrative law judge to the Commission, but then that's the end of the line before you go to a federal court. In most cases, you can appeal an agency decision to a federal court. In the case of SEC enforcement proceedings like this, you can, and George Jarkesy did. The key point is that instead of going to a federal court to get the fines imposed in the first instance, they went to an administrative law judge inside the agency.
Michael Dawson: And how did we go from there to the Supreme Court?
Noah Rosenblum: So, after the SEC, the Commissioners, validated the administrative law judge's decision, George Jarkesy appealed to federal court, saying this whole procedure was unconstitutional. The SEC should never have been allowed to adjudicate my case in front of an administrative law judge. The Fifth Circuit ruled in George Jarkesy's favor on three grounds. Judge Smith's dissent accused the majority of flouting federal law and Supreme Court precedent. So, then the Supreme Court took the case, and, in a testament to how significant the case was, they held it all the way until June to issue their decision.
Michael Dawson: And what did they rule?
Noah Rosenblum: Ultimately, the Supreme Court ruled 6-3 that the SEC proceedings against George Jarkesy were unconstitutional on one of the three grounds that the Fifth Circuit had ruled. So, they didn't touch the other two grounds and then they sent the case back.
Michael Dawson: And that ground was the Seventh Amendment right to a jury trial?
Noah Rosenblum: Exactly right. In my mind, it's actually more of like an Article I, Article III issue than a Seventh Amendment issue. But the way that people are talking about it in popular culture, they're talking about it as a Seventh Amendment issue. If you're going to get even more technical, there are really three different doctrines at issue here. There's an Article I versus Article III issue, which is a vesting clause issue. There's the Seventh Amendment jury trial issue and there's an argument about the scope of the public rights exception, which is part of the Seventh Amendment issue. These three doctrines are complicated and all related to each other, but it was that cluster of issues that the Supreme Court upheld the Fifth Circuit on.
Michael Dawson: To me, it was striking that the majority's opinion really starts with the Seventh Amendment, whereas Justice Sotomayor's dissent really starts with the vesting clause. Can you talk a little bit about that? Why does it matter where you start, and why does it matter whether you begin the analysis with the vesting clause?
Noah Rosenblum: So that struck me too, and I'm really glad to hear you say it. I think the best way to understand the stakes are actually to try to look at the question from the two different perspectives. The majority perspective, I think is actually pretty easy to wrap your mind around. It goes something like this: when an issue is the kind of thing that a court should be adjudicating with a jury, you can't get away from the protections you get by having an Article III life tenure judge, and the checks that you get by having a jury of your peers just by redefining it as something that can go to an administrative tribunal. So, in this case, the Court said, look, you're trying to sue this guy for fraud and get him to pay money for having committed fraud, that sure looks like securities fraud. If it's garden variety securities fraud, you get the protection of a judge and a jury. You're trying to stick it in an administrative tribunal thus you're depriving the guy of his Seventh Amendment jury right. Now the way the dissent sees it is that the Seventh Amendment jury right only attaches in really narrow technical circumstances. If you actually read the Seventh Amendment, it says that there are these conditions: your right to a jury trial shall not be denied in suits at common law for more than 20 bucks or something like that.
Michael Dawson: It actually says shall be preserved, right?
Noah Rosenblum: Shall be preserved, great. Thank you. Even better. Even more technical. So, the way that the dissent sees things, if you're in court and it's the kind of suit that you would have had at common law, then your jury trial right attaches. But remember those two conditions, right? You gotta be in a court and it's gotta be the kind of thing for which there might have been a jury trial right. That doesn't mean that just because you might have brought it in court, you necessarily get a jury trial right. So, the way that Sotomayor sees it, you need to be in the federal forum for the jury trial right to attach, a sort of a conditional or subsidiary matter. So, the first question we have to ask is: must you be in a federal court, must you be in an Article III court? Because if there's a choice about being in Article III court or not, then, whether there's a Seventh Amendment issue at all will turn on what forum you're in. And as Sotomayor sees it, these kinds of suits could be in federal court, but they don't have to be in federal court, and in particular—as pertains to her disagreement with the Majority opinion—just because the sanction is a money sanction, and just because the cause of action looks kind of like something that you could also have taken action out in common law doesn't require you to bring that in a federal court. There are attested adjudications from the dawn of the Republic involving money damages and things that kind of look like common lawsuits that are in fact adjudicated by non-Article III judges. For Sotomayor, the first question we have to ask is does a federal court have exclusive jurisdiction over these kinds of cases? Nothing about the Constitution requires that this suit be brought in a common law court. Therefore, there is no Seventh Amendment issue.
Michael Dawson: Your comment about the dawn of the Republic prompts me to ask a question about the role of legal history in this case. Can you talk to us a little bit about that and your own take on the relevant legal history here?
Noah Rosenblum: So the current Supreme Court has really elevated history, and especially founding era history, to a new place of authority in American law. For the Seventh Amendment and the administrative state, history is a delicate, complicated set of questions because the modern administrative state just didn't exist at the dawn of the Republic. The federal government looks so different now than it did back then. Many scholars see the New Deal as a watershed moment in the creation of the administrative state. It's of course during that era that we get the Securities and Exchange Commission, and it was created because of the crises in our securities markets connected with the Great Depression and the need to deal with the fraud that we saw there. If you were to ask the founding generation what they thought about these kinds of schemes, I suspect they would have just been flabbergasted, right? This is an era in which even just charging interest on debt is controversial. There's no unified national currency. How are you supposed to have the kinds of deep and liquid securities markets that have been so fundamental to the success of the American economy in the 20th and 21st centuries? So basically, we've got this puzzle which is that on the one hand, the current Supreme Court says founding history is critical for understanding the meaning of the Constitution. But on the other hand, especially when it comes to the administrative state, we're dealing with problems that don't really have a good founding era analogue. And yet I think most of us, liberal or conservative, would agree that it's good to have some government regulation there. So how do we square that circle? And in the Supreme Court in Jarkesy, across the three opinions, you see three very different approaches to that question. So, in the case of the Gorsuch concurrence, you have this real reliance on the founding and on the problems that the founding was trying to address. For Gorsuch, it's critical that the revolution itself was fought in order to make sure that our common law rights and our jury rights and our courts were protected and reaffirmed. That's his take. Sotomayor is kind of at the other extreme, right? For her, we see through the development of the administrative state and the federal courts cases in response to it, the emergence of a jurisprudence that balances the need for protection in court with the need for a functional state that is able to validate our rights and protect our markets. The Roberts majority wants to kind of have it both ways. For Roberts, the founding era impulse is real, and the meaning of the Constitution can be ascertained and applied to the administrative state. It doesn't mean that the whole administrative state is unconstitutional. He's careful to point out that there are places in which Congress exercising its powers can very clearly put something into an administrative adjudication, but the tenor of the majority opinion is pretty clear that some earlier cases may have gone too far.
Michael Dawson: What do you think will be the long-term impact of Jarkesy for administrative agencies and how they go about doing their job?
Noah Rosenblum: So the way that I think about it is a kind of narrow gauge and broad gauge. So, let's go narrow first. So, the specific impact of Jarkesy, there are a handful of agencies that can only bring money sanctions through administrative proceedings. It does seem like those agencies are going to have to figure out what to do next. And it's really not clear. So Jarkesy is pretty narrow in its reasoning and holding. It ends up saying that where you've got a strong common law analogue and the remedy are monetary penalties, then you have to go to court. And there are agencies that bring sanctions that look kind of like this, but there's going to be a big question about whether the particular sanctions they're seeking and the causes of action they're acting on are a lot like their common law analogues, are different enough to proceed through administrative adjudications. So, at a first level, I think we're going to see a little bit of chilling in agency enforcement proceedings. You're gonna see some hesitation as agencies try to figure out what to do next. I bet some agencies will go to Congress and ask for power to bring lawsuits in court. It's worth flagging that, I think it was in the 80s, there was an Administrative Conference of the United States report that said, hey, we really should give agencies more power to pursue sanctions in house because requiring them to go to court is just taking too long and it's putting these questions in front of generalist judges who really don't know what they're doing. So, my guess is that Jarkesy is going to swing the pendulum back the other way, and agencies may go to Congress to get some litigation authorities that they can enforce these in court. In a second beat, I genuinely don't know what's going to happen with respect to just Jarkesy. So, you could imagine agencies saying, you know, if we're going to have to ramp up in order to bring a case in court, we better make sure it's worth it to us. So, in the criminal context, we've already seen this, right? We know that prosecutors will threaten pretty serious charges in order to try to strike a deal with people and get a plea deal. I wonder if we'll start to see more stuff like that with agencies, right? Could you and I have a conversation five years from now where you'll be saying, hey, Noah, what do we make of the new SEC enforcement tactic where they meet with you privately and say, hey, unless you agree to voluntarily disgorge this money, we're going to bring you in federal court, and we're going to throw the whole book at you, right? You could imagine an enforcement officer thinking in those terms. So that's sort of the narrow gauge. I think the broader gauge is what is the signal about the way the Supreme Court is thinking about administrative enforcement, agency action, and when you put Jarkesy alongside some of the other cases that were decided this past term, you see a Court that is really suspicious of agencies extending themselves too far and trenching on individual rights and protections. So, when I'm thinking broad gauge, I think a lot of agencies are gonna look at Jarkesy alongside Loper Bright and Corner Post and say to themselves, wow, this is a Court that is signaling to lower courts you should scrutinize agency actions really carefully to make sure that no individual rights are being trampled on, that due process is being strictly observed, and if things are a little bit doubtful, don't be afraid of disciplining the agency. And so I bet agency bureaucrats are going to hear that and that's gonna lead them to push the line of what they would enforce and err on the side of non-enforcement.
Michael Dawson: Interesting. Now you've been following this case closely on its way up to the Supreme Court. I'm sure you listened to the oral arguments. When the decision came down, was there anything in the decision, the concurrence, the dissent, that surprised you?
Noah Rosenblum: So there were two things that really struck me. One was before the decision came down and then the other was after the decision came down. I wrote this really quite alarmist article for The Atlantic after the Fifth Circuit opinion came down because the Fifth Circuit also struck the proceedings down on the grounds that they were an excess of the non-delegation doctrine and that administrative law judges were unconstitutionally appointed because too insulated from the president. It's very hard to overstate how significant it would have been if the Supreme Court had upheld either of those two theories. I didn't talk about the ground the Supreme Court eventually went on to rule on because of how technical it is and its impact is substantially less. So. the first shock came when I listened to oral argument and the entire oral argument focused exclusively on the third ground. Brett Kavanaugh asked half of one question about the administrative law judges and that was it. The majority opinion is a footnote that says: there were these two other grounds, but because we're rolling on the third one, we don't have to say anything. The dissent has a footnote that says: I would have disagreed with the Fifth Circuit about those two other grounds, but we don't have to reach them, so I won't say anything. So that was surprise number 1. Surprise number 2 is that during oral argument, the judges were remarkably honest about how messy this area of doctrine is. So, I think it was John Roberts himself who said something like our precedents in this area have not been super clear—and putting on my law professor hat for a minute, I teach a bunch of the cases that he's referring to and those cases are messy and the way the court is thinking about things, it just doesn't seem to be the way they're thinking about separation of powers now. It felt like those cases have to be wrongly decided in light of the way the current Court is operating but like, beats us what's going to happen next. So, I was really hoping that the majority opinion would give us a lot of information about how to think through the Article I, Article III issue with more detail, and I was surprised at how little guidance the majority opinion gives. The main thing the majority opinion says is the remedy is all but dispositive. So, if that's right, then what the Supreme Court is telling us is that depending on the kind of administrative remedy you seek, you might be required to go to an Article III court or allowed to go to an Article I court. But that doesn't feel like it can be right to me either, and let me just give a small example. If the remedy is dispositive, then if you're not seeking money damages, you might not have to go to an Article III court at all. So come back to Jarkesy for a minute. When you and I were opening this conversation, I said the SEC fined him, but they also banned him from participating in the securities industry. Imagine if you are a professional and one option is you pay a fine and then go on doing your work. And the other option is you lose your license to practice. I think for most of us, we'd rather pay the fine and certainly the loss of the license to practice feels like a much more significant sanction. And yet it seems like, according to the Court's way of thinking, the fine entitles you to this much more elaborate process and the protections of a jury trial and an independent adjudicator, whereas to lose your license to practice, you could do that through an administrative proceeding. It seems like the Court is saying that actually you can get the more serious sanction with fewer protections. So that doesn't seem like it's right but then again, the Court doesn't tell us what else to do. So, I was surprised and disappointed that after really focusing on how confused this area of law was, the Supreme Court didn't do a better job clearing it up for us.
Michael Dawson: Your recent article in The Atlantic is entitled “The Supreme Court Won't Stop Dismantling the Government's Power.” Do you think that they will come back and revisit issues like the non-delegation doctrine that they didn't reach in Jarkesy?
Noah Rosenblum: I suppose I fear that they will. There were some other cases this term in which the Supreme Court went out of its way to tell the Fifth Circuit to cut it out. This is not one of those cases, and in fact the majority, pointedly, refuses to say anything about the two other grounds the Fifth Circuit reached. So that suggests to me at least that the Fifth Circuit will likely feel empowered to rule in a different case on either or both of those grounds, and that the Supreme Court will deal with the issue when it comes up then. How will the Supreme Court deal with it? I don't know. I have to say I think that the non-delegation challenges are unlikely to go anywhere, in part because the Supreme Court has now developed a bunch of other tools that allow it to do what it might have wanted to do through non-delegation without having to go there. So, if you think back to the high watermark of the Supreme Court signaling it was open to non-delegation challenges, which is probably when Brett Kavanaugh wrote his concurrence in the denial of certiorari in the Paul case, the companion to the case about the Sex Offender Registry Act that led to the dissent in which Gorsuch, and Roberts and co., signaled they were open to a non-delegation challenge. So, in that case, Gorsuch said, you know, we really need to revive non-delegation because Congress shouldn't be able to delegate such major questions. And in his concurrence to the denial of cert in Paul, Kavanaugh similarly said, look, you know, these major issues, you probably shouldn't be allowed to delegate. Now we live in a world without Chevron, but with the major questions doctrine, so it seems like courts are going to be empowered to scrutinize delegations to agencies and basically conclude that agencies need super explicit language, and I'll be surprised if they ever find such delegations allowed. So, if you imagine the work that a non-delegation doctrine would have done, how much more work does that do than the major questions doctrine and frankly, if I were a judge and I wanted to discipline congressional delegations, the major questions doctrine is a much neater vehicle than the non-delegation doctrine because so many massive delegations have already been upheld against the non-delegation challenge. So, you have this real problem of retconning the past if you want to revive the non-delegation doctrine, whereas if you use the major questions doctrine it's a lot easier. You just get to say well there was no clear intent to delegate this particular major question and then you can invoke a constitutional avoidance candidate if you want and chase it away. So, my guess is the non-delegation isn't going anywhere. The appointment of ALJs though, that one I worry about a lot—like a lot of other administrative law professors—because the logic of the Supreme Court's Article II separation of powers cases is so precedential that it's super hard to reconcile with independence for any agency adjudicators.
Michael Dawson: Well, it's certainly an interesting and busy time to be a professor of administrative law.
Noah Rosenblum: As I tell everyone, it's been great for my job security.
Michael Dawson: Well, we appreciate you making the time to speak to us about this really interesting area. Thank you, Noah.
Noah Rosenblum: Oh my God, it's been such a pleasure. Thank you.
Felicia Ellsworth: Thank you, everyone listening, for tuning in to this episode of “In the Public Interest.” We hope you'll join us for our next episode. If you enjoyed this podcast, please take a minute to share with a friend and subscribe, rate, and review us wherever you listen to your podcasts. If you have any questions regarding this episode, please email them to us at inthepublicinterest@wilmerhale.com.
Michael Dawson: For our WilmerHale alumni in the audience, thank you for listening. We are really proud of our extended community, including alumni in government, the nonprofit space, academia, other firms, and leadership positions in corporations around the world. If you haven't already, please join our recently launched Alumni Center at alumni.wilmerhale.com so we can stay better connected. Our show today was produced by Matt O'Malley, Walker Schneider and Wesley Schmidt. Sound engineering and editing by Bryan Benenati, marketing by Emily Freeman and her team, all under the leadership of executive producer Sydney Warren and Jake Brownell. Thank you for listening.
Felicia Ellsworth: See you next time on “In the Public Interest.”
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