Long-Running Case
Jarkesy and Patriot28’s SEC saga goes back to the agency’s 2011 investigation and 2013 commencement of in-house enforcement proceedings. An administrative law judge ultimately concluded they had committed securities fraud, and Jarkesy and Patriot28 appealed internally to the Commission itself.
The Supreme Court in 2018—while Jarkesy’s administrative appeal was pending—determined the SEC’s in-house judges were actually officers and had been unconstitutionally appointed. After the high court’s Lucia v. SEC ruling, the agency offered parties new hearings before a different, properly appointed ALJ, but Jarkesy waived this right.
The Commission affirmed the in-house judge’s fraud finding and imposed a $300,000 civil fine, $685,000 in disgorgement, and “barred Jarkesy from various securities industry activities,” Elrod said. Jarkesy then brought the case to the Fifth Circuit, seeking review of the Commission decision.
Cochran Echoes
Jarkesy and Patriot28 attempted to halt the SEC administrative proceedings early on when they sued the agency in federal district court in D.C. in 2014. They twice lost on the same jurisdictional grounds that the Supreme Court just agreed to weigh in on in Cochran v. SEC.
Jarkesy and others challenging SEC proceedings must complete the agency adjudication process before seeking review in the federal courts, the US Court of Appeals for the D.C. Circuit said in 2015. Once they have taken those steps, parties may seek review of the final Commission decision in the D.C. Circuit or the circuit where they reside or have their principal place of business.
Other circuit courts ruled similarly on the jurisdiction question until the Fifth Circuit’s December 2021 en banc opinion in CPA Michelle Cochran’s case. The full court, in a 9-7 decision, determined federal securities laws don’t actually strip lower courts of jurisdiction to hear constitutional challenges like hers and Jarkesy’s.
The SEC pointed to the D.C. Circuit’s Jarkesy opinion—along with similar opinions in the Second, Fourth, Seventh, and Eleventh circuits—as evidence of a circuit split when it petitioned the Supreme Court for review in Cochran.
SEC files on Jarkesy’s case, like Cochran’s, were among those that were improperly uploaded onto servers maintained for Enforcement Division staff. But “the timeline of filings and Commission actions in each matter shows” that memo access wouldn’t have affected any Enforcement Division filings, the agency said in an April statement.
Judge Andrew S. Oldham joined Elrod’s opinion.
Judge W. Eugene Davis dissented, saying he respectfully disagreed with the majority’s conclusions on the jury trial right, congressional delegation, and ALJ removal protections.
S. Michael McColloch and Karen Cook, both based in Dallas, represent Jarkesy and Patriot28.
The case is Jarkesy v. SEC, 5th Cir., No. 20-61007, 5/18/22.
—With assistance from Ben Bain and Greg Stohr.
This article was provided by Bloomberg News.