US Appeals Court Orders SEC to Bring Enforcement Actions to Jury Trials

A U.S. appeals court ruled the Securities and Exchange Commission (SEC) violated a hedge fund manager's constitutional rights by having an in-house judge try a securities fraud case brought against the individual.

The SEC alleged in 2013 that George Jarkesy Jr. and his firm, Patriot28 LLC, violated federal securities law by misstating his two hedge funds' assets. The case was tried before an administrative law judge rather than before a civil court. These administrative law judges, or in-house judges, may have violated Jarkesy's seventh amendment constitutional rights to a jury trial, the 5th Circuit Court of Appeals said in its ruling Wednesday.

"In sum, we agree with Petitioners that the SEC proceedings below were unconstitutional. The SEC’s judgment should be vacated for at least two reasons: (1) Petitioners were deprived of their Seventh Amendment right to a civil jury; and (2) Congress unconstitutionally delegated legislative power to the SEC by failing to give the SEC an intelligible principle by which to exercise the delegated power," the decision said.

The ruling remanded the case "for further proceedings," indicating that it was not vacating Jarkesy's conviction entirely.

According to The New York Times, the impact of the case is limited to just SEC cases brought in Texas, Louisiana and Mississippi, and only in cases that do not "involve solely 'public rights.'"

The SEC has taken on a number of enforcement actions in the crypto industry in recent years, bolstering the part of its enforcement division responsible for such cases earlier this month to just over 50 individuals.

Before Wednesday's ruling was announced, SEC Chair Gary Gensler testified before the House Appropriations Committee, arguing his agency needed more resources to continue taking on fraud and other crimes in the sector.

"I wish we had more to be able to dedicate to this," he told lawmakers.