Court to Hear Oral Argument in Case Challenging SEC's Administrative Forum

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By Yin Wilczek

Jan. 30 — An influential appellate court April 13 will hear oral argument as to whether the Securities and Exchange Commission's use of its administrative forum is unfair.

In a Jan. 30 order, the U.S. Court of Appeals for the District of Columbia scheduled oral argument in an appeal filed by Houston hedge-fund manager George Jarkesy. Jarkesy is alleging that a district court breached his constitutional rights by declining to bar the SEC from going forward with an administrative action against him over allegations that he steered bloated fees to the John Thomas Financial Inc. brokerage.

Several defendants have challenged the SEC's use of its administrative forum. This will be the first time the D.C. Circuit is hearing the issue.

Dodd-Frank Enhancement 

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act enhanced the SEC's enforcement powers in several respects, including giving it the authority to obtain monetary penalties in administrative proceedings against all individuals, not just those associated with regulated entities. The legislation also increased the amount of fines that the SEC can seek in administrative cases.

Defense attorneys have long expressed concern over the SEC's intent to proceed administratively rather than in federal court, noting that among other procedural disadvantages for respondents, discovery is sharply limited and administrative law judge findings are reviewed by the commission itself.

In its fiscal year 2014, the SEC had a 100 percent success rate in its administrative actions, compared to 61 percent in federal courts. In FY 2013, the SEC prevailed in 90 percent of the cases brought in its administrative forum, compared to 75 percent in federal courts.

SEC's Request for Summary Affirmance 

In November, the D.C. Circuit denied the SEC's motion for summary affirmance, finding that the “merits of the parties’ positions are not so clear as to warrant summary action.”

The SEC is urging the court to affirm the district court.

In a Jan. 28 filing, the commission argued that the U.S. Supreme Court and others have repeatedly recognized that a plaintiff may not perform an end run around Congress' decision to channel claims through an agency's administrative processes.

“So long as it is ‘fairly discernible' that Congress intended to establish such an exclusive review scheme, a district court is without jurisdiction to entertain such a challenge—regardless of the nature of the claim,” the SEC said. “It is ‘fairly discernible' from the text, purpose, and structure of the federal securities laws that Congress has created such a scheme here, and Jarkesy cannot establish the limited circumstances that would demonstrate that general federal-question jurisdiction nonetheless survives because appellate review is otherwise unavailable or inadequate to consider his challenge.”

To contact the reporter on this story: Yin Wilczek in Washington at ywilczek@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com

The court's order is available at http://www.bloomberglaw.com/public/document/George_Jarkesy_Jr_et_al_v_SEC_Docket_No_1405196_DC_Cir_Aug_12_201/2.

The SEC's brief is available at http://www.bloomberglaw.com/public/document/George_Jarkesy_Jr_et_al_v_SEC_Docket_No_1405196_DC_Cir_Aug_12_201/3.