John Thomas Financial CEO Thomas Belesis was riding high, having been awarded the 2011 Businessman of the Year Award from the New York Republicans. While Occupy Wall Street was at its height, he was hosting rallies dedicated to “bringing the pride back into Wall Street.” All of that came crashing down in an accusation by the SEC of fraud on investors by Belesis and George Jarkesy that effectively ended their financial careers. While Belesis settled quickly, the case against Jarkesy shows what the Fifth Circuit Court of Appeals decided yesterday was an unconstitutional violation of the separation of powers by the SEC—cutting the jury out of the process.
Jarkesy worked closely with Belesis to launch two hedge funds that raised $30 million from investors. According to the SEC, the two hedge funds were officially independent, but in reality, Jarkesy was letting Belesis make many of the decisions for the hedge fund that Jarkesy ran. Some of those decisions let Belesis’s firm collect what the SEC calls “excess” fees. The SEC also accused them of inflating the price of certain assets they owned by hiring an outside group to promote those assets, which in turn raised the fund’s valuation and the fees they were charging.
When Belesis settled, the SEC held findings of fact that the fraud occurred, before any hearing where Jarkesy could be present any evidence in his defense. Jarkesy then had to present his case to an administrative law judge (ALJ) selected by the SEC. ALJs almost always rule in favor of the agency. They are chosen by the agency and can be fired by the agency, which gives them a large incentive to rule in the agency’s favor. An ALJ decision can then be appealed to the SEC, which can overrule any decision that goes against to the agency. That judgment can be appealed, but the courts give deference to the agency’s factual findings (in other words, they are presumed to be accurate).
Given this situation, Belesis did what most people do: pay the fine the SEC and try to get on with their lives. Very few people fight the SEC in its administrative system when the deck is so stacked in the SEC’s favor. A settlement agreement always comes with a requirement that the settling party can never publicly dispute the SEC’s claims.
But Jarkesy fought on, through the ALJ and the SEC, both of which ruled against him, to the Fifth Circuit Court of Appeals, which ruled in his favor. The Fifth Circuit found three separate constitutional problems with the SEC’s actions, but this post will focus on one—the lack of a jury.
The Seventh Amendment to the Constitution guarantees a civil jury trial, which has long been considered one of the most fundamental protections against government abuse. The right is limited to only those suits “at common law,” meaning a legal remedy, such as a fine, rather than an equitable remedy, such as an order to comply. Also, so-called “public rights” are not protected, but “traditional legal claims” that would have been handled in a court of law at the Founding are.
The Fifth Circuit found that the SEC was effectively seeking to enforce a claim of fraud, which was well known in courts of law at the time of the Founding. Additionally, the Supreme Court had previously found that civil penalties, in general, were similar to an “action in debt” in courts of law at the Founding. The Supreme Court, in Tull (1987), found that civil penalties of the Clean Water Act were likewise prohibited from agency adjudication without a jury.
Restoring the jury trial right is an important check on the power of government. Thomas Belesis’s and George Jarkesy’s careers were destroyed merely on an accusation. They were accused of effectively stealing people’s money by lying to them—a very serious charge—but they were never given the opportunity to prove their innocence before a neutral decision maker.
If Belesis and Jarkesy are guilty of the accusations made against them, a jury, when presented with that evidence, will find them liable. But if not, if this is politically motivated or unfounded, the American people sitting as a jury will stop that abuse.
We need more juries ensuring the government is following the truth, so the Fifth Circuit should be commended for this decision.