Supreme Court’s Jarkesy decision sheds light on the SEC’s hidden advantages

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The Supreme Court’s momentous decision in SEC v Jarkesy provides us with a rare glimpse into the murky realm of administrative adjudication. Despite there being more than 55 administrative law courts (ALCs) scattered across the sea of federal agencies, only a handful have arisen to the Supreme Court’s attention this century. The biggest repeat offender has been the Securities and Exchange Commission’s (SEC) ALC. 

We’ve seen private litigants like Raymond Lucia, Michelle Cochran, and now George Jarkesy wage uphill, high stakes legal battles to obtain a fair trial against the SEC. Overcoming immense odds within the agency’s in-house tribunal, these individuals shouldered immense legal costs and overcame burdensome time constraints. 

By withstanding the SEC’s unfair system of adjudication, they were able to successfully present their matters before Article III courts and ultimately win on the merits before the US Supreme Court. The Court ruled 6-3 in Jarkesy that the SEC must provide for access to a jury trial whenever the agency imposes civil monetary penalties.

With the Jarkesy matter resolved, it raises the question as to why the SEC has been uniquely problematic within the federal bureaucracy’s network of adjudication. One of the primary reasons that many are unaware of pertains to how the SEC enjoys a hidden set of advantages when adjudicating matters in-house. These built-in advantages can be perceived as special regulatory constraints the SEC imposes on the administrative process, diminishing the prospect of private parties petitioning their disputes before an Article III court.

Follow-on enforcement 

Perhaps the most notable adjudicatory advantage is the SEC’s “follow-on” enforcement proceedings. As the name entails, a follow-on case is a form of layered adjudication where the ALJ deems it necessary to schedule a second case against the respondent after already rendering an initial decision against them. The Dodd Frank Act of 2010 empowers the SEC to impose collateral bars as a prospective remedy to prevent future harm to the investor public.

Follow-on cases are often proposed by the SEC’s Enforcement attorneys as recommendations to the ALJ, seeking to further penalize the prosecuted party. This request usually takes the form of a permanent bar on said individual, preventing them from practicing in the securities industry if they’ve been convicted of a crime. 

The basis for ALJs to grant follow-on requests stem from an administrative concern to prevent future misdeeds by the prosecuted party. According to former SEC attorney Russ Ryan, “the SEC must weigh factors such as the nature of misconduct, the wrongdoer’s degree of intentionality, and the likelihood of repetition.”

Follow-on proceedings enable the SEC’s ALJs to exercise broader discretion in adjudication by justifying that a bar or suspension is a necessary means of serving the public interest. The SEC rarely decides otherwise, as my research has found that ALJs uphold every follow-on proceeding in favor of the Division of Enforcement over the previous ten years. Disbarring or suspending an individual in a separate case only heightens the financial burden for the respondent. It also imposes unnecessary public pressure for the litigant to appear again before the SEC when his/her fate is already sealed. This equates to a double-blow against the litigant’s livelihood. 

George Jarkesy was among the few people who endured a follow-on proceeding while simultaneously challenging the SEC in an Article III court. Jarkesy was named a respondent to a follow-on proceeding in 2013 and 2014, all the while seeking to have fair trial before an Article III court.

Forced appeals

Another unique ability that the SEC wields in adjudication is what I call “forced appeals.” This is where the SEC’s Commissioners act akin to an oligopoly by unilaterally deciding to appeal an ALJ decision to themselves, absent the intentions of the private party or the SEC’s attorneys. So, even if the SEC’s Enforcement team lost a case and decides not to appeal, the Commissioners can intervene, override their discretion and take up the case anyway. This enables the SEC to more easily overturn a rare ALJ initial decision rendered against the agency. 

Outside of the SEC’s interference in appeals, only the National Labor Relations Board (NLFB) wields a similar ability. The National Labor Relations Act allows the Board’s clerk to review draft ALJ opinions and send them to the Board members for revisions. Both the SEC and NLRB’s ability to interfere in ALJ decision-making underscores the lack of judicial independence with agency tribunals. In an actual Article III court, an appeals judge would never possess the authority to appeal a case from a lower court in the same jurisdiction. Appeals must be triggered by one of the parties to the case, not by an uninvolved judge. The same standard should apply for ALCs.

Excessive penalties & disgorgements

The SEC enjoys a special advantage in advancing excessive civil monetary penalties and disgorgements among federal agencies. The agency has been spotlighted for imposing a record-breaking $6.4 billion in monetary penalties on financial market actors in 2022 alone. Part of this advantage is attributed to the Dodd Frank Act, which emboldens the SEC to impose higher fees upon financial actors perceived to be suspected of fraud. This was on full display in the Jarkesy case, where George Jarkesy and his investment firm Patriort28 were accused of securities fraud by the SEC and slapped with a hefty civil monetary penalty of $300,000 under a Dodd Frank provision. 

Dodd Frank also empowers the SEC to manage a broader range of its enforcement actions completely in-house, diverting them away from traditional Article III courts. As Justice Neil Gorsuch’s concurring opinion in Jarkesy states, “with the passage of the Dodd Frank Act, Congress gave the SEC an alternative court proceedings. Now, the agency could funnel cases like Mr. Jarkesy’s through its own ‘adjudicatory system.’” The Supreme Court corrected this by ensuring that a large subset of SEC enforcement actions, namely civil monetary penalties, can no longer be adjudicated in its ALC. “Jarkesy and Patriot28 are entitled to a jury trial in an Article III court,” according to Chief Justice Roberts’s majority opinion. While the Court stopped short of addressing the entirety of the SEC’s legislative venue selection power, it no longer reserves any discretion over where can enforce its monetary penalties because of Jarkesy. 

Prior to the Jarkesy ruling, in-house adjudication provided an ease of access for the SEC to impose the most severe civil monetary penalties. Like these penalties, the SEC is unique in that it can take disgorgements from those found guilty of investment fraud. 

Disgorgement serves as an equitable remedy, enabling the SEC to establish an equivalence fee that it can extract from guilty market actors. The amount disgorged would be used to restore what was lost from market fraud or theft. Unlike civil monetary penalties, which comprise a tiered set of costs that can exceed the financial value of the wrongdoing, the SEC cannot disgorge more than what was originally taken. 

In Kokesh v. SEC (2017)the Supreme Court classified disgorgement as a uniquely SEC-based remedy, which must be imposed on violators of securities laws within a five-year period from the claim. In Jarkesy, this equated to the SEC imposing $680,000 on Patriot28 for what officials perceived to be ill-gotten financial gains, determined by the fact-finding ALJ rather than by an impartial jury. 

Both the Fifth Circuit and the Supreme Court’s rulings on Jarkesy restored the jury trial right only for fraud matters that entail civil penalties and not civil remedies. Thus, the SEC can continue to seek disgorgements from private parties through its ALC.

While the SEC wins an average of 90% of its cases when managed in-house, they only win 69% when represented in federal court. Unlike the SEC’s ALJs, Justices do not simply greenlight excessive disgorgements imposed on private litigants. Rather, in Kokesh, they limited the scope of the remedy to any net profits gained as a result of the fraudulent activity, unlike the SEC’s ALJs. Similarly, in Jarkesy, the Court limited the SEC’s civil penalty cases to Article III courts with jury access.

Tripartite ALC network

One final advantage that separates the SEC’s ALC from other agencies is its linked network of self-regulatory organizations adjudicating an array of financial matters. This takes on a tripartite or triangular connection between the SEC, the Financial Industry Regulatory Authority (FINRA) and the Public Accounting Oversight Board (PCAOB). By this, FINRA adjudicates many private disputes of self-regulatory exchanges and their member firms within its own quasi-judicial forum. This helps reduce the caseload burden for the SEC’s ALJs.

If a litigant is dissatisfied with the outcome of their case, they can appeal it to FINRA’s National Adjudication Council (NAC), overseen by a body of judge-like appeal officers. The SEC comes into focus whenever a litigant possesses the immense resources and determination to appeal their NAC case all the way up to the SEC’s Commissioners, who reserve the final say in all adjudicatory matters. 

This imposes an additional step for litigants facing two layers of FINRA officers before getting the change to petition the SEC. Similarly, if the matter pertains to the PCAOB’s jurisdiction, litigants must first adjudicate before a PCAOB panel prior to appealing the case up to the SEC Commissioners. Like FINRA, the PCAOB can terminate professional licenses and pursue other heavy-handed enforcement actions against regulated firms. However, as a result of Jarkesy, FINRA and PCAOB will now need to process their monetary sanctions before an Article III court.

Fortunately, while Jarkesy’s case did not involve FINRA or the PCAOB, it is worth highlighting the extra-layer of difficulty that many face when adjudicating matters in the SEC’s ALC network. Only the most well-financed and determined litigants are even capable of taking their cases all the way up the ladder to the SEC Commissioners, who most likely will defer to the expert judgement of FINRA or PCAOB, as recently seen in the Frank Black and Southeast Investments matter.


The Supreme Court’s important decision in SEC v. Jarkesy provides a rare glimpse into the unfair nature of federal administrative law courts. This blog post uncovers many of the SEC’s built-in advantages. The Court struck down one of these advantages by requiring impartial jury trials to review penalties triggered by SEC enforcement. Transparency is desperately needed when assessing true extent of power that agencies like the SEC reserve in adjudication. The Court’s Jarkesy decision represents a major blow to the SEC’s hidden advantage over monetary penalties, while restoring the Constitution’s guarantee of jury trials in civil matters.

A version of this article first appeared on Regulatory Transparency Project.