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On Wednesday, the U.S. Court of Appeals for the Fifth Circuit issued a ruling that, if upheld by the Supreme Court, could literally shut down the regulatory authority of large parts of the federal government. In Jarkesy v. SEC, the Fifth Circuit overturned a penalty ordered by an SEC administrative law judge on the grounds that the Seventh Amendment to the Constitution guarantees the right to a jury trial. The Court, ignoring decades of Supreme Court precedent, held that Congress’s delegation of such authority to the SEC is unconstitutional.
George Jarkesy operated two hedge funds. After an extensive investigation by the SEC, the administrative law judge found that the hedge funds had misrepresented facts and risks in order to deceive investors, and ordered a fine of $300,000, a disgorgement of $685,000 in ill-gotten gains, and barred Jarkesy from a variety of securities activities. But the Court reversed the orders as unconstitutional.
The federal government uses administrative law judges in some 30 different agencies. There are about 2,000 such judges, who are civil servants, about twice the number of federal district court judges. They do everything from adjudicating benefits disputes at the Social Security Administration to issuing findings and penalties at other regulatory agencies.
If all these questions must go before a jury, much of what the far right disparages as the “administrative state” is out of business. This is of course the Fifth Circuit’s broader agenda, and it chimes with anti-regulation views of Chief Justice Roberts. The SEC can appeal to the Supreme Court, but good luck to that.
The irony is that regulatory agencies are finally doing their jobs. The assistant attorney general for antitrust, Jonathan Kanter, recently gave an interview to the Financial Times promising a long-overdue crackdown on abuses by private equity. But such efforts are now on a collision course with far-right courts that have been half a century in the making. I wish I could report that the architect of the Jarkesy ruling was a Trump appointee. But no, Judge Jennifer Walker Elrod was appointed by George W. Bush.
Here’s the broader point. If the Democratic Party had not gotten into bed with Wall Street under Carter, Clinton, and Obama, Democrats might have remained the national majority party—and those far-right judges never would have been appointed. Back when the judiciary was more supportive of regulation, the SEC might have closed down private equity before it even gained a foothold by ruling that you can’t take over a company using its own assets as collateral.
Now, despite President Biden’s attempt to revive regulatory agencies with assertive public-minded appointees, good Democratic regulators will be hobbled by the sins of bad Democratic presidents that led to even worse Republican ones, and a legacy of reactionary courts.
