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The Wall Street Journal: Appeals court deals severe blow to SEC’s in-house administrative courts


WASHINGTON — Securities regulators can’t bring enforcement actions seeking financial penalties through their in-house courts, a federal appeals court ruled on Wednesday.

The decision, from a split panel of the U.S. Court of Appeals for the Fifth Circuit, adds to the legal backlash over federal-agency tribunals that some critics say violate the separation-of-powers doctrine. The Securities and Exchange Commission, one of the biggest and busiest financial regulators, has been a focal point for the feud. Its enforcers sometimes litigate cases before administrative law judges who are employees of the SEC, but are supposed to exercise independent judicial powers.

In the case decided Wednesday, the judges ruled that a nearly decade-old SEC enforcement action against a small hedge-fund manager was invalid because it violated his right to a jury trial. An SEC judge in 2014 found George Jarkesy liable for fraud, ordering him to pay a $300,000 fine and barring him from the securities industry, according to SEC records.

Congress may in some cases assign legal disputes to agency courts, but the SEC’s fraud cases aren’t so special as to justify funneling them into those forums, the judges wrote.

The SEC’s in-house courts generated little controversy for decades, but a 2014 decision to lean on them more heavily sparked a backlash. Until then, the SEC had only used the administrative courts to sue Wall Street defendants it directly regulated, such as stockbrokers, public auditors and money managers. The 2010 Dodd-Frank financial overhaul law allowed the SEC to sue anyone in the administrative courts, including people accused of misconduct, such as insider trading, who didn’t work in the securities industry.

An expanded version of this report appears on

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