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How conservative radio host’s Supreme Court case threatens to upend the courts

Dec 06, 2023

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There’s a Supreme Court case that could turn the justice system on its head. But the scales of justice in question aren’t in the courts at all. 

Jarkesy v. SEC is all about the constitutionality of the Securities and Exchange Commission’s use of in-house judges. Administrative law judges, known as ALJs, are part of the executive branch, not the judicial branch. The judges are employed by the agency that is bringing the charges. 

  • In this case, the SEC accused conservative talk show radio host and hedge fund manager George Jarkesy of committing securities fraud by inflating the values of certain holdings.
  • The SEC opted to bring the fraud case in front of the in-house judge, who ruled Jarkesy was guilty of the crimes.
  • The judge ordered Jarkesy to pay a civil penalty of $300,000 and pay back another $685,000 in ill-gotten gains. He was also barred from the industry.

Jarkesy argued, among other things, that the Seventh Amendment grants him the right to a jury of his peers. The Fifth Circuit Court of Appeals ruled there are three ways this case violates the Constitution, and now the Supreme Court will decide. Justices heard arguments for the case during the week of Nov. 26.

There’s a lot at stake in this case beyond handling SEC fraud cases. There are more than twice as many ALJs as federal judges. Eliminating them could flood the courts. For instance, the Social Security Administration has more than 1,200 ALJs that each hear 30 dispositions per month. 

Mark Cuban’s attorney, Stephen Best, joined Straight Arrow News to discuss ALJs. Best is a partner at Brown Rudnick focusing on white-collar defense, investigation and compliance. Best served as lead counsel in the successful defense of Mark Cuban against the SEC’s claims of insider trading.

Simone Del Rosario: What is your take on ALJs?

Stephen Best: I think it’s, honestly, a cheap default by the SEC to circumvent constitutional rights and appropriate due process for people being charged with violations of SEC rules and regs. And I think that it was a ghost that nobody really focused on until after the Mark Cuban insider-trading case. When the SEC had incredible difficulties accommodating the requirements of the U.S. District Court’s rules on discovery and trial practice, they ran back to their home at the ALJ.

Simone Del Rosario: If we compare the records that the SEC has seen, at least from 2010 to 2015, they were getting a 90% success rate in front of their own administrative law judges, whereas it was only a 69% success rate if they were going in front of a federal judge. So obviously, the decks are stacked a little bit differently depending on what that venue is. Are you saying that your opinion of administrative law justices is specific to the SEC or do you think this is a wider problem?

Stephen Best: There was a very good argument in front of the U.S. Supreme Court as to the value of administrative law judges. And I think the stats are that the vast majority of administrative law judges handle Social Security cases.

I think, of the 1,600 ALJs, 1,300 or more address Social Security issues, and none of the conversation that we’re having touches that. I think the Supreme Court asked how many ALJs in the SEC exist at this point. Somebody thought it was five; it’s actually down to three. So we’re talking about a pretty finite issue here.

Simone Del Rosario: The Fifth Circuit ruling on Jarkesy points to three different arguments of unconstitutionality when it comes to administrative law justices. If the Supreme Court agrees with that assessment, does that topple the system?

Stephen Best: Let me answer it this way. The Supreme Court addressed those three specific issues and really only focused on the constitutional concerns of the Seventh Amendment right to a jury trial. There was no debate and no questions asked as to the other two arguments.

And so it was clear that the Supreme Court is concerned about the clogging of the system and the ability to give ALJs, particularly in the Social Security Administration, their powers to do their job. They also cited ALJs in tax proceedings as well, and there’s already a case before the Supreme Court that’s ruled that’s constitutional.

They’re really trying to focus on where the fencing is going to be as regards the taking of property, if you will, which in this case is monetary fines. And the SEC’s abuse of the process, I will say, by running back to a tribunal, which is really kind of a puppet court.

You have to understand my indignation to it comes from the fact that the SEC, unlike the DOJ, is not required to turn over exculpatory information that they receive on a case; which is outrageous when it’s a regulator that can give sanctions out to individuals, that they are not required to turn over to the defense attorney favorable information for them.

The process then gets even more abusive when you go to the ALJ, because discovery is abridged almost completely in the ALJ versus U.S. District Court.

Simone Del Rosario: Do you think these are systems that could be reformed versus removed?

Stephen Best: They’ve never offered a compromise. Look, it’s the same nonsense I dealt with for six years with Mark Cuban. They said no to everything. And so maybe, maybe on the eve of their losing the ability to have ALJs, which then throws into disruption the constitutionality of other rulings to date, then maybe they offer compromise.

Yes, clearly a compromise would be warranted. They could hire competent ALJs. They could have the ALJs not be paid by the SEC but maybe by another governmental entity, and they could have a more transparent and fair process in discovery to make it feel like somebody’s getting a real hearing.

Simone Del Rosario: An argument for ALJs is that they are specialized. If we take something like securities law, you’re looking at a judge who is an expert in that arena. Do you think some areas of law are too complex to go in front of a federal judge and in front of a jury? Or is that your job to make sure that they understand what the case is?

Stephen Best: There’s never a case too complex for a U.S. federal judge. There’s an old adage, which I employ in every case. It’s called KISS, keep it simple, stupid. The stupid is referencing to me. If I can’t understand it, nobody else is going to understand it.

So I will tell you, there are many times when you have a case where there are sophisticated issues that you would prefer probably a judge addressing it than a jury. But it’s our art, if you will, as trial lawyers, to break it down to its simplest form for a jury to understand.

Simone Del Rosario: Meta just sued the FTC to stop them from reopening a 2020 settlement. It seems to echo the arguments that we’re hearing right now in Jarkesy. What do you make of this action by Meta? Will the FTC be next, especially if the Supreme Court rules that the SEC was improperly using ALJs?

Stephen Best: The floodgates are about to open up, and that’s what the Supreme Court’s worried about. And so they’re going to be very careful in tailoring their opinion. But nonetheless, however careful they’re going to be, it’s still going to leave room for interpretation that it is applicable to other instances, particularly the Meta case.

Simone Del Rosario: What do you think about this makes it such a political case? If you hear the rhetoric around it, especially from the left, they’ll say, ‘Well, it’s right-wing people who want to see the ALJs thrown out.’ What makes this political?

Stephen Best: What made COVID political? I mean, I have absolutely no idea how it becomes a right-versus-left issue. I honestly don’t have an answer for you. I don’t understand how the world’s working these days.

There is no conservative-versus-liberal view here. I advocate for a better process. I advocate for clarity from Congress. And there are many cases, by the way, that could be handled by an ALJ from the SEC that don’t involve fraud, that are really administrative in nature, like books-and-records violations and the like.

It doesn’t matter whether you’re Republican or Democrat, you should both be on the side of more transparency in tribunals and in turning over exculpatory information to defendants. That’s not a Republican or Democratic issue. So I just don’t have an answer for you.

Simone Del Rosario: Well, I thought that was an answer in itself. Steve Best, thank you so much for your time today.

Stephen Best: Thank you so much.

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Simone Del Rosario: There’s a Supreme Court case that could turn the justice system on its head. But the scales of justice in question aren’t in the courts at all.

SEC v. Jarkesy is all about the SEC’s use of in-house judges and whether it’s constitutional.

Administrative law judges, ALJs, are part of the executive branch, not the judicial branch. They are employed by the agency that is bringing the charges.

Let me lay the scene. In this case, the SEC accused conservative talk show radio host and hedge fund manager George Jarkesy of committing securities fraud by inflating values of certain holdings. The SEC opted to bring the fraud case in front of the in-house judge, who ruled Jarkesy was guilty of the crimes. The judge ordered Jarkesy to pay a civil penalty of $300,000 and pay back another $685,000 in ill-gotten gains. He was also barred from the industry.

Jarkesy argues, among other things, that he deserves the right to a jury of his peers.

The Fifth  Circuit Court of Appeals ruled there are three ways this case violates the Constitution, and now the Supreme Court will decide.

There’s a lot at stake here. There are more than twice as many ALJs as federal judges. Eliminating them altogether could flood the courts. For instance, the Social Security Administration has more than 1200 ALJs that each hear 30 dispositions a month.

Joining me now is Stephen Best, a partner with Brown Rudnick, focusing on white-collar defense, investigation and compliance. Steve served as lead counsel in the successful defense of Mark Cuban against the SEC’s claims of insider trading.

First of all, Steve, what is your take on ALJs?

Stephen A. Best: I think it’s, honestly, a cheap default by the SEC to circumvent Constitutional rights and appropriate due process for people being charged with violations of SEC rules and regs. And I think that it was a ghost that nobody really focused on until after the Mark Cuban insider trading case. And when the SEC had incredible difficulties accommodating the requirements of the US District Court’s rules on discovery and trial practice, they ran back to their home at the ALJ.

Simone Del Rosario: If we compare the records that the SEC has seen, at least from 2010 to 2015, they were getting a 90% success rate in front of their own administrative law judges, whereas it was only 69% success rate over the same time period if they were going in front of a federal judge. So obviously, the decks are stacked a little bit differently depending on what that venue is. Are you saying that your opinion for administrative law justices is specific to the SEC, or do you think that this is a wider problem?

Stephen A. Best: I mean, look, there was a very good argument in front of the U.S. Supreme Court as to the value of administrative law judges. And I think the stats are that the vast majority of administrative law judges handle social security cases. I think of the 1,600 ALJs, 1,300 or more address social security issues, which none of the conversation that we’re having touches that. In fact, it goes on, I think the Supreme Court asked how many ALJs in the SEC exist at this point. Somebody thought it was five, it’s actually down to three. So we’re talking about a pretty finite issue here.

Simone Del Rosario: The Fifth Circuit ruling on Jarkesy really points to three different arguments of unconstitutionality when it comes to administrative law justices. If the Supreme Court agrees with that assessment, does that topple the system?

Stephen A. Best: Let me answer it this way. The Supreme Court addressed those three specific issues and really only focused on the constitutional concerns of the Seventh Amendment right to a jury trial. There was no debate and no questions asked as to the other two arguments. And so it was clear that the Supreme Court is concerned about the clogging of the system. And the ability to give ALJs, particularly in the Social Security Administration, their powers to do their job. They also cited ALJs in tax proceedings as well. And there’s already a case before the Supreme Court that’s ruled that that’s constitutional. They’re really trying to focus on where the fencing is going to be, as regards the taking of property, if you will, which in this case is monetary fines. And the SEC’s, really, abuse of the process, I will say, by running back to a tribunal, which is really kind of a puppet court. You have to understand my indignation to it comes from the fact that the SEC, unlike the DOJ, is not required to turn over exculpatory information that they receive on a case, which is outrageous when it’s a regulator that can give sanctions out to individuals, that they are not required to turn over to the defense attorney favorable information for them. The process then gets even more abusive when you go to the ALJ because discovery is a bridge almost completely in the ALJ versus U.S. District Court.

Simone Del Rosario: Do you think these are systems that could be reformed versus removed?

Stephen A. Best: They’ve never offered a compromise. The SEC is never, look, it’s the same nonsense I dealt with for six years with Mark Cuban. They said no to everything. And so maybe, maybe on the eve of they’re losing the ability to have ALJs, which then throws into disruption the constitutionality of other rulings to date, then maybe they offer compromise. Yes, clearly a compromise would be warranted. They could hire competent ALJs. They could have the ALJs not be paid by the SEC, but maybe another governmental entity, and they could have a more transparent and fair process in discovery to make it feel like somebody’s getting a real hearing.

Simone Del Rosario: An argument for ALJs is that they are specialized. If we take something like securities law, you’re looking at a judge who is an expert in that arena. Do you think that there are some areas of law that are too complex to go in front of a federal judge and in front of a jury? Or is that your job to make sure that they understand what the case is?

Stephen A. Best: There’s never a case too complex for a U.S. federal judge. There’s an old adage, which I employ in every case, it’s called KISS, keep it simple, stupid, the stupid is referencing to me. If I can’t understand it, nobody else is going to understand it. So I will tell you, there are many times where you have a case where there are sophisticated issues that you would prefer probably a judge addressing it than a jury. But it’s our art, if you will, as trial lawyers, to break it down to its simplest form for a jury to understand.

Simone Del Rosario: I want to ask you, Meta just sued the FTC to stop them from reopening a 2020 settlement between them and Meta. It seems to echo the arguments that we’re hearing right now in Jarkesy, what do you make of this action by Meta? Will the FTC be next, especially if the Supreme Court rules that the SEC was improperly using ALJs?

Stephen A. Best:  The floodgates are about to open up and that’s what the Supreme Court’s worried about. And so they’re going to be very careful in tailoring their opinion. But nonetheless, however careful they’re going to be, it’s still going to leave room for interpretation that it is applicable to other instances, particularly the Meta case.

Simone Del Rosario: What do you think about this makes it such a political case? If you hear the rhetoric around it, especially from the left, they’ll say, well, it’s right-wing people who want to see the ALJs thrown out. What makes this political?

Stephen A. Best: What made COVID political? I mean, I have absolutely no idea how it becomes a right versus left issue. I honestly don’t have an answer for you. I don’t understand how the world’s working these days. There is no conservative versus liberal view here. I advocate for a better process. I advocate for clarity from Congress. And there are many cases, by the way, that could be handled by an ALJ from the SEC that don’t involve fraud, that are really administrative in nature, like books and records violations and the like. It doesn’t matter whether you’re Republican or Democrat, you should both be on the side of more transparency in tribunals and in turning over exculpatory information to defendants. That’s not a Republican or Democratic issue. So I just don’t have an answer for you.

Simone Del Rosario: Well, I thought that was an answer in itself. Steve Best, thank you so much for your time today.

Stephen A. Best: Thank you so much. Have a great night.