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Could SEC v. Jarkesy Be The SCOTUS Case That Brings Down The Administrative State?

Does the SEC have the constitutional authority to regulate and target small business owners, up to the tune of a half-a-million-dollar fine?


Last Friday, the U.S. Supreme Court heard arguments for Securities and Exchange Commission v. Jarkesy, which challenges the authority of the administrative state. The defendant is George Jarkesy, a conservative radio host who was fined over half-a-million dollars by the SEC for allegedly defrauding investors and appealed this sentence by arguing that the SEC does not have the constitutional authority to do this.

His legal team makes three arguments: (1) The SEC is violating the Seventh Amendment, which guarantees a trial by jury; (2) the SEC doesn’t have the authority to adjudicate these matters since it’s an executive agency, not a federal court; and (3) the SEC judges are unfairly protected from serious political and legal accountability. All these arguments add up to condemn the administrative state as a whole, which Jarkesy’s team claims “is effectively rigged against virtually every defendant that goes before an ALJ [administrative law judge].”

Based on Supreme Court justices’ questioning (specifically those appointed by Trump), Jarkesy may be actually successful in winning his case. According to a report from The New York Times, Justice Kavanaugh took issue with the fact that the SEC is basically acting as the judge, jury, and executioner; Justice Gorsuch pointed out the lack of accountability that results from no jury option; and Justice Coney Barrett was bothered by the blurriness between what counts as public and private law.

As for the liberal justices and the SEC’s legal team, they mainly argued that this is the way things have always gone, citing the precedents set by the Chevron doctrine (which delegates legal authority to executive agencies) and Atlas Roofing Co. v. Occupational Safety and Health Review Comm’n (a 1977 case that reinforces the Chevron doctrine). Sotomayor said changing the existing order would be “dramatic,” and Kagan noted the “chutzpah” of the defendant’s claims.

Frankly, writers of the pro-government left seemed to make a more spirited (albeit more logically fallacious) case against Jarkesy. In an Atlantic article provocatively entitled, “The Case that Could Destroy the Government,” Noah Rosenblum expresses how the left really feels about all this: Basically, right-wing yahoos are using fringe constitutional theory to overturn what we generally know as “the government.” As he sums it up, “This is wild stuff. Not long ago, a lawyer would have been laughed out of court for making such nondelegation claims. Today, they’d have a good chance of destroying the federal government’s administrative capacity.”

Rosenblum goes on to explain that the SEC needs to have this authority to continue doing its job of keeping investors safe from swindlers like Jarkesy. Congress and the courts are simply too busy and not sufficiently specialized in administrative statutes to handle the problems of market manipulation. In so many words, he maintains that the idea of checks and balances and the Bill of Rights inhibit “effective government.”

After dismissing originalist jurisprudence as “born in sin” since it was supposedly implemented to defend racial segregation, Rosenblum concludes his essay by asserting that “the consequences of Jarkesy’s success would be disastrous, especially for the American economy.” For him, regulators like those in the SEC are the final line of defense against certain chaos threatening all areas of American life.

Ignoring the alarmism, Rosenblum’s reasoning somehow combines naivety and cynicism into an incoherent yet typically leftist argument. The cynical aspect is that he confuses the whole government with an executive agency. This means that instead of protecting the rights of its citizens, as is explicitly stated in the Declaration of Independence, the government exists to tell its citizens what to do and how to do it. If the government is prevented from doing this, then Americans will automatically degenerate into savages and resort to harming one another in every way possible.

The naive aspect is that he assumes that executive agencies are actually neutral, trustworthy, and competent. Whether it’s the SEC, IRS, or the FBI, their agents are professionals with a heart of gold. They could never be corrupted with unbridled authority or gargantuan budgets. They would never target specific Americans, conduct political witch hunts, or neglect their actual responsibilities.

Of course, both of these premises are ridiculous. As Sohrab Ahmari details in his recent book Tyranny Inc., it is quite possible to have a tyrannical system exist under the guise of technocratic economic governance. The problems that he sees with corporate arbitration — the private judicial process for employees with a grievance — are the same as the ones with ALJs at the SEC: “a vast parallel court system where powerful interests get to tailor the rules to their advantage, dominate weaker actors, and ultimately close off access to justice.” This explains the fact, cited by Jarkesy’s lawyers, that “the agency had won the last 200 times” before “Jarkesy’s case went to trial.”

Moreover, it is highly debatable just how honest and effective the SEC has been in keeping investors safe and preventing market manipulation. Whether it’s the insider trading of politicians like Hillary Clinton or Nancy Pelosi, the multibillion-dollar fraud of scammers like Sam Bankman-Fried, or the collapse of Silicon Valley Bank, it seems questionable that the SEC focuses its efforts on the financial shenanigans of a relatively small investor like George Jarkesy. And in today’s political climate, it would be foolish to assume that Jarkesy’s conservative positions didn’t also factor into the charges.

Finally, as most economists will attest, most regulations that were originally intended to protect smaller businesses often end up hurting them and helping large established businesses instead. After all, larger businesses can afford lawyers to meet each new regulation and keep on the right side of the SEC while smaller businesses struggle under the burden and become easy pickings for an SEC agent needing to fill his quota.

So yes, there’s good reason to think that limiting the authority of the SEC or abolishing altogether might actually be a wonderful thing that takes power from the state and gives it back to the people. The current status quo of the Leviathan state operating without any countervailing pressure is undemocratic, unfair, and unsustainable. If the Supreme Court rules in favor of Jarkesy, it could make the market free once again and significantly weaken an unruly administrative state.

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