A U.S. appeals court has ruled that the Securities and Exchange Commission (SEC) violated the constitutional rights of a hedge fund manager by having an internal judge hear a securities fraud case brought against him.
In 2013, the SEC had accused George Jarkesy Jr. and his firm Patriot28 LLC of violating federal securities law by misstating the assets of his hedge funds. The case was heard by an administrative law judge, not a civil court. Those administrative or internal judges may have violated Jarkey's Seventh Amendment right to a jury trial, the Fifth Circuit Court of Appeals said in its ruling Wednesday.
"In sum, we agree with petitioners that the SEC proceeding below was unconstitutional. The SEC's judgment should be reversed for at least two reasons: (1) petitioners were deprived of their Seventh Amendment right to a jury trial; and (2) Congress unconstitutionally delegated legislative powers to the SEC by failing to provide the SEC with an intelligible policy for exercising the delegated powers," the ruling states.
The ruling remanded the case "for further proceedings," meaning it does not completely overturn Jarkesy's conviction.
According to the New York Times, the impact of the case is limited to SEC cases in Texas, Louisiana and Mississippi, and only to cases that do not exclusively involve "public rights."
The SEC has taken on a number of crypto industry enforcement actions in recent years, increasing the portion of its enforcement division responsible for such cases to just over 50 people earlier this month.
Before announcing the decision Wednesday, SEC Chairman Gary Gensler testified before the House Appropriations Committee that his agency needed more resources to continue cracking down on fraud and other crimes in the sector.
"I wish we had more resources to devote to this task," he told lawmakers.