Earlier this month on a Friday afternoon, the Securities and Exchange Commission quietly issued an extraordinary administrative order. In one fell swoop, the SEC unconditionally abandoned more than 40 enforcement cases the agency had previously spent untold staff resources prosecuting over the past decade. In essence, the agency largely shut down what I’ve previously called its “Hotel California” adjudication system.
It was a fitting end to an ill-advised policy choice made by agency leaders a decade ago. Not content to allow enforcement targets to defend themselves in federal courts with independent, Article III judges overseeing trials before juries, SEC leaders took advantage of a provision of the Dodd-Frank Act of 2010 and began diverting as many enforcement prosecutions as possible into their own in-house adjudication system, where cases are initially decided by SEC employees called administrative law judges (ALJs) and appeals are heard by the SEC commissioners themselves.
The plan attracted immediate criticism from yours truly and others who pointed out, among other things, that the SEC can’t credibly serve as both prosecutor and judge in the same case; that punitive, quasi-criminal law enforcement cases need to be decided by juries rather than the SEC’s own personnel; and that SEC ALJs, as Executive Branch “officers,” were not properly appointed under the Constitution’s Appointments Clause and, in any event, enjoyed too many layers of protection from removal by the President.
Then the litigation began. The Supreme Court’s 2018 decision in Lucia v. SEC confirmed that the SEC’s ALJs lacked constitutionally valid appointments, effectively requiring the SEC to relitigate, settle, or abandon more than 100 pending cases on its administrative adjudication docket. The agency then effectively stopped assigning new cases to its ALJs and refused for the next several years to decide any of the dozen or so pending internal appeals from ALJ decisions. (These undecided appeals were among the cases the SEC just dismissed.)
And last year the U.S. Court of Appeals for the Fifth Circuit confirmed in Jarkesy v. SEC that the agency’s ALJs enjoy too many layers of tenure protection and that SEC in-house adjudications deprive SEC targets of their Seventh Amendment jury trial rights. (The SEC has asked the Supreme Court to review the case.)
Worse yet for the SEC, earlier this year the Supreme Court held, in the companion cases of Axon v. FTC and Cochran v. SEC, that SEC targets need not endure the entire, multi-year SEC administrative gauntlet before asking federal courts to rule on the structural constitutional defects in the agency’s adjudication system. This took away one of the SEC’s most powerful points of leverage against its targets—namely, the agency’s virtually unchecked ability to make defending administrative enforcement cases so expensive, demoralizing, and career-debilitating that nearly all respondents eventually either default or capitulate to the SEC’s settlement demands rather than fighting to the end. (Disclosure: The author’s organization is legal counsel to Mr. Cochran)
With this backdrop came this month’s sweeping dismissal order. Still playing defense not only in the Jarkesy and Cochran cases but also in my own Fifth Circuit mandamus case that seeks to force the agency to finally decide the pending appeals on its administrative docket, the agency essentially abandoned its decade-old administrative prosecution plan entirely. It simply dropped more than 40 enforcement cases that had been pending on its administrative docket, no questions asked.
Loose Ends and Open Questions
The SEC’s dismissal order did not address the merits of any individual case, characterizing the dismissals as discretionary. It cited the agency’s admission in April 2022 of a “control deficiency” that had allowed staff within its Division of Enforcement (the prosecution team) to improperly access the files of agency adjudication staff—the rough equivalent of a criminal prosecutor having secret access to internal advice memos exchanged between the presiding judge and his law clerks. The SEC admitted back then that this had happened in the Cochran and Jarkesy administrative cases, but was vague about which other cases were similarly tainted. Last week’s dismissal order revealed dozens of others.
The dismissal order leaves at least several loose ends and open questions. First, it covers only those affected cases that were still open. But what about closed cases that were affected by the agency’s internal controls failure? Why shouldn’t they be reopened and dismissed too? Even those who settled their cases—at least those who may have settled after a similar control breach in their case—might plausibly argue they were misled into settling because the SEC withheld from them information they could have used to seek dismissal of their case.
Second, while affected litigants no doubt welcome the dismissal of their cases after all these years, they may find the result less than fully satisfying. After all, most of them were contesting not only harsh public allegations of wrongdoing made by SEC staff but also adverse factual findings made against them by the ALJs in their cases, and the SEC’s dismissal order does little in the way of undoing the reputational damage inflicted by those allegations and findings. True, a footnote in the dismissal order says it the SEC has “set aside” any prior ALJ decisions in the affected cases, but those decisions will live forever on the SEC website and likely remain one of the top results when a litigant’s name is typed into any online search engine. Unless the SEC affixes a legend to those decisions to alert the casual reader that they were “set aside” and no longer have any legal effect, these litigants will continue to suffer unfair reputational harm despite having the charges against them dismissed.
Third, what about costs and attorney’s fees? After all, the SEC dragged most of the affected litigants through many years of administrative scrutiny and litigation—some nearly a decade—before belatedly conceding defeat. No doubt many litigants lost their careers and exhausted their life savings defending themselves against cases that violated their civil rights and, in the end, were all for naught. In at least one case, an ALJ dismissed charges brought against a publicly traded company back in 2019, but SEC prosecutors appealed that decision to the SEC commissioners and the commissioners simply refused to decide the case before they dismissed it earlier this month, forcing the company to remind shareholders every quarter about the overhang of the case and the unpredictability of its ultimate outcome. Surely some of these litigants deserve to recover at least a fraction of what they lost while enduring the SEC’s prolonged administrative processes.
And finally, what about George Jarkesy, the protagonist in the years-long battle that the SEC is now seeking to prolong for at least another year by seeking Supreme Court review? His case wasn’t covered by the SEC’s dismissal order, presumably because—at least for the agency’s administrative purposes—the case is already closed. But it makes little sense to treat him any differently than the others whose cases were affected by the SEC control deficiency, especially since the agency specifically admitted more than a year ago that Jarkesy’s case was in fact affected.
* * * *
The SEC’s extraordinary order is therefore unlikely to put the SEC’s administrative adjudication problems in the rearview mirror. Still, it is a cause for celebration by those who cherish their civil liberties and still believe that federal agencies should prosecute and punish private citizens only with the safeguards provided by due process of law—the baseline prerequisite of which is adjudication in an Article III court.