Supreme Court Will Hear Challenge to SEC Administrative Courts

The U.S. Supreme Court will hear a challenge to the legitimacy of the Securities and Exchange Commission’s administrative law judges, brought by George Jarkesy, a hedge fund manager. The court will likely hear the case during its next session and rule by June 2024.

The case dates back to 2011, when the SEC began investigating Jarkesy for securities fraud. Jarkesy was managing two hedge funds with more than 100 customers and more than $24 million in assets. Patriot28 LLC was the fund’s adviser and was also charged by the SEC.

The SEC alleged Jarkesy and Patriot28 defrauded investors by misrepresenting who the prime broker and auditor were; mispresenting the parameters and safeguards of the hedge fund; and overvaluing the funds’ assets in order to justify higher fees.

Jarkesy asked the district and appeals courts in the District of Columbia to review the case, and both responded that they did not have jurisdiction, because Congress empowers the SEC to choose whether to bring a case to federal courts (established via Article III of the U.S. Constitution) or to adjudicate it within the agency.

For more stories like this, sign up for the CIO Alert newsletter. 

The SEC adjudicated the case and ultimately fined Jarkesy and Patriot28 $300,000 in civil fines and ordered them to repay $685,000 in ill-gotten gains. Jarkesy was also barred “from various securities industry activities: associating with brokers, dealers, and advisers; offering penny stocks; and serving as an officer or director of an advisory board or as an investment adviser,” according to the appeals court’s decision.

Jarkesy appealed to the 5th U.S. Circuit Court of Appeals, based in New Orleans. The appellate court ruled in his favor and found that the SEC’s in-house adjudication system violated the Seventh Amendment guarantee to a jury trial in federal civil matters in which the amount in dispute exceeds $25. The appeals court also found that Congress improperly delegated legislative authority to the SEC by permitting the commission to bring a case before a court or the agency’s own administrative law judges. Lastly, the appeals court ruled that administrative law judges’ protection to not be removed except “for cause” violates Article II of the U.S. Constitution by improperly shielding them from presidential removal.

The appeals court’s decision stated, “Petitioners had the right for a jury to adjudicate the facts underlying any potential fraud liability that justifies penalties” and “Congress unconstitutionally delegated legislative power to the SEC when it gave the SEC the unfettered authority to choose whether to bring enforcement actions in Article III courts or within the agency.”

The SEC then appealed to the Supreme Court, seeking a reversal of the 5th Circuit’s decision.

The case could have profound consequences for the authority and administration of the SEC and other federal agencies, depending on which legal theories the Supreme Court upholds or reverses. In addition to the SEC, at least 20 other federal agencies employ administrative law judges.

Tags: ALJ, SEC

Just a few days after leaving the top job at Texas’ university investment organization, Britt Harris was named Wednesday as the acting CEO of the Texas Permanent School Fund Corp., replacing Holland Timmins, who retired earlier this year.

Harris will serve as a fill-in while the Texas PSF, where Timmins was CEO and CIO for more than two decades, conducts a nationwide search for a permanent replacement. Harris is not under consideration to be the permanent replacement, according to the PSF.

The PSF, with assets of $51.3 billion as of August 2022, supports public schools in the Lone Star State and has been around since the state’s early days: It was mandated in the state’s initial constitution in 1845, seeded with $2 million in 1854 as the Special School Fund, and established in its current form in the 1876 constitution.

There have, however, been recent changes to the fund’s governance, most notably the 2021 establishment of the PSF Management Corp., which placed management of the fund under the oversight of Texas’ State Board of Education, rather than reporting directly to the Texas Education Agency.

For more stories like this, sign up for the CIO Alert newsletter. 

“Industry leaders acknowledge that Harris has a stunning record as a transformational leader, in both the industry and across many different companies and types of funds,” said Texas PSF Board Chairman Tom Maynard in a news release.

Board member Dawn Buckingham noted in the release that Harris’ “exceptional knowledge and experience will allow Texas PSF to continue serving the school children of Texas for generations to come as we search for a permanent CEO.”

Harris has had a long career atop key state organizations, following many years in finance. Most recently, he was president and CEO of the University of Texas/Texas A&M Investment Management Co. Over six years as head of the endowment ($68 billion), he increased UTIMCO’s assets by 65%.

Prior to joining UTIMCO in 2017, Harris spent 10 years as CIO at the Teacher Retirement System of Texas ($155 billion). In 2013, CIO magazine gave him a Lifetime Achievement Award. During his 43-year career, Harris held various executive roles in finance, including at Bridgewater Associates and the Verizon Investment Management Corp.