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The Justice Insiders: SEC Plays Chicken with Jarkesy



Episode 18: SEC Plays Chicken with Jarkesy

Host Gregg N. Sofer welcomes back to the podcast Richard Epstein, Laurence A. Tisch Professor of Law at NYU School of Law, to discuss the U.S. Supreme Court’s consideration of Securities and Exchange Commission v. Jarkesy, a case that has the potential to vastly alter the way the SEC initiates and adjudicates enforcement proceedings, as well as its ability to choose its own in-house venue for those proceedings.

Gregg N. Sofer Biography

Full Biography

Gregg counsels businesses and individuals in connection with a range of criminal, civil and regulatory matters, including government investigations, internal investigations, litigation, export control, sanctions, and regulatory compliance. Prior to entering private practice, Gregg served as the United States Attorney for the Western District of Texas—one of the largest and busiest United States Attorney’s Offices in the country—where he supervised more than 300 employees handling a diverse caseload, including matters involving complex white-collar crime, government contract fraud, national security, cyber-crimes, public corruption, money laundering, export violations, trade secrets, tax, large-scale drug and human trafficking, immigration, child exploitation and violent crime.

Richard Epstein Biography

Richard A. Epstein is the Laurence A. Tisch Professor of Law, New York University Law School, a senior lecturer at the University of Chicago, and the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution.

Professor Epstein has published work on a broad range of constitutional, economic, historical, and philosophical subjects. He has taught administrative law, antitrust law, communications law, constitutional law, corporation criminal law, employment discrimination law, environmental law, food and drug law, health law, labor law, Roman law, real estate development and finance, and individual and corporate taxation.

Epstein’s most recent book publication is The Dubious Morality of Modern Administrative Law (2020). Other works include The Classical Liberal Constitution: The Uncertain Quest for Limited Government (2014); Design for Liberty: Private Property, Public Administration, and the Rule of Law (2011); The Case against the Employee Free Choice Act (2009); Supreme Neglect: How to Revive the Constitutional Protection for Private Property (2008); How the Progressives Rewrote the Constitution (2006); Overdose (2006); and Free Markets under Siege: Cartels, Politics, and Social Welfare (2005).

He received a BA degree in philosophy summa cum laude from Columbia in 1964; a BA degree in law with first-class honors from Oxford University in 1966; and an LLB degree cum laude, from the Yale Law School in 1968. Upon graduation he joined the faculty at the University of Southern California, where he taught until 1972. In 1972, he visited the University of Chicago and became a regular member of the faculty the following year.

He has been a senior fellow at the MacLean Center for Clinical Medical Ethics since 1984 and was elected a fellow of the American Academy of Arts and Sciences in 1985. In 2011, Epstein was a recipient of the Bradley Prize for outstanding achievement. In 2005, the College of William & Mary School of Law awarded him the Brigham-Kanner Property Rights Prize.

Additional Resources

Jarkesy v. Securities and Exchange Commission, No. 20-61007 (5th Cir. May 18, 2022).

SCOTUSblog, Securities and Exchange Commission v. Jarkesy

The Justice Insiders | The Administrative State is Not Your Friend: A Conversation with Professor Richard Epstein

Read the Transcript

This transcript has been auto-generated using Adobe Premier Pro.

00;00;01;23 - 00;00;37;18
Gregg Sofer
Ever wonder what is going on behind the scenes as the government investigates criminal cases? Are you interested in the strategies the government employs when bringing prosecutions? I'm your host, Gregg Sofer, and along with my colleagues and Husch Blackwell's White Collar, Internal investigations & Compliance team, we will bring to bear over 200 years of experience inside the government to provide you and your business thought provoking and topical legal analysis as we discuss some of the country's most interesting criminal cases and issues related to compliance and internal investigations.

00;00;37;21 - 00;01;11;11
Gregg Sofer
Welcome to the Justice Insiders podcast. Episode number 18. I'm your host, Gregg Sofer, and today we have a special guest joining the show, actually rejoining the show. Professor Richard Epstein. Professor Epstein first appeared on the Justice Insiders last summer shortly after the Fifth Circuit handed the SEC a stunning loss in a KISI versus SEC. Now, this decision threatens the SEC's ability to both initiate and adjudicate enforcement proceedings, as well as its ability to choose its own in-house venue for those proceedings.

00;01;11;28 - 00;01;30;28
Gregg Sofer
There's also the matter of how administrative law judges can be removed was sort of central to the opinion in the Fifth Circuit. The case was accepted for review by the United States Supreme Court earlier this year. And at that point, we knew we wanted to get Professor Epstein back on the podcast to sort of update where we are and where this could go.

00;01;30;29 - 00;01;34;13
Gregg Sofer
Professor, thank you so much for joining us again and welcome back to the show.

00;01;35;03 - 00;01;56;06
Professor Epstein
It's always nice to be here and many other things have happened. I would stress that you have to put our case in context. There are other cases now which are challenging the Chevron doctrine, the sound of all deference, and the Supreme Court having to do with various cases involving fisheries and boats going out to sea and so forth.

00;01;56;15 - 00;02;36;03
Professor Epstein
So what's happened is there is clearly in the Supreme Court a real administrative law conviction that too much discretion on the part of judges and legislatures and executives of one kind or another is a bad thing. And the issue is just how much is it's going to be reined in. And so what I think is clear to say is if you look at all nine Supreme Court justices, they are much more transfixed on these sort of administrative law issues of notice, hearing bias and all the rest of that stuff, and much less keen in to the substantive issues having to do with the merits of these security claims or indeed pretty much any other area

00;02;36;03 - 00;03;06;04
Professor Epstein
that we have to stated in the simplest form. This is Supreme Court, which is really tied up in administrative and constitutional law and due process and somewhat feels its relatively weak interests and business transactions of property rights. Even though most of the people who bring these cases regard administrative law as an abstract subject, but they're really worried about is how I do business without being railroaded by the FTC or the SEC or any other agency that has plenary power over the population.

00;03;06;06 - 00;03;30;21
Gregg Sofer
On what we talked about this a lot the last time we had you on the show. And I'm a little surprised the SEC actually thought cert in this case. And I'm wondering whether or not that was a strategic misstep on their behalf, given the landscape that you're describing in the Supreme Court. Given the court's current composition especially. You, however, were not surprised that the SEC sought cert in this case.

00;03;30;22 - 00;03;33;29
Gregg Sofer
In fact, last year on our show, you had this to say.

00;03;34;11 - 00;04;01;22
Professor Epstein
Well, I mean, as the general maxim, a single case is only a shot before the bell. This one is surely going to go up to the United States Supreme Court because it's a major threat to what the administrative state is. And I think it's really important to see that there are so many different lines of uneasiness about it and that I think that the decision outcome will be upheld at least by a 63 conservative majority in this case, even as the actual logic of the opinion may be changed.

00;04;02;05 - 00;04;12;25
Gregg Sofer
So, Professor, your analysis proved to be accurate, and here we are with the Jarkesy case before the Supreme Court. But again, why this case? Why has the SEC staked so much on it?

00;04;13;07 - 00;04;31;04
Professor Epstein
Yeah, I'm glad to hear that I was vindicated. I think the explanation is this is a real thorn in their side. They don't know what is going to happen. But so long as this decision remains on the books, their activities, not only in the particular circuit, they're in the Fifth Circuit, but it's also going to be all over the country.

00;04;31;04 - 00;04;53;10
Professor Epstein
So they need to get some clarification and in order to do it and they hope that they could mount the sufficient case. The argument that I would say that makes the government decision is they have a fairly strong dissent in this case by Judge Davis and that you cannot ignore. And also, I think that the court picked the wrong grounds on which to take this case up.

00;04;53;10 - 00;05;18;13
Professor Epstein
That is the Fifth Circuit. There were two issues. There was a generalized due process claim. The notion of private property be taken without due process of law, life, liberty or property. And I thought that was very strong, given the fact that the procedures here so utterly dubious. But she did not talk about that. What she talked about was much more particular institutions having to do with non delegation, jury powers and stuff like that.

00;05;18;22 - 00;05;36;23
Professor Epstein
And I don't think she actually had the strongest grounds on her opinions. So I think some of those arguments are clearly wrong, particularly one which says that it's an impermissible delegation to give prosecutors discretion who to charge and who not. That discretion is irreducible with any legal system.

00;05;36;28 - 00;05;46;17
Gregg Sofer
Well, let me pause you there and then let's turn the question around. Given the case below. What is the best argument the SEC can make before the Supreme Court?

00;05;47;04 - 00;06;08;20
Professor Epstein
I think the strongest argument is that this is not an infamous delegation of authority to a prosecutor to allow them to choose the cases they want to prosecute. It's not a legislative act which figures out whom you want to sue and why it's an administrative act. And nobody's ever found a really good way to cabinet prosecutorial discretion to the courts.

00;06;09;00 - 00;06;28;23
Professor Epstein
It's a mistake to try to do that. And so what happens is they have to reverse the opinion on that particular well. But this doesn't get rid of what I regard as the heart of the case, which is that you're trying these cases before stacked deck in which the government is the prosecutor. It puts its own people to be judges, and then it appeals itself to its own board inside the commission.

00;06;29;03 - 00;06;50;19
Professor Epstein
And only after you exhaust it one out and beaten to a pulp, you get to go to court. And there were several other cases on jurisdiction that were tried Axon Case and Cochrane of last year, in which again the Supreme Court basically saw that if you only give people the right to challenge the ability of an administrative court to hear a case after they've heard the case, you can be beaten to a pulp.

00;06;50;28 - 00;07;10;02
Professor Epstein
And so what they did is they said you could go into federal court to see whether or not the agency has jurisdiction, and only then do you have to be faced by its abuses. Now, the access, basically, you know, a canary down the mine indicating that the Supreme Court is much more concerned about the procedures that are used before these administrative agencies.

00;07;10;02 - 00;07;30;14
Professor Epstein
That might have been the case even a couple of years ago with the Lucia case, where what they did is they all know is just terrible that knew that tried by somebody who doesn't have an official appointment. But it's all bandaid remedy. What they did is all the SEC, they got the right guys to get the appointment. They brought the same prosecution as before.

00;07;30;24 - 00;07;43;09
Professor Epstein
And so that's a useless kind of remedy. And the client, Lucia, I spoke to their lawyer. Their lawyer. And they were beaten to a pulp and they had to settle on very disadvantageous terms because they just ran out of money and the will to fight.

00;07;43;24 - 00;08;03;15
Gregg Sofer
Professor, one of the features that makes this case so interesting is the way it touches upon so many different areas of administrative law, such as powers of delegation removal and due process rights. Could you briefly tell us your thoughts on how you think the case will play out across each of these various areas of law?

00;08;03;23 - 00;08;26;25
Professor Epstein
Well, I think what's going to happen is that they are not going to deal with the delegation doctors. This is not like on days where I thought there was a serious client. It's just too much the standard course of business. But I do think that they're going to take very seriously the two other features of this case. One, the jury trial, and this is the first thing.

00;08;26;25 - 00;08;51;04
Professor Epstein
And then the question of due process where the separation of powers issue is paramount. So I think that's important. Now, why is it important? Well, one thing that makes an issue important to start with, the jury question is, is there a genuine division of opinion inside the Supreme Court as to how that issue ought to be handled? And it turns out it's a very profound kind of dispute that they should resolve.

00;08;51;26 - 00;09;10;21
Professor Epstein
If you go back and you look, there is a provision in the Constitution, the Seventh Amendment, which says in jury trials of common law, the right to jury will be guaranteed in any case involving more than $20. Well, the $20 is not the serious issue anymore. But the jury trial on that. So what's the case of common law?

00;09;11;07 - 00;09;29;21
Professor Epstein
Well, what you do is you have to go back to 18th century history on this and the common law actually was essentially defined not by the theory of relief, but by the choice of remedies. And to the extent that you ask for the restitution of a particular chattel or the payment of money damages for some property that was damaged or taken from you.

00;09;30;00 - 00;09;50;25
Professor Epstein
You're dealing with this common law. But if you wanted to go to the equity side of the English court system as it existed at the time of independence and seek an injunction, a specific performance or foreclosure, these were all risks that acted on the person they were seeking damages. And what would happen is you go into a quarter of equity and there was no jury trial at all.

00;09;51;09 - 00;10;15;15
Professor Epstein
So the modern jurisprudence under the Seventh Amendment recognize that distinction. And so if in fact, the only thing that the SEC was to seek an injunction against further engagement in the practice of brokerage inside the government, that would be an equity case. Now it turns out. But suppose they're seeking damages and disgorgement is their word. Well, that's a legal case.

00;10;15;26 - 00;10;41;08
Professor Epstein
And so the question is, do you get the jury trial when you move a class a dispute from the judicial system into an administrative system? So now you're not a common law and there's just a complete split of opinion. Some people say that the administrative state is a separate thing and that so long as you're in that kind of a forum, traditional common law guarantees that applied in courts don't apply.

00;10;41;14 - 00;11;05;21
Professor Epstein
And other people say you cannot serve people that constitutional rights by creating law official form. And that was often done in the, you know, the detainee case that happened 15 or so years ago. And it was ultimately decided you may decide to put these people in the specialized tribunals, but you have to give them the same due process protections in the specialized attorneys that they had inside the court system.

00;11;05;27 - 00;11;30;02
Professor Epstein
So my prediction is that what will happen is the Supreme Court will take that view and will say that you can strip somebody of a jury rights by sending them to an administrative tribunal. It follows. But if it turns out that there are other claims having to do with banning from the practice and things of that sort, they will follow the same division inside the administrative agency as they would if this were in a federal court.

00;11;30;07 - 00;11;39;18
Professor Epstein
And if it turns out the federal judge was putting on his hat and liquidate, they would allow him or her to proceed if it's a claim in law. They would have the jury. Right. And they would block it.

00;11;40;02 - 00;11;59;17
Gregg Sofer
Let me ask this question then. If that were to happen and at this point, I wouldn't bet against you betting correctly. What is the implication of that? What is the implication for the SEC? What are the what are the implications for other government agencies who have these same administrative procedures or similar ones to the SEC?

00;12;00;12 - 00;12;06;10
Professor Epstein
Well, I mean, the saying is that they're going to be very reluctant to seek damages and restitution.

00;12;06;16 - 00;12;09;16
Gregg Sofer
But isn't that what they are? That's that's their that's their bailiwick.

00;12;09;17 - 00;12;36;20
Professor Epstein
That's what they want. That's their that's their bread and butter. Right. But remember, they also have sanctions in which they prevent you from practicing in your trade for the next ten years. So they're doing both sides of this thing. I think what will happen is that they will probably take their chances in federal court at that point so as to be able to make sure that the jury trial elements of the case will be preserved, which would be a huge transformation and a great victory for everybody who's done it.

00;12;36;20 - 00;13;02;01
Professor Epstein
I mean, you look at the record of success that people have in fighting the SEC, whether the SEC on its own or they don't win any case, know maybe one case in a thousand. The whole thing is completely rigged. They get to choose not only judges, but whichever judges they want. There is a very strong tradition in federal court of both district court judges and appellate court judges that they are selected by rotation.

00;13;02;17 - 00;13;37;08
Professor Epstein
Meaning you put names into a hat and the judges come out. Nobody knows who they are until a couple of days before the trials. And at that particular point they find out and you argue the whole point here is you don't want the same judges to hog a bunch of cases. The second point about it is, of course, there's this whole constellation of issues as to whether or not separation of powers is violated when you sort of bring everybody together, that's very close to the due process claim in which you're supposed to have a independent tribunal, three of bias to which you could go.

00;13;37;15 - 00;14;04;04
Professor Epstein
And I think that that claim is also extremely strong. And I think that what happens is that they should basically say that we cannot trust an agency to prosecute its own cases before judges whom it chooses. And remember, they aren't chosen by rotation in some of these cases, like in the oil states case. What the head of the particular panel does is picks his favorite friends and puts them on his bench and can actually add new judges to the mix.

00;14;04;13 - 00;14;24;09
Professor Epstein
If it turns out that the first group of judges that hears the case decides it in a way that's unpalatable to the powers that be. And this is just grotesque. And so what you do is you have the force. Now, mind you, you look at these charges, I have no idea whether they're true or false about picking fake agents and making all this choices.

00;14;24;18 - 00;14;47;13
Professor Epstein
Disgorgement and all the rest of that stuff doesn't matter. I mean, the government can put its case in whatever form it want. You don't have to believe them. You don't have to disagree with them, or what you want to do is to get somebody who's an independent trial. And you don't want that to only come at the end of the day when all the damage is done by the findings of facts and the various kinds of interactions that happen at a trial.

00;14;47;28 - 00;15;17;20
Gregg Sofer
So if if the court disrupts this system under either or both or even a different legal theory, how significant is this in terms of what you've seen in your life with respect to its impact on the administrative state? And then a follow on question to that. If you were advising the agencies at that point, assuming this court goes the way that you say, you say, well, they can move things into into federal court, federal district court.

00;15;18;00 - 00;15;28;16
Gregg Sofer
Are there other options available to them to tweak the current administrative system and survive this this opinion? Should it be granted along the lines that you describe.

00;15;29;00 - 00;15;48;12
Professor Epstein
I suggest that you're going to ask the hard question of what comes next for the government. If it turns out to get a smashing on this. And there's not going to be a way, I think, to keep these things inside the administrative agency. I think what they will try to do is to get them appointed to courts, maybe specialized courts.

00;15;48;21 - 00;16;08;21
Professor Epstein
They may try to get certain procedural advantages within those courts is a common practice, not one that they're very fond of, in which every time we litigate against the government, they have a longer statute of limitations, they have a longer time in which they could respond to depositions and so forth, and they'll start to teach advantages on that particular front.

00;16;08;21 - 00;16;23;16
Professor Epstein
The difficulty that the government is that they're going to be chasing after private people. And when you're chasing after private people, the advantage of not responding is relatively less important than it would be in the cases where somebody is trying to make you do something.

00;16;24;02 - 00;16;46;09
Gregg Sofer
What are the consequences under this regime? And, you know, the separation of powers, obviously a miraculous and ingenious idea. But some have argued that we're missing a functional Congress at this point. It was a dysfunctional Congress that gets this a lot of this kicked back in this direction. What are the consequences for the country?

00;16;46;25 - 00;17;14;24
Professor Epstein
Well, I mean, it's you know, it's very hard to sort of figure out what's going on. I think the general reaction is going to be that as you try to push these schemes on the companies, there's going to be a real public of management in favor of the defendants. There is no one that I'm aware of who gives a public defense of the kind of situation the government's success has depended largely on its ability to keep everything relatively secret, and now this thing is going to start to explode.

00;17;15;03 - 00;17;50;21
Professor Epstein
And so the point that I think one would make is that you have to treat this not as a case in isolation, but have to treat it as part of what I think is the kind of conservative assault on discretion in the administrative states. And it's important to understand why it's a conservative support. To give you the third case to fill it in is a case called SAC, in which what happened is there was a guy who owned a piece of land and it was about 600 yards, 200 yards from a water is on the side of Crag and the government comes along and said, you know, this thing is a wetland and you can't

00;17;50;21 - 00;18;12;08
Professor Epstein
go on it. It's tied this man up to 15 years and the Supreme Court suddenly said, enough, you can't do this to people like that. But they didn't know how to craft the opinion. They didn't understand how to put together a system of administrative law. But the one lesson that you get from that is you cannot, as an administrative agency, look to somebody and say, here's a plot of land with $50,000.

00;18;12;13 - 00;18;34;12
Professor Epstein
And if you decide to turn a single shovel full of dirt, we're going to find you $36,000 a day after your indiscretion. They stopped that in 2013 and this past year, ten years later, this still have it again as to what it is that this guy can do, and eventually they let him build. But what happens is the Supreme Court on some of these issues has a real structural weakness.

00;18;34;23 - 00;18;56;22
Professor Epstein
These guys care a great deal about administrative law, but they are not really deeply concerned with the substantive regimes that are embedded in that administrative law. So they don't really understand how an environmental satisfaction ought to work when you want that pre-clearance and when you do not want that, but want to have them sue under common law rules to prove eminent.

00;18;56;22 - 00;19;19;21
Professor Epstein
They never address that question in the second case, so they made a mess of the whole thing. And so what's going to happen is you're going to see a kind of real resentment to the arbitrariness of the administrative state, as in Sackett, as in low price in this case, but not a coherent view as to the way in which each of these administré agencies ought to run and how they want to treat themselves.

00;19;19;27 - 00;19;43;10
Professor Epstein
And that's, of course, a great concern. What's happened in the courts is they are not experts in substantive areas, they're experts in administrative law. My view is the old view administrative law is adjectival. It's a judgment to the substantive law and if you don't get the substantive scheme really right, the administrative law stuff is not going to be as sharp as accurate as it should be.

00;19;43;18 - 00;19;53;05
Gregg Sofer
So big picture, Professor, given all the facets involved in the case, do you anticipate a narrow or a broad ruling in your case?

00;19;54;02 - 00;20;17;15
Professor Epstein
I think it's going to be narrow, but I think they will start to narrow the notion they put themselves very far in the opposite direction and they're now going to have to cut back in the way you cut back on clear principles that a rule is you have principles that are half right. And so you are likely to see some sort of very unhappy accommodation come forward, distinctions that are artificial.

00;20;17;21 - 00;20;41;25
Professor Epstein
And then a couple of years later, they may move one step further. But remember, conservative majorities in six three don't last forever. It turns out among the six there are a lot of variations. I think there's more of a difference in temperament and mood among the conservatives six than among the liberals. Three, I think are likely. But in this particular case, I'm just really not sure what I would do.

00;20;41;25 - 00;21;06;13
Professor Epstein
If you look at the Liberals, that is when Justice Kagan wrote her opinion saying, oh, the administrative stable form was a silly remark. If we don't allow the attorney general to decide whether a statute has retroactive application, everybody in the academy was on the other side of this case. And so you get conservatives who believe in property rights and liberals who believe in due process on this they converged.

00;21;06;21 - 00;21;27;21
Professor Epstein
And so that's why I think this whole thing is going to be fairly vulnerable because there's just too much exercise of arbitrary power. And if one can, the key vote in many ways is Justice Thomas. What he has to do is to fall on his sword. And the command error that is he wrote some of the worst opinion on the utter lack of control.

00;21;27;29 - 00;21;50;14
Professor Epstein
Every conceivable argument that could be done by an agency is something that we want to accept. His case called Beachcombing Indications. Early in his career, he took that particular line It's not viable. A constitution can only maintain structural protections against abuse of rights if you don't give complete and objective discretion to the people who are administering this kind of system.

00;21;50;22 - 00;22;16;26
Professor Epstein
The moment you give them that kind of discretion will do whatever they want, and they'll always be able to say that with some ridiculous argument that will make it sound as though they're correct. The moment you start giving people the latitude to define terms in whatever way they see fit, you find a real deterioration in the world. And I think that's something that the conservatives are very big on, and I think the liberals, at least in some cases, will go along.

00;22;17;02 - 00;22;37;26
Professor Epstein
So I do not rule out the possibility of even a nine nothing judgment in a case like Jarkesy. But it is going to be nine is going to be narrower rather than broader. But I think in effect that these ties are moving and on the procedural due process, substantive due process issues, the Supreme Court is going to make a change.

00;22;38;03 - 00;22;52;15
Professor Epstein
That's why they took this case. That's why they took over. That's why you're going to see them take other cases on the same sort of issue. They're just fed up with administrative agencies and executive orders that make sense just literally out of nothing.

00;22;53;00 - 00;23;15;18
Gregg Sofer
Professor, thanks so much for sharing with us today your perspective on the case. I know our audience very much appreciates it, as so many of our listeners deal with the administrative state on a daily basis. And it's sort of complicated and broad reaching machinations. This case, perhaps more than others that we've seen of late, certainly has the potential to radically reform the administrative state.

00;23;16;01 - 00;23;28;22
Gregg Sofer
And I think we're all extremely curious about how the Supreme Court rules on it. Professor Epstein, again, thank you so much for coming on the show. I hope you'll consider coming back once the case is decided and walk us through what it really means.

00;23;29;08 - 00;23;31;03
Professor Epstein
Well, sure, we can do that. Take care.

00;23;31;14 - 00;23;48;03
Gregg Sofer
Thanks for joining us on The Justice Insiders. We hope you enjoyed this episode. Please go to Apple Podcasts or wherever you listen to podcasts to subscribe, rate and review the Justice Insiders. I'm your host, Gregg Sofer. And until next time, be well.


Gregg N. Sofer