The U.S. Supreme Court began its new term this week and is taking cases government enforcement practitioners will want to follow. Specifically, the Court will address issues concerning: the interplay between SEC administrative proceedings and the right to a jury trial; the amount of authority Congress can permissibly delegate to the SEC; who bears the burden of proof on the issue of retaliatory intent in adverse employment actions concerning whistleblowers; and the scope of due process for post-seizure probable cause hearings.
Because so much modern enforcement occurs within administrative agencies, as opposed to Article III courts, the decisions from this term could have major implications for individuals and entities facing current and future enforcement actions.
Overview of Cases:
Securities and Exchange Commission v. Jarkesy | Murray v. UBS Securities, LLC | Culley v. Marshall | Macquarie Infrastructure Corporation, et al. v. Moab Partners, L.P., et al.
Case No. 20-61007; Argument date to be determined
Issues:
- Whether certain statutory provisions—§ 8A of the Securities Act, § 21B of the Exchange Act, § 203(i) of the Advisers Act, and § 9(d) of the Investment Company Act—violate the Seventh Amendment right to a jury trial;
- Whether Dodd-Frank § 929P(a) violates the nondelegation doctrine because it authorizes the SEC to choose to enforce securities laws through agency adjudication instead of filing an action in an Article III district court; and
- Whether Congress violated Article II of the United States Constitution by granting administrative law judges for-cause removal protection when their agency heads also enjoy for-cause removal protection.
Commentary:
Respondent Jarkesy established two hedge funds and selected Respondent Patriot28 as the investment adviser. These funds gathered over 100 investors and held roughly $24 million in assets. In 2011, the SEC investigated Respondents’ investment activities, and eventually brought an action within the agency, alleging that Respondents committed fraud under the Securities Act, the Securities Exchange Act, and the Advisers Act. The SEC charged that Respondents: (1) misrepresented who served as the prime broker and as the auditor; (2) misrepresented the funds’ investment parameters and safeguards; and (3) overvalued the funds’ assets to increase the fees they could charge investors.
Agency proceedings began after Respondents unsuccessfully applied for injunctive relief in the D.C. Circuit. An administrative law judge (ALJ) held an evidentiary hearing and concluded that Respondents committed securities fraud. The Commission affirmed on review and ordered Respondents to cease and desist from committing further violations and to pay a civil penalty of $300,000. It also required Patriot28 to disgorge nearly $685,000 in ill-gotten gains and barred Jarkesy from various securities industry activities.
Jarkesy and Patriot28 appealed to the Fifth Circuit, arguing that the SEC proceedings violated numerous constitutional rights. The Fifth Circuit held that: (1) the Seventh Amendment jury trial right applies to civil enforcement actions; (2) the civil enforcement action could not be properly assigned to agency adjudication under the public rights doctrine; (3) Congress unconstitutionally delegated legislative power when it gave the SEC unfettered authority to choose whether to bring enforcement actions in Article III courts or within the agency; and (4) statutory removal restrictions for SEC ALJs violated the President’s power of removal under the Take Care Clause. The SEC petitioned the Supreme Court for a writ of certiorari, which the Court granted on June 30, 2023.
The first issue before the Court is whether the Commission violated Respondents’ Seventh Amendment right to a jury trial. The ALJ is fact-finder in agency proceedings, meaning Respondents’ fraud case was never put before a jury. The SEC argues that agency adjudication complies with Article III and the Seventh Amendment because violations of federal securities law involve “public rights”—i.e., rights that arise when Congress passes a statute that creates a right so closely integrated with a comprehensive regulatory scheme that the right is appropriate for agency resolution. Granfinanciera, S.A., v. Nordberg, 492 U.S. 33, 54 (1989). Respondents argue (and the Fifth Circuit held) that fraud does not concern merely public rights because the Seventh Amendment afforded a right to a jury trial for fraud cases when it was ratified.
The second issue concerns the much-debated nondelegation doctrine. The nondelegation doctrine generally means that Congress may not delegate its legislative powers or lawmaking ability to other entities, such as the SEC. Here, Congress delegated to the SEC the authority to decide whether to enforce securities laws through a district court suit or through agency adjudication. The SEC argues that forum selection is not a legislative power, but rather an executive and prosecutorial power. Respondents argue, and the Fifth Circuit held, that Congress alone holds the power to decide which defendants should receive certain legal processes (such as Article III proceedings), and that Congress delegated this power to the SEC absent a guiding intelligible principle, as Panama Refining Co. v. Ryan, 293 U.S. 388, 405–06 (1935), requires.
The third issue is whether the statutory removal restrictions on SEC ALJs violate the Take Care Clause of Article II of the United States Constitution. Pursuant to Article II, the President must “take Care that the Laws be faithfully executed.” Supreme Court precedent construing this clause requires the President to have adequate power over an official’s removal. Here, the Supreme Court will consider whether ALJs serve sufficiently important executive functions—as opposed to judicial functions—which would necessitate sufficient presidential oversight. If ALJs do serve executive functions, the Court must then determine whether the restrictions on their removal are so onerous that the President lacks the ability to take care that the laws are faithfully executed.
This is a landmark case in a landmark term for administrative law. The Court will also consider Loper Bright Enterprises v. Raimondo, No. 22-451, a case presenting a full-fledged challenge to Chevron deference. Between these two cases, the Court could seriously weaken the administrative state. While courts often constrain their holdings to the narrowest grounds possible, the Fifth Circuit grounded its partial takedown of the administrative state on three independent Constitutional bases. Time will tell whether the Supreme Court takes a similar approach.
Case No. 20-4202, 21-56; Argument on October 10, 2023
Issue:
Whether, under the burden-shifting framework that governs the Sarbanes-Oxley cases: (1) a whistleblower must prove his employer acted with “retaliatory intent” as part of his case-in-chief; or (2) an employer bears the burden to prove the lack of “retaliatory intent” as an affirmative defense.
Commentary:
Murray was a UBS strategist in its commercial mortgage-backed securities business a few years after the 2008 financial crisis. The SEC requires strategists like Murray to certify that his reports independently reflect his own views, but Murray complained that two UBS leaders pressured him to skew his research and publish reports to support their business strategies. In December 2011 and January 2012, Murray raised multiple ethical and legal concerns to his direct supervisor, who eventually recommended that UBS terminate Murray’s employment. UBS fired Murray in February 2012.
Murray sued UBS in federal district court under the Sarbanes-Oxley Act (SOX), which prohibits publicly traded companies from taking adverse employment actions to “discriminate against an employee . . . because of” any lawful whistleblowing act. The district court denied UBS’s motion for judgment as a matter of law, and the case proceeded to trial. At trial, the district court instructed the jury that: “Plaintiff is not required to prove that his protected activity was the primary motivating factor in his termination, or that UBS’s articulated reasons for his termination . . . was a pretext, in order to satisfy [the contributing factor] element.” On these instructions, the jury found UBS liable, awarding Murray $653,300 in back pay and $250,000 in non-economic damages. The district court also awarded Murray $1,769,387.52 in attorneys’ fees and costs. UBS appealed.
The Second Circuit vacated and remanded, holding that the jury instruction erroneously omitted that the whistleblower-employee bears the burden to prove his employer’s retaliatory intent. The Second Circuit specifically focused on § 1514A’s text, which provides that no covered employer may “discriminate against an employee . . . because of” whistleblowing. Turning to dictionary definitions of “discriminate” and “because of,” the Second Circuit held that the plain meaning of the statutory text “compels our conclusion that retaliatory intent is required to sustain a SOX antiretaliation claim.” Accordingly, § 1514A “necessarily requires [Murray to prove] retaliatory intent” in his case-in-chief. Because the above jury instructions omitted this requirement, and the error was not harmless, the court vacated and remanded.
Murray subsequently petitioned for a writ of certiorari, which the Court granted. The Supreme Court must now decide whether SOX requires Murray or UBS to bear the burden of proving or demonstrating the absence of UBS’s “retaliatory intent” in terminating Murray.
Case No. 21-13805, 21-13484; Argument on October 30, 2023
Issues:
- Whether the Due Process Clause requires a state or local government to provide a post-seizure probable cause hearing prior to a statutory judicial forfeiture proceeding; and
- If so, when such a hearing must take place, should district courts apply the “speedy trial” test employed under Barker v. Wingo, or the three-part due process analysis set forth in Mathews v. Eldridge.
Commentary:
This is a consolidation of two cases that involve the seizure of Petitioners’ vehicles under Section 20-2-93 of the Alabama Code. Both cases present nearly identical fact patterns. Petitioners let someone borrow their cars, and local law enforcement later stopped the borrowers for speeding. After searching the vehicle, police arrested the borrowers for drug-related offenses. The authorities seized Petitioners’ cars incident to arrest, but Petitioners did not participate in, know of, or consent to the drug trafficking or possession. Petitioners promptly and repeatedly called the police to retrieve their cars, but one to two weeks later, Alabama instituted civil forfeiture actions against their vehicles. In both instances, a state court ruled—fourteen months and twenty months after the fact—that Petitioners were innocent owners, and that their cars could not be forfeited under Section 20-2-93. In the meantime, one Petitioner failed to find work, missed several mental health treatments, and, without an income, fell behind on her bills.
Both Petitioners filed separate class actions in federal court under 42 U.S.C. § 1983, claiming that Alabama deprived them of due process by retaining their cars for over a year without providing a retention hearing. Alabama prevailed in both actions. In each case, the district court found that the Barker “speedy trial” test applied. Under Barker, courts balance four factors when weighing pretrial retention of an automobile seized incident to an arrest, including: (1) the length of the delay; (2) the reason the government provides for the delay; (3) defendant’s responsibility to assert his or her right; and (4) prejudice to the defendant. Applying these factors, the district court found that Alabama’s failure to provide a retention hearing did not violate due process. Petitioners then appealed to the Eleventh Circuit in both instances.
The Eleventh Circuit affirmed both decisions in a short and unpublished opinion. It reasoned due process does not require “a probable cause hearing to determine whether the [state] can retain [] property during the pendency of litigation.” Rather, all that is required is a timely merits hearing on forfeiture, and “the timeliness is governed by Barker.”
On review, Petitioners rely on a circuit split to argue that Mathews, not Barker, governs due process in civil forfeiture actions. While the Eleventh Circuit follows Barker when deciding whether pretrial retention of an automobile seized incident to an arrest is permissible, Petitioners emphasize that the Second, Fifth, Seventh, and Ninth Circuits hold otherwise, instead following Mathews. Petitioners claim that those others circuits have it right, and that under the three Mathews factors—private interest, the risk of erroneous deprivation, and the governmental interest—“the inexorable conclusion” is that “one deprived of property is entitled to a prompt, post-deprivation hearing on the issue of probable cause and proper form of the restriction.” Respondents, on the other hand, emphasize that Barker squarely controls post-seizure forfeiture proceedings, and even if not, the government had interests sufficient to justify full recovery of all forfeitable assets while litigation was pending.
The Supreme Court could decide the issue on procedural grounds rather than reaching the merits (e.g., issues relating to standing and liability under § 1983). But if the Court addresses the merits, any decision will have implications for how due process applies more generally to asset protection while cases are pending. Indeed, the outcome of this case could directly affect how defendants accused of white collar crimes try to protect their assets.
Case No. 20-2524; Argument date to be determined
Issue:
Whether a failure to make a disclosure required under Item 303 of SEC Regulation S-K can support a private claim under Section 10(b) of the Securities Exchange Act of 1934, even in the absence of an otherwise misleading statement.
Commentary:
Macquarie Infrastructure Corporation (MIC) was a publicly traded company that owned and operated a portfolio of infrastructure-related businesses. One of these was International-Matex Tank Terminals (IMTT), which was MIC’s most profitable business and among the largest providers of third-party bulk liquid storage devices in the United States. In 2008, the International Maritime Organization (IMO) promulgated “IMO 2020,” which would cap sulfur content of fuel oil used in shipping at 0.5% starting in 2020. This regulation rendered suspect the long-term viability of IMTT’s storage business for No. 6 oil, which contained 3% sulfur.
Respondent investors filed suit roughly a decade later when it became clear that IMO 2020 would go into effect and that it was negatively impacting demand for No. 6 oil and IMTT storage. Respondents alleged, among other things, violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Specifically, Respondents argued that MIC made four omissions to investors during the putative class period of February 2016 to February 2018:
- The extent of IMTT’s exposure to No. 6 fuel oil and the anticipated resulting losses of revenue;
- The fact that IMTT’s customer base included speculative commodities traders who typically move in and out of the market based on short-term opportunities;
- The extent of IMTT’s need to undertake significant capital expenditures to repurpose No. 6 fuel oil storage tanks so they would be suitable to store other liquid commodities; and
- The related risks to MIC’s historically predicable quarterly dividends.
MIC filed a 12(b)(6) motion to dismiss for failure to state a claim, arguing that Respondents failed to articulate an Item 303 violation and that even if they had, such violation does not support a Section 10(b) private action. Disclosures under Item 303 are intended to provide investors with information about issues that, in the view of corporate leadership, are reasonably likely to affect the company’s future operations or finances.
The district court granted MIC’s motion to dismiss (2021 WL 4082572). While it followed Second Circuit precedent that an Item 303 violation could support a Section 10(b) private action absent an otherwise misleading statement, it found that Respondent Moab Partners, L.P. (Moab) failed to plead “an uncertainty that should have been disclosed” and failed to identify “in what SEC filing or filings Defendants were supposed to disclose it.” It also found that Moab failed to allege facts to support a strong inference of scienter under heightened pleading standards.
The Second Circuit reversed (2022 WL 17815767). While it tracked with the district court that Item 303 can impose an actionable duty for a Rule 10(b) private action, it reversed because it found that MIC failed to disclose actionable “known trends or uncertainties” under Item 303 (that is, the four alleged omissions above). Based on these findings, the court further found that MIC made these omissions with scienter. MIC then filed a petition for a writ of certiorari, which the Court granted.
The Supreme Court must now resolve a circuit split between the Second Circuit and the Third, Ninth and Eleventh Circuits on Section 10(b) liability. These latter three circuits have each held that a Section 10(b) claim cannot be based solely on an alleged violation of Item 303, while the Second Circuit has held that Section 10(b) liability can be based on alleged Item 303 violations absent other misleading statements. According to MIC, the Third, Ninth, and Eleventh Circuits have it right—basing Rule 10b-5 liability on Item 303 omissions breaks from the legislative purpose of Rule 10(b) to enlarge a private right of action against corporations. Moab, on the other hand, argues that the Second Circuit’s summary order was correct, and that affirming the Second Circuit would not expand a private right of action under Rule 10b-5 because “a mere failure to disclose all the information Item 303 requires does not violate § 10(b) or Rule 10b-5 on its own.”
This is an important case on investor-facing communications. If the Supreme Court holds that a Section 10(b) private right of action can be based solely on an alleged Item 303 violation, corporations will have to weigh over-disclosure and could suffer voluminous litigation from private investors. On the other hand, as Moab argues, “over-disclosure” would increase investor transparency and ideally help the market operate on open information.
