This alert addresses proceedings in two SEC securities enforcement actions emanating out of the Fifth Circuit. Both pose issues relating to the SEC's power to bring enforcement proceedings in front of in-house administrative law judges (ALJs). In the first, on May 16, the U.S. Supreme Court granted the SEC's petition for certiorari in SEC v. Cochran.1 The petition asked the Court to address the circuit split recently created by the Fifth Circuit's en banc opinion, holding, contrary to several other circuits, that the Securities Exchange Act of 1934 does not preclude federal district courts from exercising subject matter jurisdiction over constitutional challenges to protections insulating the SEC's ALJs from removal.2 In addition to requesting that the Court address this circuit split, the SEC's petition also asked the Court to "hold" the petition "pending the decision of Axon Enterprise [v. FTC]," a second case that raised the issue of federal district courts' subject matter jurisdiction over constitutional challenges to ALJ removal provisions in the Federal Trade Commission Act. The Court, however, heeding the respondent's arguments, granted the petition without awaiting a decision in Axon Enterprise. Both Cochran and Axon Enterprise are now scheduled for oral argument during the October 2022 term,3 and the parties have asked to coordinate the briefing schedules, while keeping oral argument separate.4

Second, on May 18, a divided Fifth Circuit panel issued an opinion in Jarkesy v. SEC, holding unconstitutional on three separate grounds — including the unconstitutional removal protection issue Cochran sought to pursue — the SEC's administrative law process.5 The court concluded that SEC ALJ proceedings are unconstitutional because they deprive defendants of their Seventh Amendment right to a jury trial; the SEC's ability to bring such proceedings in either federal district court or before an SEC ALJ constitutes an unconstitutional delegation of legislative power; and the statutory provisions protecting SEC ALJs from removal are unconstitutional. At present it is not clear how Jarkesy will impact Cochran, but the holdings in Jarkesy raise fundamental questions about the constitutionality of the administrative law process governmentwide.

SEC v. Cochran

Michelle Cochran, the plaintiff in SEC v. Cochran, is an accountant who was subject to enforcement proceedings before an SEC ALJ immediately prior to the Supreme Court's decision of Lucia v. SEC in 2018.6 In Lucia, the Supreme Court held that SEC ALJs must be appointed in a manner consistent with the Appointments Clause of the Constitution and that the ALJ in Ms. Cochran's proceedings was unconstitutionally appointed. In response to Lucia, the SEC remanded Ms. Cochran's case for new proceedings before a properly appointed ALJ. Ms. Cochran, however, also alleged that removal protections enjoyed by SEC ALJs were unconstitutional. She then sought to litigate this further constitutional concern in an independent federal court action that she filed in January 2019 in the Northern District of Texas. Ms. Cochran argued that under Free Enterprise Fund v. PCAOB and Lucia v. SEC, the multilayer tenure protection insulating SEC ALJs is unconstitutional.7 Free Enterprise Fund scrutinized the statutory regime under which members of the Public Company Accounting Oversight Board (PCAOB) could be removed by SEC commissioners only for cause, while, similarly, the commissioners themselves could be removed by the president only for cause. Free Enterprise Fund held that these two layers of for-cause removal protection intervened with the president's constitutional obligation to "take Care that the laws be faithfully executed" because satisfaction of this obligation required that the president maintain sufficient control over "Officers of the United States," such as PCAOB members. Lucia held that SEC ALJs were also officers of the United States, and as Ms. Cochran's brief noted, Justice Breyer's concurrence in Lucia raised the concern that, after Lucia, the multilevel removal protections insulating SEC ALJs might be unconstitutional under Free Enterprise Fund.8

The district court, however, dismissed Ms. Cochran's complaint for lack of subject matter jurisdiction. The court reasoned that 15 U.S.C. §78y permits judicial review of final SEC orders in the courts of appeals and thus implicitly strips district courts of jurisdiction to hear challenges to ongoing SEC enforcement proceedings. The court held that Ms. Cochran was required to raise her constitutional claims in the ALJ proceeding and then petition for review in an appropriate court of appeals. Ms. Cochran appealed the district court's decision, but a divided Fifth Circuit panel initially affirmed the dismissal in August 2020.9 Subsequently, Ms. Cochran's petition for rehearing en banc was granted, and on Dec. 13, 2021, the Fifth Circuit sitting en banc held that the federal district courts did have subject matter jurisdiction over Ms. Cochran's constitutional claim.10 When the Fifth Circuit issued its en banc decision, a petition for certiorari in Axon Enterprise Inc. v. FTC had already been filed.11 That case also raised the question of federal district court jurisdiction over constitutional challenges to removal protections insulating ALJs, in this case ALJs at the Federal Trade Commission (FTC). On Dec. 20, 2021, one week after the Fifth Circuit's en banc decision in SEC v. Cochran, the petitioner in Axon Enterprise filed a supplemental brief that argued the circuit split created by Cochran affirmed the importance of granting the petition for certiorari in Axon Enterprise.12 Just over a month later, the Supreme Court granted Axon Enterprise's petition in part, limiting the grant to the jurisdictional issue.13

Prior to the Fifth Circuit's en banc opinion, the Second, Fourth, Seventh, Eleventh and D.C. Circuits had each heard a case in which a constitutional challenge to SEC enforcement before an SEC ALJ had been filed in a federal district court.14 Each of these circuit courts ultimately held that the constitutional claims should be dismissed from the district court for lack of subject matter jurisdiction. In their analysis, the courts employed a multifactor test set forth in Thunder Basin Coal v. Reich and divided into two distinct parts in Elgin v. Department of Treasury.15 The first part of the test asks whether it is "fairly discernible" from the text, structure and purpose of the statute at issue, here 15 U.S.C. §78y, that Congress intended to preclude district court jurisdiction over the plaintiff's claims and instead sought to direct the claims to the scheme set forth in the statute. As further support for a decision, the second part of the test asks a similar question: whether certain factors delineated by the court support the invocation of the presumption that Congress did not intend to limit the district courts' jurisdiction over the claims at issue. The presumption is invoked when restricting district court jurisdiction would "foreclose all meaningful judicial review" of the plaintiff's claim, the plaintiff's suit is "wholly collateral to a statute's review provisions," and the claim at issue is "outside the agency's expertise."

In applying this test to constitutional challenges to SEC ALJs, the Second, Fourth, Seventh, Eleventh and D.C. Circuits all found that 15 U.S.C. §78y expressed a "fairly discernible intent" to channel all challenges to SEC ALJ proceedings through the statutory scheme. When petitioners argued that their constitutional challenges were unique, the courts provided a largely consistent application of the second part of the test.16 They held that there would be meaningful judicial review of constitutional claims because 15 U.S.C. §78y had a mechanism for review by a court of appeals. Further, the claims were not "wholly collateral" at least because the constitutional claim could be a vehicle for overturning the ALJ's decisions, and the agency may have expertise relevant to the adjudication of the constitutional claims. The Fifth Circuit, however, split from this majority view. Addressing the first part of the test, the court concluded that it did not discern from Section 78y an intent to channel all claims through the statutory review process.17 The court also disagreed that the factors in part two supported the presumption that jurisdiction had been stripped. The Fifth Circuit held, first, that Section 78y's statutory scheme did foreclose meaningful judicial review because Ms. Cochran could prevail against the SEC in the administrative proceeding and thus lose the opportunity to litigate her constitutional claim. It concluded, second, that the constitutional claim was collateral to the relevant statutory review scheme because the relief sought is "structural" and not the sort provided by the statutory scheme. Last, the court held that Ms. Cochran's claim was not within the agency's particular expertise because it was a constitutional claim.18

Jarkesy v. SEC

George R. Jarkesy Jr. is the founding manager of two hedge funds, and Patriot28 L.L.C. is the investment adviser that Mr. Jarkesy selected for the funds (the Petitioners).19 In 2011, the SEC began investigating the Petitioners' investing activities and filed an administrative enforcement action alleging fraud under the Securities Act, the Exchange Act and the Advisers Act. During the course of these proceedings, the Petitioners filed a separate action in the District Court for the District of Columbia, claiming that the SEC's enforcement proceedings were unconstitutional and asking the court to enjoin those proceedings. In 2014, the district court dismissed the Petitioners' claims for lack of subject matter jurisdiction, and in 2015 the D.C. Circuit affirmed — providing one of the opinions that split the circuits on the issue that SEC v. Cochran brings to the Supreme Court. After losing at the D.C. Circuit, the Petitioners continued with their SEC proceedings; following an evidentiary hearing, the presiding SEC ALJ decided against the Petitioners on the merits, finding that the Petitioners violated, aided, abetted and caused violations of the anti-fraud provisions of the federal securities laws.20 The Petitioners sought review by the SEC itself (the Commission), and while this petition was pending, the Supreme Court decided Lucia v. SEC. After Lucia, the Petitioners had a right to a new hearing before a constitutionally appointed SEC ALJ, but, waiving this right, the Petitioners instead continued under their original petition to the Commission. The Commission affirmed the ALJ's decision and ordered the Petitioners to a pay a civil penalty of $300,000, ordered Patriot28 L.L.C. to disgorge "ill-gotten gains" amounting to nearly $685,000, and barred Mr. Jarkesy from associating with brokers, dealers and advisers, among other penalties. The Commission also rejected the Petitioners' several constitutional arguments. The Petitioners then appealed to the Fifth Circuit.

In an opinion issued May 18, a divided panel of the Fifth Circuit vacated the decision of the Commission and remanded the case for further proceedings consistent with three groundbreaking holdings on the constitutionality of SEC administrative proceedings. In an opinion by Judge Jennifer Walker Elrod, the court held that the SEC had deprived the Petitioners of their constitutional right to a jury trial, that Congress unconstitutionally delegated legislative power to the SEC by granting the agency unfettered discretion in exercising the option to bring enforcement actions before SEC ALJs instead of the federal district courts, and that statutory removal restrictions insulating SEC ALJs are unconstitutional. The court emphasized that the first two holdings were independently sufficient to provide grounds for vacating the SEC's judgment. It therefore did not "decide whether vacating would be the appropriate remedy" for the third issue — the removal question — alone.

The court first analyzed the Petitioners' claim that the SEC proceedings deny the Petitioners their constitutional right to a jury. The panel noted the Seventh Amendment to the Constitution created a jury right that applies only to "Suits at common law," a phrase that has been interpreted to include "all actions akin to those brought at common law." However, there is no right to a jury when Congress assigns the adjudication of "public rights" to a non-Article III tribunal. Whether the SEC's action against the Petitioners is unconstitutional thus depended on two determinations: first, whether the action is "akin to those arising at common law," and, second, if so, whether the "the Supreme Court's public-rights cases nonetheless permit Congress to assign it to agency adjudication without trial."

At the first step of this analysis, the court emphasized that the SEC's action against the Petitioners was akin to the fraud prosecutions that were "regularly brought in English courts at common law" at the time of the nation's founding. This was not only because the action alleged securities fraud but also because one of the remedies granted was a civil penalty, which "was a type of remedy at common law that could only be enforced in courts of law." Moving to the second stage, the majority concluded that the SEC's action did not involve "public rights" because the Supreme Court in Granfinanciera, S.A. v. Nordberg counseled that the public rights doctrine applies only when the action allocated to a non-Article III tribunal is a new action "unknown to the common law" and the application of jury trials in those actions would "dismantle the statutory scheme." The panel concluded that SEC actions under the securities laws are not "unknown to common law" because the Supreme Court often relies on the "common-law roots of securities fraud action" to interpret statutory securities fraud action. Further, the use of jury trials in SEC enforcement would not dismantle the statutory scheme because the scheme itself allows the SEC to bring enforcement actions either before SEC ALJs or in federal district courts where the right to a jury trial would apply.

As to the second constitutional claim, alleging unconstitutionally delegated legislative power, the court explained that the Supreme Court's application of the nondelegation doctrine reads the Article I provision that "all legislative powers herein granted shall be vested in a Congress" to imply that Congress cannot delegate that power to other bodies, including administrative agencies. The doctrine first asks whether "Congress has delegated power to the agency that would be legislative power but for an intelligible principle that guides its use," and second, whether Congress has provided such an "intelligible principle." Agreeing with the Petitioners, the Fifth Circuit concluded that 15 U.S.C. §78u-2(a), which provides the SEC with discretion to enforce securities laws in a federal district court or before an SEC ALJ, would delegate legislative power if no statutory principle guides this discretion, and the statute provides no such principle. Rejecting the SEC's argument that the selection of a forum for enforcement is an exercise of prosecutorial discretion — and thus executive power — the court relied on INS v. Chadha, which concluded that an action is legislative if it has "the purpose and effect of altering the legal rights, duties and relations of persons ... outside the legislative branch." Because the choice of forum determines the legal process available to a defendant — and determines whether those procedures include a jury trial — the court held that the choice of the forum of enforcement alters legal rights and is an exercise of legislative power.

The last constitutional claim addressed by the court is the same constitutional claim that Ms. Cochran seeks to litigate in federal district court. This claim alleged that proceedings before SEC ALJs are unconstitutional due to statutory provisions requiring that officials themselves removable only for cause must find that there is adequate cause before an SEC ALJ is removed. The Fifth Circuit held this statutory scheme unconstitutional because it purportedly intervenes excessively with the president's power to remove officers of the United States, a power entailed by the Take Care Clause, which grants the president the obligation to "take Care that the laws be faithfully executed." The Fifth Circuit most heavily relied on Free Enterprise Fund v. PCAOB from 2010, which held, as discussed above, that removal protections for members of the PCAOB were unconstitutional because two layers of for-cause removal protections unconstitutionally intervened in the president's capacity to faithfully execute the law.

A dissent written by Judge W. Eugene Davis disagreed with each of the panel's three holdings. The dissent argued, first, that under the Supreme Court's public rights doctrine, public rights are those at issue in matters arising between the government and persons under the government's authority "in connection with the performance of the constitutional functions of the executive or legislative departments." The public nature of SEC enforcement renders the proceedings against the Petitioners a matter of public rights. The dissent argued that Granfinanciera is inapposite because the factors set forth in that case apply only to "seemingly private rights" — namely, those not enforced by a government authority — that nonetheless fall within the public rights doctrine. Discussing the second constitutional challenge, the dissent again disagreed with the majority, arguing that the majority misapplied INS v. Chadha's definition of legislative action and that the majority's reasoning was inconsistent with other opinions of the Supreme Court, such as United States v. Batchelder.21 Discussing the issue of ALJ removability, the dissent argued that the holding of Free Enterprise Fund does not apply to SEC ALJs because SEC ALJs serve an "adjudicative" rather than "executive" function. Emphasizing dicta in Free Enterprise Fund that suggested the distinction, Judge Davis noted that the PCAOB serves such functions as "inspecting accounting firms, initiating formal investigations and disciplinary proceedings, and issuing sanctions." By contrast, SEC ALJs, as noted in Lucia v. SEC, exercise authority "comparable to that of a federal district judge conducting a bench trial."


The SEC may seek further review in Jarkesy. Its holdings raise questions that may apply to the administrative law process in many other government agencies. The issue before the Supreme Court in Cochran is limited to the jurisdictional one: Can Ms. Cochran proceed with her claim — that the administrative law scheme is constitutionally flawed because SEC ALJs have multilevel for-cause protection from removal — immediately in a direct federal district court action, or must she assert the argument as the Jarkesy petitioners did, as a defense in the administrative proceeding, seek review of its result before the Commission, and only then get review in a court of appeals. Jarkesy would give Ms. Cochran the relief she seeks on the merits. It is unclear at this juncture what action the SEC will take going forward as it deals with two cases that could upend its administrative practices.


1. Cochran v. SEC, No. 21-1239, 2022 WL 1528373 (May 16, 2022) (granting certiorari); see also Order List, Supreme Court of the United States (May 16, 2022),

2. Petition for Writ of Certiorari, SEC v. Cochran, (No. 21-1239),; Cochran v. SEC, 20 F.4th 194 (5th Cir. 2021); see also "Creating Circuit Split, Fifth Circuit Rules District Court May Hear Constitutional Challenge to SEC Enforcement Action," Kramer Levin (Dec. 20, 2021),

3. Granted and Noted List, October Term 2022 Cases for Argument, Supreme Court of the United States (May 16, 2022),

4. Letter from the Solicitor General of the United States (May 19, 2022),

5. Jarkesy v. SEC, No. 20-61007, 2022 WL 156314 (5th Cir. May 18, 2022).

6. Cochran v. SEC, 20 F.4th 194 (5th Cir. 2021).

7. Plaintiff's Brief in Support of Motion for Preliminary Injunction, Cochran v. SEC, (No. 4:19-cv-00066-A), 2019 WL 1359252, 561 U.S. 477 (2010).

8. Lucia v. SEC, 138 S.Ct. 2044, 2060 (2018) (Breyer, J. concurring).

9. Cochran v. SEC, 969 F.3d 507 (5th Cir. 2020).

10. Cochran v. SEC, 20 F.4th 194 (5th Cir. 2021).

11. Petition for Writ of Certiorari, Axon Enterprise, Inc. v. FTC, (No. 21-86),

12. Supplemental Brief of Petitioner, Axon Enterprise, Inc. v. FTC, (No. 21-86),

13. Axon Enterprise, Inc. v. FTC, 142 S.Ct. 895 (2022).

14. Bennett v. SEC, 844 F.3d 174 (4th Cir. 2016); Hill v. SEC, 825 F.3d 1236 (11th Cir. 2016); Tilton v. SEC, 824 F.3d 276 (2d Cir. 2016); Jarkesy v. SEC, 803 F.3d 9 (D.C. Cir. 2015); Bebo v. SEC, 799 F.3d 765 (7th Cir. 2015); but see Gupta v. SEC, 96 F. Supp. 2d 503 (S.D.N.Y. 2011) (denying a motion to dismiss an equal protection challenge to an SEC administrative proceeding). Plaintiff Rajat Gupta was represented in this action by Kramer Levin Naftalis & Frankel, LLP.

15. Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994); Elgin v. Department of Treasury, 567 U.S. 1 (2012).

16. The cases before the Second, Fourth and Eleventh Circuits all concerned challenges to the appointment of ALJs under the Appointments Clause, while the cases before the Seventh and D.C. Circuits concerned other constitutional challenges, including challenges to provisions in the Dodd-Frank Act and challenges under the Due Process Clause and the Equal Protection Clause.

17. Cochran v. SEC, 20 F.4th 194 (5th Cir. 2021).

18. In Free Enterprise Fund v. PCAOB, the Supreme Court addressed an analogous jurisdictional issue—whether Section 78y stripped federal district courts of jurisdiction over constitutional challenges to the appointment process and removal protections for members of the PCAOB. 561 U.S. 477, 489-92 (2010). The Sarbanes-Oxley Act empowers the SEC to review any rule or sanction issued by the PCAOB, and because Section 78y allows aggrieved parties to challenge a final order or rule of the Commission in a court of appeals, the government argued that Section 78y stripped federal district courts of jurisdiction over such challenges, even constitutional challenges. The Court disagreed. Applying Thunder Basin, the Court concluded that the statute did not express a "fairly discernible" intent to limit jurisdiction. The Court also concluded that the statute did not provide a meaningful opportunity for review because some actions of the PCAOB would not be encapsulated in a final Commission order or rule, that the constitutional claims were "wholly collateral" to Section 78y because they challenged the PCAOB itself, rather than any order or rule that would be reviewable under the statute, and that the constitutional claims at issue—not "standard questions of administrative law"—were outside of the Commission's competence and expertise. On these grounds, the Court held that the federal district court below did have jurisdiction over the constitutional claims.

19. Jarkesy v. SEC, No. 20-61007, 2022 WL 156314 (5th Cir. May 18, 2022).

20. In re John Thomas Capital Mgmt. d/b/a Patriot 28 LLC, Exchange Act Release No. 10834, 2020 WL 5291417 (Sept. 4, 2020),

21. In that case, the Court found that it was not a violation of the nondelegation doctrine for Congress to allow prosecutors to choose between two criminal statutes that provide "different penalties, for essentially the same conduct." The dissent claimed the majority's treatment of legislative power would characterize a charging decision like this one as an exercise of legislative power, running the opinion into direct conflict with Batchelder.

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