George Washington, George Jarkesy, and the Administrative State’s Lack of Fundamental Justice John Berlau

https://cei.org/blog/george-washington-george-jarkesy-and-the-administrative-states-lack-of-fundamental-justice/

The recent ruling by the U.S. Court of Appeals for the Fifth Circuit in Jarkesy v. SEC is a victory for limited constitutional government on many levels. As Mario Loyola, professor at Florida International University and senior fellow here at the Competitive Enterprise Institute, writes in The Wall Street Journal, the court “has taken what could be a historic step toward restoring the Constitution’s checks and balances.”

The case involved the Securities and Exchange Commission (SEC) seeking penalties for alleged fraud against hedge fund manager George Jarkesy. Utilizing a provision of the Dodd-Frank “financial reform” of 2010, the SEC chose to pursue Jarkesy in an internal proceeding before an administrative law judge (ALJ) rather than a normal federal court that is part of the judicial branch created by the Constitution’s Article III. As Loyola points out, in Jarkesy’s and other cases, the SEC “acts as rulemaker, prosecutor, and judge for America’s securities laws.”

On multiple grounds, the Fifth Circuit majority found the SEC’s denying Jarkesy the venue of a federal court in which to defend himself to be in violation of the Constitution. The court ruled that, because fraud has been a common-law offense to which jury trial right attaches, and the SEC in-house proceeding lacked a jury of his peers, Jarkesy was denied his Seventh Amendment guarantee of trial by jury.

The court also ruled that Jarkesy was denied justice by violations of the Constitution’s separation of powers provisions. The ruling found that in enacting the Dodd-Frank provision, 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.” And, citing the precedent of the Supreme Court ruling in Free Enterprise Fund v. PCAOB (a case in which CEI was instrumental in bringing and in which CEI attorneys served as co-counsel to the victorious plaintiffs), the court ruled that the proceeding was unconstitutional because ALJs exercise executive functions without being removable by the president.

Both the Jarkesy ruling itself and commentary for and against the decision contain many quotes from the Constitution’s framers and other Founding Fathers. The ruling’s majority opinion cites Thomas Jefferson’s identification of the jury “as the only anchor, ever yet imagined by man, by which a government can be held to the principles of its constitution,” and John Adams’s description of trial by jury as part of “the heart and lungs of liberty.”

One person who hasn’t been quoted yet on the case, that I know of, is our first president. Based on research in writing my recent book, George Washington, Entrepreneur, it is clear to me that George Washington would quite chagrined that George Jarkesy did not have the protections of an Article III federal court.

One of the main grievances of the Founding Fathers that led to the Revolutionary War was growing use by Great Britain of admiralty courts to prosecute colonists for offenses such as smuggling. In these proceedings, colonists were forcibly taken to the mother country or the then-British colony of Nova Scotia (now a Canadian province) for trials without juries and with much lower standards of evidence than normal colonial courts.

In a 1774 letter Washington to his longtime friend and neighbor Bryan Fairfax making the case for drastic action against Great Britain (reprinted in the appendix of my book and available at Founders Online), Washington identified the admiralty courts’ lack of justice as one of his primary motivations. In the letter, he decried the British government’s “transporting offenders into other colonies or to Great Britain for trial where it is impossible from the nature of the thing that justice can be obtained.”

The abuses of the admiralty courts appears to have motivated the Constitution’s framers in writing the document to guarantee both the right of trial by jury and a strict separation of powers between the executive, legislative, and judicial branches.

In a largely overlooked section of his 1796 Farewell Address, Washington stressed the importance of the separation of powers in preserving liberty and warned against government branches’ “encroachment” into one another’s functions. The words Washington spoke could be seen as an early warning against the growth of the “administrative state” upon which the Fifth Circuit placed limits.

Washington called for “caution in those entrusted with its administration to confine themselves within their respective constitutional spheres, avoiding in the exercise of the powers of one department to encroach upon another.” He then warned, “The spirit of encroachment tends to consolidate the powers of all the departments in one and thus to create, whatever the form of government, a real despotism.”

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