[What was once a fringe legal theory now stands a real chance of
being adopted by the Supreme Court. ]
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THE CASE THAT COULD DESTROY THE GOVERNMENT  
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Noah Rosenblum
November 27, 2023
The Atlantic
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_ What was once a fringe legal theory now stands a real chance of
being adopted by the Supreme Court. _

Supporters of then-President Donald Trump riot in front of the
Capitol in Washington on Jan. 6., Reuters

 

This Wednesday, the Supreme Court will hear a case that poses the most
direct challenge yet to the legitimacy of the modern federal
government. The right-wing legal movement’s target is the
“administrative state”—the agencies and institutions that set
standards for safety in the workplace, limit environmental hazards and
damage, and impose rules on financial markets to ensure their
stability and basic fairness, among many other important things. The
case, _Securities and Exchange Commission v. Jarkesy_, threatens all
of that. Terrifyingly, this gambit might succeed.

The case involves garden-variety securities fraud. George R. Jarkesy
Jr., a right-wing activist and conservative-radio talk-show host, ran
a pair of investment funds with $24 million in assets. But he
misrepresented how the funds were run, paid himself and his partner
exorbitant fees, and inflated the assets’ value. As punishment, the
SEC fined him several hundred thousand dollars and prohibited him from
working in some parts of the securities industry—very standard
stuff.

Jarkesy responded with what can be described only as chutzpah. He
didn’t just contest the SEC’s ruling; he alleged that the SEC’s
entire process against him was unconstitutional. Among other things,
he asserted that Congress never had the authority to empower the SEC
and that the SEC adjudicator who punished him was too independent from
presidential control.

In May of last year, Jarkesy’s arguments were accepted by two judges
on the conservative Fifth Circuit Court of Appeals. In a 2–1
decision, the court agreed with Jarkesy, all but ruling the SEC’s
entire existence unconstitutional. The opinion was so extreme that
Judge W. Eugene Davis, twice appointed by Republican presidents—and
elevated to the appeals court by Ronald Reagan—dissented vigorously.

Jarkesy’s most far-reaching constitutional argument is built on the
“nondelegation doctrine,” which holds that there may be some
limits on the kinds of powers that Congress can give to agencies.
Jarkesy argues that, when Congress gave the SEC the power to decide
whether to bring enforcement actions in court or in front of an
independent agency adjudicator, it gave away a core legislative
function. It thus violated the doctrine and engaged in an
unconstitutional delegation.

This is wild stuff. Not long ago, a lawyer would have been laughed out
of court for making such nondelegation claims. Today, they’d have a
good chance of destroying the federal government’s administrative
capacity—taking down its ability to protect Americans’ health and
safety while unleashing fraud in the financial markets.

Whether Congress’s grant of authority to the SEC was constitutional
should not be a close question. Congress has delegated expansive
authority to government agencies since the dawn of the republic. Only
twice in American history has the Supreme Court concluded that a
delegation to an agency ran afoul of the Constitution—and both of
those times, nearly 90 years ago, involved unusual statutes nothing
like this one.

The SEC was created as an independent agency in 1934, after the
financial crash of 1929, to thwart the sort of market manipulation
that preceded the Great Depression; Congress has granted it additional
powers over the years to continue protecting financial markets.
Responding to catastrophes and guarding against market manipulation is
exactly the kind of work that Congress should empower the executive
branch to do. Requiring Congress to legislate in response to every new
fraud some crook might dream up would not be a good use of its time.
And there’s no reason to think that delegating authority to police
markets runs afoul of the Constitution.

This was, of course, irrelevant to the conservative judges who heard
Jarkesy’s appeal. The Fifth Circuit majority concluded
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Congress acted “unconstitutionally” without “an intelligible
principle” by letting the SEC choose where to bring its enforcement
actions. But of course, statutes routinely leave prosecutors and other
enforcement agencies the discretion over how to proceed in their
cases, without raising delegation concerns. And for more than 75
years, the Supreme Court has recognized that other agencies can decide
how to proceed in their policy-making activities—whether via
case-by-case adjudications or general rule makings, for
example—without even hinting at any delegation problems.

Jarkesy’s second claim—that the internal adjudicator who first
heard his case held too much independence—is especially galling.
These adjudicators _should_ be independent; the alternative would be
to put their regulatory powers at the political whim of whichever
administration might be in charge. They have long enjoyed some
protection from removal, in order to insulate them from threats of
reprisal. The Supreme Court has always recognized the need to maintain
the independence of internal agency adjudicators: Even the
conservative Chief Justice William Howard Taft, who wrote an opinion
nearly 100 years ago extolling the benefits of presidential control of
all government officers, was careful to carve out exceptions for
adjudicator independence
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But, apparently, Taft is no longer conservative enough.

Underlying the Fifth Circuit’s ruling is a deep misunderstanding of
American history. Of the three judges who decided the case, the two in
the majority seem to believe that government regulation of any kind is
somehow un-American. Their opinion invokes the opening language of the
Constitution, “We the People,” and then cherry-picks quotes from
the Framers to support a stifling vision of federal power. For
instance, they cite James Madison for the proposition that unless we
keep the government’s powers strictly separated among three
different branches, we will inevitably fall into tyranny. But Madison
goes on, in “Federalist No. 51,” to recognize that “some
deviations … from the principle [of the separation of powers] must
be admitted.” And Alexander Hamilton, in “Federalist No. 66,”
goes further still, championing “partial intermixture.” Besides,
both Madison and Hamilton were interested first and foremost in
establishing a powerful national government. That is, after all, why
they had participated in what the legal historian Michael Klarman has
called the “Framers’ coup” to get rid of the Articles of
Confederation.

The Fifth Circuit’s claim that regulation and the separation of
powers are incompatible is not simply bad history; like much of the
rest of originalist jurisprudence, it is selective history served up
to justify a preferred political outcome. In fact, as voluminous
scholarship has decisively established, regulation was pervasive in
the early republic
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Congress has always depended on expansive delegations to govern the
country. Separation of powers was not understood to be a bar to
effective government. Indeed, for the drafters and ratifiers of the
Constitution, such separation was a pragmatic principle to ensure free
and efficacious government. That is why, far from impeding
delegations, Congress made creative use of the separation of
powers—such as in the establishment of the Sinking Fund Commission
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by the very first Congress, which mixed representation from the three
branches to ensure the stability of the federal debt.

The Fifth Circuit’s misuse of history is symptomatic of much of the
originalism practiced by judges affiliated with the conservative
Federalist Society, who now hold immense power across the federal
judiciary. Originalism’s ideology was born in sin; recent
scholarship has argued that originalism first emerged to defend
segregation following the Supreme Court’s decision in _Brown v.
Board of Education_
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And, in any case, many conservative judges don’t even bother to make
substantial originalist arguments anymore. A lazy hand-waving suffices
instead. They sprinkle in a few historical quotations, refuse to
engage seriously with historians’ findings, and then declare that
their right-wing policy preferences are dictated by the authority of
history.
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Thus, Jarkesy’s challenge might succeed. Arguments like his have
been rejected by federal courts many times already. But the federal
judiciary has drastically changed in recent years, and the Supreme
Court with it—opening the possibility of a new, friendly reception
to these absurd legal claims. (The Court could also set aside these
substantive questions and decide the case on other, more technical
grounds.)

Were Jarkesy to win, he would help achieve what the conservative legal
movement’s members have long dreamed of: the destruction of the New
Deal. The SEC, Jarkesy’s target, is not just the most important
regulator of the financial markets, it is also one of the crown jewels
of the New Deal agencies. Republicans have had it in their crosshairs
for nearly a century.

The consequences of Jarkesy’s success would be disastrous,
especially for the American economy. The SEC enforces the basic rules
that make stock markets work. Without it, stock issuers and dealers
would lie—with disastrous results. One needs only to examine the
rampant fraud, contagion, and meltdown in crypto markets last year to
see what an unregulated securities market looks like.

More generally, if Congress cannot delegate to agencies, it cannot
govern. Congress could never and has never written rules specific
enough to anticipate all eventualities. This is why Congress delegated
power to the SEC in the first place.

Finally, and most dangerous, ending independence for internal agency
adjudicators would undermine the rule of law. Without independence,
adjudicators would be beholden to the politicians who oversee
agencies. Unscrupulous presidents would use agencies to punish their
opponents and reward their allies. This would do more than turn
regulators into political handmaidens; it would destabilize markets,
stifle growth, and inevitably lead to financial crises.

Of course, if Republicans want to pursue this terrifying course, they
can try. The country is still a democracy. The right way to abolish
the SEC and undo the New Deal is to win a majority and pass a statute.
But Americans like having functional financial markets and bringing
fraudulent hedge-fund managers to justice—just as they like eating
unspoiled food and using effective and safe medication. The
“administrative state”—that is, government regulation to protect
the public—is rightly popular, as Republican presidential
candidates, to their chagrin, keep discovering.

But Jarkesy, a fringe figure using fringe arguments, is trying to do
an end run around the democratic process and win in the Court what
right-wing activists have failed to achieve at the ballot box. The
Supreme Court should reject this antidemocratic ploy rather than
accept the Fifth Circuit’s fake history.

_Noah Rosenblum is a professor at New York University School of Law._

* government regulation and safety
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* Supreme Court
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* Deregulation
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