The Case That Could Destroy the Government

Atlantic Magazine

What was once a fringe legal theory now stands a real chance of being adopted by the Supreme Court.By Noah Rosenblum

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 that 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. 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. 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, enacted 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. 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 their right-wing policy preferences are dictated by the authority of history.

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.

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