Month: August 2022

Earlier this year, in Jarkesy v. SEC, a divided panel of the U.S. Court of Appeals for the Fifth Circuit held that Securities and Exchange Commission’s enforcement proceedings are unconstitutional on three separate grounds. Judge Elrod wrote for the panel, joined by Judge Oldham. Judge Davis dissented. Last month, the SEC filed a petition for en banc review.

The Jarkesy opinion brought cheers from some quarters, dismay from others. Even Jon Stewart had an opinion on it.

Yesterday I participated in a webinar on Jarkesy for the Federalist Society’s Regulatory Transparency Project, and I thought it was worth a quick post to summarize my views on the good, bad, and ugly parts of the opinion.

The background of hte case is  that the SEC brought an enforcement action against Jarkesy and Patriot28, alleging that they had committed securities fraud. The SEC pursued the action not in federal court, but in an administrative proceeding in front of an Administrative Law Judge (ALJ), who concluded that the defendants had, in fact, committed fraud. The SEC affirmed this conclusion and rejected Jarkesy’s constitutional challenges to the SEC proceedings, prompting Jarkesy to seek review before the Fifth Circuit.

Here is how the Judge Elrod summarized the case and the issues presented in the intro to the opinion:

Congress has given the Securities and Exchange Commission substantial power to enforce the nation’s securities laws. It often acts as both prosecutor and judge, and its decisions have broad consequences for personal liberty and property. But the Constitution constrains the SEC’s powers by protecting individual rights and the prerogatives of the other branches of government. This case is about the nature and extent of those constraints in securities fraud cases in which the SEC seeks penalties.

The SEC brought an enforcement action within the agency against Petitioners for securities fraud. An SEC administrative law judge adjudged Petitioners liable and ordered various remedies, and the SEC affirmed on appeal over several constitutional arguments that Petitioners raised. Petitioners raise those same arguments before this court. We hold that: (1) the SEC’s in-house adjudication of Petitioners’ case violated their Seventh Amendment right to a jury trial; (2) Congress unconstitutionally delegated legislative power to the SEC by failing to provide an intelligible principle by which the SEC would exercise the delegated power, in violation of Article I’s vesting of “all” legislative power in Congress; and (3) statutory removal restrictions on SEC ALJs violate the Take Care Clause of Article II. Because the agency proceedings below were unconstitutional, we GRANT the petition for review, VACATE the decision of the SEC, and REMAND for further proceedings consistent with this opinion.

As indicated by the title of this post, there are parts of the Jarkesy opinion that I like, and there are others that I do not. So herewith are what I see as the good, the bad, and the ugly parts of the opinion.

First the “good”. The Fifth Circuit’s conclusion that the statutory limitation on the removal of SEC ALJs is unconstitutional is the strongest part of the opinion. The Supreme Court has made explicit that this is an open question, and relevant Supreme Court caselaw makes the conclusion that limiting removal of SEC ALJs is unconstitutional hard to resist. In Lucia the Court concluded that SEC ALJs are “officers” under Article II (albeit inferior officers), and in Free Enterprise Fund v. PCAOB the Court held that double-for-cause removal restrictions violate Article II. From this, the Fifth Circuit’s conclusion easily follows.

The strongest counter-argument is that ALJs, unlike other inferior officers, do not exercise the sort of power that must be subject to presidential control, but this argument rests on the sort of functional analysis we have not seen in an majority opinion from the Supreme Court on appointment and removal in quite some time, and it is almost certainly a loser on the current court. On this point it is telling that the SEC hardly contests this holding in its petition for en banc review.

That “bad” part of the opinion, in my view, is the court’s holding that the SEC’s decision to adjudicate the case before an agency ALJ violated Jarkesy’s Seventh Amendment right to a jury trial. I say this not because I am unsympathetic to the result, but because I think the Fifth Circuit’s holding cuts against applicable Supreme Court precedent on the applicability of the Seventh Amendment to agency proceedings involving “public rights.”

As a matter of first principles, the idea that the Seventh Amendment allows the government to prosecute individuals (albeit civilly) and subject them to substantial monetary and other penalties without affording them the right to a jury seems hard to credit, and Judge Elrod’s opinion is persuasive on that point (perhaps, in no small part, because this is a subject on which she’s written at least two law review articles).

The problem is that the Supreme Court said this was okay in Atlas Roofing v. OSHRC, and the Fifth Circuit’s arguments that Atlas Roofing has been abrogated (by cases such as Granfinanciera v. Nordberg) or otherwise does not apply are thoroughly unconvincing. So while I would prefer a rule that prevents agencies from subjecting folks like Jarkesy to administrative proceedings of this sort, relevant precedent cuts the other way. And while it’s certainly possible that the Supreme Court may revisit these prior cases to prevent the violation of Seventh Amendment rights in administrative proceedings, I think it’s bad from circuit courts to effectively usurp that authority, as I think the Fifth Circuit did here.

That brings us to the “ugly”: The Fifth Circuit’s nondelegation holding. This part of the decision is almost certainly wrong, and I was quite surprised to read it. Here’s how that portion of the opinion begins:

Petitioners next argue that 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. Because Congress gave the SEC a significant legislative power by failing to provide it with an intelligible principle to guide its use of the delegated power, we agree with Petitioners.

Set aside that the Supreme Court has turned away every opportunity to enforce the nondelegation doctrine in over eighty years. Assume that there are five votes on the Supreme Court to enforce the requirement that Congress articulate an “intelligible principle” when delegating what would otherwise be legislative power to agencies. Even with these concessions, this part of the opinion is still a confused mess.

Here’s the problem: The delegated power at issue is the SEC’s authority to make case-by-case decisions about how to enforce the securities laws against individual regulated entities. This is not legislative power. This is the sort of prosecutorial discretion that lies at the core of executive authority. And because this is not legislative power, no “intelligible principle” is required.

The Fifth Circuit tries to parry this objection by claiming that power is “legislative” if it has “the purpose and affect of altering the legal rights, duties and relations of persons.” But this doesn’t do the work the Fifth Circuit wants it to. Jarkesy’s rights in an Article III court and in an administrative proceeding are what they are under the Constitution and relevant statutes. The SEC did not alter these rights. It merely chose how to enforce the laws Congress enacted.

Were the Fifth Circuit correct, it would be an unconstitutional delegation of power when Congress allows agencies (or any executive official, for that matter) the choice of proceeding civilly or criminally against a regulated entity for related conduct. This choice, much like the choice between an Article III court and agency proceeding, affects what rights the defendant may raise. Among other thigs, the finder of fact may not draw a negative inference from a defendant’s invocation of the Fifth Amendment right against self-incrimination in a criminal proceeding, but can in a civil proceeding. And don’t even get me started on how the Fifth Circuit’s holding would make an absolute hash of immigration enforcement.

The point here is that The Fifth Circuit makes a fundamental category error when it characterizes the power at issue — the power to choose which method of enforcement to use in a given case involving a given regulated entity — as a legislative one. It is not, and the Fifth Circuit blundered when concluding otherwise.

As noted above, the SEC has filed an en banc petition in this case, so the panel opinion may not be the last word on these questions. Stay tuned to see whether the full court opts to clean up the mistaken parts of the opinion, or whether it saves these questions for the Supreme Court.

The post The Good, the Bad, and the Ugly of Jarkesy v. SEC appeared first on Reason.com.

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The Centers for Disease Control and Prevention (CDC) did neither control nor prevention when confronted with the COVID-19 coronavirus outbreak over the past two-and-a-half years. The agency’s many shortcomings began with its spectacularly botched rollout of tests for monitoring the spread of the coronavirus in early 2020. This was followed by the agency’s failure for many months to recognize that the disease was chiefly spread via respiratory droplets. And let’s not forget the agency’s comprehensive ineptitude concerning the swift evaluation of the effectiveness of its proposed mitigation strategies such as masking, social distancing, and quarantining. In addition, the agency was dilatory in releasing relevant data concerning boosters, hospitalization trends, and wastewater detection of the virus.

“For 75 years, C.D.C. and public health have been preparing for Covid-19, and in our big moment, our performance did not reliably meet expectations,” admits CDC director Dr. Rochelle P. Walensky in a statement this week announcing the reorganization of the agency. According to Bloomberg, she also acknowledged, “To be frank, we are responsible for some pretty dramatic, pretty public mistakes — from testing to data, to comms.” Those are understatements.

According to The Washington Post, Walensky plans to speed up the agency’s response to future disease outbreaks by using preprint scientific reports to get out actionable data as opposed to waiting for peer review; revamp its communications office and websites to make agency guidance clearer and more accessible; and require agency bureaucrats responding to outbreak emergencies to remain in their positions for at least six months. That’s not nearly enough.

When the CDC was founded on July 1, 1946, as the Communicable Disease Center, its chief mission was to control and eliminate the scourge of malaria from the United States. By 1951, the efforts overseen by the agency succeeded in eradicating the mosquito-borne illness from the 13 southeastern states in which it was endemic. The agency was further tasked in 1948 with investigating typhus, polio, rabies, hookworm, tuberculosis, and viral encephalitis. The CDC played a major role in the global eradication of smallpox and the elimination of endemic polio, measles, and rubella in the United States.

Over the decades, the agency lost its focus on monitoring and fighting epidemic infectious diseases as it accumulated new branches and offices that aimed to combat “epidemics” of obesity, smoking, and violence. All of these issues have public health implications but not nearly the same urgency that actual epidemics caused by novel infectious diseases do. The manifold failures of the agency during the COVID-19 pandemic show that the CDC needs radical reform—not just Walensky’s goals of improved communications and less bureaucratic turnover—that returns the agency to its infectious-disease fighting roots.

The post Make the CDC an Infectious Disease Epidemic Fighter Again appeared first on Reason.com.

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New U.S. home construction is plunging after a brief pandemic boom, showing the strain of continued supply chain woes mixed with persistently high inflation.

Data released Tuesday by the U.S. Census Bureau and U.S. Department of Housing and Urban Development show that 1,446,000 new homes started construction in July, a 9.6 percent fall from June and an 8 percent fall from July last year.

This is the latest bit of bad news to come out of the industry, adding to the growing pessimism in the homebuilding sector.

“A housing recession is underway with builder sentiment falling for eight consecutive months while the pace of single-family home building has declined for the last five months,” said National Association of Home Builders Chief Economist Robert Dietz in a press release. He did note that multifamily construction, while down in July, was still up nearly 20 percent from 2021.

The talk of a housing recession was echoed by credit reporting agency Finch, which said the likelihood of a “severe downturn” in the housing sector featuring price declines of 10 to 15 percent had increased. They still predict a more moderate, rather than severe, downturn in both prices and homebuilding is most likely.

Some analysts are pointing to buyers being discouraged by record high prices and the rising interest rates that have come with Federal Reserve belt-tightening as the reason for the slowdown.

“Prospective home buyers have gotten to the place that they are either intentionally stepping out of the housing market as they wait and see what happens next or are forced out of the housing market given the higher costs of homeownership,” Ali Wolf, chief economist at real estate company Zonda, told The Washington Post.

As of May, home prices had grown 20 percent this year, as measured by the Case-Shiller Home Price Index. Housing affordability—measured as a ratio of housing costs to income—is at its worst since the 1980s.

Kevin Erdman, a senior affiliated scholar at George Mason University’s Mercatus Center, cautions against reading the fall in housing starts as a sign of a housing recession or more general economic contraction. Rather, he says it’s a product of temporarily inflated housing starts falling to reflect the actual capacity of builders to construct new housing.

During the pandemic, housing starts rose at a much faster rate than housing completions. Erdman chalks this up to a mix of elevated demand for new homes colliding with COVID-caused supply chain problems limiting the ability of homebuilders to service that demand. Home prices shot up, and, for a time, so did profit margins on those homes.

“Builders were willing to meet that demand by raising prices but taking some of the extra margin,” says Erdman. Those higher margins meant they’d be willing to start projects they couldn’t complete on time.

Those supply chain problems haven’t gone away. But persistent inflation is starting to eat into the elevated margins builders were earning, he says.

Indeed, the price of building materials continued to tick up in July, according to the latest Producer Price Index. They’ve risen 35 percent since 2020, with most of that increase coming after 2021. Labor shortages have also hit construction companies hard.

That all means builders are less willing to take on new projects.

The good news is that housing starts remain above housing completions, and those completions have remained steady throughout the year.

“The slowdown we’ve seen so far is unwinding that excess,” says Erdman. “It’s not necessarily a contraction.”

This is still hardly an ideal situation. One would have hoped instead that easing supply chain issues would have seen housing completions rise to meet housing starts. That clearly isn’t happening.

It also comes after over a decade of underbuilding in most American cities following the Great Recession. The country is still short an estimated 4 million to 20 million homes.

Addressing long-term affordability issues exacerbated by the pandemic will require building more. Until that happens, says Erdman, we can expect home prices and rents to stay high.

The post The Pandemic Home-Building Boom Is Over appeared first on Reason.com.

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From Chief Judge F. Dennis Saylor IV in McLeod v. Fessenden School (D. Mass.):

This case concerns alleged acts of sexual abuse and molestation of a student by her teacher. According to the complaint, some of the abuse occurred during a summer program at The Fessenden School…. The complaint, exclusive of exhibits, is 152 pages long; it names 49 defendants and purports to assert 65 counts. Portions of it read more like a tabloid story than a legal pleading, and large sections of it are obviously irrelevant and improper. Defendants have moved to strike various portions of the complaint under Fed. R. Civ. P. 12(f)….

Pursuant to Fed. R. Civ. P. 12(f), the court may strike from a pleading “any redundant, immaterial, impertinent, or scandalous matter.” Rule 12(f) specifically gives the court discretion as to whether or not to strike a particular matter, although motions to strike are generally disfavored.

The challenged portions of the complaint contain substantial amounts of attorney argument, inadmissible opinion, legal conclusions, and irrelevant allegations. Such statements, at a minimum, are immaterial because they have “no essential or important relationship to the claim for relief or the defenses being pleaded” and are impertinent because they “do not pertain, and are not necessary, to the issues in question.” They will accordingly be struck….

Allegations concerning the defendant’s childhood, his mother, and his ethnic origin are obviously immaterial and impertinent [and will be struck]…. Allegations concerning the occupations, personal wealth, and private lives of the trustees of Fessenden are immaterial and impertinent [and will be struck]….

Allegations referring to past suspected sexual assaults that occurred on Fessenden’s campus are also immaterial and impertinent. Most of those allegations refer to alleged sexual assaults that occurred 20 to 40 years ago. But even as to the allegations that refer to more recent suspected acts of sexual abuse, there is no allegation, or even any suggestion, in the complaint that this should have put defendants on notice of such conduct.

Because information concerning other alleged sexual assaults occurring on Fessenden’s campus are immaterial, the following portions of the complaint, including illustrations, will be struck: paragraphs 72-84, 86-90, 93, 94, 161, and 167-69….

Plaintiff included a multitude of other irrelevant statements throughout the complaint. For example, the complaint contains information regarding some of the “distinguished alumni” of Fessenden. And it is larded with inappropriate editorial statements, such as the last sentences of paragraphs 4 and 164. (See id. ¶ 4 (“However, the real cause of Fabiana’s symptoms was more sinister.”) and ¶ 164 (“Leung, like the villainous deacon in the movie Night of the Hunter, was back!”)).

In addition, the complaint contains numerous statements that refer to news reports of the charges brought against Leung and counsel’s pre-litigation communications with Fessenden.

Those statements are unrelated to plaintiffs’ claims of alleged abuse or defendants’ failure to stop that abuse and will be struck….

The court, however, denied the motion to strike as to material that it found potentially relevant to the case, and of course the rest of the case will still go forward.

The post "Leung, Like the Villainous Deacon in the Movie <i>Night of the Hunter</i>, Was Back!" appeared first on Reason.com.

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