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DeFi and Credit Risk

The Securities and Exchange Commission (SEC) violated the constitutional rights of a hedge fund manager by having an in-house judge handle a securities fraud case brought against him, according to a US appeals court.

In 2013, the SEC charged George Jarkesy Jr. and his business, Patriot28 LLC, with violating federal securities law by understating the assets of his hedge funds. Rather than a civil court, the matter was heard by an administrative law judge. According to the 5th Circuit Court of Appeals, these administrative law judges, or in-house judges, may have violated Jarkesy's right to a jury trial under the seventh amendment.

"In conclusion, we agree with Petitioners that the SEC procedures below were illegal. The SEC's decision should be overturned for at least two reasons: (1) petitioners were denied their right to a civil jury under the Seventh Amendment; and (2) Congress unconstitutionally delegated legislative power to the SEC by failing to provide the SEC with an intelligible principle by which to exercise that power "According to the decision.

Jarkesy's conviction was not wholly overturned by the judgment, which remanded the case "for further procedures."

The significance of the case, according to The New York Times, is restricted to SEC lawsuits filed in Texas, Louisiana, and Mississippi, and only in instances that do not "involve primarily 'public rights.'"

In recent years, the SEC has pursued a number of enforcement actions in the crypto market, expanding the component of its enforcement division responsible for such matters to just over 50 people earlier this month.

SEC Chair Gary Gensler spoke before the House Appropriations Committee on Wednesday, saying that his agency needs additional resources to continue combating fraud and other crimes in the financial industry.

He told legislators, "I wish we had more resources to devote to this."

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