FDIC Argues that Jarkesy Does Not Affect Its In-House Proceedings

At least, not in this specific context

A few months ago the Supreme Court in Securities and Exchange Commission v. Jarkesy ruled that when the SEC pursues securities fraud charges seeking civil penalties it cannot bring those claims before the SEC’s in-house judges. Instead, this sort of case must be filed in federal court where defendants have the right to a jury trial.

An individual currently subject to an in-house FDIC enforcement proceeding is now challenging the proceeding in federal court in Washington, DC, arguing that in light of Jarkesy he too is entitled to a jury trial.

Earlier today the FDIC filed its response, representing what may be the first detailed public argument from a banking regulator as to what, if anything, Jarkesy changes for its enforcement proceedings.

This post takes a brief look at the Jarkesy arguments being made by each side.

The TRO Motion

The FDIC’s filing today comes in the context of a motion for a temporary restraining order filed by John C. Ponte.

In February 2023, the FDIC brought charges alleging that Ponte is an institution-affiliated party of Independence Bank in Providence, Rhode Island, and in that capacity “directly or indirectly violated regulations and recklessly engaged in unsafe or unsound practices in connection with the Bank.” Independence Bank and the alleged activities of Ponte and others have been previously discussed on this blog in the context of Independence Bank’s ongoing effort to persuade a court that the bank should be allowed, over the FDIC’s objections, to wind up its operations and liquidate.

For purposes of this post, though, it is enough to say that Ponte is currently subject to an FDIC in-house enforcement proceeding before the Office of Financial Institution Adjudication. Ponte believes that the in-house proceeding is a violation of his constitutional rights because Jarkesy means he is entitled to a jury trial on the FDIC’s claims.¹

This is so, Ponte argues, even though the FDIC’s enforcement counsel last month informed Ponte that the FDIC (unlike the SEC in Jarkesy) is no longer seeking civil money penalties, and instead now only seeks restitution and a removal and prohibition order.²

Here, the FDIC initially sought civil penalties and “restitution” against Ponte. After Jarkesy was decided, the FDIC dropped the civil penalty demand and is proceeding on a demand for statutory restitution and to debar him from banking. But as explained below, these recent machinations by the FDIC to claim that its “penalties” are now somehow matters of equity not law are unavailing. While the Notice of Foregoing Claims for Civil Money Penalties, issued when its request to stay the matter for 60 days was denied, purports to drop its request for civil money penalties it maintains a request for statutory restitution that is identical to money damages as it is simply a judgment for money against Ponte. …

The statute under which the FDIC charges Ponte is demonstrably a claim for money damages for common law fraud, or to the extent they claim he overcharged on a contract, a contract action. FDIC counsel by unilateral action cannot change the nature of the claim. There is yet another problem with relying on FDIC counsel’s waiver even if the ALJ goes along with it. The FDIC and its Board are not bound by counsel or the ALJ’s views. If the ALJ does not impose second tier civil money penalties nothing prevents the Board from issuing the same penalty in a final order.

Ponte goes on to argue that, whether the FDIC is seeking civil penalties, restitution, or otherwise, this case bears the same hallmarks that the Supreme Court in Jarkesy concluded ought to entitle a defendant to a jury trial.

Even more than in Jarkesy, this case “is a common law suit in all but name.” Here, as noted, it was named. All the badges of common law fraud identified in the securities laws as requiring a jury are also true for the FDIC. The FDIC called it “fraud” and then sought general liability against Ponte for material omissions or misstatements (fraud) and for overcharging those he had a contract with (breach of contract). …

The other aspects of whether a jury trial is required that Jarkesy noted are easily dealt with and redound in Ponte’s favor. This is not a case of a “public right” however defined. There is no “public right” at issue in this case. Ponte’s right to engage in banking (which he did not do) is not one granted by the Government. If the FDIC wants to prevent Mr. Ponte from engaging in lawful employment, if it wants to restrict his liberty, it must convince a jury that the facts warrant it.

Ponte also argues, somewhat shakily,³ that the FDIC can just bring cases in federal court instead (though not necessarily against him).

This relief will not “‘dismantle the statutory scheme’” as the FDIC can bring claims in federal court where juries are available. See 12 U.S.C. § 1812(c), (d) (cease and desist orders), (i) (enforcement proceedings under §§ 1818, 1831o, or 1831p-1), and (n) (enforcing subpoenas) … Claims involving requests for civil monetary penalties and the like are heard every day by federal courts sitting in diversity and by federal courts adjudicating liability under various state and federal statutory schemes.

Ponte therefore asks the court to grant his motion for a temporary restraining order staying the FDIC’s in-house administrative proceeding against him.⁴

The FDIC’s Response

After Ponte filed his motion for a TRO the FDIC requested that the court permit the FDIC to file its opposition to the TRO motion by August 23. The court agreed and the FDIC filed its response as scheduled.

Assuming the court reaches the Jarkesy question,⁵ the FDIC argues this proceeding is fundamentally different from the sort of proceeding at issue in Jarkesy, such that it is constitutionally permissible for the FDIC to continue proceeding against Ponte via an in-house administrative proceeding and without a jury.⁶

At the outset, the FDIC says that the “salient difference between this case and Jarkesy is simple: the FDIC’s enforcement proceeding against Ponte involves restitutionary remedies, not damages or penalties.” This sort of remedy, the FDIC argues, does not require a jury.

The FDIC also takes issue with Ponte’s contention that the charges against him are essentially based in common law fraud.

[T]he FDIC alleges not that Ponte defrauded the borrowers, but rather that he engaged in unsafe and unsound practices and violated SBA regulations by misleading the SBA. Nothing in Jarkesy suggests that a misstatement or omission in a regulatory filing is analogous to fraud on a private party. …

Ponte’s scheme, in other words, involves regulatory violations, and there is simply no plausible common-law analogy to misconduct in the handling of a regulatory program for agency backing of loans to small business borrowers. There is nothing like the “close relationship between federal securities fraud and common law fraud” that the Jarkesy Court found, in other words, and the Seventh Amendment is not implicated here.

The FDIC then says that even if the court disagrees with the FDIC’s argument above, the public rights exception means that Ponte still is not entitled to a jury trial. This is so for at least five reasons.

First, the FDIC argues that Jarkesy stands for the proposition that an enforcement action falls outside the public rights exception (and thus entitles a defendant to a jury trial) if the action seeks a “punitive remedy” that targets the same basic conduct as a common law action and operates pursuant to similar principles. The FDIC believes that is not the case here - “restitution remedies are restorative, not punitive” - and in any event:

Violating the SBA’s fee regulations has literally nothing to do with the common law, just as the OSHA regulations discussed in Atlas Roofing “br[ought] no common law soil with them” and did not “trace[] their ancestry to the common law,” and thus, per Jarkesy, qualified for the public rights exception.

Second, the FDIC picks up on language in Jarkesy saying that the SEC action at issue there was seeking to “regulate transactions between private individuals interacting in a pre-existing market” and did so by “creat[ing] claims whose causes of action are modeled on common law fraud and that provide a type of remedy available only in law courts.” “None of that is true here,” the FDIC writes.

The FDIC is addressing misconduct that occurred under the auspices of a regulatory initiative, the SBA’s loan guarantee program—not “private individuals interacting in a pre-existing market.” Furthermore, the FDIC’s restitution action is not “modeled on common law fraud” …

Third, the FDIC turns to examples of public rights cases cited by the Supreme Court in Jarkesy and argues that “enforcement of the banking laws fits this category of cases.”

Effective banking regulation ensures the continued stability of the financial system, and federal regulations permeate every aspect of banking. Just as the federal government has an interest in ensuring the effective operation of the laws governing taxation, immigration, and international trade, it has a compelling interest in preventing banking misconduct like Ponte’s, and Congress has leeway to provide for the adjudication of those matters in an administrative forum.

Fourth, the FDIC notes language in prior Supreme Court decisions saying that when a “statutory right is not closely intertwined with a federal regulatory program Congress has power to enact, and if that right neither belongs to nor exists against the Federal Government” then the case cannot proceed in-house and must be brought before a federal court. Here, the FDIC says the opposite is true — the FDIC’s proceeding is closely intertwined with a federal regulatory program (SBA lending) and the right to seek restitution belongs to the FDIC as regulator of Independence Bank.

Finally, the FDIC asserts that other considerations present in the Supreme Court’s cases finding a public rights exception are present here, too. Most notably, the FDIC argues that if a court were to require this sort of case to be brought before a jury this would “go far to dismantle” the existing statutory scheme for federal bank regulator enforcement actions.

[R]equiring a jury would “go far to dismantle the statutory scheme” for the simple reason that Section 1818 anticipates that restitution, like the other enforcement actions set forth there, will be litigated administratively and does not offer the FDIC the choice of proceeding in federal court. … The SEC, by contrast, has the explicit option to proceed in federal court, as the Jarkesy Court repeatedly emphasized.

Ponte’s mis-citations point to nothing suggesting that Congress has given the FDIC a corresponding power (the provisions Ponte attempts to cite authorize the FDIC to enforce its orders in court, not to bring the proceedings there in the first place)…

[R]equiring a jury trial would not simply “impede” swift resolution of this matter, it would make it impossible to bring it under Section 1818 at all.

***

This post focused on the arguments from Ponte and the FDIC as to Jarkesy because they seem to be the most novel and most interesting, but just to avoid giving the wrong impression it bears noting that there is a real possibility the court in this case never reaches the Jarkesy arguments at all.⁷

As for timing of a potential ruling, whether on the merits of the Jarkesy arguments or otherwise, Ponte and the FDIC have stated that they share the goal of proceeding expeditiously toward a resolution of the case, but the expected timeline for a decision from Judge Mehta is not clear at the time of this writing.

1. The discussion in this post focuses on Ponte’s Jarkesy-based argument in his TRO motion, but the TRO motion first must address the threshold question of whether a federal court can hear Ponte’s argument in the first place, or whether instead 12 USC 1818(i)(1) strips the court of subject matter jurisdiction.

Section 1818(i)(1) provides that, subject to certain exceptions, “no court shall have jurisdiction to affect by injunction or otherwise the issuance or enforcement of any notice or order under any such section, or to review, modify, suspend, terminate, or set aside any such notice or order.” Ponte, relying on the Supreme Court’s 2023 Axon decision, argues that Section 1818(i)(1) does not bar federal courts from hearing his suit, given that the suit is not about any substantive FDIC decision regarding enforcement of the banking laws, but is instead an exogenous constitutional claim.

2. The quotes below come from Ponte’s TRO motion. Internal footnotes and citations have been omitted.

3. The reference to Section 1812 seems to be a typo and is probably meant to be a reference to Section 1818.

4. The request for a TRO follows a complaint filed by Ponte a few days previously that, in addition to making a Jarkesy-based argument as to Ponte’s right to a jury trial, argues that the FDIC’s proceeding is invalid for several other reasons, including because the FDIC is unconstitutionally structured. The FDIC responds to this claim in the filing it made today, see pages 34-40.

5. As mentioned in footnote 1, there is a threshold question as to whether the court can hear Ponte’s Jarkesy argument in the first place. The FDIC argues that Ponte, having already failed to convince a federal court in Rhode Island that Section 1818(i)(1) permitted that federal court to hear his challenge, cannot now try the same argument again before a different federal court in DC. See pages 11-14 of the FDIC’s response.

The FDIC then argues (pp. 14-23) that even if collateral estoppel does not prevent Ponte from making the same argument before this court, the court should, like the Rhode Island district court before it, also conclude that Section 1818(i)(1) prevents the court from intervening. The FDIC distinguishes the Axon case on which Ponte relies, saying that Axon was about a statute that, the SEC claimed, implicitly withdrew jurisdiction from the federal courts. Here, the FDIC says that Section 1818(i)(1) explicitly withdraws jurisdiction, and so ought to be analyzed differently.

6. All quotes in this section of the post come from the FDIC’s response to Ponte’s TRO motion. Internal footnotes and citations have been omitted.

7. See footnotes 1 and 5 above.