illustration of car

There’s something quintessentially American about a lone man driving on an open road: the space, the freedom, the control. An airplane is the opposite—you’re a passenger in a flying can with tiny windows and no control at all.

Frank Black loves to drive. Now in his 80s, Frank grew up poor in Rock Hill, South Carolina. His family didn’t own a car. Now Frank owns a securities broker-dealer, Southeast Investments. He could fly anywhere he wants; but, he says, “I hate the thought of planes. Are you telling me I’m going to be cramped in this little space? I’m not going to be able to choose when I want a cup of coffee! I’m not going to be able to listen to my music!”

For years, when he had to visit the offices of remote brokers who worked for him, Frank took road trips instead of flying. “Heaven to me is 90-miles-an-hour on a highway,” he says.

Incredibly, that’s what earned him a quarter-million-dollar fine from federal regulators and a lifetime ban from the financial industry.

Frank was not convicted of a crime in a court of law. He didn’t scam or steal from his customers. No independent judge or jury found he’d done something wrong.

But Frank was still treated as guilty of fraud: Regulators accused him of providing false documents about his travel to remote brokers’ offices and of failing to preserve emails. And instead of being tried in a real court in the judicial branch, Frank was tried in one of the executive branch’s many in-house tribunals, where Americans can be found guilty of violating regulations and robbed of their livelihoods.

Today, the SEC is allowed to demand over a million dollars per violation—and its enforcement actions are handled in-house, without due process for the accused.

Agency Adjudication

Normally, if you’re accused of a crime or sued in the United States, you’re entitled to a fair trial with a jury of your peers and fixed rules of evidence.

But with the growth of the administrative state over the 20th and 21st centuries came the rise of so-called agency adjudication: in-house judgment proceedings at regulatory agencies that look like courts but operate entirely outside the judicial system. These proceedings are happening behind closed doors at the Securities and Exchange Commission (SEC), National Labor Relations Board (NLRB), Environmental Protection Agency (EPA), Consumer Product Safety Commission (CPSC), and every other major regulatory agency.

Anyone can be accused of violating federal regulations and hauled before an agency tribunal—where the presiding authority is an administrative law judge or hearing officer employed by the agency that’s accusing you of wrongdoing.

These biased proceedings have long been controversial. The American Bar Association released a report in 1934—the same year the SEC was created in the New Deal—about “the evils notoriously prevalent” in agency hearings.

“The judicial branch of the federal government is being rapidly and seriously undermined” by executive branch tribunals, the report said. In another report, in 1938, the ABA complained about “[t]hose who would turn the administration of justice over to administrative absolutism.”

As executive branch agencies multiplied in Washington, concern spread—particularly among lawyers—that bureaucrats at these agencies were assuming judicial powers and violating individual rights. In a 1940 journal article, attorney Samuel Kaufman warned:

The addition of a few new arms to government machinery is no occasion for abandoning our guarantees of liberty and property—or for scrapping the principles of the judicial process, developed over centuries for the protection of a democratic people… The Securities and Exchange Commission, with its consummate power of investigation, can terrorize by the indiscriminate use of the facts it gathers… The alarming tendency toward absolutism in all forms of government owes much to the same blind principle that if the ultimate goal seems desirable, the means used to get there may not be questioned.

For most of the 20th century, the only punishments agencies could impose were nonmonetary: issuing cease-and-desist orders, suspending licenses, and other similar penalties. But in 1970, Congress began giving federal agencies the power to punish people with monetary penalties. A Pacific Legal Foundation study found that by 2022, agencies were issuing fines in 70% of administrative proceedings—all together, exacting over $10 billion from the public in penalties for alleged regulatory violations.

Today, the SEC is allowed to demand over a million dollars per violation—and its enforcement actions are handled in-house, without review by an independent judge and without due process for the accused.

Frank’s Story

“I’ve never considered this a job,” Frank says of finance.  

Growing up, he was one of seven kids. After his father died when Frank was 12, his mother went to work for another family making $15 per week. Frank’s sister got work pouring dirt: That’s a job.

The family didn’t even have a bank account. “I had never heard the term ‘stock market’ in my life,” Frank says.

After high school Frank worked at a cotton mill, then joined the Navy, then put himself through college working at a car factory.

One day a Merrill Lynch stockbroker spoke at Frank’s college. Frank was intrigued. “I went up afterwards and said, ‘Let me get this straight. You get paid and you don’t have to sweat?’”

He bought a share of stock and fell in love. It’s hard for him to describe the way he sees the market. Some people just have the touch. “My wife’s an artist,” Frank says. “If you look at a blank wall, she can picture whatever you want her to picture and then paint it. I have no concept of what’s on that wall. All I see is a blank wall. But when it comes to dollars and cents, I can see relationships.”

After college he found a job in finance, although he wasn’t making much. Eventually he convinced Merrill Lynch to give him a shot. He passed their tests. Merrill Lynch asked if he’d accept the same low salary he was already making. He’d have cut off his leg for the job. “I’ve starved to death all my life,” Frank remembers thinking. “I can starve to death on less than that.”

He moved up in the industry, later opening up his own branch at another firm. In 1997 he started his own broker-dealer. It wasn’t like Glengarry Glen Ross: There were no sales contests, no penny stocks, no get-rich-quick schemes. “I can’t emphasize enough how much I care about my clients,” Frank says.

He considers himself old-fashioned. “I grew up in the fifties,” he says. “And the old saying was, Truth, Justice, and the American Way.”

Charged with Fraud

The SEC delegates some of its authority to the Financial Industry Regulatory Authority (FINRA), a quasi-governmental organization that acts as a regulatory arm of the SEC over brokerage firms.

In 2012, FINRA conducted a routine investigation of Frank’s firm and demanded proof Frank had been regularly visiting the offices of four brokers who worked for him remotely. He was required to visit their offices every one to three years.

How can the government keep someone like Frank—a success story, an embodiment of the American Dream—away from his livelihood?

Frank confirmed he visited the offices by car. He turned over his inspection reports and expense vouchers, showing he’d been reimbursed for mileage and meals.

But FINRA accused him of lying. Airplane tickets would establish definitive proof of travel—but Frank drove.FINRA charged Frank with fraud: According to the regulators, he had submitted “false documents” and was deficient in conducting branch inspections. They also accused Frank of failing to preserve 16 emails of one of the firm’s representatives. For these infractions, FINRA brought Frank before an in-house tribunal, where a hearing officer who worked for FINRA found Frank guilty. The sentence? A $243,000 fine and a lifetime ban from the financial industry.

The fine is a staggering amount of money for allegations that nobody, not even the regulators,, believe harmed any customers. But a quarter-million-dollar fine makes sense when you realize FINRA keeps the money it collects. In 2021, for example, FINRA collected $103 million in fines, all of which went into its budget—paying the salaries of the employees who levied the fines. To Frank, that’s like a police officer who stops every car on a highway and puts fines straight into his own pocket.

Worse than the fine, of course, is the ban. Frank built everything he has. Finance is what he’s good at. It’s a family business now: His daughter and niece work for his firm. How can the government keep someone like Frank—a success story, an embodiment of the American Dream—away from his livelihood?

He appealed the judgment. In the normal American justice system, Frank’s appeal would go to a higher-level court where independent judges would agree or disagree with the lower court’s ruling. But in federal agency adjudication, the appeal stays within the agency whose regulations you’re accused of violating.

Frank’s appeal went first to a committee at FINRA—which lowered the fine to $146,000 but kept the lifetime ban—and then up to the SEC, which sat on the case for more than four years while Frank remained banned from the industry he loved.

Picture of Frank Black
Frank Black. (Source: PLF)

Jarkesy and the Future of In-House Tribunals

Around the same time FINRA first investigated Frank, the SEC accused investment advisor George Jarkesy of securities fraud.

George was found guilty at an SEC tribunal and given a $300,000 penalty. He appealed, but his appeal went to SEC commissioners, who (predictably) ruled against him. (It’s worth noting that 90% of the SEC’s in-house proceedings end in guilty verdicts. When the SEC is litigating a case in a normal federal court, it only wins 69% of the time. Clearly, the SEC has a home-court advantage in its own tribunals.) After his appeal was exhausted—which took years—George was finally allowed to challenge the ruling in a normal federal court, where he argued the SEC denied him his Seventh Amendment right to a trial by jury.

The case went to the U.S. Supreme Court last term, and in June the Court ruled for George: The SEC couldn’t find people guilty of securities fraud and seek civil penalties without a jury trial, the Court ruled.

Frank Black is also challenging the constitutionality of the in-house adjudication process. Pacific Legal Foundation started representing Frank last year. After we helped him file a federal lawsuit, the SEC finally ruled on Frank’s appeal: It disagreed with most of FINRA’s accusations and lifted the lifetime ban—a huge victory for Frank, although it came after almost five frustrating years of not being able to work. But the SEC agreed with FINRA that Frank had failed to preserve 16 emails and had “deficient supervisory procedures for electronic communications.” Then the agency sent Frank’s case back to FINRA for yet another adjudication.

Even after the SEC disagreed with Frank’s ban, and after the SEC was chastised by the Supreme Court in the Jarkesy case, Frank remains caught in the web of adjudication.

PLF is now litigating his case at the Fourth Circuit Court of Appeals. Our argument against in-house agency judgments like Frank’s echoes concerns from almost a century ago, when the New Deal put adjudicative powers in the hands of the SEC and other agencies.

“If administrative agencies have been created to promote the general welfare, they must do so subject to that due process which protects and guarantees the rights of the individual,” Samuel Kaufman wrote in 1940. “The administrative process will never be assimilated into the American scheme until it partakes of the magic of our tradition, unless it shares in the hallowed guarantees of due process.”