The US Supreme Court curbed the Securities and Exchange Commission’s ability to press complaints before in-house judges, saying defendants have a constitutional right to make their case to a federal jury when the agency is seeking financial penalties.
The 6-3 decision could reduce the commission’s leverage to extract high-dollar settlements. It deals a blow to an administrative system the SEC once used to adjudicate more than 100 cases a year before scaling back amid legal challenges.
The ruling could ripple across the government, potentially affecting the Federal Trade Commission, Agriculture Department and Environmental Protection Agency. A Justice Department lawyer said during arguments that more than two dozen agencies now impose penalties through administrative proceedings and that only some of those bodies have the option to go to federal court instead.
Dissenting Justice Sonia Sotomayor said the ruling will unleash “chaos” across the government.
The dispute is part of a Supreme Court term likely to have broad implications for federal regulators. The justices are also considering whether to overturn a precedent that gives agencies leeway when they interpret ambiguous congressional commands. The court’s conservative majority has been broadly skeptical of what it views as overreach by regulatory agencies.
The majority said that the SEC’s “antifraud provisions replicate common law fraud” and that it was “well established” that those types of claims should be heard by a jury.
“A defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator,” Chief Justice John Roberts wrote for the majority. “Rather than recognize that right, the dissent would permit Congress to concentrate the roles of prosecutor, judge, and jury in the hands of the Executive Branch. That is the very opposite of the separation of powers that the Constitution demands.”
Roberts was joined by Justices Clarence Thomas, Samuel Alito, Neil Gorsuch, Brett Kavanaugh and Amy Coney Barrett.
Sotomayor listed 19 other agencies that also impose civil penalties through administrative proceedings. She said several agencies, including the Occupational Safety and Health Review Commission and the Federal Energy Regulatory Commission, currently don’t have the legal authority to go to court to seek civil penalties.
“For those and countless other agencies, all the majority can say is tough luck; get a new statute from Congress,” Sotomayor wrote in an opinion joined by Justices Elena Kagan and Ketanji Brown Jackson.
The latest ruling is a victory for George Jarkesy, a former hedge fund manager and conservative radio host. The SEC accused Jarkesy in 2013 of misleading investors about who served as his funds’ prime broker and auditor and about their investment strategies and holdings.
“The ramifications of this case are so much bigger than one person,” Jarkesy said in an emailed statement. “After a decade of gross misconduct and blatantly unconstitutional political attacks from the SEC and their in-house court, today the United States Supreme Court ruled that the Constitution still matters.”
SEC Order
An administrative law judge found Jarkesy had committed securities fraud, and the SEC eventually ordered him to pay almost $1 million. The high court’s decision nullifies that order.
The Biden administration argued unsuccessfully that SEC complaints don’t fall within the Constitution’s Seventh Amendment and its jury-trial right. That provision by its terms applies to “common law” suits, which typically are between private parties.
The administration pointed to a 1977 Supreme Court ruling that said Congress can create “public rights,” aimed at protecting the common good, and empower an agency to handle adjudications.
Jarkesy and his allies, including Elon Musk and Mark Cuban, said the SEC process is fraught with injustice. Defendants have fewer rights to obtain evidence in administrative hearings than federal court, and SEC lawyers can rely on third-party “hearsay” testimony. Appeals go to the same SEC commissioners who approved the complaint in the first place.
Industry Impact
The ruling could have significant effect on how brokers, investment advisers and others that fall under SEC rules can settle cases. Many enforcement proceedings are settled through the administrative process, which allows parties to file enforcement orders and settlements at the same time.
The SEC may want to amend its language in future administrative cases that explicitly require defendants to waive their rights to jury trials, said Rebecca Fike, a partner at the law firm Vinson & Elkins in Dallas and a former senior counsel in the SEC’s enforcement division.
If the regulator views the ruling as requiring even greater caution in using administrative judges, more cases might be settled in court, Fike said. That brings greater uncertainty for the SEC and defendants because it opens the door to a judge disagreeing with settlements, she said.
“There’s something about court filings that most corporate defendants want to stay away from,” Fike said.
The high court’s decision also raises the question of what constitutes fraud specifically in the securities context, said David Fredrickson, senior of counsel at Covington & Burling and a former SEC senior attorney. Many cases that have challenged the agency’s use of administrative proceedings involved fraud allegations, assuming the allegations are similar to common law fraud, he said.
“But Congress also authorized the SEC and perhaps other agencies to define things that are fraudulent,” Fredrickson said.
It’s unclear whether fraud allegations that, for example, involve violations of the SEC’s advertising rules or a broker’s failure to provide confirmation of a sale might still go through the administrative process, he said.