Supreme Court dampens SEC’s use of in-house courts

The conservative majority decision nullifying a nearly $1M penalty could hamper the regulator's power to extract high-dollar settlements.

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.

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, Brett Kavanaugh and Amy Coney Barrett. Justices Sonia Sotomayor wrote a dissenting opinion, joined by Justices Elena Kagan and Ketanji Brown Jackson.

“Today’s ruling is part of a disconcerting trend: When it comes to the separation of powers, this Court tells the American public and its coordinate branches that it knows best,” Sotomayor wrote.

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.

An administrative law judge found Jarkesy had committed securities fraud, and the SEC eventually ordered him to pay almost $1 million. The high court 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.

The case is Securities and Exchange Commission v. Jarkesy, 22-859.