Washington— The Supreme Court on Thursday ruled against the Securities and Exchange Commission in a dispute over the agency’s ability to use domestic courts to seek civil penalties against defendants in securities fraud, stripping the agency of a key enforcement tool.
The court ruled 6-3 in favor of the SEC in the case, finding that the Seventh Amendment gives defendants a right to a jury trial. The court split along ideological lines, with Chief Justice John Roberts writing for the conservative majority.
“A defendant facing a fraud charge has the right to be tried by a jury of his peers before a neutral adjudicator,” Roberts wrote for the court. He said allowing the executive branch to play the roles of prosecutor, judge and jury — as in enforcement proceedings conducted internally by the SEC — is “the very opposite of the separation of powers that the Constitution demands.”
Justice Sonia Sotomayor wrote the dissenting opinion, a brief read from the bench. Joined by Justices Elena Kagan and Ketanji Brown Jackson, Sotomayor wrote that for years, Congress has allowed agencies to impose civil penalties and warned the majority’s decision would lead to “chaos.” He criticized the decision as a “power grab”.
“The majority today upholds long-standing precedent and the practice of equal partners in a tripartite system of government,” Sotomayor wrote. He accused the court of failing to act as a “neutral umpire,” which appeared to be a reference to Roberts’ statement during his 2005 confirmation hearing that judges are like umpires who “call balls and strikes.”
SEC v. Jarkesy
The case, known as SEC v. Jarkesy, is one of several before the Supreme Court this term who have challenged the actions of federal agencies and threatened to reduce their powers. It has yet to rule in a pair of cases in which the justices were asked to overturn a 40-year-old ruling that required courts to defer to agencies’ interpretations of ambiguous statutes if they were reasonable.
This dispute involves how the SEC enforces securities laws: through civil actions brought in federal district court or through internal proceedings overseen by administrative law judges in-house. These judges, appointed by the SEC in this case, can be removed only for “good cause established and determined by the Merit System Protection Board,” whose three members are appointed by the president and can be removed “only for inefficiency, neglect of duty. , or malfeasance in office.”
The case arose in 2013, when the SEC brought administrative proceedings against George Jarkesy, the founder of two hedge funds with approximately 120 investors and $24 million in assets. An administrative law judge at the SEC was tasked with the proceedings and found that Jarkesy violated several securities laws. He was eventually ordered to pay a $300,000 civil penalty and his advisory firm, Patriot28, also had to pay back nearly $685,000 in what the SEC determined were illegal profits.
Jarkesy appealed the decision to the US Court of Appeals for the 5th Circuit, as allowed by law, which threw out the SEC’s findings on three different constitutional grounds. In a split ruling, the appeals court found that the SEC’s proceedings violated the Seventh Amendment right to a jury trial and held that Congress improperly delegated power to the SEC when it allowed the agency to conduct internal litigation on certain matters or bring such cases. district court. Finally, the 5th Circuit ruled that the SEC’s administrative law judge removal restrictions were unconstitutional.
The SEC appealed the decision to the Supreme Court and asked it to review three constitutional issues by the end of November. But much of the argument session before the justices involved Jarkesy’s contention that Congress violated the Seventh Amendment by allowing the SEC to conduct administrative proceedings at home.
The court said that because the answer to the Seventh Amendment question settled the case, it did not have to address the remaining issues.
Jarkesy hailed the Supreme Court decision as showing that “the Constitution still matters.”
The case threatens to disrupt the work of administrative law judges who work at federal agencies, including the Occupational Safety and Health Administration, the Social Security Administration and the Environmental Protection Agency.
Addressing these risks, Sotomayor noted that over the past 50 years, Congress has passed numerous laws empowering federal agencies to impose civil penalties for violations of the law. There are more than two dozen agencies that can enforce these penalties in administrative proceedings.
The majority’s decision, he said, jeopardized the constitutionality of the statute and could strip agencies of their power to enforce laws passed by Congress.
“Today’s ruling is part of a surprising trend: When it comes to the separation of powers, this court tells the American people and the coordinate branches know best,” Sotomayor wrote. “Courts tell Congress how best to structure agencies, correct harms to the general public, and even provide enforcement of rights to governments.”
In rejecting the ongoing criticism of the conservative legal movement about the power of federal agencies, Sotomayor said that the argument about the benefits of a scheme like the SEC is carried out against the background of a philosophical and “perhaps ideological” debate about the ability of the federal government to respond to the problems that develop in society.
“The American people should not be mistaken for judicial hubris in protecting individual rights,” Sotomayor wrote in her dissent.