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SEC’s Use of In-House Judges Cast in Doubt by Supreme Court

In a session that lasted more than two hours, the justices suggested that people accused of fraud by the SEC have a constitutional right to go before a federal court jury, at least when the commission is seeking civil penalties.

(Bloomberg) -- The US Supreme Court’s conservative majority cast doubt on the Securities and Exchange Commission’s use of in-house judges, hearing arguments in a case that could strip the agency of a key enforcement tool.

In a session that lasted more than two hours Wednesday, the justices suggested that people accused of fraud by the SEC have a constitutional right to go before a federal court jury, at least when the commission is seeking civil penalties.

It “seems problematic to say the government can deprive you of your property, your money, substantial sums in a tribunal that is at least perceived as not being impartial,” Justice Brett Kavanaugh said.

The SEC uses its in-house system for hundreds of cases a year – even after scaling back in response to a 2018 loss at the Supreme Court. A fresh high court loss for the commission would reduce its leverage to extract expensive settlements. 

The dispute is part of a Supreme Court term likely to have broad implications for federal regulators. The justices are also considering whether the Consumer Financial Protection Bureau’s funding system is constitutional and whether to overturn a precedent that gives agencies leeway when they interpret ambiguous congressional commands.

The session underscored the deep skepticism among the court’s six Republican-appointed justices toward the expansion of federal regulatory power in recent decades.

The “impact of government agencies on daily life today is enormously more significant than it was 50 years ago,” Chief Justice John Roberts said.

One of the court’s liberals, Justice Elena Kagan, countered that “our problems have only gotten more complicated and difficult, and it’s usually Congress that decides how to solve those problems.”

That brought a response from another conservative, Justice Neil Gorsuch. “We all agree Congress has a lot more problems on its plate today than it did 100 years ago, or even 50 years ago, but that doesn’t mean that the constraints of the Constitution somehow evaporate, do they?” he asked Deputy Solicitor General Brian Fletcher moments later. 

Jury Right

The Biden administration is appealing a ruling that found multiple flaws with the SEC’s reliance on its administrative law judges. The high court session focused almost entirely on contentions that the Constitution’s Seventh Amendment guarantees the right to a jury trial in SEC enforcement cases.

Fletcher pointed to a 1977 Supreme Court ruling that said the jury right doesn’t apply when Congress authorizes an administrative agency to adjudicate so-called “public rights” — those that go beyond traditional “common law” suits between private parties. He told the justices that a ruling against the SEC could affect other agencies, including the Federal Trade Commission.

“Throughout our nation’s history, Congress has authorized the agencies charged with enforcing federal statutes to conduct adjudications, find facts, and impose civil penalties and other consequences prescribed by law,” Fletcher said.

Wednesday’s case involves 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. 

No ‘Chutzpah’

An SEC judge found Jarkesy had committed securities fraud, and the commission eventually ordered him and his firm to pay almost $1 million. Jarkesy then appealed to the 5th US Circuit Court of Appeals.

His lawyer, Michael McColloch, told the justices that “the actual claims made against Jarkesy in this case are common law claims that required a right to trial by jury under the Seventh Amendment.”

Kagan told McColloch the 1977 ruling, known as Atlas Roofing, had settled the issue, prompting him to say the subject was resolved “only to the extent no one’s brought it up and forced the issue” since then.

That brought a quick response. “Nobody has had the, you know, chutzpah, to quote my people, to bring it up since Atlas Roofing,” said Kagan, who is Jewish, drawing laughter from the crowd.

Jarkesy and his allies, including Elon Musk and Mark Cuban, also say 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 court will rule by June in the case, Securities and Exchange Commission v. Jarkesy, 22-859.

TAGS: Industry
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