(This story is developing and may be updated.)
In a 6-3 vote along ideological lines, the U.S. Supreme Court on Thursday ruled unconstitutional the SEC’s use of administrative tribunals, one way the financial regulator enforces securities fraud law, in a decision observers expect to have implications far beyond the SEC.
Like other federal agencies, the SEC has often used administrative law judges to bring enforcement actions, a practice the conservative majority said violates the U.S. Constitution’s guarantee of a right to a jury trial. Writing for the majority, Chief Justice John Roberts said, “A defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator.”
Somewhat ironically, the SEC had already scaled back its use of in-house courts after a 2018 Supreme Court decision held that the agency’s administrative law judges (ALJs) had not been properly appointed in accordance with the constitution’s appointments clause. Since that ruling, the agency had avoided filling litigated cases in administrative proceedings, but Thursday’s ruling still represents a blow to the SEC’s enforcement tools and could have sweeping implications for other agencies that use ALJs.
In a dissent joined by Justices Elena Kagan and Ketanji Brown Jackson, Justice Sonia Sotomayor warned of the potential for broad implications as a result of the court’s ruling in SEC v. Jarkesy.
“The constitutionality of hundreds of statutes may now be in peril, and dozens of agencies could be stripped of their power to enforce laws enacted by Congress,” Sotomayor wrote. “Rather than acknowledge the earthshattering nature of its holding, the majority has tried to disguise it.”
Indeed, many legal observers expect broad ramifications — and not just for the SEC.
“This is a big loss for the SEC because it forces the SEC to have trials with juries, which may be more skeptical of the more aggressive theories,” said former SEC counsel Brad Bondi, now global co-chair of the investigations and white collar defense practice at law firm Paul Hastings. “This is a landmark decision that has broad ramifications across other government agencies that use administrative proceedings.”
Thursday’s ruling involved a civil enforcement action against hedge fund manager George Jarkesy before an ALJ employed by the SEC. That judge ruled against Jarkesy and after an appeal, the SEC levied $300,000 in civil penalties and ordered him to disgorge $685,000 of what the agency said were illicit gains.
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