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The US Supreme Court has ruled that the Securities and Exchange Commission may not use its own in-house courts when seeking civil penalties in fraud cases, in the latest decision to restrain federal agencies’ powers.
The high court on Thursday held that a defendant must have access to a jury trial when the SEC is seeking civil penalties for securities fraud, citing the constitution’s Seventh Amendment, which protects individuals’ rights to a jury trial for civil cases.
In a 6-3 decision penned by Chief Justice John Roberts, the court’s majority said the matter “implicates the Seventh Amendment” since the “SEC’s antifraud provisions replicate common law fraud, and it is well established that common law claims must be heard by a jury”.
The decision was split along ideological lines, with the court’s other five conservative justices joining Roberts’s opinion and its three liberal justices dissenting.
The ruling curbs the SEC’s internal adjudication powers while also raising questions about similar enforcement mechanisms used by agencies across the US to adjudicate a broad swath of claims, from social security petitions to securities laws violations.
The case, SEC vs Jarkesy, involves a radio talk show host and hedge fund manager, George Jarkesy, who was charged with fraud in the SEC’s in-house administrative court in 2013.
Jarkesy sought to dismiss this proceeding, but the SEC’s in-house judge rejected his motions. He had asked the Supreme Court to find the regulator’s in-house court unconstitutional, arguing that it denies defendants their right to a jury trial and flouts separations of power between the legislative and executive branches of government, among other issues.
The regulator has argued that pursuing charges internally does not violate the constitution and that Congress gave it the power to adjudicate enforcement proceedings under securities laws as a means to ensure investor protection.
In her dissent, Justice Sonia Sotomayor warned the ruling would have “momentous consequences”, pointing to more than two dozen agencies with in-house courts that can impose civil penalties.
“The majority pulls a rug out from under Congress without even acknowledging that its decision upends over two centuries of settled government practice,” she added.
The SEC has the option to bring cases in federal district courts. But pursuing cases in-house tends to be more straightforward for the regulator compared with navigating potentially lengthy discovery processes, jury trials and additional oversight.
The agency has in recent years cut back on its use of internal adjudication. The number of pending proceedings before the SEC’s in-house judges dropped from 186 as of September 2018 to just two as of March.
“The SEC has already been shifting more to federal court, especially for fraud claims . . . [so the decision] will likely have a somewhat limited impact on the number of federal cases that the SEC brings,” said Jeremiah Williams, partner at Ropes & Gray.
He also stressed that the ruling was limited to fraud claims. “The SEC enforces many statutes and rules that do not involve fraud, and these can still be brought in-house.”
The decision marks the Supreme Court’s latest broadside against federal agencies’ authority as conservative justices have led efforts to pare back their rulemaking and enforcement powers.
“Today’s decision is a massive sea change,” Sotomayor wrote. “Litigants seeking further dismantling of the ‘administrative state’ have reason to rejoice in their win today, but those of us who cherish the rule of law have nothing to celebrate.”
A concurring opinion penned by Neil Gorsuch and joined by Clarence Thomas stressed that the “high walls” built in the Constitution “ensure even the least popular among us has an independent judge and a jury of his peers resolve his case under procedures designed to ensure a fair trial in a fair forum”.
The SEC did not immediately respond to a request for comment.
