Supreme Court Weighs Whether SEC Violates Defendants’ Jury-Trial Rights
A ruling limiting the agency’s in-house court system could clear the way for attacks on similar executive-branch bodies.
WASHINGTON—The Supreme Court on Wednesday will consider a case that could severely limit the Securities and Exchange Commission’s use of its special in-house courts to punish wrongdoers.
Critics have complained about the SEC’s special courts for years, saying they rob defendants, including those accused of fraud, of their right to a jury trial. Administrative law judges, who preside in the in-house courts, are supposed to be independent but are appointed by the same commissioners who authorize the enforcement cases that the judges hear.
The justices’ decision, expected sometime before July, could open the door to more legal attacks on administrative courts at other federal agencies, including the Federal Trade Commission, where an in-house bench considers complaints about anticompetitive mergers and consumer-protection violations. Other agencies, such as the Federal Energy Regulatory Commission and Federal Mine Safety and Health Review Commission, also have adjudicators who consider violations of federal rules or laws.
The SEC asked the high court to consider the case after an appeals court in New Orleans ruled last year that the administrative courts are unconstitutional. The forum violates defendants’ jury-trial rights and gives too much power to regulators, a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit found in a 2-1 decision. SEC judges also enjoy protections from removal, an infringement on the president’s authority to appoint officers, the Fifth Circuit said.
The case, SEC v. Jarkesy, has generated interest among high-profile SEC critics and big-business groups, which have urged the justices to remove the agency’s freedom to file enforcement actions outside of federal court. Billionaires Elon Musk and Mark Cuban, who have both been sued by the SEC, told the high court in a brief that regulators began using the administrative courts more around 2015, after losing a string of insider-trading trials in federal court.
The SEC’s courts once heard only claims against stockbrokers and money managers—people who had submitted to the SEC’s oversight. But after the 2008 financial crisis, Congress passed the Dodd-Frank Act, named for its authors, that empowered the SEC to sue any defendant in administrative court, including people who didn’t work in finance but had, for instance, been accused of insider trading.
“Dodd-Frank really expanded the ability of the SEC to bring virtually any type of case in its administrative courts,” said Deborah Meshulam, a partner at DLA Piper who previously worked at the SEC. “It made these constitutional challenges much more ripe.”
The appeal before the high court involves hedge-fund manager George Jarkesy, whom the SEC accused of fraud in 2013. An administrative judge found that he “testified in an evasive manner” and told investors that the funds’ auditor was KPMG when it was a much smaller Houston-based accounting firm. The judge barred him from the securities industry and ordered penalties totaling $1.72 million.
Jarkesy and other defendants say the SEC’s administrative courts don’t give defendants the same due-process rights as a federal court. The in-house courts limit, for instance, how much information defendants can get from the SEC to challenge the case against them.
The SEC has litigated far fewer enforcement cases in the administrative courts in recent years as defendants challenged aspects of their structure. The pullback began after the Supreme Court ruled in 2018 that SEC judges were hired in a way that violated the Constitution.
Critics of the system say the in-house judges are executive-branch officers who enjoy too much protection from the president’s oversight. Congress provided them that independence through a law that says administrative law judges can be removed only for good cause.
If the justices decide administrative judges enjoy too much job protection—that a president should be able to dismiss them for whatever reason—the in-house judges would ironically become less independent than they are now, an association of administrative law judges wrote in a brief to the court.
The legal assault on in-house judges is part of a broader pattern of cases decided by the high court in recent years that question the growth of independent regulatory agencies such as the SEC. Such agencies have rule-making, prosecutorial and judicial functions, violating the Constitution’s separation of powers doctrine, according to groups such as the U.S. Chamber of Commerce.
The Fifth Circuit panel, in its 2022 decision siding with Jarkesy, said Congress delegated too much legislative power to the SEC by allowing regulators to pick and choose where to file enforcement actions.
Losing on that argument could “create a fertile new field” for challenging other commission actions, such as new regulations, based on the idea that commissioners wielded too much quasilegislative power, said David Zaring, a professor at the University of Pennsylvania’s Wharton School.
The Supreme Court has repeatedly ruled against the SEC in recent years. In April, the justices said people and businesses subjected to SEC administrative proceedings can seek to enjoin, or block, those proceedings by suing in a federal-district court and raising constitutional arguments there.
—Jan Wolfe contributed to this article.
Write to Dave Michaels at dave.michaels@wsj.com
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Business NewsNewsSupreme Court Weighs Whether SEC Violates Defendants’ Jury-Trial Rights
First Published:29 Nov 2023, 10:42 PM IST
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