Supreme Court Again Rejects Regulatory Agencies, Overturns SEC Tribunals

The Supreme Court on Thursday rejected one of the main ways the Securities and Exchange Commission enforces rules against securities fraud, likely also making it harder for other regulators to take enforcement action.

The SEC, like other regulators, sometimes enforces its regulations and imposes penalties using internal non-jury tribunals rather than federal courts. Chief Justice John G. Roberts Jr., writing for a conservative six-justice majority, said this practice violated the Seventh Amendment right to a jury trial.

“A defendant facing a fraud case has the right to be tried by a jury of his peers before a neutral jury,” the chief justice wrote.

The decision in this case, divided along ideological lines. Justice Sonia Sotomayor, joined by Justices Elena Kagan and Ketanji Brown Jackson, dissented, accusing the majority of overturning “long-standing precedent“to limit the powers of administrative bodies.

The so-called administrative state is the way American society imposes rules on powerful business interests. Congress has passed laws to broadly govern various sectors of the economy — such as banning publicly traded companies from defrauding investors or limiting the extent to which factories can pollute the air or water — and created agencies of technocratic experts to implement those laws by creating detailed regulations and then enforcing them.

Many of these agencies take enforcement action against violators through internal proceedings before administrative law judges that can impose fines and other financial penalties. During arguments, attorneys for the SEC warned that some two dozen other agencies could be affected if the Supreme Court were to rule against its practice of doing so.

These include the Federal Trade Commission, the Internal Revenue Service, the Environmental Protection Agency, the Social Security Administration, the National Labor Relations Board, and the Occupational Safety and Health Administration.

Devin Watkins, an attorney for the Competitive Enterprise Institute, a think tank that opposes regulation, called the outcome a victory.

The ruling “ensures that 12 ordinary Americans, not government officials, will decide whether to seize a defendant’s property,” he said in a statement.

But Robert Weissman, president of Public Citizen, a consumer advocacy group, warned of the implications for the financial system as it would hamper the agency’s regulatory ability.

“Today’s decision is another step in the companies’ long-term project to neutralize the ability of federal agencies to protect the public from fraudsters, scammers, dangerous products, carbon polluters and more,” he said in a statement.

The case, Securities and Exchange Commission v. Jarkesy, No. 22-859, involved George Jarkesy, a hedge fund manager accused of misleading investors. The SEC filed a civil enforcement action against him before an administrative law judge employed by the agency, who ruled against Mr. Jarkesy. After an internal appeal, the agency ultimately ordered him and his company to pay a $300,000 civil penalty and spend $685,000 on what it said were illegal profits.

Mr. Jarkesy appealed to the U.S. Court of Appeals for the Fifth Circuit in New Orleans. A divided panel of three judges of that court ruled against the agencyincluding saying he had the right to a jury trial. The agency then appealed to the Supreme Court.

In her dissent, Justice Sotomayor accused the majority of ignoring the court’s precedents to reach a conclusion that was “plainly wrong.” She said Congress has the constitutional authority to decide that civil suits to protect the rights of the public in general, unlike private suits, can be decided by administrative courts.

“Beyond the majority’s legal errors, the ruling highlights a much more fundamental problem: this court’s repeated failure to recognize that its decisions may threaten the separation of powers,” she wrote.

But Chief Justice Roberts disagreed with that ruling, saying the issue focused not on Congress’s constitutional role but on the rights of people accused of breaking the law. That view “would allow Congress to concentrate the roles of prosecutor, judge, and jury in the hands of the executive branch,” he wrote. “That is the exact opposite of the separation of powers required by the Constitution.”

In one respect, the majority opinion did not go as far as critics of the administrative state would have liked. In his earlier ruling against the agencythe Fifth Circuit panel had also ruled that the agency’s judges were excessively insulated from presidential oversight and that Congress could not allow the agency to decide for itself where to file lawsuits.

Those other two grounds for a ruling against the agency also had the potential to disrupt enforcement of not only the securities laws, but many other types of regulations. However, Chief Justice Roberts emphasized that the majority justices affirmed the appeals court only on the jury trial issue and “do not reach the remaining constitutional issues.”

Since President Donald J. Trump appointed three justices to the court, securing a conservative supermajority, corporate interests have mounted a flurry of challenges aimed at curbing the power of the administrative state. The SEC case is just one of many such cases this term.

Last month, the court rejected an objection to how the Consumer Financial Protection Bureau is funded. The vote was 7 to 2. Going against the agency would have opened the door to lawsuits to nullify all regulations and enforcement actions it has taken in its 13 years of existence, including actions related to mortgages, credit cards, consumer loans and banking.

In January, the court heard arguments in a pair of challenges to the so-called Chevron doctrine, a fundamental part of administrative law. The doctrine requires judges to defer to federal agencies when it comes to interpreting the laws Congress created and authorized them to make, in cases where a provision is ambiguous and an agency’s interpretation of it is reasonable.

The Supreme Court has not yet ruled on the case, which is seen as one of the most important decisions the court has yet to make before the end of its term.

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