The Supreme Court appears wary of internal SEC tribunals

The conservative majority of the Supreme Court seemed receptive Wednesday to an attack on one of the key ways the Securities and Exchange Commission enforces securities fraud laws.

The agency, like other regulators, pursues some enforcement actions in internal tribunals rather than in federal courts. The practice has been criticized, especially by conservatives, for several reasons, including the fact that it violates the constitutional right to a jury trial, the separation of powers and fundamental fairness.

“The government can deprive you of your assets, your money, and significant sums of money,” Justice Brett M. Kavanaugh said during oral arguments Wednesday, “in a tribunal that is seen, at the very least, as not being impartial in the sense that it is an internal court. executive agency where the commissioners initiate the enforcement process, supervise the enforcers and then appoint the arbitrators and review the ruling. That does not seem to be a neutral process.”

The case, Securities and Exchange Commission v. Jarkesy, No. 22-859, is one of many challenges this term to the power of administrative agencies, long a target of the conservative legal movement. The court heard arguments in October about the constitutionality of how the Consumer Financial Protection Bureau is funded. In January, it will consider overruling the Chevron Doctrine, a fundamental principle of administrative law that requires judicial deference to agencies’ reasonable interpretations of statutes.

Wednesday’s argument focused on a key difference between proceedings in administrative tribunals and proceedings in federal courts: only the latter guarantee suspects a constitutional right to a jury.

Justice Neil M. Gorsuch said the difference was crucial. “The right to a jury trial, whether criminal or civil,” he said, “is a very important fundamental freedom in American society and a check on all branches of government.”

Brian H. Fletcher, an attorney for the agency, said the two procedures serve different purposes with different rules. In administrative tribunals, he said, the government protected the rights of the public in general. “We are trying to defend the public’s right to fair and honest markets,” he said.

When the rights of the public are at stake, he said, the right to a jury trial is guaranteed by the Seventh Amendment in “lawsuits” was not applicable.

Judge Amy Coney Barrett said the court failed to draw an administrative line on this issue. “Our cases were not very clear on how to distinguish public from private rights,” she said.

But Judge Kavanaugh said the right to a jury is even more important in cases brought by the government.

“What’s the point of saying that the full constitutional protections apply when a private party sues you,” he asked, “but we’re going to override those basic constitutional historical protections when the government comes after you for the same money?”

The case concerns 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 United States Court of Appeals for the Fifth Circuit in New Orleans. A divided panel of three judges from that court ruled against the agency on three different grounds, all with the potential to disrupt enforcement of not only securities laws but many other types of regulations.

Wednesday’s argument, which lasted about two and a half hours, focused almost entirely on that first argument, about the right to a jury trial. It only briefly addressed the appeals court’s ruling that the agency’s judges were excessively shielded from presidential oversight, and not at all the third position, that Congress could not let the agency decide for itself where to file lawsuits.

S. Michael McColloch, a lawyer for Mr. Jarkesy, said that “the right to a jury trial should especially apply when the government is pursuing a citizen for punishment.”

Deliberations by agencies without a jury are common, Mr. Fletcher said, adding that there are “two dozen agencies that have the authority to impose sanctions in administrative proceedings.”

Several justices appeared wary of a ruling that would be too broad and impact actions by, for example, the Federal Trade Commission, the Internal Revenue Service, the Environmental Protection Agency, the Social Security Administration, the National Labor Relations Board or the Occupational Safety and Health. Administration.

A broad ruling for Mr. Jarkesy could be “quite dramatic,” according to Judge Sonia Sotomayor.

The judges spent much of the discussion wrestling a 1977 Supreme Court decision with some saying they fully supported the government’s position.

Chief Justice John G. Roberts Jr. said government agencies have much more power today, suggesting the precedent warrants a new investigation. “The scale of the impact of government agencies on daily life today is vastly more important than it was 50 years ago,” he said.

Justice Elena Kagan countered that the 1977 decision required a ruling by the agency, adding that it had not been challenged in the intervening decades. “No one has had the, you know, chutzpah,” she said, “to quote my people.”