The justices were reviewing a ruling from the U.S. Court of Appeals for the 5th Circuit that said the SEC’s in-house tribunals violated the Seventh Amendment, which guarantees the right to a jury trial. The appeals court said Congress exceeded its power in allowing such tribunals and that the job security provided to administrative law judges who hear such cases infringed on the executive branch’s prerogatives.
Writing for the majority, Chief Justice John G. Roberts Jr. said a defendant facing a fraud suit has “the right to be tried by a jury of his peers before a neutral adjudicator. Rather than recognize that right, the dissent would permit Congress to concentrate the roles of prosecutor, judge, and jury in the hands of the Executive Branch.”
In dissent, Justice Sonia Sotomayor warned of a “massive sea change” for federal agencies.
“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,” wrote Sotomayor, joined by Justices Elena Kagan and Ketanji Brown Jackson. “Rather than acknowledge the earthshattering nature of its holding, the majority has tried to disguise it.”
The challenge was brought by George Jarkesy, who set up two hedge funds and used a company named Patriot28 LLC to advise on those investments. The funds had more than 100 investors and about $24 million in assets.
The SEC launched an investigation into Jarkesy and Patriot28’s investing activities in 2011, and the agency alleged in 2013 that he the company made several misrepresentations and overvalued the funds’ assets to increase fees charged to investors.
Jarkesy and the companies represented to brokers and investors that a prominent accounting firm served as the auditor for the funds and that a prominent investment bank served as their prime broker, the government said in its brief, even though “the firm never audited the funds and the bank never opened a prime brokerage account for them.”
After an internal tribunal found the violations, the SEC ordered Jarkesy and Patriot28 to pay $300,000 in a civil penalty and turn over nearly $685,000 in illicit profits.
Individuals and entities who face such proceedings have the right to challenge adverse rulings in federal court. Jarkesy did so, and the conservative appeals court threw out the findings against him on three grounds: that they violated the Seventh Amendment, that Congress exceeded its powers in allowing the SEC the choice to bring actions either in-house or in district court, and that the removal procedures for administrative law judges who hear such proceedings provide too much protection.
Justice Elena Kagan said during oral arguments in SEC v. Jarkesy that the 5th Circuit ruling contradicted a 1977 opinion by the high court that backed the powers of a workplace safety commission to conduct administrative hearings. That case, Atlas Roofing Co. v. Occupational Safety and Health Review Commission came up more than 100 times during the November discussion.
Some justices worried a broad ruling could disrupt administrative law proceedings by additional agencies, such as the Federal Trade Commission, Social Security Administration and Environmental Protection Agency.
But Roberts said it was time to revisit that 1977 precedent. Other conservative justices said they felt the in-house tribunals gave the SEC too much power, essentially allowing it to act as judge and jury.
The SEC, which was formed in the wake of the stock market crash of 1929 and the Great Depression that followed, is tasked with protecting investors and regulating markets.
The SEC case is one of a series that the Supreme Court is hearing this term that could reshape the regulatory power of the federal government. Also on Thursday, the high court put a hold an ambitious plan by the EPA to regulate air pollution that drifts across state lines.
Last month, the Supreme Court rejected a broad challenge to the powerful Consumer Financial Protection Bureau, which would have undermined the agency established to protect borrowers from predatory lenders, excessive fees and other abuses in the wake of the 2008 financial crisis. In a 7-2 decision authored by Justice Clarence Thomas, the majority found the agency’s funding mechanism to be constitutional.
Two cases still to be decided seek to overturn a major ruling that requires courts defer to federal agency’s reasonable interpretations of ambiguous laws. Lower courts still rely on the precedent known as Chevron, but the Supreme Court has moved away from its holdings in recent years.
This is a developing story. It will be updated.