Conservative Supreme Court justices are showing openness to a challenge to the methods employed by the Securities and Exchange Commission (SEC) in combating fraud. This case has the potential to greatly impact other regulatory agencies as well.
A majority of the nine justices indicated that individuals accused of fraud by the SEC should be entitled to a jury trial in federal court rather than being subject to the SEC’s in-house administrative law judges.
During the session, which lasted over two hours, the justices heard arguments from the Biden administration regarding an appeal of a lower-court ruling that dismissed significant financial penalties imposed on hedge fund manager George R. Jarkesy by the SEC.
Justice Brett Kavanaugh expressed concerns, stating, “That seems problematic to say that the government can deprive you of your property, your money, substantial sums in a tribunal that is at least perceived as not being impartial.”
Brian Fletcher, a lawyer from the Justice Department, cautioned the justices about the broader implications their decision would have beyond just the SEC. He pointed out that nearly two dozen agencies have similar enforcement frameworks.
“I don’t want you to think it’s just about the SEC,” Fletcher emphasized.
The Biden administration is relying on a five-decade-old ruling that declared in-house proceedings did not violate an individual’s right to a jury trial in civil lawsuits. However, Chief Justice John Roberts—who has expressed concerns about the power of federal regulators—highlighted the increased significance of governmental agencies in our daily lives since that ruling was made.
“The impact of governmental agencies on daily life today is enormously more significant than it was 50 years ago,” Chief Justice Roberts noted.
The court’s three liberal justices appeared more receptive to the Biden administration’s arguments. Responding to Chief Justice Roberts, Justice Elena Kagan acknowledged that “our problems have only gotten more complicated and difficult.”
The Impact of the SEC’s Case Against Jarkesy
Divided Opinions
On the other hand, Judge Eugene Davis, nominated by President Ronald Reagan, dissented from the majority opinion. Despite their differing viewpoints, all three judges acknowledged the contentious nature of this case.
Implications for the SEC
Jarkesy’s legal team highlighted a significant disparity in success rates between cases brought before administrative law judges and those tried in federal court. While the SEC overwhelmingly wins cases in front of administrative law judges, their success rate drops to about 60% in federal court trials. This discrepancy has raised concerns about the fairness and effectiveness of the SEC’s in-house proceedings.
The SEC proudly announced that it was awarded over $5 billion in civil penalties during the 2023 government spending year, which ended on September 30. However, it remains unclear how much of this sum was acquired through in-house proceedings or lawsuits in federal court.
Looking Ahead
As legal battles continue to unfold, it is evident that this case could have far-reaching implications for the future of the SEC and its regulatory practices.
