By a vote of 6-3, the U.S. Supreme Court decided on Thursday that the use of in-house judges by the Securities and Exchange Commission (SEC) violates the Constitution's right to a jury trial. As a result, the SEC will be stripped of one of its most important enforcement processes.
Instead of suing in federal court to deal with allegations of civil securities fraud and impose financial penalties, the SEC has occasionally utilized an internal procedure supervised by administrative law judges. The Dodd-Frank Act, which was enacted in response to the global financial crisis that occurred in 2008, gave the SEC the authority to deal with matters internally in 2010.
The SEC will be compelled to rely once more solely on federal trial courts to enforce securities laws and seek financial penalties following the Supreme Court's decision.
The decision could have far-reaching consequences for other federal agencies, including the National Labor Relations Board (NLRB), which is facing a similar challenge, in addition to kneecapping the SEC's enforcement capabilities. In the past, these agencies have been able to handle enforcement through internal processes.
"Today's decision imposes a significant and important restriction on the capacity of federal agencies to resolve enforcement actions internally rather than litigating them in court." Even though this case involves the SEC, many other federal agencies take enforcement actions based on statutory standards that are very similar to fraud or other common law claims, according to an email statement from Andrew Pincus, a partner at the international law firm Mayer Brown.
Pincus continued, "The decision of the Supreme Court indicates that all of those actions will now have to be tried before an independent federal judge and a jury—eliminating the "home court advantage" that has benefited many agencies for decades."
"A defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator," Chief Justice John Roberts wrote in the majority opinion.
Roberts wrote, "The dissent would allow Congress to concentrate the roles of prosecutor, judge, and jury in the hands of the Executive Branch rather than recognize that right." That is in direct opposition to the Constitution's requirement for separation of powers."
Associate Justice Neil Gorsuch made the case that the SEC's authority to "penalize citizens without a jury, without an independent judge, and under procedures foreign to our courts" violates individual liberty in a concurring opinion.
Gorsuch wrote, "The Court hardly leaves the SEC without ample powers and recourse in reaffirming all this today."
The SEC's 2018 case against Michigan-based "ICO Superstore" TokenLot LLC and its two owners and its 2014 case against a computer programmer who created a crypto-denominated virtual stock exchange are two examples of crypto cases that have been resolved through administrative proceedings.
The dissenting opinion was written by Associate Judge Sonia Sotomayor, who characterized the ruling as a "power grab" and "part of a disconcerting trend: This Court informs the American public and its coordinate branches that it knows best regarding the separation of powers.
Sotomayor wrote, "The Court tells Congress how best to structure agencies, defend harms to the general public, and even provide for the enforcement of rights created for the Government." A plan like the SEC's should have been set up by Congress for good reasons. It may offer significant advantages over jury trials in federal court, such as greater uniformity, predictability, and political accountability, efficiency and expertise, transparency, and reasoned decision-making."
The SEC's claim that hedge fund manager George Jarkesy Jr. and his company, Patriot28 LLC, had violated federal securities laws by misstating the assets of his two hedge funds led to the start of the case known as SEC vs. Jarksey in 2013.
The case was initially tried before an administrative law judge rather than a federal court. Jarksey filed an appeal, and in 2022, an appeals court in New Orleans ruled that the SEC's actions were unconstitutional. The SEC filed an appeal, and in November, the Supreme Court heard arguments.
UPDATE: At 16:13 UTC on June 27, 2024: includes a comment from an attorney and information about two of the SEC's previous administrative proceedings involving crypto.
Instead of suing in federal court to deal with allegations of civil securities fraud and impose financial penalties, the SEC has occasionally utilized an internal procedure supervised by administrative law judges. The Dodd-Frank Act, which was enacted in response to the global financial crisis that occurred in 2008, gave the SEC the authority to deal with matters internally in 2010.
The SEC will be compelled to rely once more solely on federal trial courts to enforce securities laws and seek financial penalties following the Supreme Court's decision.
The decision could have far-reaching consequences for other federal agencies, including the National Labor Relations Board (NLRB), which is facing a similar challenge, in addition to kneecapping the SEC's enforcement capabilities. In the past, these agencies have been able to handle enforcement through internal processes.
"Today's decision imposes a significant and important restriction on the capacity of federal agencies to resolve enforcement actions internally rather than litigating them in court." Even though this case involves the SEC, many other federal agencies take enforcement actions based on statutory standards that are very similar to fraud or other common law claims, according to an email statement from Andrew Pincus, a partner at the international law firm Mayer Brown.
Pincus continued, "The decision of the Supreme Court indicates that all of those actions will now have to be tried before an independent federal judge and a jury—eliminating the "home court advantage" that has benefited many agencies for decades."
"A defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator," Chief Justice John Roberts wrote in the majority opinion.
Roberts wrote, "The dissent would allow Congress to concentrate the roles of prosecutor, judge, and jury in the hands of the Executive Branch rather than recognize that right." That is in direct opposition to the Constitution's requirement for separation of powers."
Associate Justice Neil Gorsuch made the case that the SEC's authority to "penalize citizens without a jury, without an independent judge, and under procedures foreign to our courts" violates individual liberty in a concurring opinion.
Gorsuch wrote, "The Court hardly leaves the SEC without ample powers and recourse in reaffirming all this today."
The SEC's 2018 case against Michigan-based "ICO Superstore" TokenLot LLC and its two owners and its 2014 case against a computer programmer who created a crypto-denominated virtual stock exchange are two examples of crypto cases that have been resolved through administrative proceedings.
The dissenting opinion was written by Associate Judge Sonia Sotomayor, who characterized the ruling as a "power grab" and "part of a disconcerting trend: This Court informs the American public and its coordinate branches that it knows best regarding the separation of powers.
Sotomayor wrote, "The Court tells Congress how best to structure agencies, defend harms to the general public, and even provide for the enforcement of rights created for the Government." A plan like the SEC's should have been set up by Congress for good reasons. It may offer significant advantages over jury trials in federal court, such as greater uniformity, predictability, and political accountability, efficiency and expertise, transparency, and reasoned decision-making."
The SEC's claim that hedge fund manager George Jarkesy Jr. and his company, Patriot28 LLC, had violated federal securities laws by misstating the assets of his two hedge funds led to the start of the case known as SEC vs. Jarksey in 2013.
The case was initially tried before an administrative law judge rather than a federal court. Jarksey filed an appeal, and in 2022, an appeals court in New Orleans ruled that the SEC's actions were unconstitutional. The SEC filed an appeal, and in November, the Supreme Court heard arguments.
UPDATE: At 16:13 UTC on June 27, 2024: includes a comment from an attorney and information about two of the SEC's previous administrative proceedings involving crypto.
