The Republican-appointed majority on the Supreme Court appears skeptical of the Securities and Exchange Commission's powers to conduct in-house adjudications without juries in a case that could disrupt the administrative state.
Justices heard oral arguments on Wednesday involving hedge fund manager and conservative radio jockey George Jarkesy, whom the SEC fined and barred from the industry after determining he had committed securities fraud. In a bid to avoid commission-appointed administrative law judges deciding his case behind a bureaucratic curtain, Jarkesy appealed to the federal courts, arguing the agency's procedures infringed on his Seventh Amendment right to a jury trial.
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Jarkesy achieved favor from the U.S. 5th Circuit Court of Appeals in a 2022 ruling when the court held that the SEC's in-house proceedings violated the constitutional right to a jury trial and tore through presidential and constitutional powers.
During oral arguments Wednesday, Chief Justice John Roberts, an appointee of former President George W. Bush, said it was "curious" that federal agencies such as the SEC appeared to exert more leverage on daily life than in the past, a position that a majority of the court appeared to agree with in some capacity.
“The government is much more likely to affect you or proceed against you in one of its own agencies than it is in court,” he said. “It does seem to me to be curious that, and unlike most constitutional rights, that you have that right [to a jury trial] until the government decides it doesn’t want you to have it. That doesn’t seem to me the way the Constitution traditionally works.”
Carrying a similar tune of skepticism, Justice Neil Gorsuch, a Trump-era jurist, contended this isn't "your grandfather's SEC."
“A right to trial by jury … is a check on all branches of government,” he said. "An ancient right, too."
Roughly 27 federal agencies have utilized administrative law judges, which stand apart from the federal judiciary, which includes district courts, appeals courts, and the Supreme Court. Administrative law judges are touted by proponents as a way to adjudicate claims at a much faster rate than in the federal court system, and their rulings do not set a precedent.
A Supreme Court ruling affirming the 5th Circuit's holding for Jarkesy could reduce or delay action against misconduct by brokers, investment advisers, and more, possibly gumming up enforcement mechanisms at other agencies as well.
But critics of the commission's powers, such as Jarkesy, argue the authority of administrative law judges creates an unfair advantage in favor of the SEC's position against people it targets for fines.
"The agency court in Jarkesy had a nearly spotless record — always ruling for the agency," Jarkesy's attorneys wrote in a DC Journal op-ed. "When Jarkesy’s case went to trial, the agency had won the last 200 times."
Brian Fletcher, principal deputy solicitor general for the Justice Department representing the SEC, argued that "civil penalties" in government enforcement actions are permissible through in-house adjudications, adding that the precedent has been established for more than 100 years.
Justice Sonia Sotomayor, an Obama-era appointee, gave more credence to the government's arguments, saying, “We have permitted the public interest to be protected in an administrative proceeding.”
The crux of the argument by Jarkesy's attorney Michael McColloch is that the founders intended that any defendant, regardless of the agency involved or enforcement action levied against them, should be allowed a public trial.
“The common law claims that were incorporated into the Securities Act are in fact litigated privately,” he said. “If you look at fraud claims litigated in the 1800s … basic fraud cases … all of these issues … are litigated in state courts today.”
The SEC started investigating Jarkesy in 2011, and an in-house judge eventually found his firm, Patriot28, violated the Securities Act of 1933 by misrepresenting the identity of the funds' auditor and the value of the holdings. The SEC upheld the judge's findings and ordered his firm to pay a $300,000 civil penalty and Patriot28 to disgorge nearly $685,000 in what the SEC said were ill-gotten gains.
A panel on the 5th Circuit tossed out the SEC's decision and further held that Congress gave too much power to the commission to choose whether to bring a case in-house or in federal court and that the protections for administrative law judges made them too difficult to remove, which infringed on the Constitution's presidential powers.
In an eventual ruling by the end of June, the justices will have to answer three questions presented by Securities and Exchange Commission v. Jarkesy.
One is whether the statutory provisions that give the SEC power to initiate administrative enforcement proceedings seeking civil penalties violate the Seventh Amendment right to a jury trial.
Another question is whether such provisions that authorize the SEC to choose to enforce the law administratively instead of filing a district court action violate the nondelegation doctrine, which stands for the principle that Congress can't delegate legislative powers to other entities, such as administrative agencies. The last question is whether Congress was incorrect in granting for-cause removal protection to administrative law judges, which essentially makes in-house judges removable only for good cause established and determined by the federal Merit Systems Protection Board.
"The court focused almost exclusively on the jury trial question, with the justices plumbing different approaches to the difficult line-drawing questions," said Peggy Little, an attorney at New Civil Liberties Alliance. "There's a decent chance the 5th Circuit could be narrowly affirmed on jury trial rights where the claim maps the elements of common law actions and seeks civil penalties."
"Because there was no argument at all on the other two certified questions, it is impossible to speculate on whether the court plans to reach those, or if so, what the decision might be," Little said of the other two questions.
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Jarkesy, who came to the high court on Wednesday, released a statement following the nearly two-hour oral arguments over his case.
"I am grateful to the justices for taking this case. A fair and impartial hearing is all we ever asked for, and we didn’t get that at the SEC," Jarkesy said, adding, "It was quite the opposite."