The Supreme Court is set to hear arguments on whether civil penalties imposed by a federal agency, not a judicial court, violate the Constitution in a case that legal experts say could unravel the administrative state.
In SEC v. Jarkesy, which the justices will hear on Nov. 29, the Securities and Exchange Commission is seeking to overturn a lower court ruling that it violated the Seventh Amendment when an in-house administrative law judge fined a hedge fund manager $300,000 for a securities violation.
If the high court rules against the SEC — depending on how sweeping the decision is — it could limit or even end federal agencies’ in-house proceedings and require federal judges to rule in administrative cases.
“A win on any of the grounds would impact the administrative state well beyond the SEC, because in-house enforcement proceedings are widespread across the federal bureaucracy,” said Curt Levey, president of the Committee for Justice.
“SEC v. Jarkesy has huge implications for the administrative state, specifically federal agencies’ virtually unchecked enforcement powers exercised through in-house proceedings that largely displace the role of Article III courts and allow agencies to act as prosecutor, judge and jury,” Mr. Levey he said.
Article III of the Constitution establishes the federal judiciary, including the Supreme Court. Administrative courts are not a part of the judiciary or recognized in the Constitution, and their rulings do not set judicial precedent.
Richard Pierce, a law professor at The George Washington University, said the case could “eliminate the ability of agencies to adjudicate any disputes.”
“That is a very, very big deal,” Mr. Pierce said, adding that he thinks the high court won’t upend the agencies’ adjudicative powers. He said Chief Justice John G. Roberts Jr. and Justice Brett M. Kavanaugh, who occupy the ideological middle of the bench, are “very often open minded and very thoughtful about what they are willing to do.”
At least 27 federal agencies have employed administrative law judges, according to the Congressional Research Service.
The Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 gave the SEC authority to seek civil penalties against individuals for violating securities laws.
George Jarkesy, at the heart of the legal battle, managed two hedge funds with roughly $24 million in assets and was charged with violating securities laws. The SEC alleged he misrepresented investments and strategies to his investors and inflated the funds’ holdings.
Looking to fine Mr. Jarkesy, the SEC started administrative proceedings against him in 2013.
Mr. Jarkesy tried to sue citing constitutional concerns, arguing that a federal agency’s civil penalties run afoul of the Seventh Amendment, which guarantees a right to a jury trial. He issued the argument in federal court, trying to avoid being adjudicated against in the SEC proceedings, but his complaint was dismissed.
An administrative law judge ruled that Mr. Jarkesy had violated federal securities law and fined him $300,000, among other penalties. He appealed to the 5th U.S. Circuit Court of Appeals, which ruled that his Seventh Amendment rights were violated by having an administrative proceeding issue a civil penalty.
The 5th Circuit also said it was unlawful for agencies to decide to initiate proceedings in-house versus traditional federal courts.
Mr. Jarkesy’s lawyers said the SEC’s power has “expanded exponentially” since it was created in 1934.
“At some point the never-ending power creep was bound to crash headlong into the tripartite constitutional structure, and it did so here. The Fifth Circuit’s holdings below merely affirmed our constitution’s intrinsic limits on unconstrained executive power,” they wrote in a court filing.
The Justice Department had asked the high court to review the 5th Circuit decision, arguing it calls into question longstanding practices at the SEC and other federal agencies — as well as precedent.
“The Court has held, for instance, that executive agencies may conduct adjudications and impose monetary sanctions under tariff laws,” Solicitor General Elizabeth Prelogar wrote in the government’s filing.
“Under that long line of precedent, SEC administrative adjudications seeking civil penalties qualify as matters involving public rights.”
It took at least four justices to vote in favor of hearing the dispute as the Justice Department had requested.
Alan Morrison, a law professor at The George Washington University, said if the high court eliminates administrative agency proceedings, it would increase stress on Article III courts.
“The courts are not set up to handle thousands of these cases,” he said. “No new judges and no new resources.”
“These cases are complicated and take a long time,” Mr. Morrison added. “This would be a big, big change.”
A decision from the high court in SEC v. Jarkesy is expected by the end of June, when the court wraps up its 2023 term.
• Alex Swoyer can be reached at aswoyer@washingtontimes.com.