Supreme Court limits SEC enforcement by striking in-house courts

The move has potentially wide ramifications for any public company, including major players in the housing space

The U.S. Supreme Court on Thursday announced a decision that strips the Securities and Exchange Commission (SEC) of its ability to try civil financial fraud cases in its in-house court system, ruling that defendants in these cases have the right to a trial by jury under the U.S. Constitution.

Other reporting outlets have characterized the implications of the decision as potentially far-reaching, since the SEC’s “administrative tribunals” have been seen as a key tool for the agency to prosecute cases of alleged financial and securities fraud. The case could also be used as a cited precedent should challenges to other agencies’ similar enforcement mechanisms emerge in the future.

The court ruling stems from a 2013 case in which the SEC brought civil fraud charges against hedge fund manager George Jarkesy, accusing him and two alleged collaborators of defrauding investors.

In response, Jarkesy sued the SEC, saying that the in-house enforcement process was a violation of his rights under the Seventh Amendment to the U.S. Constitution, which protects the rights of the accused to a civil trial in federal court.

The Fifth Circuit Court of Appeals sided with Jarkesy and the matter was then appealed to the Supreme Court, which agreed with Jarkesy’s constitutional argument.

“[W]hen the SEC adjudicates the matter in-house, there are no juries,” Chief Justice John Roberts wrote in an opinion delivered for the majority. “Instead, the Commission presides and finds facts while its Division of Enforcement prosecutes the case. The Commission may also delegate its role as judge and factfinder to one of its members or to an administrative law judge that it employs.”

This, Roberts wrote, is not in alignment with the Seventh Amendment.

“This case poses a straightforward question: whether the Seventh Amendment entitles a defendant to a jury trial when the SEC seeks civil penalties against him for securities fraud,” Roberts wrote in part. “The threshold issue is whether this action implicates the Seventh Amendment. It does. The SEC’s antifraud provisions replicate common law fraud, and it is well established that common law claims must be heard by a jury.”

The case was decided 6-3 along the ideological lines of the court. Justices appointed by Republican presidents (Roberts, Samuel Alito, Amy Coney Barrett, Neil Gorsuch, Brett Kavanaugh and Clarence Thomas) ruled in favor of Jarkesy while justices appointed by Democratic presidents (Elena Kagan, Ketanji Brown Jackson and Sonya Sotomayor) sided with the SEC.

The high court has heard several recent cases challenging federal regulatory authority, most recently deciding that the funding structure of the Consumer Financial Protection Bureau (CFPB) was constitutional. But changes to certain processes at federal agencies could have broader implications for other agencies.

For instance, when the court decided roughly five months before the 2020 election that the CFPB director was not insulated from firing by the president, a successful subsequent case invalidated a similar structure at the Federal Housing Finance Agency (FHFA).

Soon after, the Biden administration seized on that decision to force the Donald Trump-appointed Mark Calabria out of the FHFA’s leadership post and chose Sandra Thompson to replace him.

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