Supreme Court’s conservatives voice concerns about SEC’s in-house enforcement

The Supreme Court’s conservatives expressed concerns during oral arguments Wednesday about the Securities and Exchange Commission’s (SEC) abilities to use in-house judges in seeking civil penalties for fraud.

One of several attacks being waged by conservative and business interests against the executive branch, the case could claw back the SEC’s and other agencies’ powers to enforce regulatory schemes.

The justices are reviewing a ruling that tossed civil penalties imposed against conservative radio host George Jarkesy, who was found to have violated securities laws while managing two hedge funds.

On three separate constitutional grounds, the 5th Circuit Court of Appeals invalidated the SEC’s use of administrative law judges in enforcing securities laws.

In more than two hours of arguments, the justices spent much of their time on the first of those grounds: whether the SEC’s in-house system deprives individuals of their Seventh Amendment right to a jury trial.

“It does seem odd from a constitutional perspective to say that a private suit triggers the Article III right to a federal court and a jury, a private suit against you for money,” said Justice Brett Kavanaugh.

“But a government suit against you for money is somehow exempt from those Article III and Seventh Amendment and due process requirements, simply because the government attaches a different label. ... I think that’s a strong argument on the other side,” Kavanaugh added.

The 5th Circuit panel separately invalidated Jarkesy’s penalties by ruling Congress impermissibly delegated legislative power in allowing the SEC to choose whether to bring enforcement actions in-house or in federal district court. 

Finally, the panel struck down the SEC’s administrative law judges’ removal protections, citing a 2010 Supreme Court decision that found another group of federal officials’ double-layered “for-cause” removal protections were unconstitutional.

Little attention was given to those issues, except for a singular question from Kavanaugh.

“This seems problematic under Free Enterprise Fund,” Kavanaugh noted, referring to the 2010 case.

Although that lack of discussion leaves the justices’ thinking unclear on those issues, affirming any of the 5th Circuit’s three findings would force a shift in how the agency protects investors against fraud and possibly create spillover effects for other agencies.

Justice Sonia Sotomayor, one of the court’s liberals, said following Jarkesy’s argument would impact a “series of agencies” ability to enforce regulatory schemes, including the Environmental Protection Agency, the  Commodity Futures Trading Commission and the United States Postal Service.

“The dramatic change that you’re proposing in our approach and jurisdiction is going to have consequences across the board,” Sotomayor said.

But several of the court’s conservatives appeared skeptical of the government’s position, expressing concerns about the growth of the federal bureaucracy since a nearly 50-year-old precedent the Justice Department said resolves the case.

“The extent of impact of government agencies on daily life today is enormously more significant than it was 50 years ago. Should that be a concern for us or a consideration when we're trying to consider what power the government has to take away the jury trial right?” Chief Justice John Roberts pressed the Justice Department.

Justice Neil Gorsuch said at one point, “This is not your grandfather’s SEC.”

The case arose after the SEC launched in-house enforcement proceedings in 2013 against Jarkesy, who managed approximately $24 million in assets across two hedge funds with his investment advisory firm, Patriot28 LLC.

An administrative law judge found Jarkesy violated securities laws by making false claims about who was auditing the funds to investors, misrepresenting the funds’ investment strategy and overvaluing the funds to increase management fees. 

Jarkesy and other critics have condemned the SEC’s system, noting that the agency has a record of winning cases enforced in-house at a higher rate than in federal courts.

The SEC ultimately rejected Jarkesy’s constitutional arguments and barred him from the securities industry, also imposing a $300,000 fine and ordering Patriot28 to disgorge $685,000 in ill-gotten gains.

Jarkesy said in a statement following the hearing that he was glad the Supreme Court sought to hear the matter.

"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. “It was quite the opposite.”

The case is one of multiple at the high court this term that could curb federal agencies’ authority. Earlier this fall, the justices heard a challenge to the Consumer Financial Protection Bureau, and they are scheduled to hear arguments next month about whether to overrule a decades-old precedent granting broad deference to federal agencies.

A decision in the case, SEC v. Jarkesy, is expected by the end of June.