The Supreme Court on Thursday struck down an internal system the Securities and Exchange Commission (SEC) used to seek civil fraud penalties, stripping the SEC of its authority.
The ideologically-aligned 6-3 ruling finds unconstitutional the SEC’s internal administrative tribunal, a key tool it has used to enforce securities laws, and the Biden administration has warned that such a ruling would threaten other federal agencies with similar systems.
Chief Justice John Roberts, writing the majority opinion, said that forcing defendants to go through the SEC’s internal system rather than through federal district courts violates their Seventh Amendment right to a jury trial.
“A defendant facing a fraud lawsuit has the right to be tried before an impartial judge and by a jury of his peers,” Roberts wrote. “Instead of recognizing that right, the dissent would allow Congress to centralize the roles of prosecutor, judge, and jury in the executive branch – the opposite of the separation of powers required by the Constitution.”
Justice Roberts and the Supreme Court’s five other conservative justices dissented, along with the court’s three liberal justices. Justice Sonia Sotomayor read a dissenting opinion from the bench, a rare move to highlight the sharp differences in the case. It was the second time a justice had done so this term.
“Today’s decision is part of a disconcerting trend: when it comes to the separation of powers, this Court is telling the American people and their coordinated branches that it knows best,” Sotomayor wrote.
The decision marks a major victory for conservatives and business leaders who have sought to destroy the system as part of a broader attack on the “administrative state.”
While SEC v. Jarcasm has received less attention than other cases on the Supreme Court’s docket this term that involve the scope of executive branch power, legal experts say the SEC case could have far-reaching implications.
The decision will force changes in how the SEC protects investors from fraud and could have ripple effects for other agencies, including the Federal Trade Commission, the IRS, the Environmental Protection Agency and the National Labor Relations Board (NLRB).
Major corporations are attacking the constitutionality of administrative law judges at the National Labor Relations Board, the federal agency charged with enforcing labor laws in the U.S. Facing NLA complaints alleging unlawful harassment and firing of union members, Amazon, Starbucks, SpaceX and Trader Joe’s have each challenged the constitutionality of the New Deal-era agency in recent months.
Elon Musk’s SpaceX cited SEC v. Jarcasm in its January complaint to the NLRB, arguing that the agency’s structure is unconstitutional because it improperly protects its members and administrative law judges from removal.
The SEC has had a higher success rate when it seeks civil penalties before its own administrative law judges rather than in the regular federal court system.
The case that came before the Supreme Court began when the SEC in 2013 initiated internal enforcement proceedings against conservative radio host George Jarkiesy, who managed about $24 million in assets in two hedge funds through his investment advisory firm, Patriot 28 LLC.
An administrative law judge found that Jarkesy violated securities laws by making false representations to investors about the fund’s auditors, misrepresenting the fund’s investment strategy and overvaluing the fund to increase management fees.
Jarquessy appealed, and the Fifth Circuit Court of Appeals ruled in Jarquessy’s favor, invalidating the SEC’s plan on three different constitutional grounds.
The Supreme Court upheld the lower court’s decision on the first ground that Jahkessy had a right to a jury trial.
But the justices did not address two other lower court decisions that found the SEC’s system was further unconstitutional because it improperly delegated legislative power and created impermissible removal protections for administrative law judges.
In a statement, Jarkesy called the ruling “a great day for the Constitution.”
“It has been a long and difficult road and I am extremely grateful that the Supreme Court has vindicated me, but the impact of this case is much bigger than one person,” Jahkesy said.
“If this can happen to me, it can happen to any citizen of this country. After a decade of gross misconduct and patently unconstitutional political attacks by the SEC and its internal courts, today the United States Supreme Court ruled that the Constitution still matters.”
Updated 11:05 a.m. ET
