Here's What the Supreme Court's Scrutiny of SEC's Power Could Mean for the Fight Against Fraud

In a decisive move by the American Supreme Court, key justices have raised serious concerns about the Securities and Exchange Commission's (SEC) approach to enforcing securities fraud. The court appears poised to potentially curtail the agency's authority, particularly in cases involving in-house administrative law judges, sparking debates about constitutional rights and the reach of government agencies. Here's a closer look at the key arguments and potential implications of this landmark case.

Constitutional concerns

Conservative justices have expressed reservations about the SEC's use of in-house administrative law judges, suggesting that it might infringe upon an individual's right to a trial by jury under the Seventh Amendment. Chief Justice John Roberts voiced unease about enforcement proceedings lacking both a court and a jury, stating that it seemed "curious" for the government to decide when this right applies. Justice Neil Gorsuch emphasized the foundational nature of the Seventh Amendment, signaling the importance of the right to trial by jury in American society.

The SEC's dominant role in enforcement

Judges also raised concerns about the SEC's increasingly dominant role in enforcement, noting a shift from past decades. Justice Brett Kavanaugh questioned the constitutional perspective of distinguishing between private and government suits.

Implications beyond the SEC's role

If the Supreme Court rules that the SEC's method of adjudicating fraud claims violates the Constitution, it could impact other agencies using similar tactics. The Social Security Administration, among others, may face scrutiny, potentially reshaping the landscape of how financial regulatory agencies conduct enforcement actions.

Background of the case

The case in question originated in 2013 when the SEC pursued an enforcement action for securities fraud against George Jarkesy, founder of Patriot28 advisory firm. The SEC utilized an administrative law judge, leading to a penalty of $300,000 and a repayment order of nearly $685,000. Jarkesy contested the proceedings, arguing a violation of constitutional rights.

Focus on seventh amendment in Supreme Court

During the Supreme Court arguments, the justices appeared focused on the Seventh Amendment right to a jury. Principal Deputy Solicitor General Brian Fletcher defended the SEC's proceedings, asserting that Congress did not violate the Seventh Amendment by authorizing in-house proceedings.

Potential ripple effects

While liberal justices questioned the limits of challenging these proceedings, a group of administrative law scholars warned of "devastating" consequences if the Supreme Court rules against the SEC. The impact could extend beyond the SEC to agencies such as the Federal Trade Commission, Department of Labor, and the National Labor Relations Board.

Supporting arguments and opposition

Supporters of the SEC argue that flexibility in agency adjudication is essential for addressing complex issues in the regulatory framework. On the other hand, those supporting Jarkesy, including the Chamber of Commerce, see an opportunity for the Supreme Court to reaffirm constitutional limitations on the administrative state.

In a broader context, the case reflects a growing scrutiny of the structure of government agencies by a conservative-leaning majority, questioning the accountability and powers of these entities. As the Supreme Court deliberates, the outcome could reshape the landscape of how financial regulatory agencies enforce securities laws and potentially redefine the boundaries of the administrative state.

This case is not merely a legal dispute; it is a reflection of ongoing debates about the balance of power, constitutional rights, and the role of administrative agencies in shaping and enforcing financial regulations.