Supreme Court strips SEC of critical enforcement tool in fraud cases

The United States Supreme Court on Thursday stripped the US Securities and Exchange Commission, SEC, of a major tool in fighting securities fraud in a decision that also could have far-reaching effects on other regulatory agencies.

The justices ruled in a 6-3 vote that people accused of fraud by the SEC, which regulates securities markets, have the right to a jury trial in federal court. The in-house proceedings the SEC has used in some civil fraud complaints violate the Constitution, the court said.

The SEC was awarded more than US$5 billion in civil penalties in the 2023 government spending year that ended September 30, the agency said in a news release. It was unclear how much of that money came through in-house proceedings or lawsuits in federal court.

The agency had already reduced the number of cases it brings in administrative proceedings, pending the Supreme Court’s resolution of the case.

The case is among several this term in which conservative and business interests are urging the nine-member court to constrict federal regulators. The court’s six conservatives already have reined them in, including in a decision last year that sharply limited environmental regulators’ ability to police water pollution in wetlands.

The high court rejected arguments advanced by President Joe Biden’s Democratic administration that relied on a 50-year-old decision in which the court ruled that in-house proceedings did not violate the Constitution’s right to a jury trial in civil lawsuits.

The justices ruled in the case of Houston hedge fund manager George R. Jarkesy. The SEC appealed to the Supreme Court after a divided panel of the New Orleans-based 5th US Circuit Court of Appeals threw out stiff financial penalties against Jarkesy and his Patriot28 investment adviser.

The appeals court found that the SEC’s case against Jarkesy, resulting in a US$300,000 civil fine and the repayment of US$680,000 in allegedly ill-gotten gains, should have been heard in a federal court instead of before one of the SEC’s administrative law judges.

Jarkesy’s lawyers noted that the SEC wins almost all the cases it brings in front of the administrative law judges, but only about 60 per cent of cases tried in federal court.

The appeals court also said Congress unconstitutionally granted the SEC “unfettered authority” to decide whether the case should be tried in a court of law or handled within the executive branch agency. And it said laws shielding the commission’s administrative law judges from being fired by the president are unconstitutional.

Those issues got virtually no attention during arguments in November, and the court chose to resolve the case only on the right to a jury trial.

– AP