US Supreme Court limits SEC enforcement power

The US Supreme Court has thrown out the US Securities and Exchange Commission's (SEC) ability to use in-house proceedings to seek civil penalties for securities fraud, finding those cases must instead be brought before a jury trial in federal court.

The Supreme Court, in a 6-3 ruling in the case SEC v Jarkesy, said continuing to adjudicate those cases internally would be a violation of the the Seventh Amendment of the US Constitution, which protects the right to a jury trial in some cases. The court's ruling marks a win for conservatives that have pushed to curtail the powers at the SEC and other federal agencies, which often rely on in-house administrative law judges (ALJs) to adjudicate enforcement cases that can be complicated and highly technical.

The Supreme Court's ruling centered around an enforcement case filed in 2013 against an investment fund owner named George Jarkesy, who the SEC alleged defrauded investors by misrepresenting investment strategies and inflating the claimed value of the fund. The SEC relied on part of the 2010 Dodd-Frank financial law to pursue the case internally through an ALJ, which imposed a $300,000 civil penalty against Jarkesy, which he then challenged in federal court.

But chief justice John Roberts, writing for the majority, said the securities fraud charges could only be brought through a lawsuit in federal court, where there would be an independent judge, a jury trial and broader due process protections. Roberts said that the US Congress had exceeded its powers when it said that securities fraud lawsuits could be adjudicated internally by the SEC, which he said would concentrate the roles of "prosecutor, judge and jury in the hands of the executive branch."

The court's opinion could have ramifications across the federal government for enforcement cases that also used ALJs, and which have been put on hold awaiting the Supreme Court ruling. The US Federal Energy Regulatory Commission (FERC) relied on an ALJ when it sought $40mn in penalties from the owner of the Rover natural gas pipeline and a separate case that is seeking up to $223mn in fines from France's TotalEnergies for natural gas trades in 2009-12. FERC chairman Willie Phillips said the agency would take a "careful look" at the opinion but did not have an immediate comment.

Although the SEC and other agencies can still pursue the same enforcement cases under the Supreme Court's holding, a jury trial can be more resource-intensive and unpredictable than a case brought before an ALJ, who usually has years of experience in the technicalities of securities and energy laws. Public interest groups have worried the result will be reduced enforcement of federal laws meant to protect the public from fraud and manipulation, particularly in cases where penalties are small.

Justice Sonia Sotomayor, who wrote the dissent, said the court's decision was a "power grab" that ignored the policy considerations that Congress made when it authorized the SEC to pursue securities fraud cases internally, such as greater efficiency, expertise, predictability and uniformity in how federal securities laws are enforced. Sotomayor said the court had also disregarded its own precedent, set in a case in 1977, that affirmed agencies could pursue civil penalties internally.

The Supreme Court did not rule on the merits of other issues in Jarkesy, such as the claim that the process for appointing ALJs was unconstitutional.

By Chris Knight