U.S. Supreme Court Says No More In-House Tribunals for the SEC, Other Federal Regulators

The decision strips the federal securities regulator of a key enforcement power.

The U.S. Supreme Court ruled on Thursday that the Securities and Exchange Commission (SEC) cannot use in-house judges to hear cases, a decision that will significantly hamper the agency's ability to enforce securities laws and quickly resolve crypto-related cases.

In a 6-3 vote, the court ruled that the SEC's use of administrative law judges to handle civil securities fraud cases violates the constitutional right to a jury trial. The ruling comes in a case involving hedge fund manager George Jarkesy Jr., who was accused by the SEC of misstating his hedge funds' assets.

The SEC has often used an internal process, presided over by administrative law judges, to handle civil securities fraud accusations and levy financial penalties, rather than suing in federal court. The agency's ability to handle matters internally was granted in 2010 by the passage of the Dodd-Frank Act in response to the 2008 global financial crisis.

After the Supreme Court’s decision, the SEC will be forced to once again rely solely on federal trial courts to enforce securities laws and seek financial penalties.

The court's decision could also have far-reaching implications for other federal agencies that have historically been able to handle enforcement via internal processes, including the National Labor Relations Board (NLRB), which is facing a similar challenge.

“Today’s decision imposes an import and significant restriction on federal agencies’ ability to adjudicate enforcement actions internally rather than trying their cases in court. Although this case involves the SEC, many other federal agencies bring enforcement actions based on statutory standards that closely resemble fraud or other common law claims,” said Andrew Pincus, partner at international law firm Mayer Brown in an emailed statement.

“The Supreme Court’s decision indicates that all of those actions will now have to be tried before an independent federal judge and a jury—eliminating the “home court advantage” that has benefited many agencies for decades,” Pincus added.

Chief Justice John Roberts delivered the majority opinion, writing, "A defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator."

"Rather than recognize that right, the dissent would permit Congress to concentrate the roles of prosecutor, judge and jury in the hands of the Executive Branch," Roberts wrote. "That is the very opposite of the separation of powers that the Constitution demands."

In a concurring opinion, Associate Justice Neil Gorsuch argued that the SEC’s authority to "penalize citizens without a jury, without an independent judge, and under procedures foreign to our courts" are a violation of individual liberty.

"In reaffirming all this today, the Court hardly leaves the SEC without ample powers and recourse," Gorsuch wrote.

Some crypto cases have been among those resolved by the SEC via administrative proceedings, including its 2018 case against Michigan-based "ICO Superstore" TokenLot LLC and its two owners, and its 2014 case against a computer programmer who created a crypto-denominated virtual stock exchange.

Associate Judge Sonia Sotomayor wrote the dissenting opinion, calling the ruling a "power grab" and "part of a disconcerting trend: when it comes to the separation of powers, this Court tells the American public and its coordinate branches that it knows best."

"The Court tells Congress how best to structure agencies, vindicate harms to the public at large, and even provide for the enforcement of rights created for the Government," Sotomayor wrote. "There are good reasons for Congress to set up a scheme like the SEC’s. It may yield important benefits over jury trials in federal court, such as greater efficiency and expertise, transparency and reasoned decisionmaking, as well as uniformity, predictability, and greater political accountability."

The case, SEC vs. Jarkesy, began in 2013 when the SEC alleged that Jarkesy and his firm, Patriot28 LLC, violated federal securities laws by misstating his two hedge fund’s assets.

Instead of suing Jarkesy in federal court, the case was originally tried before an administrative law judge. Jarkesy appealed, and in 2022 a New Orleans-based appeals court ruled that the SEC’s proceedings were unconstitutional. The SEC appealed, and the Supreme Court heard arguments last November.

UPDATE (June 27, 2024 at 16:13 UTC): Adds comment from an attorney and detail about two of the SEC's past crypto-related administrative proceedings.

Cheyenne Ligon is a CoinDesk news reporter with a focus on crypto regulation and policy. She has no significant crypto holdings.

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