Supreme Court Curbs SEC's In-House Judges in Fraud Cases

What You Need to Know

The 6-3 decision in Securities and Exchange Commission v. Jarkesy could reduce the agency’s leverage to extract high-dollar settlements.
Elon Musk and Mark Cuban are allies of Jarkesy, who argued that defendants have a right to a jury trial when financial penalties are in play.
The ruling could potentially affect other federal regulators.

The U.S. Supreme Court curbed the Securities and Exchange Commission’s ability to press complaints before in-house judges, saying defendants have a constitutional right to make their case to a federal jury when the agency is seeking financial penalties.

The 6-3 decision could reduce the commission’s leverage to extract high-dollar settlements. It deals a blow to an administrative system the SEC once used to adjudicate more than 100 cases a year before scaling back amid legal challenges.

The ruling could ripple across the government, potentially affecting the Federal Trade Commission, Agriculture Department and Environmental Protection Agency. A Justice Department lawyer said during arguments that more than two dozen agencies now impose penalties through administrative proceedings and that only some of those bodies have the option to go to federal court instead.

The dispute is part of a Supreme Court term likely to have broad implications for federal regulators. The justices are also considering whether to overturn a precedent that gives agencies leeway when they interpret ambiguous congressional commands. The court’s conservative majority has been broadly skeptical of what it views as overreach by regulatory agencies.

The majority said that the SEC’s “antifraud provisions replicate common law fraud” and that it was “well established” that those types of claims should be heard by a jury.

“A defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator,” Chief Justice John Roberts wrote for the majority. “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. That is the very opposite of the separation of powers that the Constitution demands.”

Roberts was joined by Justices Clarence Thomas, Samuel Alito, Brett Kavanaugh and Amy Coney Barrett. Justices Sonia Sotomayor wrote a dissenting opinion, joined by Justices Elena Kagan and Ketanji Brown Jackson.

“Today’s ruling is 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,” Sotomayor wrote.