Supreme Court faults SEC’s use of in-house judges

(Reuters) — The U.S. Supreme Court Thursday rejected the Securities and Exchange Commission’s in-house enforcement of laws protecting investors against securities fraud, dealing a blow to the agency’s powers in a ruling that could reverberate through other federal regulators.

The decision — a setback for the Biden administration — upheld a lower court’s decision siding with George Jarkesy, a Texas-based hedge fund manager who contested the legality of the SEC’s actions against him after the agency determined he had committed securities fraud.

It was a 6-3 decision authored by Chief Justice John Roberts, with the court’s conservative justices in the majority and the liberal justices dissenting. The court ruled that agency proceedings seeking penalties for fraud that are handled by the SEC itself instead of in federal court violate the U.S. Constitution’s Seventh Amendment right to a jury trial.

“The SEC’s antifraud provisions replicate common law fraud, and it is well established that common law claims must be heard by a jury,” Justice Roberts wrote.

The liberal justices expressed doubt that the decision can be limited only to fraud actions pursued by the SEC.

Justice Sonia Sotomayor, writing for the three liberals, called the decision “a massive sea change.”

The view expressed in the decision, Sotomayor wrote, “means that the constitutionality of hundreds of statutes may now be in peril, and dozens of agencies could be stripped of their power to enforce laws enacted by Congress.”

The case involved Texas-based hedge fund manager George Jarkesy, who the SEC fined and barred from the industry after determining he had committed securities fraud. He responded with a lawsuit challenging the legality of the SEC’s system.

Mr. Jarkesy was supported in the case by numerous conservative and business groups, which long have complained about the regulatory reach of the federal “administrative state” in areas such as energy, the environment, climate policy, workplace safety and financial regulation.

The Biden administration had appealed a 2022 decision against the SEC by the New Orleans-based 5th U.S. Circuit Court of Appeals.