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US Supreme Court weighing case challenging SEC enforcement proceedings

On Behalf of | Dec 7, 2023 | Securities and Compliance

The U.S. Supreme Court is weighing a challenge to the enforcement powers of the Securities and Exchange Commission, according to Reuters.

The case is being brought by hedge fund manager George Jarkesy, who was the subject of an SEC enforcement action for securities fraud in 2013.  After an in-house hearing before an administrative law judge, Jarkesy was ordered to pay a civil penalty of $300,000, and to repay nearly $685,000 in ill-gotten gains. He was also barred from the industry.

Jarkesy filed a lawsuit, saying the SEC’s proceedings violated the Constitution.  He contended that he was entitled to a federal trial before a jury of his peers, and that Congress did not have the power to delegate such enforcement powers to an agency.   He also argued that the administrative law judges are unconstitutionally protected from removal by the president.

In 2022, Jarkesy won a ruling in his favor from the 5th U.S. Circuit Court of Appeals, which dismissed the SEC’s decision.  The court asserted that the SEC’s power to seek penalties through in-house enforcement proceedings violates the U.S. Constitution’s Seventh Amendment right to a jury trial and infringes on presidential and congressional powers.

Last week the Supreme Court heard oral arguments in the case, as the Biden Administration asserted its position that the SEC does in fact have the constitutional authority to enforce its rules through in-house enforcement proceedings.

Deputy Solicitor General Brian Fletcher contended that if the SEC’s method of adjudicating certain fraud claims is found to be unconstitutional, it could affect the enforcement powers of dozens of other federal agencies who conduct administrative proceedings.

Justices questioning Fletcher raised the issue of whether an administrative agency can impose penalties without offering the option of a jury trial, thus possibly infringing on Seventh Amendment rights. “It seems to me that undermines the whole point of the constitutional protection in the first place,” Chief Justice John Roberts said.

The case is being decided at the same time that a challenge to the Financial Industry Regulatory Authority’s enforcement power is being considered by the U.S. Court of Appeals for the D.C. Circuit.  Expelled brokerage firm Alpine Securities is claiming that FINRA’s structure and operation, including its Board of Governors and enforcement units, are in violation of the Constitution’s separation of powers.

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