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Supreme Court ruling curtails SEC’s ability to bring fraud cases before in-house judges

On Behalf of | Jul 2, 2024 | Securities and Compliance

A ruling by the U.S. Supreme Court found that the in-house proceedings used by the Securities and Exchange Commission in some securities fraud cases are a violation of the Constitution, ThinkAdvisor reports.

In a 6-3 decision, the nation’s highest court said that people accused of fraud by the SEC have the right to a jury trial in federal court.

The ruling came in the case of a Houston hedge fund manager, George Jarkesy, who was fined $300,000 and ordered to pay $680,000 in allegedly ill-gotten gains after being accused by the SEC of misleading investors about who served as his funds’ prime broker and auditor and about their investment strategies and holdings.

The 5th U.S. Circuit Court of Appeals dismissed the penalties against Jarkesy and his Patriot28 investment adviser, saying the case should have been heard in a federal court instead of before one of the SEC’s administrative law judges.

That ruling was upheld by the Supreme Court, with Chief Justice John Roberts 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. That is the very opposite of the separation of powers that the Constitution demands.”

In her dissent, Justice Sonia Sotomayor said the decision would be welcomed by “litigants who seek to dismantle the administrative state.”  She said it could have implications for other federal agencies that that can only impose civil penalties in in-house, administrative proceedings.  “For those and countless other agencies, all the majority can say is tough luck; get a new statute from Congress,” she wrote.

During arguments before the court, a  Justice Department lawyer said that over 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 ramifications of this case are so much bigger than one person,” Jarkesy said in an emailed statement. “After a decade of gross misconduct and blatantly unconstitutional political attacks from the SEC and their in-house court, today the United States Supreme Court ruled that the Constitution still matters.”

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