Supreme Court Strips SEC of Key Power to Penalize Fraud

( – The Supreme Court’s June 27 ruling strips the Securities and Exchange Commission (SEC), which regulates securities markets, of a key enforcement tool used to fight securities fraud.

The case, SEC v. Jarkesy, began in 2013 when administrative proceedings were brought against hedge fund founder George Jarkesy by the SEC. An SEC-assigned administrative law judge found Jarkesy had violated several securities laws and ordered him to pay a $300,000 civil penalty. His advisory firm, Patriot28, was ordered to repay what the SEC said were illicit gains of nearly $685,000.

Jarkesy’s attorneys appealed the ruling and argued that the SEC wins almost all the cases brought before its administrative law judges but only wins 60 percent of the cases brought to federal court.

The U.S. Court of Appeals for the 5th Circuit overruled the SEC’s ruling, stating that the SEC’s proceedings violated the right to a jury trial under the Seventh Amendment, adding that “Congress improperly delegated power” by allowing the SEC to conduct internal proceedings. The court also found that the SEC’s rules preventing the administrative law judges from being fired were unconstitutional.

In November, the SEC appealed the 5th Circuit’s ruling to the Supreme Court.

In its 6-3 ruling, the Supreme Court found that defendants accused of securities fraud are entitled to a jury trial in federal court.

In the majority opinion, Chief Justice John Roberts wrote that during enforcement proceedings conducted internally by the SEC, the executive branch played the “role of prosecutor, judge and jury.” However, he said that is the “opposite of the separation of powers,” and defendants accused of securities fraud have the right to a jury trial.

In the dissenting opinion, Justice Sonia Sotomayor criticized the ruling as a “power grab” and claimed the decision would cause “chaos.” She said the decision “upends longstanding precedent” and “established practice.”

After the ruling, Jarkesy said the Supreme Court’s decision shows that the “Constitution still matters.”

Copyright 2024,