The Case at Hand
To uphold the power of federal agencies, President Joe Biden's administration has turned to the U.S. Supreme Court. On Friday, the justices agreed to hear an appeal from the administration related to a lower court ruling. The lower court decision deemed certain SEC enforcement proceedings unconstitutional, alleging these infringed on the right to a jury trial and overstepped presidential and congressional powers. This case centers around George Jarkesy, a hedge fund manager penalized by the SEC for securities fraud.
History of Legal Challenges against SEC
This lawsuit underscores the most recent legal challenge against SEC's actions. The SEC, responsible for enforcing federal laws that safeguard investors, has witnessed a rising skepticism against its expansive regulatory power, especially from the Supreme Court's conservative majority. Previously, in 2018, the justices criticized the commission's process of selecting in-house judges. In April, they permitted those facing SEC and other regulators' actions to immediately contest agency processes in federal court.
The SEC versus George Jarkesy
The SEC initiated investigations against Jarkesy in 2011. The hedge fund manager, along with his Houston-based investment advisory firm, Patriot28 LLC, was managing two hedge funds with approximately 120 investors and nearly $24 million in assets. The SEC's charges against Jarkesy and Patriot28 were adjudicated by an in-house judge, and the findings concluded multiple legal violations, including misrepresentation of the funds' auditor and assets' value. The SEC consequently ordered a $300,000 civil penalty and the disgorgement of around $685,000 in ill-gotten gains from Patriot28, also barring Jarkesy from the securities industry.
The Core Legal Argument
Central to Jarkesy's case is the constitutionality of the SEC's ability to seek monetary penalties for securities fraud through in-house adjudications. This procedure is under scrutiny for potentially violating the Seventh Amendment, which ensures the right to a jury trial. In 2022, the 5th Circuit ruled against the SEC, maintaining that their proceedings denied Jarkesy his constitutional right to a jury trial. The 5th Circuit also asserted that the SEC possessed undue power to decide the forum for cases and that administrative judges were excessively shielded from removal, infringing on presidential powers.
Implications for the 'Administrative State
Trimming the regulatory authority of federal agencies is a primary aim for numerous business and conservative groups. They criticize what they call the "administrative state," which extends its powers across critical areas such as energy, the environment, climate policy, and workplace safety. Reflecting this stance, the Supreme Court has previously curtailed federal agency powers. Notably, it has restricted the U.S. Environmental Protection Agency's ability to preserve wetlands and regulate greenhouse gas emissions from power plants.
