Supreme Court Limits SEC’s Power To Decide on Civil Penalties for Fraud Cases

Academic FX
June 27, 2024
9 mins

Those facing civil penalties for securities fraud have a right to a jury trial, high court rules

KEY TAKEAWAYS

The U.S. Supreme Court in a ruling Thursday curbed the Security and Exchange Commission’s ability to penalize defendants accused of fraud without a jury trial.
In the SEC v. Jarkesy case, the high court ruled that the regulator’s practice of handing down civil penalties from an in-house judge violates Americans’ rights to a jury of their peers.
This ruling could have far-reaching effects, as at least two dozen other federal and administrative agencies currently handle enforcement proceedings in-house.

The U.S. Supreme Court ruled against the Securities and Exchange Commission (SEC) Thursday, curbing the regulator’s ability to penalize those accused of fraud without a jury trial.

In a 6-3 decision, the high court upheld the ruling of a Fifth Circuit court that said the SEC did not have the power to use in-house judges to decide on penalties for fraud cases.

This ruling could have far-reaching consequences for other agencies that also enforce laws using in-house rulings.

What Is SEC v. Jaresky?

The case brought in front of the Supreme Court, SEC v. Jaresky, began in 2013, when George R. Jarkesy Jr. and his hedge fund were penalized by the SEC for fraud. The regulator claimed Jarskey and his company misled investors by lying to them about the value of its funds’ assets, and the identity of its auditor and prime broker.2

The regulator eventually levied a $300,000 civil penalty on Jarkesy and asked his company to pay back $685,000 in illicit profits.

Jarkesy contested this order by suing the regulator, and a Fifth Circuit court ruled in his favor. The lower court said by deciding the matter in-house, the SEC’s process violated Jarkesy’s Seventh Amendment right to a jury trial in a federal court.

The regulator appealed this decision before the country’s highest court, which only ruled on the constitutionality of in-house adjudication proceedings.

“A defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator,” Chief Justice John Roberts wrote in delivering opinion of the Court.

Why Should You Care About This Ruling?

Even though the SEC was established in 1934 for investor protection in the aftermath of the 1929 stock market crash, for a majority of its existence the regulator could not impose civil penalties for fraud cases through its in-house adjudication process. Congress gave that power to the SEC via the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

And the SEC is not the only regulatory or federal agency with such powers. This ruling may set a precedent that may disrupt in-house adjudication processes for more than two dozen federal and regulatory agencies.

Talking about such agencies, Justice Sonia Sotomayor wrote in her dissent 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.”

Tags :

Government, SEC

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