Supreme Court rules US must enforce securities violations in court

WASHINGTON — The Supreme Court limited the reach of Securities and Exchange Commission administrative courts in a decision Thursday that could impact the federal government’s ability to use internal administrative judges.

The 6-3 decision found that the SEC cannot use those internal administrative judges to seek civil penalties for securities law violations because that violates the constitutional right to a jury trial. The majority opinion, written by Justice John G. Roberts Jr., says civil penalties for securities law violations too closely resemble allegations that would normally have to be brought in federal court.

“This is a common law suit in all but name. And such suits typically must be adjudicated in Article III courts,” the majority opinion stated.

In a dissent, Justice Sonia Sotomayor warned that the decision could reverberate across dozens of agencies with internal courts that adjudicate disputes, including the Environmental Protection Agency, Consumer Financial Protection Bureau and U.S. Postal Service.

“Today’s decision is a massive sea change,” Sotomayor wrote.

The 2010 financial reform law gave the SEC the ability to seek civil penalties both in federal courts and through internal administrative judges. The case comes from a challenge to an SEC administrative prosecution of George Jarkesy for securities fraud, which would have resulted in $300,000 in fines and $685,000 in disgorgement.

Jarkesy challenged the constitutionality of the agency’s administrative judge process, and a panel of the U.S. Court of Appeals for the 5th Circuit agreed in a decision issued in 2022.

Roberts wrote that although the SEC is concerned about maintaining “public rights” like a fraud-free market, that doesn’t mean it gets to avoid the jury trial requirement.

Allowing Congress to specify certain public rights for agency adjudication would turn the Constitution’s jury trial guarantee into “nothing more than a game” for Congress to maneuver around, Roberts wrote.

The Biden administration warned the justices during oral arguments that upholding that decision would take a “blunderbuss” to the existing federal administrative structure, where internal agency judges handle thousands of disputes that would otherwise be sent to federal courts.

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