Supreme Court limits SEC's powers to impose fines

The U.S. Supreme Court is pictured in May 2020. Saul Loeb/AFP via Getty Images hide caption

toggle caption Saul Loeb/AFP via Getty Images

The U.S. Supreme Court, in a 6-3 vote, declared unconstitutional the way the Securities and Exchange Commission imposes fines for fraudulent conduct and requires that wrongdoers give back their ill-gotten gains.

Writing for the court majority, Chief Justice John Roberts said the use of administrative law judges to make factual findings and legal conclusions deprives accused wrongdoers of their Seventh Amendment right to a jury trial.

The court’s decision could have huge ripple effects on dozens of agencies that use ALJs to make factual and legal findings on everything from labor rights to mine safety and energy regulation.

Ironically, the agency is likely to suffer fewer consequences, largely because the Supreme Court, beginning in 2018, began eating away at the agency’s power to use administrative law judges, and the agency, in response, decreased the number of ALJ’s at the agency from six to two, choosing instead to bring its cases mainly in federal court.

Federal courts, however, do not have some of the tools the agency has to protect the securities market—tools such as barring offenders from working in the securities and investment business. That can only be done by the agency, which must take extra steps to do that after it wins in court.

As damaging as the court’s decision is for many federal agencies’ ability to enforce their mandate, the court majority did not go as far as it could have. At least for now, it excluded from its decision those agencies that deal with federal benefits. Indeed, the largest cadre of Administrative Law Judges—more than 1,500 ALJ’s— make decisions in over a half million hearings and appeals each year at the Social Security Administration.

Conversely, while the court’s conservatives agreed on the bottom line in the case, some of them wanted to go further.

The court’s three liberals, in dissent, blasted the majority.

Thursday's case was brought by George Jarkesy, a former conservative radio talk show host and hedge fund manager. After a fraud investigation by the SEC, and an in-house evidentiary hearing conducted the an independent administrative law judge, the SEC fined Jarkesy $300,000, ordered him to pay back nearly $700,000 in ill-gotten gains, and barred him from various activities in the securities industry.

Jarkesy challenged the SEC actions in court, contending that he was entitled to a jury trial in federal court and that Congress didn’t have the power to delegate such enforcement powers to an agency. Supporting him at the Supreme Court was a virtual who’s who of conservative and business groups, plus some individuals like Elon Musk, who has repeatedly resisted the SEC’s attempts to probe whether he illegally manipulated his company’s stock prices.