Supreme Court strikes serious blow against the administrative state

Supreme Court strikes serious blow against the administrative state

In a potentially groundbreaking decision, the Supreme Court on Thursday ruled that defendants accused of fraud by the Securities and Exchange Commission have the right to a jury trial.

Why it matters: The decision in SEC v. Jarkesy deals a serious blow to the administrative state, part of a yearslong project by the financial sector and conservatives to weaken federal power.

• The decision hobbles not just the SEC but other federal agencies like the EPA and Labor Department that rely on administrative law judges, which report to federal agencies and are part of the executive branch and not the judicial.
• Jarkesy could weaken the ability of a range of federal agencies who use these judges — from the EPA to OSHA — to enforce laws in the public interest.

The big picture: It's one of a handful of cases the Court has taken on this term that chip away at federal agency power — the most important one, a case regarding the deference courts show to agency decisions, is still to be decided.

Catch up fast: George Jarkesy ran two hedge funds that the SEC said were a fraud, so the agency brought a case against him before an administrative law judge — one of about 2,000 who work for a range of federal agencies.

• The judge ordered Jarkesy to pay a penalty of $300,000 and disgorge $685,000 in illicit profits.
• Jarkesy appealed to the conservative 5th Circuit, which ruled that, under the 7th Amendment, he was entitled to a trial by jury.

State of play: Before Thursday's decision, the SEC, like many other agencies, had the option of bringing a case to an administrative law judge or taking its claims to court.

• The SEC had already taken the hint from a 2018 case that the Supreme Court wasn't thrilled with in-house judges and cases and brought its most serious types of fraud cases to the courts, says James Tierney, a former staff attorney for the agency.
• But the new ruling could mean that even run-of-the-mill actions go to court. For example, a case where a defendant agrees to a penalty and settles.
• That's a far more expensive and time consuming endeavor.

"The SEC doesn't have infinite resources, and so if the cost of settlement goes up, it means they're going to have fewer resources to bring enforcement actions," says Tierney, who is now an assistant professor at Chicago-Kent College of Law.

• That's good news for the financial industry which has long pushed back on the agency's actions.

Between the lines: The 6-3 decision fell along ideological lines, with chief justice John Roberts writing for the majority.

• "A defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator," Roberts writes.

The other side: In a blistering dissent, calling the decision a "massive sea change," Justice Sonia Sotomayor argues that the court's ruling violates well established precedent — that Congress had long given federal agencies the right to adjudicate certain kinds of cases.

• "The majority pulls a rug out from under Congress without even acknowledging that its decision upends over two centuries of settled Government practice."
• "The majority takes a wrecking ball to this settled law and stable government practice. "
• Limiting agency's ability to enforce the laws, and throwing it to the courts amounts to a "power grab" by the court's majority, she writes.

What's next: The ramifications of the decision will play out in the courts for years as agency's try and figure out the new world it established.

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