The US Supreme Court will hear a landmark case this week that could dramatically alter the SEC’s enforcement powers and have sweeping implications for other federal regulatory agencies.
The Court is being asked to decide whether statutory provisions that empower the Securities and Exchange Commission to initiate and adjudicate administrative enforcement proceedings seeking civil penalties violate the Seventh Amendment, which covers a defendant’s right to a jury trial. The case also revolves around whether statutory provisions that authorize the SEC to choose to enforce the securities laws through an agency adjudication instead of filing a district court action violate the nondelegation doctrine, and whether Congress violated Article II by granting for-cause removal protection to administrative law judges in agencies whose heads enjoy for-cause removal protection.
The case involves Houston-based hedge fund manager George Jarkesy, who in March 2013 was accused by the SEC of civil charges of fraud. The charges alleged that Jarkesy and Thomas Belesis of John Thomas Financial (since renamed Patriot28 LLC) defrauded investors in two hedge funds. According to the complaint, Jarkesy told investors that he was the fund manager, when in fact a number of decisions were made by Belesis. Additionally, investors were led to believe the funds were audited by KPMG when they were not.
According to the SEC’s order, Jarkesy used fund assets to hire multiple stock promoters in 2010 and 2011 to create an artificial and unsustainable spike in the price of two microcap stocks in which the funds were heavily invested. As a result of these efforts, the funds recorded temporary gains in the value of the microcap stocks that Jarkesy used to mask the write-down of other more illiquid holdings of the funds.
Jarkesy was found guilty in an SEC administrative proceeding adjudicated by an administrative law judge. However, the hedge fund manager won a later challenge to that process in federal court, arguing that the Seventh Amendment guaranteed his right to a jury trial.
The SEC challenged that ruling, arguing that the right to a jury trial is limited for civil actions and that Congress did not make a mistake in setting up the agency with authority to conduct administrative proceedings. But defendants, including Jarkesy, argue that administrative proceedings are tilted in favor of the federal agencies.
Under the current composition of the Supreme Court, most of the justices have indicated their intent to curtail agency power. The pending case before them is one of several challenging the power of federal regulatory agencies. The Court is also evaluating the power of the Consumer Financial Protection Bureau and whether to eliminate a provision that requires judges to defer to agencies’ interpretations of administrative rules.
Meanwhile, The US Chamber of Commerce, Business Roundtable and other groups last month filed an amicus brief, asking the court to curb the overreach of a vast “administrative state.” Prominent executives and investors, including Elon Musk and Mark Cuban, have also chimed in, saying that the SEC’s in-house administrative processes “lead to unequal and unjust results.”
Arguments begin Nov. 29 before the high court. A decision is expected before the end of the term in June. Read more.
