Andrew Chang
WASHINGTON (Reuters) – The U.S. Supreme Court ruled on Thursday in favor of a challenge to the Securities and Exchange Commission’s domestic enforcement of investor protection laws in certain proceedings, dealing a blow to the agency amid scrutiny from federal judges. regulatory power.
The 6-3 decision, a setback for President Joe Biden’s administration, upheld a lower court ruling that sided with George Jarkey, a Texas hedge fund manager who challenged the legality of the SEC’s action against him after the agency found he had committed fraud. with securities. .
The case involved Texas hedge fund manager George Jarkey, who was fined and banned from the industry by the SEC after it determined he had committed securities fraud. He responded with a lawsuit challenging the legality of the SEC’s system.
Jarkisi’s case was supported by numerous conservative and business groups that have long complained about the regulatory influence of the federal “administrative state” in areas such as energy, the environment, climate policy, workplace safety and financial regulation.
The Biden administration appealed the SEC’s 2022 decision to the Fifth U.S. Circuit Court of Appeals in New Orleans.
The Securities and Exchange Commission (SEC) has faced a series of legal attacks in recent years, even as Supreme Court conservatives have demonstrated skepticism about expansive federal regulatory powers. In 2018, the court condemned the SEC’s selection of staff judges. In 2023 decisions in cases involving the SEC and the Federal Trade Commission, the court made it easier for targets of the agency’s actions to sue in federal court. In recent years, the court has limited the powers of other agencies, including the Environmental Protection Agency.
Critics of the Securities and Exchange Commission have said the agency has an unfair advantage in trying cases before its own judges rather than a jury in federal court. The U.S. Securities and Exchange Commission, which enforces various U.S. laws that protect investors, filed 270 new domestic proceedings in the fiscal year ended Sept. 30, compared with 231 in federal court.
However, following a 2018 Supreme Court decision, most SEC administrative proceedings are now heard by the commission itself, and very few—as of March, just two—are heard by an administrative law judge.
In 2011, the Securities and Exchange Commission (SEC) began investigating Jarkesy, who founded two hedge funds with his Houston-based investment advisory firm Patriot28 LLC. The funds had approximately 120 investors and approximately $24 million in assets under management.
An SEC administrative judge found that Jarkisi and his firm violated the Securities Act of 1933 and other U.S. laws, including by misrepresenting the identity of the funds’ auditor and the value of the assets. The SEC then ordered them to pay a civil penalty of $300,000 and ordered Patriot28 to return nearly $685,000 in ill-gotten gains.
The Fifth Court reversed the SEC’s decision. In addition to its finding on the right to a jury trial, the 5th Circuit found that Congress gave the SEC too much power to decide whether to bring cases within the organization and that protecting the positions of its administrative judges made them too difficult to remove . an encroachment on the presidential powers provided for by the Constitution.
During oral arguments in the case in November, conservative justices expressed concern that the SEC’s administrative proceedings on some charges, such as fraud, are being held without juries, while they would be in similar fraud cases in federal court.
The liberal justices said that existing Supreme Court precedent allowed Congress to transfer oversight of regulatory compliance to nonjury administrative tribunals, and that Congress gave the SEC more power after the Great Depression of the 1930s and subsequent financial crises to combat investor fraud.
In recent years, the Supreme Court has limited the power of federal agencies to make important decisions. During his current term, he has decided several cases on behalf of departments. On May 16, the justices upheld the Consumer Financial Protection Bureau’s funding mechanism to combat the problem caused by the payday loan industry.
The court is expected to rule in other cases involving the Environmental Protection Agency and the National Marine Fisheries Service in the coming days.