Supreme Court knocks down Wall Street regulator’s in-house courts

The Supreme Court ruled Thursday that the Securities and Exchange Commission can’t rely on in-house courts to resolve certain enforcement disputes, a decision that could deliver a blow to a critical power of corporate watchdogs across the federal government.

In a 6-3 decision along ideological lines, the justices backed a challenge to the constitutionality of the SEC’s internal tribunals — a resounding win for conservatives who have argued for years that regulators wield too much authority with too little oversight.

Chief Justice John Roberts, who penned the majority opinion, wrote that the SEC’s reliance on in-house courts and judges violates the Constitution’s guarantee of a jury trial when the agency is seeking civil penalties for fraud. The court did not take up other issues raised in the case about whether Congress erred in allowing the SEC to choose where to bring cases and if the agency’s in-house judges are too insulated from removal.

“A defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator,” Roberts wrote.

Conservative critics of the so-called administrative state have had a mixed record with the high court this term. Most notably, the justices recently dealt the movement a surprise and major loss by upholding the Consumer Financial Protection Bureau’s funding mechanism, which avoids the regular congressional appropriations process. The court will also rule in the coming days on cases that could overturn a crucial, decades-old precedent giving agencies broad latitude when interpreting the law.

But the case decided Thursday, Securities and Exchange Commission v. Jarkesy, hits at an obscure though important issue that has been at the forefront of those attacks for more than a decade.

Justice Sonia Sotomayor wrote a dissenting opinion and read large portions of it from the bench, which is typically a sign of more profound disagreement.

Sotomayor called the majority’s ruling “earthshattering” and said claims that the decision is limited to the SEC were “incredible” and “should fool no one.”

“The constitutionality of hundreds of statutes may now be in peril, and dozens of agencies could be stripped of their power to enforce laws enacted by Congress,” Sotomayor warned in her opinion, joined by Justices Elena Kagan and Ketanji Brown Jackson.

Sotomayor pointed to worker safety programs run by the Occupational Safety and Health Administration as in particular jeopardy.

“Litigants seeking further dismantling of the ‘administrative state’ have reason to rejoice in their win today, but those of us who cherish the rule of law have nothing to celebrate,” she declared in one line she recited in the courtroom.

In a concurring opinion, Justice Neil Gorsuch criticized Sotomayor’s reading of the court's precedents, calling it “like a picky child at the dinner table.” Gorsuch was joined in concurring by Justice Clarence Thomas.

The SEC's in-house courts, historically used to adjudicate a broad slate of securities law violations, have become the subject of a decadelong attack by legal activists, the business lobby and billionaires like Mark Cuban and Elon Musk. Critics say the courts are riddled with biased judges and constitutional issues, accusations the agency has rejected.

Supporters of the administrative law judge system say it routes disputes to adjudicators who typically have deep expertise in the subject matter. They also note that anyone dissatisfied with the outcome of those proceedings can seek review at the end of that process from the traditional federal courts.

Attorneys representing the SEC had argued that the right to a jury trial doesn't apply to the types of cases usually brought in the agency's courts, which have dealt with financial malfeasance or fraud. But the court ruled in the opinion that the SEC’s “antifraud provisions replicate common law fraud” and that it is “well established” that those cases “must be heard by a jury.”

During oral arguments in November, Roberts questioned the SEC’s claims, saying “it’s curious that — unlike most constitutional rights — you have that right until the government decides that you shouldn’t.”

The Supreme Court has previously found issues with the structure of the SEC’s internal tribunals and how judges overseeing the courts are appointed, prompting the agency to sharply scale them back and to funnel nearly all contentious cases through the federal judiciary instead of its own courts. The SEC still brings a number of other matters, such as industry bars and suspensions, through its own courts, which are not expected to be affected by Thursday’s ruling.

“The Court hardly leaves the SEC without ample powers and recourse,” Gorsuch wrote in his concurring opinion. “The agency is free to pursue all of its charges against Mr. Jarkesy. And it is free to pursue them exactly as it had always done until 2010: In a court, before a judge, and with a jury.”

Jarkesy’s reach, however, could extend well beyond Wall Street’s top cop.

In advance of the high court’s decision, consumer and labor groups warned that a broad ruling by the justices could rope in the in-house courts of other agencies like the Federal Trade Commission and the National Labor Relations Board.

Legal challenges to the administrative law judges at both agencies are pending with those involved closely watching the high court’s action in the SEC-focused dispute. Sidelining the in-house courts at those agencies wouldn’t cripple them entirely, but current and former officials said it would complicate and slow enforcement efforts.

The Supreme Court’s ruling could have a “more profound effect on other agencies than the SEC itself,” said Jay Dubow, a former SEC attorney and current partner at Troutman Pepper, before the decision.

Following the ruling, SEC Enforcement Director Gurbir Grewal said the agency was reviewing the decision but that it "will continue to protect investors and enforce the federal securities laws, including by filing actions in federal court."

"Indeed, during the last several years, the SEC has successfully enforced the federal securities laws in federal court, obtaining favorable jury verdicts and dispositive motion rulings in highly contested matters with industry-wide implications," Grewal said.

The Supreme Court case stems from a securities-law enforcement action the SEC brought in 2013 against hedge-fund manager George Jarkesy, who’s also a conservative TV and radio commentator. He unsuccessfully sued to block the proceedings and was later fined for defrauding investors.

Eventually, Jarkesy challenged the SEC’s actions, and, in 2022, a New Orleans-based appellate court found that the SEC had violated his right to a jury trial. The judges also ruled that Congress wrongly allowed the SEC to determine what cases go to its courts versus the federal courts and that the judges overseeing the SEC’s courts were too insulated from removal by the president.

The justices, however, only opted to weigh in on the jury-trial issue in their opinion as many expected following oral arguments.

Critics of the SEC’s in-house courts cheered the justices’ ruling Thursday. In a statement, Karen Cook, an attorney for Jarkesy, said the court had “restored the balance of powers vital to our republic, safeguarding the rights of the people above an overreaching government.”

But Public Citizen President Robert Weissman warned that the ruling stands to undermine the SEC’s enforcement efforts as well as the work of other federal agencies, some of which may even need to seek out new authority from Congress to enforce the law.

“Although this case involves the SEC, many other federal agencies bring enforcement actions based on statutory standards that closely resemble fraud or other common law claims,” Mayer Brown Partner Andrew Pincus said. “The Supreme Court’s decision indicates that all of those actions will now have to be tried before an independent federal judge and a jury — eliminating the ‘home court advantage’ that has benefited many agencies for decades.”