Under-the-Radar Supreme Court Ruling Threatens Untold Damage to Government (2024)


By Alan B. Morrison

Under-the-Radar Supreme Court Ruling Threatens Untold Damage to Government (1)

By a vote of 6–3, with Chief Justice John Roberts writing for the majority, the Supreme Court ruled on Thursday that if the Securities and Exchange Commission wishes to seek civil penalties for violations of the anti-fraud laws that it enforces, it must go to federal court to do so, and cannot obtain that remedy in proceedings before the agency. In doing so, the court opened the door for defendants in cases before at least the two dozen agencies that work under similar statutes to raise the same challenge, threatening an untold number of agency enforcements on topics ranging from labor violations to federal trade issues.

First, it’s worth focusing on what was directly at stake in SEC v. Jarkesy itself. The SEC enforces the laws designed to assure fair dealing in the buying and selling of securities under several statutes that go far beyond common-law fraud. Among those laws are the Investment Company Act, which regulates the work of investment advisers, such as George Jarkesy. The SEC believed that he was violating various laws and commenced an administrative proceeding against him and his company. The agency eventually obtained a decision ordering the defendants not to violate certain specific laws, barring Jarkesy from engaging in certain parts of the securities business, and requiring him to disgorge $685,000 in ill-gotten gains to his clients and to pay civil penalties of $300,000. He appealed to the U.S. Court of Appeals for the 5th Circuit, which overturned the SEC decision on three separate constitutional grounds. On Thursday, the Supreme Court agreed with one: Congress could not constitutionally permit the SEC to impose civil penalties for what the court saw as basically claims for common-law fraud. It did not discuss the other grounds.

There was no dispute that, if the SEC went to court, Jarkesy would have been entitled to a jury under the Seventh Amendment and a judge appointed for life, as well as many other procedural rules available there, but not as part of an SEC enforcement action before an administrative law judge. The government and the dissenters argued that the “public rights” doctrine, which permits Congress to assign some claims that might be brought in court to a federal agency for their determination at that agency, permitted the SEC to seek penalties without going to court. In particular, they pointed to a unanimous 1977 Supreme Court decision in Atlas Roofing Co. v. Occupational Safety and Health Review Commission that rejected a similar objection to the imposition of civil penalties there. The majority did not overrule Atlas Roofing, but distinguished it on the grounds that the law enforced there was not the equivalent of a common-law claim, like fraud is here, and so the public rights doctrine was available there, but not to the SEC. The chief justice also defended the continued viability of the public rights doctrine in a number of other situations that he concluded differed from this one. The concurring opinion of Justice Neil Gorsuch, joined by Justice Clarence Thomas, expressed broader doubts about the future of public rights as a way to move cases out of the federal courts into the agencies.





In one sense, the SEC has a clear choice: If it wants to seek penalties, it has to go to court, where it can also obtain preliminary injunctive relief not available in agency proceedings. But there is at least some question as to whether the courts have been empowered to provide all the remedies available under all of its statutes, in particular under the Investment Company Act at issue in this case. If not, can the agency seek some relief administratively, while also going to court for penalties, or would that violate the principle forbidding a party from splitting its claim?

The SEC did not have the power to seek penalties in court until 2010, and not all agencies have that power now. Going forward, every defendant facing an administrative agency complaint seeking penalties will trot out Jarkesy, and will claim that the agency is constitutionally barred from even commencing the case and the court should step in immediately. To add complexity, each agency has a different set of governing statutes, and in many of the estimated 200 laws allowing agencies to order civil penalties, the relation between them and the allegedly analogous common-law actions will be different from that at issue in Jarkesy. In short, the court appears to have given birth to a whole new body of federal court litigation, with the high court as the only entity that can decide on which side of the Atlas Roofing line a particular statute falls.


What happens next? The Jarkesy majority did not deny the SEC the right to hold an administrative hearing in this case, except to seek civil penalties. The SEC will probably argue that the rest of the case is untainted, which would leave in place the injunctions against the defendants and the disgorgement order of $685,000. Jarkesy will surely disagree. Moreover, the 5th Circuit also ruled that Congress may not constitutionally provide for-cause protection against removal for administrative law judges at the SEC, and Jarkesy will argue that the rest of the order against him must be set aside for that reason. (The Supreme Court did not rule on this question.) The 5th Circuit equivocated on whether that ruling could be the basis to overturn the entire decision, so that at least that remedial aspect will be back in that court. More significantly, that precedent will be cited by all defendants whose trials are being held by administrative law judges at the SEC. And on top of that, similar administrative law judge challenges are certain to arise at other agencies, probably sooner rather than later.



Beyond the specifics of this case, the decision is another in a line in which the court has, in effect, overruled Congress’ determination as to how agencies should be structured and what they can and cannot do. The net result is to make it harder for agencies to accomplish what Congress has given them the power to do, with little hope that Congress will step in and fill the voids left by the court.

This is part ofOpinionpalooza, Slate’s coverage of the major decisions from the Supreme Court this June. AlongsideAmicus, we kicked things off this year by explainingHow Originalism Ate the Law. The best way to support our work is by joiningSlate Plus. (If you are already a member, consider adonationormerch!)

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Under-the-Radar Supreme Court Ruling Threatens Untold Damage to Government (2024)


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