Supreme Court Vs. SEC: A Potential Game-Changer For Investors And Regulators' In-House Courts

The Supreme Court is expected to rule on a case that could severely restrict the ability of U.S. regulators and federal agencies, like the U.S. Securities and Exchange Commission (SEC), to prosecute wrongdoers.

What Happened: Last year, an appeals court in New Orleans ruled that in-house court proceedings conducted by the SEC were unconstitutional because they denied defendants a trial by jury.

The decision was a win for right-wing activist and hedge fund manager George R. Jarkesy Jr., whom the SEC had previously fined for securities fraud.

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On Wednesday, the Supreme Court — which has a 6-3 conservative majority — heard an appeal by President Joe Biden’s administration regarding the New Orleans decision.

The outcome could have far-reaching consequences if it upholds a decision that the SEC’s use of administrative law judges — who preside over the agency’s in-house courts — is unconstitutional.

If that happens, securities fraud cases will, in the future, be heard through traditional courts.

Why It Matters: Administrative law judges are a common feature of several regulators and federal agencies, including the Federal Trade Commission and the Federal Energy Regulatory Commission, and could all be affected by the outcome of SEC v. Jarkesy.

Elon Musk criticized these in-house courts. Recall how the Tesla TSLA CEO settled with the SEC in 2018 for $20 million after being accused of defrauding investors after tweeting about taking Tesla private.

A landmark case in administrative law — Chevron CVX. v. Natural Resources Defense Council — could prove pivotal. In 1984 the Supreme Court ruled in favor of the agency, overturning a district court circuit decision, with Congress admonishing the D.C. for making a “policy decision on the regulation of air pollution emissions.”

Clogging Up The System, Consumers At Risk?

In-house courts and judges have been used for decades. Commentators predict that if the Supreme Court rules the in-house courts unconstitutional, future regulatory cases — including hearings over securities fraud — could clog up federal courts for years.

U.S. think tank Center For American Progress said that a ruling in favor of Jarkesy could “result in 80 years of administrative law being overturned.”

“In turn, this would flood the federal courts with cases, causing both agencies and the courts to grind to a halt.”

The SEC, meanwhile, maintains that it has securities fraud experts who oversee its cases, while an appointed judge in a federal court might not have this expertise to rule fairly, which could put investors’ interests at risk. Eliminating administrative law judges from all regulatory oversight could also put consumer rights at risk

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