Supreme Court Limits Authority of Agencies to Adjudicate Fines
WASHINGTON — A Supreme Court ruling Thursday gutted the authority of administrative agencies to resolve disputes internally over the financial penalties they impose.
The result is likely to be an increase in the number of jury trials when organizations or individuals are fined for violating federal or state regulations.
The case of SEC v. Jarkesy arose from Securities and Exchange Commission fines to a hedge fund company it accused of fraudulent misrepresentations to investors.
The hedge fund manager appealed the fines but under Securities and Exchange Commission rules could challenge the agency’s action only through its internal administrative tribunal.
The hedge fund called the internal tribunals a violation of Seventh Amendment rights to a jury trial.
The Supreme Court agreed, meaning hundreds of regulations and administrative procedures are likely to be revised to comply with the ruling.
A lack of jury trial rights “would permit Congress to concentrate the roles of prosecutor, judge, and jury in the hands of the executive branch” of government, Chief Justice John G. Roberts Jr. wrote for the majority, which consisted of the court’s conservatives.
The dissent, written by Justice Sonia Sotomayor, said the ruling could cause a “massive sea change” for federal agencies and a “wrecking ball” to administrative laws.
“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,” wrote Sotomayor.
Administrative proceedings are used by more than two dozen federal agencies, such as the Justice Department, the Federal Communications Commission and the Environmental Protection Agency.
The Securities and Exchange Commission said its internal tribunals were an extension of its authorization to enforce regulations.
Its enforcement in the case before the Supreme Court was directed at George Jarkesy, who operated two hedge funds under the name Patriot28 LLC. They managed about $24 million for more than 100 investors.
Patriot28 told investors its funds were audited by a prominent accounting firm and that a large investment bank was its prime broker.
The Securities and Exchange Commission said in a brief that the accounting firm “never audited the funds and the bank never opened a prime brokerage account for them.”
The agency ordered Patriot28 to pay a $300,000 civil penalty and return nearly $685,000 in profits that regulators said were undeserved.
After losing before the agency’s internal tribunal, Jarkesy appealed to the federal courts. The Fifth Circuit Court of Appeals sided with the Securities and Exchange Commission but the Supreme Court overturned the lower court.
Jarkesy praised the Supreme Court, saying in a statement that “after a decade of gross misconduct and blatantly unconstitutional political attacks from the SEC and their in-house court, today the U.S. Supreme Court ruled that the Constitution still matters.”
The Securities and Exchange Commission was undaunted, saying in a statement that the agency “will continue to protect investors and enforce the federal securities laws, including by filing actions in federal court.”
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