WASHINGTON (CN) — The Securities and Exchange Commission violated a hedge fund manager's rights by having an in-house administrative law judge decide the fraud case against him instead of a jury, a split Supreme Court said Thursday, upholding an appeals court ruling.
“A defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator,” Chief Justice John Roberts wrote for the 6-3 majority.
Splitting along ideological lines, the three liberal justices said the conservative majority ruled in favor of judicial policymaking and threatened the separation of powers.
Justice Sonia Sotomayor read her dissent aloud from the bench, denouncing the majority’s decision by saying it had failed to act as a “neutral umpire when it rewrites established rules in the matter it does today.”
The justices were asked to review what rights private citizens have when federal agencies bring charges against them for law infringements. In the court’s 1977 ruling Atlas Roofing Company v. OSHA, the justices said Congress gave executive agencies the ability to adjudicate violations of public rights statutes without infringing on the Seventh Amendment right to a jury trial.
George Jarkesy claimed the SEC violated his constitutional rights when it brought fraud charges against him. The government said Jarkesy violated the Exchange Act and the Advisers Act when he lied to investors, misrepresented investment strategies and arbitrarily inflated the values of the hedge fund he operated.
The executive branch uses specialized judges to oversee administrative proceedings. Administrative law judges differ from their counterparts in the judiciary, specializing in the policies of the agency they preside over.
The administrative law judge presiding over Jarkey’s case ordered him to pay a $300,000 civil penalty, barred him from the industry and required his company to disgorge almost $700,000 in illicit gains.
The Fifth Circuit reversed the judge’s ruling, finding the judge violated the Seventh Amendment by refusing to allow the case to proceed before a federal court, and said presidents should have the ability to remove administrative law judges.
Justice Roberts said Jarkesy was entitled to a jury trial under the Seventh Amendment. This rationale was drawn by comparing SEC civil penalties and common law. Since the agency’s antifraud provisions replicate common law provisions, Roberts said defendants qualified for a jury trial in both circumstances.
“If a suit is in the nature of an action at common law, then the matter presumptively concerns private rights, and adjudication by an Article III court is mandatory,” the George W. Bush appointee wrote.
In a concurrence, Justice Neil Gorsuch further explained that leaving these decisions in the hands of agency judges deprived individuals like Jarkesy of their rights to individual liberty.
“That is why the Constitution built ‘high walls and clear distinctions’ to safeguard individual liberty,” the Donald Trump appointee wrote. “Ones that ensure even the least popular among us has an independent judge and a jury of his peers resolve his case under procedures designed to ensure a fair trial in a fair forum.”
The fight over adjudication for securities fraud claims devolved into a dispute over the court’s role in the democratic system.
“Today’s decision is a massive sea change,” Sotomayor wrote in dissent. “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.”
Sotomayor said the majority had gone against over 150 years of precedent that the distinction between “private rights” and “public rights” allows a case concerning public rights to be assigned outside of a usual court.
That included a unanimous decision the court made in Atlas Roofing, where the court upheld a move by Congress to allow OSHA to impose civil penalties for unsafe working conditions without going through the courts.
By going against such precedent the court dealt a “devastating blow to the way our government operates,” she warned, and the move could result in numerous agencies losing their ability to enforce federal statutes.
“To these agencies, the majority says ‘tough luck, get a new statute,’” Sotomayor said. “The majority may think it is protecting liberty, but the American people should not mistake judicial hubris with the protection of individual rights.”
Over two dozen agencies used administrative proceedings to impose civil penalties. Sotomayor said the court’s ruling now imperiled the constitutionality of hundreds of statutes and left those agencies fearing their authority could too be stripped.
Sotomayor characterized the court’s decision as a “power grab” that allows the judiciary to encroach on Congress’ constitutional authority.
“Its decision offends the framers’ constitutional design so critical to the preservation of individual liberty: the division of our government into three coordinate branches to avoid the concentration of power in the same hands,” Sotomayor wrote. “Judicial aggrandizement is as pernicious to the separation of powers as any aggrandizing action from either of the political branches.”
Reactions to the ruling were as split as the justices themselves. Carrie Severino, president of the Judicial Crisis Network, called it a long-overdue vindication of Seventh Amendment rights and a reminder that government agencies "can't opt out of the Bill of Rights."
"The court rightfully saw through the government’s attempt to evade its protection of Jarkesy’s Seventh Amendment right by trying to distance its fraud claim from the common-law claims covered by the Seventh Amendment," Severino said in a statement. "Now, if the government seeks to deprive someone of his property and money in this kind of case, it must employ the jury trial option available in Article III courts."
In contrast, Devon Ombres, senior director for Courts and Legal Policy at the Center for American Progress, said the ruling was a major blow to the government's ability to target financial fraud.
"By forcing these actions into already overloaded federal courts, much of the fraudulent activity by financial predators will be delayed or go unpunished," Ombres said in a statement. "But the impact could be even worse; it could unleash chaos at other agencies and hamstring enforcement of laws and regulations affecting labor, trade, and a host of other areas. The court is again siding with wealthy financiers and corporate interests over everyday Americans."
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