SEC use of in-house judges to be reviewed by Supreme Court

investmentnews.com:

The Supreme Court will review a ruling that cast a constitutional cloud over the use of in-house judges to handle cases pressed by the Securities and Exchange Commission.

The justices said they will hear a Biden administration appeal that contends the federal appeals court ruling will have “massive practical consequences” across the government if not overturned. The decision by the 5th US Circuit Court of Appeals found multiple flaws with a system the SEC uses for hundreds of cases a year.  

The case adds to a 2023-24 term that was already set to have broad implications for federal regulators. The justices are also planning to consider whether the Consumer Financial Protection Bureau’s funding system is constitutional and whether to overturn a precedent that gives agencies leeway when they interpret ambiguous congressional commands.

The 5th Circuit said in a 2-1 decision that Congress violated the Seventh Amendment, which protects the right to a jury trial in civil lawsuits, by letting the SEC ask an administrative law judge to impose penalties rather than going to federal court. The 5th Circuit also said Congress gave the commission too much leeway to decide which cases will go before its in-house judges.

In addition, the 5th Circuit panel said the judges’ job protections leave them too insulated from presidential control.

The decision stemmed from an SEC complaint against George Jarkesy, a hedge fund manager accused in 2013 of misleading investors about who served as the funds’ prime broker and auditor and about their investment strategies and holdings. An administrative law judge found Jarkesy had committed securities fraud, and the SEC eventually ordered him to pay almost $1 million.

Jarkesy’s lawyers said he was