Supreme Court signals support for hedge fund manager who wants to gut SEC enforcement

WASHINGTON – The Supreme Court's conservative majority on Wednesday appeared ready to side with a hedge fund manager and former radio talk show host who claims a key government agency violated his constitutional rights by relying on in-house judges rather than a jury.

The high court appeared poised to side with the hedge fund manager in his battle with the Securities and Exchange Commission. The appeal from George Jarkesy has the potential to spill over into other critical areas and weaken the government's ability to enforce workplace regulations or punish polluters who violate environmental law.

It's one of several cases before the court this year attempting to undermine what conservatives often deride as the "administrative state."

Those cases are playing out at a moment when former President Donald Trump is campaigning for the White House in part on a promise to dismantle the federal "deep state" by reducing the size of government agencies and weakening civil service protections.  

More: Supreme Court skeptical of CFPB case, which could add 'chaos' to US economy

The SEC fined Jarkesy $300,000 in 2020 for committing securities fraud and ordered him to return nearly $685,000 for misleading investors so he could charge higher fees. The punishment was meted out not by a court but by an administrative law judge at the agency whose decision was later approved by the SEC commissioners.

Jarkesy didn’t just appeal the punishment. He attacked the underlying process the SEC used to hear his case, claiming – among other things – that it violated his Seventh Amendment right to a jury trial. That argument was embraced by the New Orleans-based U.S. Court of Appeals for the 5th Circuit last year and it appeared to resonate with several of the Supreme Court’s conservative justices during more than two hours of arguments Wednesday.

“It does seem to me to be curious that...unlike most constitutional rights, that you have that right until the government decides that they don't want you to have it,” Chief Justice John Roberts said. “That doesn't seem to me the way the Constitution normally works.”

The Biden administration is relying in part on a 1977 precedent from the high court which drew a distinction between “private rights” involving individuals and “public rights,” in which the executive branch is performing its enforcement role on behalf of the public. Securities fraud enforcement, the Biden administration's attorney told the court, falls squarely within that second category and so the Seventh Amendment concerns don't apply.

Several members of the court’s conservative wing signaled skepticism of that argument.

“What sense does it make to say the full constitutional protections apply when a private party is suing you but we're going to discard those core constitutional historic protections when the government comes at you?” asked Justice Brett Kavanaugh, a conservative who, along with Roberts, is often viewed as sitting at the ideological center of the court.

The US Supreme Court in Washington, DC, on December 4, 2022. (Photo by Daniel SLIM / AFP) (Photo by DANIEL SLIM/AFP via Getty Images)
The US Supreme Court in Washington, DC, on December 4, 2022. (Photo by Daniel SLIM / AFP) (Photo by DANIEL SLIM/AFP via Getty Images)

The three justices in the court’s liberal wing were more sympathetic to the government’s position.

Justice Elena Kagan noted that Congress had repeatedly expanded the power of the SEC in response to economic calamity and investors being defrauded.

“Is Congress's judgment after the Depression, after the savings and loan crisis, after the Great Recession − is Congress's judgment that more powers were needed within an administrative agency entitled to no respect?” she asked.

Kagan at one point suggested that the question Jarkesy was raising had already been settled in a way that would favor the SEC. Jarksey's attorney, Michael McColloch, said it was only settled because no one had brought a case quite like this one to the Supreme Court.

“Nobody has had the, you know, chutzpah, to quote my people,” Kagan shot back, using a Yiddish word to reference her Jewish ethnicity.

Jarkesy also claimed Congress violated the Constitution by making it harder for a president to remove administrative law judges from office. In the case of the SEC, those in-house judges can only be removed for “good cause” by officials who themselves have a degree of independence from the political whims of a president.

That issue, in particular, has drawn the attention of Trump's critics, who fear a sweeping decision from the Supreme Court could empower a future president to remove agency judges in politically charged cases. But on Wednesday the justices spent no time on that, focusing instead on the Seventh Amendment question.

Jarkesy, who attended the arguments in person, said he was grateful for the “fair and impartial hearing” from the Supreme Court.

“We didn’t get that at the SEC," he said in a statement. “It was quite the opposite.”

In addition to the Jarkesy case, the Supreme Court is considering an appeal filed by Atlantic herring fishermen who are fighting a regulation that requires them to pay the salary of federal inspectors who board their boats to monitor compliance with fishing rules. In that case, the justices could weaken the ability of agencies to approve regulations without the explicit approval of Congress.

The court is also weighing an effort by the payday lending industry to undermine the Consumer Financial Protection Bureau, an agency created in the wake of the housing market collapse more than a decade ago. Its critics say the CFPB's funding violates the Constitution, though a majority of the justices appeared skeptical of the most sweeping arguments when they heard that case last month.

All of the cases, including Jarkesy's, will likely be decided in middle of next year's presidential election.

This article originally appeared on USA TODAY: Supreme Court leans towards hedge fund manager seeking to weaken SEC