SEC's Use of In-House Judges Cast in Doubt by Supreme Court

Fletcher pointed to a 1977 Supreme Court ruling that said the jury right doesn’t apply when Congress authorizes an administrative agency to adjudicate so-called “public rights” — those that go beyond traditional “common law” suits between private parties. He told the justices that a ruling against the SEC could affect other agencies, including the Federal Trade Commission.

“Throughout our nation’s history, Congress has authorized the agencies charged with enforcing federal statutes to conduct adjudications, find facts, and impose civil penalties and other consequences prescribed by law,” Fletcher said.

Wednesday’s case involves George Jarkesy, a former hedge fund manager and conservative radio host. The SEC accused Jarkesy in 2013 of misleading investors about who served as his funds’ prime broker and auditor and about their investment strategies and holdings.

No ‘Chutzpah’

An SEC judge found Jarkesy had committed securities fraud, and the commission eventually ordered him and his firm to pay almost $1 million. Jarkesy then appealed to the 5th U.S. Circuit Court of Appeals.

His lawyer, Michael McColloch, told the justices that “the actual claims made against Jarkesy in this case are common law claims that required a right to trial by jury under the Seventh Amendment.”

Kagan told McColloch the 1977 ruling, known as Atlas Roofing, had settled the issue, prompting him to say the subject was resolved “only to the extent no one’s brought it up and forced the issue” since then.

That brought a quick response. “Nobody has had the, you know, chutzpah, to quote my people, to bring it up since Atlas Roofing,” said Kagan, who is Jewish, drawing laughter from the crowd.

Jarkesy and his allies, including Elon Musk and Mark Cuban, also say the SEC process is fraught with injustice. Defendants have fewer rights to obtain evidence in administrative hearings than federal court, and SEC lawyers can rely on third-party “hearsay” testimony. Appeals go to the same SEC commissioners who approved the complaint in the first place.

The court will rule by June in the case, Securities and Exchange Commission v. Jarkesy, 22-859.