Breaking News: Supreme Court Decision Weakens SEC Powers, Eliminates In-House Fraud Legal Proceedings
In a significant blow to the Securities and Exchange Commission (SEC), the United States Supreme Court has ruled against the federal regulator’s appointment of in-house judges in fraud cases. The ruling, which came as a result of hedge fund manager George Jarkesy’s case, has major implications for the SEC’s ability to enforce securities laws.
In a 6-3 vote, the Supreme Court sided with Jarkesy, who was accused of defrauding investors in 2013. He was ordered to pay $300,000 in fines, and his investment advisory firm, Patriot28, had to repay over $680,000 in fraudulent gains. Previously, the SEC’s administrative law judge (ALJ) had decided the case.
This ruling significantly limits the SEC’s enforcement powers in fraud cases, as defendants will now have the right to a trial by jury in federal court instead of the SEC’s internal judicial process.
The SEC has been a powerful force in securities law enforcement, collecting nearly $5 billion in fines last year alone, second only to the record-breaking $6.4 billion collected in 2022, according to a press release from November 2023. However, with this ruling, the SEC will now have to seek approval through federal court if it wants to impose fines in cases.
Associate Justice Neil Gorsuch, in his concurring opinion, emphasized the importance of fair trial procedures for all defendants, even those who may be unpopular. Chief Justice John Roberts concluded that defendants facing fraud charges have the right to be tried by a jury and that consolidating the roles of prosecutor, judge, and jury in the hands of the Executive Branch would go against the separation of powers mandated by the Constitution.
However, Associate Justice Sonia Sotomayor dissented, highlighting the benefits of the administrative legal system, such as uniformity, predictability, and greater political accountability. She argued that there are valid reasons for Congress to establish a scheme like the SEC’s.
The implications of this ruling extend beyond the SEC, potentially impacting other federal agencies’ internal enforcement proceedings, including the Federal Trade Commission (FTC) and Consumer Financial Protection Bureau (CFPB).
This landmark decision represents a pushback against what many in the crypto community perceive as executive overreach by the SEC. The agency has been involved in numerous lawsuits against key players in the crypto sector in recent years. Interestingly, crypto exchange Coinbase announced earlier on Thursday that it was filing a lawsuit against the SEC.
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