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Supreme Court Rules Federal Agency’s In-House Judges Violate Constitution

The Supreme Court held Thursday held that the Securities and Exchange Commission’s (SEC) use of in-house judges violates the right to a jury trial guaranteed in the Constitution when the agency is seeking civil penalties.

When Congress passed the Dodd-Frank Act in 2010, it gave the agency the option to adjudicate enforcement actions in-house using its own administrative law judges (ALJ), rather than in the federal courts. George R. Jarkesy, who became tied up in the SEC’s in-house proceedings after he was charged in 2013 with fraud relating to his investment activities, challenged this practice.

In a 6-3 ruling, the justices held in SEC v. Jarkesy that defendants under the Seventh Amendment are entitled to a jury trial when the SEC seeks civil penalties against them.

“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 in the ruling. “Rather than recognize that right, the dissent would permit Congress to concentrate the roles of prosecutor, judge, and jury in the hands of the Executive Branch. That is the very opposite of the separation of powers that the Constitution demands.”

The Fifth Circuit previously held in 2022 the SEC’s in-house adjudication violated Jarkesy’s Seventh Amendment right to a jury trial. Additionally, the panel held that removal restrictions on ALJs were unconstitutional and said Congress “unconstitutionally delegated legislative power to the SEC” when it allowed the agency to choose whether to initiate proceedings in-house or in the federal courts.

In April 2023, the Supreme Court held that individuals subject to SEC or Federal Trade Commission (FTC) complaints can bring their constitutional challenges directly to federal court, instead of going through the agency’s administrative proceedings.

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