The Blubber

The U.S. Supreme Court has agreed to hear a case that involves President Joe Biden's administration defending specific Securities and Exchange Commission (SEC) in-house enforcement proceedings. This case has the potential to significantly undermine the authority of federal agencies.

The administration is appealing a lower court's ruling that declared certain SEC enforcement proceedings as unconstitutional due to violations of the right to a jury trial and encroachment on the powers of the president and Congress. The case revolves around George Jarkesy, a hedge fund manager who was fined and banned from the industry by the SEC for committing securities fraud.

This case is the latest legal challenge against the actions of the SEC, which is responsible for enforcing federal laws that safeguard investors. The Supreme Court, currently leaning conservative with a 6-3 majority, has previously shown skepticism towards extensive federal regulatory power.

In 2018, the justices criticized the SEC's selection process for in-house judges, and in April, they permitted individuals targeted by the SEC and other regulators to immediately challenge agency procedures in federal court.

The SEC initiated an investigation into Jarkesy in 2011. Jarkesy had established two hedge funds through his Houston-based investment advisory firm, Patriot28 LLC, with approximately 120 investors and around $24 million in managed assets.

The SEC brought charges against Jarkesy and his firm through an in-house judge. The agency upheld the judge's findings, which concluded that Jarkesy and his firm violated the Securities Act of 1933 and other laws by misrepresenting the funds' auditor and the value of their holdings.

As a result, the SEC imposed a $300,000 civil penalty, ordered Patriot28 to disgorge nearly $685,000 in illicit gains, and barred Jarkesy from engaging in the securities industry.

A central issue in Jarkesy's case is whether the SEC's ability to seek monetary penalties for securities fraud through in-house adjudications, conducted by administrative law judges rather than federal courts, violates the right to a jury trial as guaranteed by the Seventh Amendment of the U.S. Constitution.