A recent U.S. Supreme Court decision could have major implications for Securities and Exchange Commission enforcement, but there are larger legal questions looming that need to be settled before anything is certain, attorney sources said.
The Supreme Court's unanimous decision on April 14 granting companies and people facing SEC charges the ability to challenge the agency's constitutional authority in U.S. District Court before the SEC resolves the matter in-house could cause "headaches" for at least some of the SEC's enforcement efforts, said Christian D. H. Schultz, a Washington-based partner at Arnold & Porter Kaye Scholer LLP and former assistant chief litigation counsel in the SEC's enforcement division.
"There will be many cases that the commission may want to bring in an administrative proceeding where the defendant could say, 'Well I should have this heard by a jury, not some in-house judge,' which creates a constitutional issue for a federal court to resolve and that jams up the SEC from doing anything in that administrative proceeding," Mr. Schultz said.
"The whole administrative proceeding process really has the potential to get jammed up significantly."
The case in question, SEC vs. Cochran, which was combined with a similar case, Axon Enterprise Inc. vs. FTC, focuses on a procedural issue involving the SEC's use of administrative law judges, or ALJs, which handle administrative enforcement cases in-house.
The plaintiff, Michelle Cochran, an accountant facing SEC administrative charges of violating federal accounting standards, originally challenged the constitutionality of the SEC's ALJ system in the Northern District of Texas in 2019. She asked the court to allow her to challenge the constitutionality of the ALJs in a U.S. District Court before the conclusion of the agency adjudication. Historically, a person or company facing charges heard before an ALJ has to go through a lengthy administrative process before bringing a case to challenge the constitutionality.
After losing the initial case, Ms. Cochran appealed to the Fifth U.S. Circuit Court of Appeals in New Orleans and lost once more. She then petitioned the Fifth Circuit for an en banc hearing before all judges of the court and the full court in December 2021 reversed the initial decision.
The Supreme Court heard oral arguments in Ms. Cochran's case and the Axon case in November and seemed open to siding with the plaintiffs.
But the court's unanimous decision was still surprising to sources. "A 9-0 (decision) means you can't get a, 'You're more wrong' opinion from the Supreme Court," Mr. Schultz said.
In the court opinion written by Justice Elena Kagan, the court found that the "statutory review schemes set out in the Securities Exchange Act and Federal Trade Commission Act do not displace a district court's federal-question jurisdiction over claims challenging as unconstitutional the structure or existence of the SEC or FTC."
The New Civil Liberties Alliance and law firm Latham & Watkins LLP, which represented Ms. Cochran in the case, said in a statement that for decades, "Americans have been hauled before agencies which act as investigator, prosecutor, judge and their first court of appeal. Whether that is constitutional is, as Justice Kagan notes at the outset, 'fundamental, even existential.'"
When asked for comment on the Cochran decision, an SEC spokesman said in an email that "we're reviewing the opinion of the court."