"What sense does it make to say the full constitutional protections apply when a private party is suing you, but we're going to discard those core constitutional protections when the government comes at you for the same money?" Justice Brett Kavanaugh said.
He added, "Your individual liberty, it would seem, is even more, or at least equally, affected when the government is coming after you than another private party."
Kavanagh was addressing Brian H. Fletcher, principal deputy solicitor general at the Department of Justice, who represented the SEC before the court.
Chief among Fletcher's arguments was the Supreme Court has already considered similar cases and has previously sided with the federal government. He frequently referenced Atlas Roofing Co. vs. Occupational Safety and Health Review Commission, a 1977 case in which the Supreme Court reaffirmed that Congress doesn't violate the Seventh Amendment right to a jury trial when it authorizes an agency to impose civil penalties in administrative proceedings to enforce a federal statute.
The Supreme Court agreed to hear the Jarkesy vs. SEC after the SEC petitioned it to review the case following a May 2022 decision from the 5th U.S. Circuit Court of Appeals in New Orleans. The 5th Circuit sided with the plaintiff and ruled that the SEC's ALJ system was unconstitutional. Specifically, the decision found that the SEC's use of ALJs violated the right to trial by jury, that Congress unconstitutionally delegated to the SEC the power to decide whether securities fraud cases were heard in federal courts or before an ALJ, and that the removal protections given to SEC ALJs were unconstitutional because the president couldn't simply fire them.
The bulk of the Nov. 29 arguments focused on the question of the right to a jury trial. Based on what he heard from the justices, Hamish Hume, a partner at law firm Boies Schiller Flexner, thinks there will be five or six votes to uphold the 5th Circuit ruling and deal the SEC another loss.
"I think it's clear where six justices think the law should go," Hume said, noting the court's 6-3 conservative majority. "I think (Chief Justice John) Roberts will be more cautious in how he gets there, but I would expect to see him write in the majority to keep it cautious but to also affirm the 5th Circuit."
In his opening remarks, S. Michael McColloch, a partner at law firm S. Michael McColloch who represented Jarkesy, said Congress has expanded the SEC's authority too much over the past several decades. "And now like a house that's been added onto too many times, it's crushing the original foundation," he said.
The SEC began investigating George R. Jarkesy Jr. in 2011 after he selected Patriot28 as the investment adviser for two hedge funds he managed. The SEC alleged that Jarkesy and Patriot28 committed securities fraud and in 2013 instituted an administrative enforcement action against the two parties before an administrative law judge. Jarkesy subsequently sued the SEC, arguing that the agency's structure and administrative enforcement powers violated the Constitution, according to a Troutman Pepper Hamilton Sanders client alert.
The case could impact SEC enforcement and all federal agencies that use ALJs, including the Federal Trade Commission and Commodity Futures Trading Commission.
Several justices, including Kavanagh, expressed concern about the wide-ranging impact the court's decision could have. Justice Elena Kagan hinted that a supplemental briefing could be requested to focus on that subject.
Following the arguments, Thomas O. Gorman, a partner at law firm Dorsey & Whitney, felt better about the SEC's chances than others.
Gorman said in a statement that the justices "drew a distinction between common law cases initiated by private parties and government enforcement action designed to address what Congress clearly viewed as an issue when creating a statutory scheme such as the one reflected in the federal securities laws."
He added, "The lengthy and repeated questions from the bench during oral argument more than suggest that the decision in Jarkesy will follow Atlas Roofing and clarify its underlying theory. If adopted, that theory will be a clear victory for the SEC."
The court's term ends June 30, and a decision is expected that month.