Kavanaugh, part of the Supreme Court's 6-3 conservative majority, 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."
The Supreme Court agreed to hear 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 job removal protections given to SEC ALJs were unconstitutional because the president couldn't simply fire them.
If the Supreme Court upholds the 5th Circuit's decision, it would make permanent a slower enforcement process for the SEC and could make securing settlements more difficult, attorneys said.
"I think the administrative proceeding is more streamlined," said Jeremiah Williams, a partner in Ropes & Gray's litigation and enforcement practice group. "Going through federal court gives defendants more fulsome discovery process and pretrial motions. It's a little bit of a slower process and it's more even-handed. Once you're in federal district court, in theory the SEC, the plaintiff, is on the same playing field as far as discovery and things like that."
Administrative law judges, which are appointed by the president, are well versed in many of the complex issues in the securities industry and, in particular, the professional standards for those registered with the SEC, sources said.
The ALJ function was created by the Administrative Procedure Act in 1946 to ensure fairness in administrative proceedings before federal government agencies, according to U.S. Office of Personnel Management's website.