Supreme Court Leans Toward Reducing Enforcement Authority of Federal Agencies

WASHINGTON -- The Supreme Court seemed ready last week to cut back on the authority of federal agencies to enforce their regulations through fines or seizures of property.

Questions from the conservative majority of justices during a hearing focused on whether the agencies were committing unconstitutional procedural violations.

"It seems problematic to say the government can deprive you of your property, your money, substantial sums in a tribunal that is at least perceived as not being impartial," Justice Brett Kavanaugh said.

The Supreme Court is considering the lawsuit filed by former hedge fund manager George Jarkesy, who is challenging the Securities and Exchange Commission's (SEC) authority to fine him.

A ruling against the SEC is likely to convert agencies’ in-house counsel from regulatory enforcers to advisors.

The SEC ordered Jarkesy and his investment firm in 2020 to pay nearly $1 million after accusing him of securities fraud by deceiving his hedge fund investors.

Jarkesy has won an appeal before the Fifth Circuit Court of Appeals in New Orleans. The appellate court invalidated the fines, prompting the SEC to petition the Supreme Court to review the case.

The ramifications extend far beyond Jarkesy to include the authority of nearly all federal agencies to determine punishments for regulation violations.

The Environmental Protection Agency, for example, could become more restricted in its ability to regulate wetland protection if the Supreme Court rules against the SEC.

Chief Justice John Roberts said, "It does seem to me to be curious that, unlike most constitutional rights, you have that right [to a jury trial] until the government decides they don't want you to have it. That doesn't seem to me the way the Constitution operates."

Justice Department attorneys relied on case law interpretations of the Seventh Amendment to argue the authority of federal agencies to enforce regulations should be preserved.

The Seventh Amendment says there is a right to jury trials in civil matters.

However, the right in regulatory cases was modified by the 1977 Supreme Court ruling in Atlas Roofing Co. v. Occupational Safety and Health Review Commission. The ruling said jury trial rights do not apply if Congress authorizes administrative agencies to decide “public rights.”

Public rights normally refer to government regulatory matters but not lawsuits between private parties.

“Throughout our nation’s history, Congress has authorized the agencies charged with enforcing federal statutes to conduct adjudications, find facts, and impose civil penalties and other consequences prescribed by law,” Justice Department attorney Brian Fletcher said.

Several of the justices said the power of administrative agencies has been growing in recent years to a level that might not have been anticipated in earlier court judgments.

The “impact of government agencies on daily life today is enormously more significant than it was 50 years ago,” Roberts said.

The SEC uses its in-house adjudication system for hundreds of cases each year.

Jarkesy was joined in his criticisms of the regulatory adjudications by billionaire businessmen Elon Musk and Mark Cuban.

They say defendants are more restricted in their rights to gather evidence. They also say agency lawyers can use hearsay evidence that never would be allowed in federal courts.

In addition, there’s a conflict of interest when appeals are adjudicated by the same agency commissioners who approved enforcement action, according to critics of the agency adjudications.

Justice Elena Kagan warned against a “radical change” for administrative agencies if Jarkesy wins in the Supreme Court.

"We have a series of other agencies with very big responsibilities, start with the EPA, start with the Commodities Commission, the Postal Service that can assess penalties for transporting hazardous materials in interstate traffic," Kagan said. "All of those agencies will have to go to court."

The case is Securities and Exchange Commission v. Jarkesy, No. 22-859, in the U.S. Supreme Court. A ruling is expected before next June.

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