The US Supreme Court is seen in Washington, DC, on October 9, 2023. (Photo by Mandel NGAN / AFP) (Photo by MANDEL NGAN/AFP via Getty Images)
CNN  — 

Key Supreme Court justices expressed deep reservations Wednesday with how the Securities and Exchange Commission brings some enforcement actions for securities fraud, suggesting the court could be poised to pare back on the agency’s power in the latest dispute concerning the so-called administrative state to come before the high court.

For more than two hours of arguments the justices were receptive to a key section of a lower court opinion that scaled back on the agency’s ability to enforce securities law, although they did not seem poised to address some broader aspects of the controversial ruling.

Conservative justices suggested that the agency’s decision to allow some disputes to be heard by in house administrative law judges, instead of filing suit in federal court, violates an individual’s right to trial by jury under the Seventh Amendment.

If the court holds that the SEC’s method of adjudicating certain fraud claims violates the Constitution, it could impact other agencies that use similar proceedings such as the Social Security Administration.

Chief Justice John Roberts worried about an enforcement proceeding with “no court” and “no jury.”

Roberts said he found it “curious” that a person would have a right to a jury “until the government decides you don’t have that right.”

Justice Neil Gorsuch repeatedly emphasized the foundational Seventh Amendment right.

“We’d agree that the right to trial by jury, whether it’s criminal or civil is a very important foundational freedom in American Society,” he said.

Justice Samuel Alito asked whether “the right to a trial by jury simply goes out the window” when the government brings an enforcement proceeding.

Another concern expressed by Roberts and Gorsuch is that the SEC plays a more dominant role in enforcement than it has in past decades. Nodding to a constant refrain from those who believe agencies have become too powerful, Gorsuch quipped: “This is not your grandfather’s SEC.”

Justice Brett Kavanaugh pushed back on the government’s argument that in-house proceedings passed legal muster because they concerned a so called “public right” that are subject to more legislative control.

“It does seem odd from a constitutional perspective to say that a private suit triggers the Article Three right to a federal court and a jury against you for money, but a government suit against you for money is somehow exempt from” those courts, he said.

The case is one of several this term where the conservative leaning majority is taking a hard look at the structure of government out of a belief that in recent years independent agencies – unaccountable to the public – have become too unwieldy.

Central to Wednesday’s discussion was the latest controversial opinion from the 5th US Circuit Court of Appeals – one of the most conservative appellate courts in the country that covers Louisiana, Mississippi and Texas – where conservative litigants often file suit hoping for eventual Supreme Court review.

The SEC consists of five members appointed by the president and confirmed by the Senate. The commission can enforce a variety of federal statutes in two ways. It can institute administrative enforcement proceedings seeking civil penalties, or it may bring civil actions in federal court.

The case arose in 2013 after the SEC brought an enforcement action for securities fraud against George Jarkesy, who had established two hedge funds with his advisory firm, Patriot28. The funds brought in over 100 investors and held about $24 million in assets.

An SEC administrative law judge found Jarkesy had violated the Securities Act, Exchange Act and Advisers Act for fraud actions. He was ordered to pay a civil penalty of $300,000, and to repay nearly $685,000 in ill-gotten gains. Jarkesy was also barred from various securities industry activities including serving as an investment adviser.

Jarkesy, however, challenged the proceedings arguing they violated the Constitution, and won in the 5th Circuit.

The federal appeals court ruled in favor of Jarkesy on three separate constitutional claims. It held that certain of the SEC’s proceedings deprive individuals of their Seventh Amendment right to a civil jury. In addition, the court said that Congress had improperly delegated legislative power to the SEC which gave the agency unconstrained authority at times to choose the in-house administrative proceeding rather than filing suit in district court. The court emphasized that under precedent, Congress can only grant regulatory power to another entity if it provides an “intelligible principle” to guide the proceedings.

“The Constitution,” the court held, “provides strict rules to ensure that Congress exercises the legislative power in a way that comports with the People’s will.”

The conservative appellate court also said that rules allowing for the removal of SEC administrative law judges only for “good cause” – are unconstitutional because they insulate the judges from the presidents’ ability to remove them for any reason in violation of the separation of powers.

On Wednesday, however, the court seemed to center only on one part of the opinion having to do with the Seventh Amendment right to a jury, suggesting that it may never reach the other parts of the federal appeals court sprawling decision.

In court, Principal Deputy Solicitor General Brian Fletcher rejected any claim that Congress violated the Seventh Amendment right by allowing in house proceedings.

“Congress does not violate the Seventh Amendment when it authorizes an agency to impose civil penalties and administrative proceedings to enforce a federal statute,” he said.

S. Michael McColloch, an attorney for Jarkesy, relied on history to make his argument that the use of in house proceedings against Jarkesy was “anti-ethical” to the founders’ intent.

For their part liberal justices on the bench repeatedly pressed McColloch for the limits of his position and how it might impact other agencies. Justice Elena Kagan pointed to historical events such as the depression, savings and loan crisis and recessions and asked whether Congress is entitled to deference when giving the SEC greater powers.

Nodding to her Jewish faith, Kagan said some of McColloch’s arguments amounted to “chutzpah to quote my people.”

A group of administrative law scholars in support of the SEC argued in a friend of the court brief that if the justices were to rule that the SEC’s proceedings violate the Seventh Amendment’s right to a trial by jury it would have a “devastating” impact on other agencies such as the Federal Trade Commission, Department of Labor and the National Labor Relations Board.

The 5th Circuit’s decision, their lawyer Alan Morrison argued, “was made without proper appreciation for the need for Congress to have flexibility when it seeks to solve important problems by making use of agency adjudication in today’s regulatory framework.”

Morrison also believes the lower court was wrong when it comes to the removal procedures applicable to the SEC administrative law judges.

As things stand the administrative judges can only be removed if they have done something glaringly wrong. The 5th Circuit essentially said the president should be able to fire them for any reason – or no reason.

“That is wrong,” Morrison said in an interview. “Nothing in the Constitution forbids Congress from assuring that administrative judges do not serve at the whim of their agency heads in order to protect the rights of those who appear before them.”

Lawyers for the Chamber of Commerce support Jarkesy and argue the case presents the court “with another opportunity to reaffirm the structural limitations of the Constitution,” noting that like other financial regulatory agencies the SEC is responsible for creating substantive rules and “levying knee-buckling penalties against private citizens.”

“The growth of the administrative state has eroded” safeguards, lawyer Steven A. Engel argued on behalf of the chamber.