Sotomayor warns of new "threat" from Supreme Court (2024)

In her dissenting opinion in Securities and Exchange Commission (SEC) v. Jarkesy, U.S. Supreme Court Justice Sonia Sotomayor warned that the highest court has failed to understand how its "decisions can threaten the separation of powers."

On Thursday, the court released its 6-3 majority decision, ruling: "When the SEC seeks civil penalties against a defendant for securities fraud, the Seventh Amendment entitles the defendant to a jury trial."

The Seventh Amendment states: "In suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved."

Currently, under the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010, the SEC could impose penalties and fines for securities fraud through its own in-house proceedings. This means that instead of filing in federal court, the SEC's administrative law judges could adjudicate the issues.

Thursday's ruling invalidates that process, with the court's conservative majority saying the SEC must bring the cases to the judiciary for a jury trial, in line with the Seventh Amendment, which Sotomayor said breaks with precedent.

The justices ruled in favor of the plaintiff and hedge fund manager George Jarkesy. His legal team argued that the SEC's case against him, which included a $300,000 civil penalty and the repayment of $680,000 in allegedly ill-gotten gains, should have been heard in federal court with a jury, rather than by one of the SEC's administrative law judges.

Sotomayor was joined by justices Elena Kagan and Ketanji Brown Jackson in dissent, writing in her opinion that "Congress had no reason to anticipate the chaos today's majority would unleash after all the years."

Warningly, Sotomayor wrote: "Beyond the majority's legal errors, its ruling reveals a far more fundamental problem: This Court's repeated failure to appreciate that its decisions can threaten the separation of powers." She specified that in this case, "that threat comes from the Court's mistaken conclusion that Congress cannot assign a certain public-rights matter for initial adjudication to the Executive because it must come only to the Judiciary.

"The majority today upends longstanding precedent and the established practice of its coequal partners in our tripartite system of Government," referring to the three branches of government: executive, legislative and judicial.

"Although this case involves a Seventh Amendment challenge, the principal question at issue is one rooted in Article III and the separation of powers," which establishes the judicial branch, outlining where judicial power shall be vested.

In response to Sotomayor's dissenting opinion, Yale law professor Jonathan Macey told Newsweek in an email Thursday: "From a balance of powers perspective, the key question is whether the opinion threatens the legitimacy of other administrative agency tribunals such as those used by the Federal Trade Commission, the IRS, the Environmental Protection Agency and the National Labor Relations Board [NLRB].

"At the moment, the opinion seems limited to fraud cases. For this reason, it is not an immediate existential threat to the modern administrative state. But, if the holding is extended beyond the fraud context to the routine work of the administrative courts used by other agencies in other contexts, it has the potential to weaken the administrative state pretty significantly.

"On the other hand, the SEC's view of what constitutes 'fraud' is much broader than that of most federal courts, and for this reason, the result in the case is not too surprising."

The corporate finance and securities law professor said that the SEC's "particular use of these tribunals has long been of concern because of the fact that the SEC's historical win-rate led many to believe that these were little more than kangaroo courts."

Jarkesy's lawyers previously said that the SEC wins nearly all the cases it brings in front of the administrative law judges, but only a little more than half of the cases tried in federal court.

In addition to this decision, the court released three other opinions Thursday, one of which, Moyle v. United States, was erroneously posted on the court's website Wednesday.

Update 6/27/24, 12:57 p.m. ET: This story has been updated to include comment from Jonathan Macey.