The Supreme Court Won’t Stop Dismantling the Government’s Power

Yesterday, the Supreme Court handed down one of its most anticipated opinions of the year, Jarkesy v. SEC. The decision will embolden conservatives who hope to hamstring the federal government, and guarantees the proliferation of ongoing, expensive, and existentially threatening legal disagreement. Along with other decisions from this Supreme Court term—in particular today’s decision in Loper Bright—Jarkesy continues the Court’s attack on the federal government’s capacity to do many of its most basic jobs.

The case started as garden-variety securities fraud. According to SEC findings, the radio host George Jarkesy stole from his investors by lying to them about his investment strategy, lying about his auditor and prime broker, and lying about his take. To protect the integrity of the financial markets, the SEC forced Jarkesy to disgorge his ill-gotten gains and banned him from the securities industry. It also fined him $300,000 for good measure.

This is where the story should have ended. Instead, two Republican-appointed judges on the United States Court of Appeals for the Fifth Circuit made Jarkesy into a cause célèbre. In recent years, that court has repeatedly endorsed fringe right-wing legal efforts, such as when it struck down access to mifepristone nationwide (a decision later overturned by the Supreme Court). This has made it into a preferred forum for conservative activists seeking to use the judiciary to advance right-wing projects, among which attacking the federal government’s ability to regulate industry is a top priority.

[Noah Rosenblum: The case that could destroy the government]

In May 2022, a divided panel of the Fifth Circuit issued a sweeping ruling, holding that the public officials known as administrative-law judges, such as the one who adjudicated the claims against Jarkesy, were unconstitutionally insulated from presidential control; that the powers the SEC exercised had been unconstitutionally delegated; and that because the SEC sought to impose a fine on Jarkesy, he was entitled to a jury trial. This ruling placed the foundations of federal administration in jeopardy; if the Supreme Court upheld it in full, much of the government would have ceased to be able to operate, as many different agencies would have become unconstitutional and tens of thousands of adjudications would have been thrown into question.

The Supreme Court avoided this terrifying course. But it did not steer the country away from it. Rather, it opened new avenues for ideological critics to chip away at government power. At the same time, it gave itself more power to control the operations of the executive branch.

The ruling itself is narrow and technical. As a matter of doctrine, SEC v. Jarkesy holds that because the SEC pursued money damages against Jarkesy for something that looks like common-law fraud, Jarkesy was entitled to a jury trial in front of a regular judge. As the Court explained, the right to a jury is deeply rooted in our nation’s history and tradition and is enshrined in the Seventh Amendment to the Constitution. This means that if a defendant is facing something that looks like a classic lawsuit—if it is “made of the stuff of the traditional actions at common law tried by the courts at Westminster in 1789”—he must be afforded a jury trial if he wants one.  

Because the Supreme Court cannot go back in time and talk to dead English jurists, it has to reason by analogy and look for tells to figure out if it is dealing with the kind of suit that triggers the old jury-trial right. The best tell, the Court has stated, is the remedy sought. The quintessential common-law remedy was money damages. Thus, if a lawsuit is seeking money, then it probably triggers the right to be tried in front of a jury.  

Here, the SEC was not only seeking money, it was doing so because Jarkesy had committed securities fraud. And the legislative history of the securities-fraud statute showed that the charge was basically a form of common-law fraud. In other words, the SEC was trying to get money damages in an analog to a common-law action. This was close enough to trigger the jury-trial right, and so the Court concluded that the SEC’s fine was unconstitutional.

The immediate consequences of this holding may not be large. As it happens, the SEC could have gone to court to fine Jarkesy. Indeed, until 2010, if it had wanted to seek money damages, it had to go to court to do so. Many administrative agencies are already dependent on courts to enforce their orders. So to force the SEC to go to court in cases like these may not change very much. Moreover, the SEC has plenty of other tools it can use to regulate the securities markets. In this case, the fine was only one of the many penalties the SEC had imposed. Its other powers, including in particular so-called equitable remedies, do not appear to be implicated.

Nevertheless, the decision opens up avenues for much future destruction. Going to court takes significant agency resources. Requiring that agencies pursue suits in front of federal judges and juries for monetary damages will lead to fewer enforcement actions seeking financial penalties. And doing so could have many strange and unpredictable consequences. Perhaps agencies will act more like prosecutors, seeking ruinous fines to compel plea bargains and enforcing “trial penalties” on defendants who refuse. Or maybe they will rely less on money damages and more on other remedies, which are arguably harsher. (Many would rather pay a fine than see their license to practice in their field revoked.) Will defendants in fact get to have their cases heard by a jury of their peers? Unlikely. Civil jury trials are already difficult to get, and corporate actors will almost certainly prefer to let a judge find facts and decide on damages rather than try their luck with unpredictable juries.

The deeper problem is structural, though. Nothing in the Constitution required this outcome. The text of the Seventh Amendment does not say that securities-fraud claims must go in front of a federal judge. The courts at Westminster in 1789 would never have heard a case about a fraudster inflating the value of his fund assets to pay himself higher fees. Whether the claims against Jarkesy needed to go to a federal court or could be heard by an agency is a question of policy. In 2010, in the aftermath of the Enron scandal, the president and Congress decided those cases could be heard by the SEC. They enacted that decision into law through the Dodd-Frank Act, which gave the SEC the enforcement power at issue in the case. Relying on nothing but its own opinion, the Supreme Court disagreed and struck part of that act down to force the SEC to go into federal court. This is a dangerous act of judicial aggrandizement.

[Kimberly Wehle: The Supreme Court’s extreme power grab]

Worse, the Supreme Court did not explain the limits or logic of its reasoning. Many agencies pursue enforcement actions that have common-law analogs and have done so for decades. It is unclear whether they, too, will now need to go in front of federal judges.

This confusion is a powerful weapon. With the demise of Chevron deference in the Loper Bright case today, agencies have lost the power to construe ambiguous statutes, leaving them uncertain about their authority. Jarkesy will only deepen their malaise. Agencies may hesitate to bring enforcement cases against well-resourced parties, given that they may lack independent litigation authority to pursue their cases in court, and may be uncertain about where they can pursue which kinds of remedies. Defendants, taking advantage of the Supreme Court’s lack of clarity, will raise new challenges to once-typical enforcement proceedings. And the Fifth Circuit will take cover under the most aggressive reading of the case to further inhibit the government from regulatory action.

As if this were not dangerous enough, more ominous developments seem in the offing. The Supreme Court set aside and did not rule in any way on the Fifth Circuit’s two most extreme holdings: that the SEC’s powers were an unconstitutional delegation, and that administrative-law judges were unconstitutionally insulated. Those claims will surely resurface in the future. If they win the Court’s approval, they will create a generational upheaval in government practice.