US Supreme Court Considers SEC's Trial System in Crypto Cases

Legal experts caution against high hopes for significant changes

In a potential game-changer, the US Supreme Court is reviewing a case that could reshape the Securities and Exchange Commission's (SEC) enforcement actions, particularly in the crypto industry. The case involves hedge fund founder George Jarkesy, accused of securities fraud by the SEC in a 2011 administrative proceeding. Jarkesy contested the lack of a jury trial, claiming a violation of the seventh amendment.

Constitutional Challenge: Jarkesy vs. SEC

Appellate judge supports Jarkesy, SEC argues public rights exemption

Following an investigation accusing Jarkesy of inflating asset prices for personal gain, the SEC opted for an administrative proceeding instead of a federal court trial. Jarkesy challenged this choice, asserting a denial of his seventh amendment rights. The appellate judge sided with him, but the SEC maintains that such rights only apply in cases involving private, not public, rights. The Supreme Court is currently reviewing the case after oral arguments in November.

Potential Impact on Administrative Agencies

Supreme Court's decision could lead to broader changes

Legal experts, including Sam Dibble from Baker Botts, anticipate widespread consequences if the Supreme Court mandates jury trials for all administrative matters. The court may introduce a new process for determining the venue, challenging the SEC's current authority under the 2010 Dodd Frank Act to decide the proceeding's location.

Uncertain Impact on Crypto Industry

Crypto cases mostly in federal court, but settlements may be affected

While the Supreme Court case could reshape administrative proceedings, experts like Andrew Kim from Goodwin believe it might not significantly alter the crypto industry's landscape. Ongoing cases involving major players like Coinbase, Binance, and Kraken are already in federal district courts. However, settlements, a common occurrence in the crypto space, could face changes post-Jarkesy.

Settlements Under Scrutiny

SEC may need Article III court approval for settlements

Historically, the SEC has used administrative proceedings for settlements. In a post-Jarkesy scenario, the SEC might have to turn to an Article III court for each settlement, potentially impacting the efficiency of enforcement actions. Article III court judges could scrutinize settlements more thoroughly, challenging the SEC's decisions.

A Check on Federal Government's Reach

Potential impact aligns with limiting federal government reach

Regardless of the court's decision, experts agree that the case reflects a consistent theme of limiting the federal government's reach and serving as a check against the Executive Branch. While it may not mark the end of the SEC or the administrative state, the decision is expected to align with a broader trend of restraint on governmental powers.