The U.S. Supreme Court on Friday unanimously ruled that companies and people facing Securities and Exchange Commission charges can challenge the agency's constitutional authority in U.S. District Court before the SEC settles the matter in-house.
"The statutory review schemes set out in the Securities Exchange Act and Federal Trade Commission Act do not displace a district court's federal-question jurisdiction over claims challenging as unconstitutional the structure or existence of the SEC or FTC," the court opinion, written by Justice Elana Kagan, said.
The case, SEC vs. Cochran, which was combined with a similar case, Axon Enterprise Inc. vs. FTC, focuses on a procedural issue involving the SEC's use of administrative law judges, or ALJs, which handle administrative enforcement cases in-house.
The plaintiff, Michelle Cochran, an accountant facing SEC administrative charges of violating federal accounting standards, originally challenged the constitutionality of the SEC's ALJ system in the Northern District of Texas in 2019. She asked the court to allow her to challenge the constitutionality of the SEC's ALJs in a U.S. District Court before the conclusion of the agency adjudication. Historically, a person or company facing charges heard before an ALJ has to go through a lengthy administrative process before bringing a case to challenge the constitutionality of the ALJs.
After losing the initial case, Ms. Cochran appealed to the Fifth Circuit Court of Appeals in New Orleans and lost once more. She then petitioned the Fifth Circuit for en banc hearing before all judges of the court and the full court in December 2021 reversed the initial decision.
The Supreme Court heard oral arguments in Ms. Cochran's case and the Axon case in November and seemed open to siding with the plaintiffs.
The ramifications for the decision could be massive, attorney sources said. "If every litigant before an ALJ has the right to an immediate collateral challenge in district court — which would pause the ALJ process — the ALJ process across agencies would grind to a halt until the underlying challenges are resolved," attorneys from Troutman Pepper said in a Pensions & Investments industry voice piece last year.
