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Accounting & Audit

Supreme Court Mulls Allowing Court Challenges to SEC and FTC

A ruling against the government could undercut two of the most powerful federal regulators in the U.S.

By Greg Stohr, Bloomberg News (TNS)

The U.S. Supreme Court signaled it may open a new avenue for companies and people to fight off complaints by the Securities and Exchange Commission and Federal Trade Commission, hearing arguments in cases that could undercut the clout of two powerful market regulators.

The justices are considering whether those facing agency claims can go straight to federal court with constitutional challenges—including attacks on the use of in-house judges to handle cases. Critics say the system gives agencies an unfair home-field advantage.

“What sense does it make for a claim that goes to the very structure of the agency having to go through the administrative process?” Justice Samuel Alito asked.

A ruling against the government could undercut two of the most powerful federal regulators. The SEC filed more than 700 enforcement actions in the last fiscal year and won judgments and orders worth $6.4 billion, including from investment banks.

The FTC, which is seeking to break up Meta Platforms Inc. and is investigating Amazon.com Inc., among other initiatives under Chair Lina Khan’s aggressive antitrust enforcement agenda, returned $2.4 billion to consumers last year.

Agency critics are seeking to extend a line of Supreme Court decisions that are chipping away at the federal administrative state.

The challengers—accountant Michelle Cochran in the SEC case and body-camera manufacturer Axon Enterprise Inc. in the FTC case—say the agencies’ in-house systems violate the Constitution.

Cochran and Axon say the job protections afforded to agency administrative law judges, known as ALJs, insulate them too much from presidential control. The challengers point to a 2010 Supreme Court ruling that invalidated similar protections for members of the Public Company Accounting Oversight Board.

Most lower courts have said that type of challenge must wait for the administrative proceedings to finish, something that can take years.

Biden stance

Several of the Supreme Court’s conservatives wondered Monday why delay made sense given the similarity to the 2010 ruling.

“This is a series of cases that are a constellation around some fairly basic propositions,” Chief Justice John Roberts said. “And to have it go over and over and over again, it does make the case about the need for direct resolution of a related claim pretty strong.”

The Biden administration says that under the system set out by Congress, Cochran and Axon can make their arguments—but only after they go through commission proceedings and challenge the final decisions in a federal appeals court.

Justice Department lawyer Malcolm Stewart said federal courts normally try to “avoid constitutional challenges if it’s possible to do so.”

Cochran has been battling the SEC since 2016, when the commission first accused her of engaging in improper professional conduct. Her lawyer, Gregory Garre, told the justices that “this case illustrates the crucial importance of this district court jurisdiction for everyday Americans who find themselves trapped before an unconstitutional agency decisionmaker.”

Axon is fighting the FTC’s effort to unwind the company’s acquisition of a rival. In addition to challenging the tenure protections for the commission’s lone ALJ, the company seeks to challenge the process by which the FTC and the Justice Department decide which agency will review a deal. Unlike the FTC, DOJ litigates only in federal court.

The company’s lawyer, Paul Clement, argued that “any review mechanism that delays judicial review of a here-and-now constitutional injury until it has come and went does not provide meaningful review.”

Narrow ruling

Several justices said the sweeping arguments pressed by the private lawyers might go too far in undercutting in-house adjudications.

“Suppose you claimed something about the way agencies treated witnesses, or what kinds of witnesses were allowed, or what kinds of cross examination, or when subpoenas were issued, or—you could just keep on going,” Justice Elena Kagan said to Clement. “I mean would all of that go to a court first?”

Justice Brett Kavanaugh, who could wield a pivotal vote, indicated he read the court’s precedents as offering a narrow way to resolve the cases. He suggested the court could rule for Axon and Cochran because their challenges are “wholly collateral” to the complaints filed against them by the agency.

“What I’m challenging and pushing back on is kind of throwing it all open again after decades of trying to figure out how these claims should be sorted out,” Kavanaugh told Garre. The possibility “causes me some concern, at least,” Kavanaugh said.

The court is scheduled to rule by June in the cases, Axon v. Federal Trade Commission, 21-86, and Securities and Exchange Commission v. Cochran, 21-1239.

Bloomberg News staff writers Lydia Beyoud, Leah Nylen and Sara Forden contributed to this article.

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