Congress’s Use of Agency Power and the U.S. Securities and Exchange Commission

Forchelli Deegan Terrana LLP’s Securities Litigation and Regulation practice group is pleased to share with you the below alert, which details an issue argued this week in the U.S. Supreme Court.

It seems that the legislative acorn of Rule 10b-5 was never meant to be grown outside of the federal courtroom, and in the SEC’s own backyard.  The Securities and Exchange Commission’s internal enforcement division actions may be transplanted back to a federal court near you.  On Wednesday November 29, 2023 the U.S. Supreme Court heard arguments in Securities and Exchange Commission v. Jarkesy, No. 22-859 challenging the Congressional powers granted to the SEC.

Investor protection is paramount, and the anti-fraud provisions under Section 10(b) and Rule 10b-5 makes it unlawful “for any person . . . [t]o use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe[.]”, and are necessary to the integrity of the U.S. markets.  A misstatement or omission of material fact is a fact or information that an investor would have found to be important when making a decision to buy or sell a security.

When private rights are being taken away by the federal government with no court or jury, it is argued that, the Federal Rules Evidence do not apply, Federal Rules of Civil Procedure do not apply, particularly, the hearsay rule does not apply, at least to the Defendant but not the SEC in its own enforcement proceeding.

The consequences of taking common law fraud and indoctrinating it into a statute, as it was argued on Wednesday, should be heard in a courtroom, not a conference room, to provide the protections that the Constitution and Bill of Rights were meant to do.  Nevertheless, however the US Supreme Court rules, Securities litigation related to fraud under Rule 10b-5, both private and public right to sue will continue, however the process of proving a securities fraud case seems like it is being reconfigured.

This article was written by Anthony C. Varbero, partner and Chairperson of the firm’s Securities Litigation and Regulation practice group. Should you have any questions regarding this topic, please reach out to Anthony C. Varbero or call 516-248-1700.