Casey Wagner

A Supreme Court case could change the way the US Securities and Exchange Commission and other federal agencies bring enforcement actions — but legal experts warn the crypto industry not to hold its breath.&nbsp;



Following a 2011 investigation, the SEC sued hedge fund founder George Jarkesy for securities fraud, allegeding he inflated asset prices to boost his own management fee. By the SEC’s choice, the case was an “administrative proceeding,” a non-judicial process overseen by an administrative law judge instead of a federal court.&nbsp;



In an appeal to the Fifth Circuit, Jarkesy argued the administrative proceeding violated the US Constitution’s seventh amendment by denying him a right to a trial by jury.&nbsp;



The appellate judge sided with Jarkesy. But the SEC maintains that seventh amendment rights only apply when private rights are at stake, not public.&nbsp;



Now, the case is in the hands of the <a href="https://www.supremecourt.gov/docket/docketfiles/html/public/22-859.html">Supreme Court</a>. Justices heard oral arguments at the end of November and their opinion is pending.&nbsp;



“If the Supreme Court determines that jury trials are required in all administrative matters, there would be a very widespread impact on all administrative agencies – and a corresponding big impact on the Federal courts which would have to absorb all of those cases,” said Sam Dibble, partner at Baker Botts.



Justices could opt to create a new process for determining which cases brought by federal agencies go to federal court versus administrative tribunal. As of now, the <a href="https://blockworks.co/tag/sec">SEC</a> has the power to decide the venue, which is supported by the 2010 Dodd Frank Act.&nbsp;



Other legal experts are less certain the Supreme Court case could materially change much — especially for the crypto industry, where most cases are already advanced in federal court.&nbsp;&nbsp;



Read more: <a href="https://blockworks.co/news/coinbase-supreme-court-victory">Coinbase walks away with Supreme Court victory in arbitration case</a>



“Some have suggested that Jarkesy might mark the end of the administrative state,” Andrew Kim, partner at Goodwin, said. “Such sentiments are hyperbolic, to say the least.&nbsp; And it’s quite clear now that Jarkesy isn’t going to deal a death blow to either the SEC or the administrative state writ large. Regardless of how Jarkesy comes out, an Article III court will usually remain available to the SEC for enforcement proceedings, so you will continue to see actions like Coinbase, Binance, Kraken, etc.”&nbsp;



The SEC’s cases against <a href="https://blockworks.co/news/sec-sues-coinbase">Coinbase</a>, <a href="https://blockworks.co/news/sec-allegations-against-binance">Binance</a> and <a href="https://blockworks.co/news/kraken-commingle-customer-funds">Kraken</a> are all currently playing out in federal district courts as opposed to administrative proceedings. But for settlements, which are also common in the crypto space, the Supreme Court cases could change things, Kim said.



Read more: <a href="https://blockworks.co/news/coinbase-binance-suits-different">‘Fundamental Difference’ between SEC’s Binance and Coinbase suits</a>



“Historically, the SEC has used administrative proceedings to finalize settlements with private parties,” Kim said. “In a post-Jarkesy world, the SEC may well have to go to an Article III court, which can exercise independent discretion, every single time it wants to settle a potential enforcement action and extract civil money penalties as part of the agreed-upon resolution.”&nbsp;



Article III court judges — i.e. federal judges — could easily approve consent orders for settlements, or “some may decide to put the SEC through the ringer,” Kim said. 



“While Jarkesy won’t mark the end of the SEC or the modern federal administrative state, whatever the Court decides will be in line with a consistent theme of limiting the reach of the federal government and providing a check against the Executive Branch,” he added. “You’ll see a lot more of that this term.”



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The US Supreme Court could reshape the SEC’s powers — and how the agency approaches crypto

Katherine Ross

The Supreme Court sided with Coinbase in a 5-4 ruling that reinforces arbitration.&nbsp;



The case was argued back in March, and is part of the October 2022-2023 Supreme Court term. <a href="https://blockworks.co/news/coinbase-supreme-court-user-lawsuits">In March, the Justices were divided on the case</a>.



Justice Kavanaugh, who delivered the opinion, <a href="https://www.supremecourt.gov/opinions/22pdf/22-105_5536.pdf">said</a>, “When a federal district court denies a motion to compel arbitration, the losing party has a statutory right to an interlocutory appeal.”



Paul Grewal, <a href="https://blockworks.co/tag/coinbase">Coinbase</a>’s chief legal officer, tweeted that Coinbase is “grateful to the Supreme Court of its careful review. Another example of why I believe in the American court system.”



“The rule of law is sometimes slow, and at times disappointing. But it remains our last, best hope in an imperfect democracy,” he continued.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">We are grateful to the Supreme Court for its careful review. Another example of why I believe in the American court system. The rule of law is sometime slow, and at times disappointing. But it remains our last, best hope in an imperfect democracy. <a href="https://t.co/PeItwXC32s">https://t.co/PeItwXC32s</a>&mdash; paulgrewal.eth (@iampaulgrewal) <a href="https://twitter.com/iampaulgrewal/status/1672252332292157441?ref_src=twsrc%5Etfw">June 23, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Coinbase v. Bielski sought to allow Coinbase to halt customer lawsuits while the crypto company moved them out of the court and into private arbitration.&nbsp;



It stems from a class action suit filed by Bielski, on behalf of Coinbase users, which alleges that Coinbase “failed to replace funds fraudulently taken from the users’ accounts.”



According to the original plaintiff, a scammer pretending to be a PayPal representative accessed his Coinbase account and drained it of roughly $31,000. However, Coinbase’s customer service caused a “nightmare” because the bots did not have the responses or ability to help the situation. 



The Supreme Court case is not the only legal battle Coinbase currently faces. It has two open cases with the SEC — one is <a href="https://blockworks.co/news/court-requests-clarity-from-sec">Coinbase v. SEC which seeks to force the SEC to provide clear regulations</a> for the crypto industry. Then there’s the <a href="https://blockworks.co/news/sec-sues-coinbase">SEC v. Coinbase, in which the regulatory agency accuses Coinbase</a> of operating an unregistered exchange and listing and selling unregistered securities.



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