The U.S. Supreme Court's ruling last week that the SEC can no longer use administrative law judges to decide disputes will have widespread consequences for all litigants charged with fraud by the SEC, according to Brian Hamburger, founder, President and CEO of Hamburger Law Firm and MarketCounsel Consulting.

SEC v. Jarkesy was brought by hedge fund manager George Jarkesy and challenged the SEC’s practice of using administrative law judges who decide legal disputes outside of the typical judicial system. The Supreme Court decided that Jarkesy is indeed entitled to jury trial.

“The ruling is a good win for advisors and quite disruptive in that it brings back a degree of fairness to this process,” said Hamburger, a veteran attorney who represents independent investment advisor firms. He predicted that the ruling, approved by the Supreme Court 6-3 on Thursday, will force the SEC to reduce both the fines and penalties it ask for in settlements, as well as the number of cases the agency brings to those it believes it can actually win in court.

“The reality we’ve been dealing with for quite some time is that administrative law judge hearings gave the SEC a home court advantage. So, when the SEC brought a case, the burden of proof was relatively low and the agency’s win percentage was abnormally high. Compare the SEC’s wins in administrative law judge hearings to actual court,” Hamburger said.

The ruling will require the SEC to take some of its cases and go to court, as opposed to administrative courts set up in the executive branch. “So, the SEC will have far less certainty in outcome of cases, which will cause them to assess the likelihood of success. So from a practical perspective, the industry will see more reasonable settlements.” Hamburger said.

Up until the decision, anyone charged by the SEC had to pay all the legal expenses and attorney fees to make it through an administrative law judge hearing to request a jury trial. In effect, jury trials have become the appeals court for ALJ decisions and that’s how Jarkesy ended up in the Supreme Court, he said.

The process was expensive and the SEC used that to their advantage when calculating settlement fines and penalties, he said. They’ll no longer be able to bake all of that in, Hamburger said.

According to one securities industry attorney who asked for anonymity, the SEC can offer to settle with an advisor who they’ve accused of even low-level violations and ask for $200,000 because they know the advisor will need to pay $50,000 in legal fees for defense in the administrative hearing and another $150,000 for legal defense in a jury trial and still risk having to pay penalties and fines.

“They know you’ll risk spending $250,000, which is why they offer $200,000. They’re counting on the fact that your business sense will prevail and you’ll want to save the time. So it becomes very easy for the SEC to convince advisors to enter into settlement agreements,” the attorney said. 

“If you take administrative hearings out of the equation and allow litigants to go directly to court and you can dispose of the matter through some type of summary disposition, it might cost $30,000 to $50,000 in legal fees—or a total of $100,000 even if it goes to court. So now it’s far less likely litigants will settle for $200,000,” he added.

The ruling “effectively changes the formula, so the SEC offers has to become much more reasonable in their asks because you don’t have to walk through the ALJ process to get to court,” Hamburger said.

Some litigants, like Jarkesy, will prefer to go to court because there are numerous tactics and strategies such as summary disposition their attorneys can use in court, which are not allowed in administrative law hearings, he said.

Litigants and their attorneys also perceive ALJs as having potential bias, “because the person deciding the case is also and employee of the U.S. government, so people have become skeptical they’ll get a fair decision,” Hamburger added.

“This is going to see this unfold over time. My hope is that the SEC refocuses time and attention on cases that really matter. Right now we see them spending a lot of time on sweep exams because they found a fact pattern they can use over and over again and while it’s made for efficient work for the SEC, it’s really hard for litigants not to enter into settlements like the recent share class disclosure initiative settlements the SEC brought,” he noted.

Instead, the SEC may return to bringing individual cases against firms that send a message which protects investors, rather than using sweep exam settlements “to punish people for a novel theory the SEC just came up with,” Hamburger added.

The SEC did not respond to a request for comment.