The US Securities and Exchange Commission (SEC) has had a choppy year so far. From the Ripple defeat to its knock-back on Grayscale’s spot Bitcoin ETF approval, it seems everyone has a bad word to say about Gary Gensler and co.
Now, two of the world’s most famous billionaires, Mark Cuban, owner of the Dallas Mavericks, and Elon Musk, owner of X (formerly Twitter), Tesla, and SpaceX, are teaming up to take on the world’s most powerful financial regulator. In an amicus brief , the pair make the case that the SEC is unfairly stacking cases in its favor with in-house judges. But what are their complaints and do they hold any water?
Billionaires Elon Musk and Mark Cuban joined with four other investors and a public interest law group in filing a brief supporting respondents George Jarkesy Jr. and Patriot28 against the SEC.
The case , which has been going on for years, was backed by the Fifth Circuit, which ruled that the SEC’s use of in-house administrative law judges (ALJs) to impose civil penalties violates defendants’ 7th Amendment right to a jury trial. The battle is now in front of the Supreme Court.
The two entrepreneurs and their allies argue the SEC unfairly uses its in-house administrative law judges rather than federal jury trials to prosecute cases. This denies the defendants’ Seventh Amendment right to a trial by jury, even though the SEC has agreed jury trials were appropriate in similar past cases.
The brief says the SEC gets to “forum shop” by choosing where to bring cases. It can prosecute identical cases before an SEC judge or a jury trial. This leads to unequal treatment for defendants facing the same charges.
“Such proceedings contravene the protections guaranteed to litigants by the United States,” the brief reads.
The investors contend the SEC dodges unfavorable jury verdicts by steering more cases to its internal judges after losing several trials. This discretion erodes public trust in institutions and creates a biased playing field.
They also argue SEC proceedings lack the transparency of federal trials open to the public as jury scrutiny brings out important details about enforcement cases. Shielding cases from juries deprives the public of this market-critical information, and this conflicts with the SEC’s mission to promote transparency, they say.
The battle over how the SEC litigates in-house cases could have profound implications for the crypto industry. Currently, defenders of the current system argue in-house judges allow the SEC to leverage specialized expertise in complex securities cases, control the rules and procedures, and resolve matters more quickly.
However, critics – including Musk and Cuban – argue this can disadvantage outside parties if the judges exhibit pro-SEC biases or tilt the playing field too far in the agency’s favor.
For new and disruptive crypto businesses, this system poses risks of an unfair hearing. The SEC judges work for the agency and may internalize its skepticism of cryptocurrencies. With the regulator able to shape the rules and procedures, crypto firms may face an uphill battle in proving their case before an administrative judge aligned with the SEC’s agenda.
The accelerated timeline also gives crypto businesses less time to build their case compared to federal court. While expertise in securities law is important, that expertise may also lead to prejudices against novel crypto business models. Furthermore, without binding precedent, each case becomes more about the discretion of individual judges, further compounding the problem.
Both Musk and Cuban have been supportive of crypto to various degrees in the past. So whilst the amicus brief filed by the billionaire pair does not mention crypto or cryptocurrency by name, it remains the elephant in the room.