Court dismisses father-son's constitutional challenge to SEC industry ban

A father-son advisory team lost their fight to stop the SEC from potentially ending their careers, as a federal court upheld the agency's enforcement powers.

The ruling in Sztrom v. Securities and Exchange Commission, issued January 8, shows that despite recent setbacks for federal regulators, the SEC still has plenty of teeth when it comes to policing the investment advisory industry.

Michael and David Sztrom, California-based investment advisors, were hoping to block an SEC administrative proceeding that could bar them from the securities business for good. But U.S. District Judge Christopher Cooper dismissed their constitutional challenge, leaving them to face the agency's tribunal.

Here's how it went down. Back in 2021, the SEC came after the Sztroms with fraud allegations. The agency said that for three years starting in 2015, David helped his father Michael get his hands on confidential client information and access to a broker dealer. The problem? Michael wasn't registered with an investment adviser at the time, but he was still advising clients and executing trades.

The SEC accused them of breaking their fiduciary duties and violating the Investment Advisers Act. The Sztroms decided to settle in October 2022, paying $25,000 each and agreeing not to break securities laws going forward. They didn't admit to doing anything wrong.

Most advisors in their position might have thought that was the end of it. Not quite. Seven months later, the SEC started what's called a follow-on proceeding. Think of it as round two. This time, the agency wants to kick them out of the industry entirely.

The Sztroms fought back, arguing the whole setup was unconstitutional. Their main gripe? The same agency that investigated them, charged them, and prosecuted them would also be the one deciding their fate. That sounds unfair, they said, violating their due process rights.

They also claimed only federal courts should handle cases like theirs, not agency tribunals. And they wanted a jury trial, arguing the government can't take away someone's livelihood without one.

Judge Cooper wasn't buying it. On the due process argument, he pointed to a 1998 appeals court decision that said agencies can wear both the prosecutor and judge hats without violating the Constitution. The Sztroms asked him to ignore that old case given recent Supreme Court rulings that have slapped down agency overreach. One of those cases, decided in 2024, said people facing SEC monetary penalties get jury trials.

But Cooper said none of those recent decisions actually overturned the rule about agencies combining enforcement and adjudication roles. The law hasn't changed on that front, he wrote.

On whether federal courts must handle these cases, Cooper said the SEC is dealing with what lawyers call public rights, not private ones. Translation: Congress can let agencies decide certain regulatory matters without violating the constitutional requirement that courts handle judicial business.

The decision means the Sztroms will have to go through the SEC's administrative process. Their only shot at getting a federal court involved now would be appealing whatever the agency decides.