SEC In-House Proceedings
Securities and Exchange Commission v. Jarkesy
Date: June 27, 2024
Issue: Whether the Seventh Amendment entitles a defendant to a jury trial when the Securities and Exchange Commission (SEC) seeks civil penalties for securities fraud.
Case Summary: In a 6-3 decision written by Justice John Roberts, the U.S. Supreme Court ruled the SEC’s use of its in-house judicial forum violates the Seventh Amendment when used to impose civil penalties for securities fraud.
Under the federal securities laws, the SEC has the option to bring an enforcement action against a defendant either by filing a lawsuit in federal court or by initiating an administrative enforcement proceeding in-house and in front of the SEC’s own Administrative Law Judge (“ALJ”). Before 2010, the SEC could pursue only injunctive relief against individual defendants in its home forum, and seek civil penalties only in federal court. But in the Dodd-Frank Act, Congress gave the SEC the additional power to seek civil penalties in agency proceedings.
In 2007 and 2009, George Jarkesy established two hedge funds and selected Patriot28 as his investment adviser. The funds brought in over 100 investors and held approximately $24 million in assets. In 2011, the SEC investigated Jarkesy and Patriot28’s investment activities. The SEC instituted an administrative enforcement action against Jarkesy and Patriot28 before an administrative law judge (ALJ), which held that Jarkesy committed securities fraud. Jarkesy sought SEC review of that decision. While the commission’s review was pending, the U.S. Supreme Court ruled in Lucia v. SEC that SEC ALJ’s were not properly appointed under the U.S. Constitution. After Lucia, the SEC affirmed the ALJ’s decision, and having exhausted administrative remedies, Jarkesy filed for review in the Fifth Circuit.
In a 2-1 decision, a Fifth Circuit panel determined the SEC’s administrative enforcement against Jarkesy to be unconstitutional. The Fifth Circuit concluded Jarkesy and Patriot28 were deprived of their constitutional right to a jury trial; Congress unconstitutionally delegated legislative power to the SEC; and statutory removal restrictions on SEC ALJs violated Article III of the U.S. Constitution. The SEC petitioned the U.S. Supreme Court for review.
ABA filed a coalition amicus brief urging the U.S. Supreme Court to affirm a Fifth Circuit decision. ABA argued the Fifth Circuit correctly held administrative enforcement proceedings to recover civil penalties violate Article III and the Seventh Amendment. ABA also argued affirming the Fifth Circuit’s holding would promote fair enforcement of federal banking laws against banks and their directors, officers, and employees. Finally, ABA argued unfair enforcement proceedings are a disincentive for talented personnel to work in the banking industry.
The U.S. Supreme Court affirmed the Fifth Circuit’s ruling on Jarkesy’s Seventh Amendment right. The Seventh Amendment “embraces all suits which are not of equity or admiralty jurisdiction” including statutory claims which are “legal in nature.” According to the Court, to determine whether a suit is “legal in nature,” courts examine whether the cause of action resembles common law causes of action and whether the remedy is the sort that was traditionally obtained in a court of law.
The Court ruled the Seventh Amendment’s right to a jury trial for “suits at common law” prevents the SEC from seeking civil penalties for securities fraud claims before in-house agency courts, where there are no juries. Writing for the majority, Chief Justice Roberts first reasoned that the Seventh Amendment’s jury trial right applies to SEC securities fraud claims for civil penalties under the federal securities laws, because of the close relationship between those claims and common law fraud. The Court also reasoned that civil monetary penalties are the “prototypical common law remedy.” The majority made clear the SEC’s action was legal in nature, rather than an action in equity to which no constitutional jury right is attached. According to the majority, the civil penalties sought by the SEC were designed to “punish and deter” the wrongdoer rather than to enforce a public right or “restore the status quo.”
The Court then turned to whether the “public rights” exception applied. Under the public rights exception, Congress may assign certain matters to an agency, rather than a jury. The Court stressed that generally matters concerning private rights may not be removed from Article III courts, and here, the SEC’s civil penalty claims implicated the defendants’ private rights. The Court distinguished prior precedent applying the “public rights” exception, because those cases applied the exception only where the claim related to matters that were historically determined by the executive and legislative branches, including the powers to collect revenue, regulate immigration, and impose tariffs.
In concurrence, Justice Neil Gorsuch explained other constitutional provisions reinforce the correctness of the Court’s decision. According to Gorsuch, the Seventh Amendment’s jury-trial right does not work alone. It operates with Article III and the Due Process Clause of the Fifth Amendment to limit how the government may deprive an individual of life, liberty, or property. In dissent, Justice Sonia Sotomayor argued the Court’s precedents supported Congress’s decision to assign adjudication to an agency tribunal. Justice Sotomayor stressed the majority’s ruling would unleash “chaos” by casting doubt on “more than 200 statutes authorizing dozens of agencies to impose civil penalties for violations of statutory obligations.”
Bottom Line: The Court did not resolve several broader challenges to the SEC’s authority that Jarkesy had raised. Jarkesy brought an Article III challenge to the SEC ALJs’ insulation from presidential removal and brought a non-delegation doctrine challenge to the SEC’s discretion to choose which forum to bring suit. The Court declined to resolve either contention.
Documents: Opinion
