On June 27, 2024, the U.S. Supreme Court issued a significant decision in Securities and Exchange Commission v. Jarkesy et al., Case No. 22-859, ruling that a defendant is entitled to a jury trial when the Securities and Exchange Commission (SEC) seeks civil penalties for securities fraud. While this may not seem groundbreaking, in practice it is a landmark decision as it effectively precludes the SEC from seeking civil penalties against a defendant for securities fraud in the SEC’s own in-house court and instead requires the SEC to bring such actions in federal court. This decision is the latest in an increasing trend among courts to reduce federal agencies’ enforcement powers and
could have ripple effects on several other agencies that use similar administrative proceedings.
Background
Since 2010, the SEC has used its own in-house proceedings to impose civil penalties for securities fraud actions. Over the years, many challenged the SEC’s handling of these cases in-house as a violation of the right to a jury trial under the Seventh Amendment. One such challenge was by a man named George Jarkesy, Jr. In 2013, the SEC brought administrative enforcement proceedings against Mr. Jarkesy and his firm for alleged securities fraud, and the SEC opted to adjudicate the matter in-house. An SEC administrative law judge found that Jarkesy and his firm engaged in securities fraud and ordered them to pay a $300,000.00 civil penalty. Jarkesy and his firm then petitioned for judicial review of
the SEC’s Order and argued that the SEC adjudicating the matter in-house violated their Seventh Amendment right to a jury trial. The U.S. Supreme Court agreed.
Court’s Decision
Writing for a 6-3 majority, Chief Justice Roberts’ majority opinion concluded that when the SEC seeks civil penalties against a defendant for securities fraud, the Seventh Amendment entitles the defendant to a jury trial. The majority discussed how the Seventh Amendment, which provides a right to a jury trial in suits at common law, is a fundamental principle of the justice system and that any curtailment of that right must be scrutinized with the utmost care. The majority reasoned that the SEC’s antifraud provisions are akin to common law fraud, and therefore a defendant is entitled to a trial by jury in such proceedings. The majority further reasoned that where a civil penalty is designed to
punish and deter, not to compensate, then it can only be obtained through a federal court, not an internal agency proceeding.
The majority also explored whether the “public rights” doctrine permitted an exception to the right to a trial by jury in an SEC securities fraud action. The public rights doctrine permits Congress to assign certain matters to agencies to internally adjudicate. Some examples include matters concerning the collection of revenue, immigration law, the administration of public lands, and the granting of public benefits. The majority concluded that the public rights exception does not apply to an SEC securities fraud action seeking civil penalties because when an agency seeks civil penalties for the same general conduct as a claim under common law, then the enforcement proceeding involves a private,
not a public right. Accordingly, the majority ultimately concluded that a defendant facing a securities fraud claim has the right to a jury trial and cannot be forced to defend against such a claim in the SEC’s in-house court.
In contrast, the dissent, written by Justice Sotomayor argued that cases in which the government itself is a claimant fit squarely within the public rights exception to a constitutional right to a jury trial. The dissent cautioned that the “majority’s insistence that the Government’s rights to civil penalties must now be tried before a jury in federal court” may have “momentous consequences” and curtail at least two dozen agencies’ abilities to impose civil penalties through internal administrative proceedings.
What’s Next
In light of the Court’s decision, the SEC is less likely to litigate securities fraud matters in its own in-house court, particularly if it intends to seek remedies that look like penalties. It remains to be seen what this might mean for claims for disgorgement. And, as foreshadowed by the dissent, the Court’s decision may impact other federal agencies and cause them to exercise similar caution when contemplating whether to seek civil penalties through internal proceedings instead of federal courts.
The takeaway is that if you are faced with agency investigations or enforcement actions, you should carefully evaluate the agency’s claims and requested penalties and consider asserting your constitutional right to a jury trial. If you have any questions regarding the Court’s decision in SEC v. Jarkesy, please contact any member of Calfee’s Securities Litigation practice group.
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