Decision Alert: Supreme Court Holds Defendants Entitled to a Jury Trial When SEC Seeks Civil Penalties for Securities Fraud

On June 27, 2024, the Supreme Court held in SEC v. Jarkesy that Congress violated the Seventh Amendment by allowing the Securities and Exchange Commission to pursue civil penalties through administrative proceedings that do not allow defendants to be tried by a jury. Chief Justice Roberts authored the opinion. Justice Gorsuch filed a concurring opinion, joined by Justice Thomas. Justice Sotomayor authored the dissent, joined by Justices Kagan and Jackson.

As summarized in Dykema’s January 2024 edition, George Jarkesy, founder of and investment advisor for two hedge funds, allegedly misrepresented material information to brokers and investors. The SEC initiated administrative proceedings against him. After an administrative law judge determined that Jarkesy violated securities laws, the SEC affirmed, imposing fines on Jarkesy, barring him from engaging in further activity within the securities industry, and disgorging his profits. The Fifth Circuit vacated the SEC’s decision and held in part that Congress violated the Seventh Amendment by allowing the SEC to seek civil penalties through administrative proceedings without juries.

The Court affirmed. Beginning with a review of the historical influences of the Seventh Amendment, the Court highlighted that the civil penalties imposed by the SEC are designed to punish and deter certain conduct. The penalties are not compensatory because the SEC is not required to return any money to the victims. The penalties are thus a type of remedy that could be enforced only in courts of law. The Court compared federal securities fraud to common law fraud, holding that their close relationship confirms that the SEC’s actions are legal, not equitable, in nature. The Court disagreed with the Government’s argument that the “public rights” exception applies. Distinguishing its 1977 decision in Atlas Roofing, the Court held that Congress could assign the adjudication of certain claims to an agency if those claims are “unknown to the common law.” However, the type of fraud claims brought against Jarkesy have been resolved by courts of law since before the Founding. And because fraud is a common law claim by nature, the Seventh Amendment—a common law right—cannot be abridged by the SEC or Congress in suits asserting fraud. The Court declined to reach the other issues decided by the Fifth Circuit, affirming the decision only on the Seventh Amendment ground.

In his concurrence, Justice Gorsuch wrote that the Seventh Amendment “does not work alone”—Article III and due process principles would have commanded the same outcome. In dissent, Justice Sotomayor argued that the Court’s decision has subverted long-established precedent which has allowed for “two centuries of settled Government practice,” and she called the majority’s decision a “power grab.”

Takeaways

• The Seventh Amendment entitles defendants to a jury trial when the SEC seeks civil penalties for securities fraud.
• The Court’s holding may have ramifications beyond SEC actions, as lower courts will now grapple with whether market participants in other regulated industries are entitled to a jury trial in enforcement actions.
• Although the Court declined to address whether it is unconstitutional for the SEC’s administrative law judges to be protected from removal, expect future cases to continue teeing up that big issue. The Court likely will not avoid the question for long.
• Financial institutions may have more leverage in settlement negotiations because some administrative proceedings will no longer be jury-less.
• Moving forward, the SEC and banking agencies may possibly limit the types of relief they seek when bringing administrative cases.

For more information, please contact Chantel Febus, James Azadian, Cory Webster, Christopher Sakauye, Monika Harris, Puja Valera, or A. Joseph Duffy, IV.