On June 27, 2024, the United States Supreme Court (SCOTUS) released its ruling [PDF] on what has been a decade-long dispute between the Securities Exchange Commission (SEC) and hedge fund manager, George Jarkesy1, ultimately curtailing the SEC's use of its in-house court system. In a 6-3 ruling, SCOTUS upheld the Fifth Circuit's decision2 that the SEC's use of its in-house judicial forum and administrative law judges (ALJs) violates the Seventh Amendment of the U.S. Constitution, particularly when it is used to impose civil penalties on defendants accused of securities fraud. Jarksey was accused of committing securities fraud, more specifically for deceiving various investors regarding the risks associated with investing in funds overseen by his company, Patriot 28, LLC. Osler previously reported on the Fifth Circuit's ruling, outlining the structure and history of SEC administrative proceedings, a summary of the Fifth Circuit's ruling, and key takeaways and potential implications for administrative decision-making and enforcement in the United States.
The Jarkesy decision came out one day before the Loper Bright Enterprises v. Raimondo[PDF] decision which overruled the 1984 landmark decision in Chevron v. Natural Resources, restraining certain powers of federal agencies to interpret laws within their purview. Jarkesy read in combination with Loper, seems to reflect the SCOTUS's current approach to regulatory decision-making and enforcement.
The U.S. Supreme Court's Decision
In Jarkesy, the Fifth Circuit ruled on three different constitutional issues — (i) whether the SEC's use of administrative courts violate the non-delegation doctrine (i.e. the principle that Congress cannot delegate its legislative powers or law making ability to other entities including to administrative agencies), (ii) whether the agency's ALJs are unconstitutionally protected from removal, and (iii); the constitutionality of the $300,000 civil penalty leveled against Jarkesy and his company, Patriot 28 LLC. The third issue was the prime consideration for SCOTUS.
According to Chief Justice Roberts, writing for the majority, the Seventh Amendment of the American constitution entitles a defendant to a jury trial, particularly in instances where the SEC seeks civil penalties against a defendant for alleged securities fraud. Historically, Roberts CJ noted, any action brought by the government to recover civil penalties from an accused under statutory provisions requires a trial by jury, particularly where the penalty value sought exceeds $20. Thus, in Jarkesy, the majority found that the penalties levied against the defendant, given their value, implicated the Seventh Amendment, thereby entitling Jarkesy to a trial by jury.
To be sure, monetary relief can be legal or equitable, but it is the purpose sought to be achieved by a monetary remedy that is dispositive and determines whether said remedy is legal (specifically, whether it is intended to punish or deter the wrongdoer or conversely, "restore the status quo").3 Per the majority, a civil sanction that fails to serve a purely remedial purpose but rather, advances either retributive or deterrent objectives, is in fact punishment. As explained by Roberts CJ for the majority, only courts of law can issue monetary penalties to punish culpable individuals, and because the civil penalties in this case were designed to punish and deter rather than compensate, they must be seen, in the majority's view, as a "type of remedy at common law" enforceable only in courts of law.4 For greater clarity, the majority held that, because the SEC's anti-fraud provisions replicate common-law fraud claims, such a civil sanction served a more retributive purpose, obtainable only through a court of law with a jury present.
As such, SCOTUS upheld the Fifth Circuit's ruling that the securities fraud charges in question were akin to traditional fraud prosecutions under common law, engaging the right to a jury trial. As there is no jury built into the SEC's in-house process, in bringing a civil enforcement action against Jarkesy for securities fraud, SCOTUS ruled that the SEC acted unconstitutionally and violated Jarkesy's Seventh Amendment rights.
The majority also found that the public rights exception to the Seventh Amendment, pursuant to which Congress can assign a matter for decision by an agency without a jury in certain limited circumstances, does not apply to these actions. Echoing its decision in Granfinanciera, S.A. v. Nordberg, 492 U.S. 133 (1989), the Court in Jarkesy clarified that what matters is the "substance of the action, not where Congress has assigned it." [PDF pg 19] Since the nature of the civil penalties levied by the SEC against Jarkesy did not satisfy the requirements for a public rights exemption, the SEC's securities fraud action could not be saved by the public rights exception. Rather, the majority opinion emphasized that a "defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator."
Are the majority's reasons relatable in Canada?
Broadly speaking, the issues raised in Jarkesy emphasize the distinctions between the scope of adjudicative powers of the administrative regulatory tribunals and those of the traditional court system. And while the SCOTUS decision is grounded in the particulars of the American constitutional system and its judicial practices, some of its premises are relatable in the Canadian context, particularly as it may highlight the respective roles of administrative decision-making and the courts. Specifically, in Canada, the role of a statutory capital markets adjudicator, such as the Capital Markets Tribunal in Ontario (created from the bifurcation of the Ontario Securities Commission in 2022 as we have previously written), is to protect investors and the integrity of the capital markets. It is not to punish wrongdoers for contraventions — that is the role of the courts under Canadian law (see Canadian Supreme Court's 2001 decision in Asbestos 5). While courts have acknowledged the role of specific and general deterrence in sanctioning by capital markets tribunals, the line is often a challenging one for tribunals to navigate. Some of the reasoning underlying Jarkesy should resonate with Canadian tribunals to stay in their lane. As pressures mount on tribunals and regulators to demonstrate that they have enforcement 'teeth', yielding increasingly ratcheted up sanctions imposed against wrongdoers that may appear penal, (particularly in an environment in which enforcers go to tribunals for enforcement rather than the courts), Jarkesy should remind statutory tribunals that their jurisdiction is limited by law and the rights of the parties before them.
Footnotes
1. Securities & Exch. Comm'n v. Jarkesy, No. 22-859 (2024) (Jarkesy)
2. Jarkesy v. Sec. & Exch. Comm'n, 34 F.4th 446 (5th Cir. 2022)
3. Page 9 of the decision
4. Pages 9-11 of decision
5. Committee for the Equal Treatment of Asbestos Minority Shareholders v Ontario (Securities Commission), 2001 SCC 37, [2001] 2 SCR 132.
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