In a potentially landmark decision with implications at both the federal and state level, on June 27, 2024 the United States Supreme Court held in SEC v. Jarkesy that the Seventh Amendment's preservation of the right to trial by jury prohibits the Securities and Exchange Commission from using its internal administrative proceedings to seek civil monetary penalties from those whom it accuses of violating the anti-fraud provisions of the federal securities laws. The decision was 6-3, and Chief Justice Roberts authored the opinion. Justices Kagan, Jackson, and Sotomayor dissented, with Justice Sotomayor writing a lengthy dissent.
The case centered on the process by which the SEC can elect to bring an administrative proceeding to adjudicate alleged securities laws violations rather than bringing the case in federal court. In such proceedings, the SEC can designate an administrative law judge (ALJ)—who is an employee of the SEC—to serve as judge and factfinder. The ALJ conducts the hearing, determines the scope and form of admissible evidence (including admitting hearsay and other testimony that would not be permissible in federal court), and makes findings and conclusions that may include imposing civil penalties—in essence fines—of up to $725,000 per violation. The ALJ's findings and conclusions are subject to review, and confirmation, denial, or modification by the SEC, and although the accused party may seek judicial review of the ALJ's or SEC's decision in federal court, the reviewing court must treat the factual findings as conclusive if sufficiently supported by the record. Prior to the passage of the Dodd Frank Wall Street Reform Act of 2010 the SEC could seek such monetary penalties only in federal court.
Although the inherent unfairness of such proceedings is manifest—referenced in Justice Robert's opinion and more fully examined in Justice Gorsuch's concurrence—the Court based its decision solely on the monetary penalties aspect. Justice Roberts phrased the issue as "whether the Seventh Amendment entitles a defendant to a jury trial when the SEC seeks civil penalties against him for securities fraud." The decision affirms that there is such a right.
There are already headlines to the effect that decision strips the SEC of its enforcement powers, but this is an exaggeration; Jarkesy does not prevent the SEC from using administrative proceedings for purposes other than seeking civil penalties. There is also a "public rights" exception, and further exceptions for cases not under or analogous to common law, where monetary penalties could still be assessed (none of which were applicable in Jarkesy). Regardless, the issue is not whether the SEC's enforcement powers have been limited—they have—but whether enforcements action seeking monetary penalties invokes the accused's Seventh Amendment's right to trial by jury. Jarkesy holds that they do. As Justice Roberts noted (and as expanded upon by Justice Gorsuch is his concurring opinion), the right to jury trial in cases seeking monetary awards is not only firmly embedded in our Constitution, but the attempt of the English Parliament to deprive colonists of the right to trial by jury in cases under the common law—which right had been enshrined in English law for hundreds of years—was one of the principal factors leading up to the Declaration of Independence. This Constitutional right cannot be abrogated by Congress through legislation.
The implications of the Jarkesy decision are not limited to securities laws enforcement actions. The decision should prompt all federal agencies to review their administrative proceedings to determine if any of their monetary penalty provisions come within the permissible exceptions referenced in Justice Roberts' opinion. The decision should also cause states whose laws allow them to impose monetary penalties in administrative proceedings to review those laws; the Seventh Amendment's preservation of the right to trial by jury applies to the states through incorporation of this right (and others) by the 14th Amendment. There may also be challenges to existing decisions by federal and state agencies that have imposed monetary penalties, and requests for injunctions against pending administrative cases seeking such penalties. Congressional action to rewrite agency enforcement powers may be necessary.
Insofar as Jarkesy' s implications in Ohio, in our view it does not affect the ability of the Ohio Division of Securities to use administrative proceeding to enforce the Ohio Securities Act because the Division lacks the statutory authority to seek monetary penalties in such proceedings.
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