In an important new decision, the Supreme Court, in SEC v. Jarkesy, recently held that when the SEC seeks civil penalties against a defendant for securities fraud, the Seventh Amendment applies and the defendant is entitled to a jury trial in federal court. Chief Justice Roberts delivered the Court's opinion, with a dissent by Justice Sotomayor and others. The Court's decision has considerable, potentially far-reaching consequences for administrative agencies, like the SEC, that rely on administrative proceedings.
Background
In 2011, the SEC began investigating George Jarkesy, Jr. and his firm Patriot28 LLC. In 2013, the SEC initiated an in-house enforcement action before one of its administrative law judges (each, an "ALJ") seeking to recover civil penalties, among other types of relief, against Jarkesy and Patriot28 for alleged securities fraud violations. The ALJ issued an initial decision that was reviewed and released in a final order by the SEC, imposing sanctions including civil penalties of $300,000 against Jarkesy and Patriot28. The defendants petitioned for judicial review before the Fifth Circuit, which granted their petition and vacated the final order after finding that defendants were entitled to a jury trial under the Seventh Amendment. The Fifth Circuit denied rehearing en banc, and the Supreme Court granted certiorari to consider the question of whether the Seventh Amendment entitles a defendant to a jury trial when the SEC seeks civil penalties for securities fraud.
The Supreme Court's Decision
The Court affirmed the Fifth Circuit's decision and found that Jarkesy's Seventh Amendment right to a jury trial was violated when civil penalties were entered against him by the ALJ in the administrative proceeding. The Court relied on the Seventh Amendment's guarantee of a right to a jury trial in "[s]uits at common law," which include statutory claims that are "legal in nature." The Court explained that a claim is "legal in nature" where the cause of action resembles a common law cause of action and the remedy is the sort traditionally obtained in a court of law, with the latter factor holding more weight. After determining that securities fraud and common law fraud claims hold a "close relationship" and civil penalties are imposed to "punish and deter" rather than "restore the status quo," the Court found the claim was "legal in nature" such that the Seventh Amendment was implicated.
The Court further determined that the "public rights" exception to the Seventh Amendment, which allows Congress to assign certain matters for a decision to an agency without a jury, did not apply to Jarseky's case because the SEC's fraud claim against him involved a "matter[] of private right rather than public right." While the Court admitted that the contours of the public rights exception is not "definitively explained," it rooted its finding in this case, in part, on the determination that the substance of the SEC's claim "target[ed] the same basic conduct as common law fraud" and sought civil penalties, a remedy that "could only be enforced in courts of law." Therefore, the matter was one that could "not be removed from Article III courts."
Key Takeaways
Following Jarkesy, the SEC will no longer be permitted to recover civil penalties (one of the SEC's most "potent enforcement tools") for securities fraud violations in administrative proceedings and will instead be required to seek enforcement of those claims in federal court – a win for many would-be defendants. It is not yet clear how the Court's interpretation of the Seventh Amendment and the public-rights exception in this case will apply where the SEC alleges securities violations not based in fraud.
The Court's decision also has significant implications for other administrative agencies that utilize administrative proceedings. While the majority opinion distinguished certain cases involving tariffs, immigration, pensions and other government benefits, public lands, and patents as involving "public rights" excepted from the Seventh Amendment's guarantee, other agencies (two dozen of which were cited by the dissent) may lose their statutory authority to bring administrative proceedings.
These salient issues undoubtedly will continue to unfold in the months and years to come.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.