Yesterday, the United States Supreme Court held that when the Securities and Exchange Commission seeks civil penalties against a defendant for securities fraud, the Seventh Amendment to the U.S. Constitution entitles the defendant to a jury trial. S.E.C. v. Jarkesy, 2024 WL 3187811 (June 27, 2024).
The California Corporate Securities Law of 1968 authorizes the Commissioner of Financial Protection & Innovation, after notice and opportunity for hearing to levy administrative penalties for willful violations of the CSL, the Commissioner's rules, or the Commissioner's orders. Cal. Corp. Code § 25252. This authority is separate from the Commissioner's authority to seek penalties in a civil action pursuant to Section 25535.
At first pass, it would seem that Jarkesy will have no impact on the Commissioner's authority to levy penalties under the CSL because the Supreme Court has held that the Seventh Amendment to jury trial requirement does not extend to state courts. Minneapolis & St. Louis R. Co. v. Bombolis, 241 U.S. 211 (1916). The California Constitution, however, also includes a right to a trial by jury. Cal. Const. Art. 1, § 16. California cases, however, make it clear that the state constitutional right to a jury trial is the right as it existed at common law in 1850 when the California Constitution was first adopted. Because the CSL was enacted in 1968, it obviously postdates California's admission as a state. Nonetheless, many CSL violations, like their federal counterparts, are closely related to common law fraud. Further, the administrative under Section 25252 are punitive, not remedial, in nature because they are paid to the State Corporations Fund and not the victims of corporate fraud.
In Nationwide Biweekly Admin., Inc. v. Superior Ct. of Alameda Cnty., 9 Cal. 5th 279, 462 P.3d 461 (2020), the California Supreme Court held that in an action under the California's Unfair Competition Law or False Advertising Law seeking injunctive relief and civil penalties, the gist of the actions is equitable, and there is no right to a jury trial in such actions under California law either as a statutory or constitutional matter. It will be interesting to see if Jarkesy will inspire California courts to arrive at a different result with respect to administrative penalties under the CSL.
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