In SEC v. Jarkesy, No. 22-859, 603 U.S. __ (2024), the Supreme Court held that the Seventh Amendment prohibits the Securities and Exchange Commission (SEC or Commission) from seeking civil penalties in certain enforcement actions when the Commission chooses to proceed in-house before its own administrative law judges (ALJs), rather than in federal court. In a 6-3 opinion written by Chief Justice Roberts, the Court held that the Seventh Amendment requires, at a minimum, that any fraud action involving civil penalties be tried in front of a jury in federal court. The Court’s decision will have immediate implications for the SEC’s enforcement program and will likely have broader implications for administrative adjudications for a host of federal agencies and federal laws.
In 2010, the SEC began investigating George Jarkesy, Jr., and an investment firm, Patriot28, LLC, that Jarkesy managed. Jarkesy had launched two investment funds, raising roughly $24 million from 120 “accredited” investors, and he served as the funds’ investment adviser. Slip Op. at 4. The SEC alleged Jarkesy and Patriot28 misled investors by misrepresenting the investment strategies they used, lying about the identity of the funds’ auditor and prime broker, and inflating the funds’ claimed value for larger management fees. Id. at 4–5. The SEC then initiated an enforcement action alleging fraud before an ALJ instead of in federal court. Id. at 5. The SEC prevailed, and the final order issued by the ALJ levied a civil penalty of $300,000 against Jarkesy and Patriot28, directed them to cease and desist committing or causing violations of the antifraud provisions of the federal securities laws, ordered Patriot28 to disgorge earnings, and prohibited Jarkesy from participating in the securities industry and in offerings of penny stocks. Id.
Jarkesy and Patriot28 sought judicial review in federal court. Id. The U.S. Court of Appeals for the Fifth Circuit granted the petition and vacated the order, holding: (1) Jarkesy and Patriot28 were entitled to a jury trial for the civil penalties sought by the SEC; (2) Congress exceeded its powers by delegating these types of actions to the SEC; and (3) ALJs cannot be removable for cause when they work for agencies headed by similarly insulated officials. See generally Jarkesy v. SEC, 34 F.4th 446 (5th Cir. 2022), aff’d and remanded, No. 22-859, 2024 WL 3187811 (U.S. June 27, 2024). The Supreme Court chose to only address the first question, affirming the Fifth Circuit on that basis. Slip Op. at 6.
The Court framed the issue in Jarkesy as “whether the Seventh Amendment entitles a defendant to a jury trial when the SEC seeks civil penalties against him for securities fraud.” Id. at 6. The Court readily concluded that the case implicated the Seventh Amendment, such that Jarkesy would be entitled to a jury if the case proceeded in federal court. The Court observed that the Seventh Amendment jury trial right applies to all suits that are “not of equity or admiralty jurisdiction.” Id. at 8. In other words, the Seventh Amendment extends to statutory claims whenever they are “legal in nature,” id. at 8 (quoting Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 53 (1989)), which is determined by the cause of action and the remedy, with particular emphasis on the remedy, id. at 9. Here, the fact that the SEC sought civil penalties, in the Court’s view, “[wa]s all but dispositive” because “civil penalties are a type of remedy at common law that could only be enforced in the courts of law.” Id. at 9 (brackets omitted). And the close connection between the securities fraud claims and common law fraud “confirm[ed]” the Court’s conclusion that the Seventh Amendment applied. Id.
Next, the Court rejected the SEC’s assertion that the case could nevertheless proceed before a federal agency without a jury under the “public rights exception” to Article III and the Seventh Amendment. That exception allows Congress to assign certain matters for decision to an administrative agency without a jury, rather than a federal court—i.e., an “Article III tribunal.” Historically, that exception had been applied to cases involving foreign commerce, immigration, the collection of tax revenue, and “certain other historic categories of adjudication.” Id. at 17. The Court admitted that its precedent governing the public-rights exception did not always speak in precise terms and that it “has not definitely explained that distinction between public and private rights.” Id. It again declined to do so. Id.
Instead, the Court held that a prior public-rights decision, Granfinanciera, “effectively decide[d] this case.” Id. at 20.In Granfinanciera, the Court held that bankruptcy fraudulent-conveyance claims—i.e., claims that a pre-bankruptcy transfer should be voided because the debtor had received less than a reasonable equivalent value in exchange—could not be assigned to a non-Article III tribunal without a jury. Id. at 19–20. There, the Court reasoned that similar actions had been brought at law since 18th-century England and that the remedy voiding the transfer was one “traditionally provided by law courts.” Id. at 20 (quoting Granfinanciera, 492 U.S. at 49). Here, the Court reasoned that, ina similar way, the securities fraud claims at issue target the same basic conduct as common law fraud and that civil penalties have been recognized as only available in “courts of law.” Id. at 21.
In concurrence, Justice Gorsuch, joined by Justice Thomas, further elaborated on this view of the Seventh Amendment question, while explaining why Article III and the Due Process Clause reinforced the Court’s decision. Specifically, Justice Gorsuch said that any matter must go before an Article III court if it is by nature the subject of a suit at common law, and withdrawing any such matter “from judicial cognizance” and handing it over to the Executive Branch for an in-house trial violates Article III. Slip Op., Gorsuch Concurrence, at 11 (citation omitted). Similarly, the Fifth Amendment’s Due Process Clause confirmed that the SEC could not perform an in-house proceeding because the SEC sought to deprive Jarkesy of property, requiring regular trial proceedings with their usual protections. Id. at 12. Justice Gorsuch emphasized these constitutional protections along with the Seventh Amendment are meant to “protect the individual” rather than to protect judicial authority for its own sake. Id. at 19 (citation omitted).
The impact of this decision will likely be felt both in cases involving the SEC and those involving different administrative agencies. Most immediately, the SEC will have a hard decision to make with respect to a large swath of pending administrative enforcement proceedings seeking civil penalties for securities fraud. The SEC will need to reconsider whether to file those cases in federal court or to drop any claims for civil penalty. SEC Enforcement Director Gurbir Grewal said in October of last year that the SEC would not hesitate to file charges against accountants and auditors in district courts instead of using ALJs, if the Supreme Court decided against the SEC in this case. They are faced with that decision now. Further, Director Grewal has made very clear that civil penalties are an important part of the SEC’s enforcement program; time and again, he has pledged aggressive use of them to deter wrongdoing.
Now and going forward, the decision will likely curtail the SEC’s ability to obtain civil penalties or other types of monetary relief meant to punish culpable individuals rather than recompense victims. From 2019 to 2023 alone, the SEC collected roughly $9.2B in civil penalties. Recently, those cases have been divided between administrative and federal court adjudication; the SEC has brought roughly 50% of its standalone enforcement proceedings before ALJs, though because of the increase in successful constitutional challenges against the SEC’s use of its own ALJ’s to litigate matters, in recent years, it has filed more of its litigated cases in federal court. According to Justice Gorsuch’s concurrence, one study noted that from 2010–2015, the SEC won roughly 90% of its contested in-house proceedings compared to 69% of cases in federal court. See Slip Op., Gorsuch Concurrence, at 3 (citing D. Thornley & J. Blount, SEC In-House Tribunals: A Call for Reform, 62 Vill. L. Rev. 261, 286 (2017) (Thornley)). So, now, for fraud cases (in which the SEC nearly always seeks a civil penalty), the SEC will need to file more of its administrative docket in what seems to be a less friendly forum. The decision does not prohibit parties from agreeing to settle an enforcement matter that involves a financial penalty administratively. This could result in more administrative settlements since the SEC may in some cases be inclined to accept a lesser civil penalty or forego one entirely to avoid filing a contested federal court litigation. On the other hand, the Court’s decision may not necessarily be good news for regulated entities and individuals as they may now find themselves more often hauled into federal district court rather than have their cases heard or resolved in the historically more traditional administrative forum.
The reasoning of Jarkesy could also impact other remedies the SEC seeks, such as industry bars and suspensions, with courts having to determine whether the remedies when sought for securities fraud or other violations, similarly implicate the Seventh Amendment and fall outside the public-rights exception. Whether those other remedies are ultimately considered equitable or legal, they are often brought together with claims for civil penalties. There will no doubt be more litigation ahead regarding the scope of the Seventh Amendment, the remedies to which it applies, and the rules that govern when an agency seeks both types of relief.
Further, while the Court’s decision involved an unregistered investment adviser and the SEC’s penalty authority under the Dodd-Frank Act, the Court’s reasoning suggests that the SEC likewise is prohibited from obtaining civil penalties from registered individuals and entities in its administrative forum, upending the SEC’s authority in place long before Dodd-Frank to obtain civil penalties against registrants administratively. The Court explained that Congress cannot conjure away the Seventh Amendment by mandating traditional legal claims be taken to an administrative tribunal; nor does the fact that the SEC action originated in a newly fashioned regulatory scheme (Dodd-Frank) permit Congress to siphon away the action from an Article III court. Slip Op. at 20–21.
Finally, although Jarkesy concerned administrative proceedings for securities fraud before the SEC, its reasoning will likely be applied to administrative adjudications before other federal agencies and may be applied to other types of claims. Several other administrative agencies have similar civil-penalty enforcement schemes—for example, the Environmental Protection Agency, the Office of Foreign Assets Control, and the Federal Energy Regulatory Commission, among others—and litigants will argue that the Supreme Court’s reasoning in Jarkesy applies to them as well. After all, the Court found that the government’s request for civil penalties was “all but dispositive” of whether the Seventh Amendment applied in the first instance. Moreover, although the Court declined to definitively articulate the limits of the public-rights exception, it made clear that it presumably will not apply beyond existing categories. In his concurrence, Justice Gorsuch went further, explaining that in his view, the Seventh Amendment applies to all requests for civil penalties and that the public-rights exception applies only to those categories of claim with “a serious and unbroken historical pedigree” of being heard in non-Article III tribunals. If Justice Gorsuch’s view prevails, litigants may be able to further limit the use of ALJs to impose civil penalties in a wide array of circumstances.
