On June 27, 2024, the U.S. Supreme Court held in Securities and Exchange Commission v. Jarkesy that the Seventh Amendment to the United States Constitution entitles a defendant to a jury trial when the U.S. Securities and Exchange Commission (SEC) seeks civil penalties for securities fraud. As a result, the SEC must sue in federal court, rather than in the agency’s in-house administrative law court that lacks juries, when it seeks civil penalties for fraud.

The Decision

In a 6-3 decision authored by Chief Justice Roberts, the Supreme Court held that the SEC’s antifraud provisions “replicate common law fraud, and it is well established that common law fraud claims must be heard by a jury.”¹ In particular, the Court found that civil penalties “designed to punish and deter, not to compensate[,]” as opposed to equitable remedies like director and officer bars and disgorgement, are legal remedies that can “only be enforced in courts of law.”² The Court stated that because civil penalties are “legal in nature,” they implicate the Seventh Amendment’s right to a jury trial.³ The Court further stated that the so-called “public rights” exception to the Seventh Amendment—an exception found to apply, for example, to the collection of revenue, immigration and customs law, relations with Indian tribes, the administration of public lands, and the granting of public benefits—did not apply to SEC claims seeking civil penalties.⁴

Key Takeaways

• Going forward, if the SEC seeks civil penalties on a claim that resembles traditional common law claims, like fraud, it must do so in federal court. The SEC may continue using in-house administrative proceedings when not seeking civil penalties.
• This decision should not impact how the SEC settles most enforcement actions with public companies and individual directors and officers involving civil penalties. The SEC’s use of simultaneous orders instituting administrative proceedings and settlements will continue because parties are generally free to waive constitutional rights, and offers of settlement with the SEC almost always contain such a waiver.
• The SEC’s practice in recent years has been to pursue contested actions in federal court, so this decision is unlikely to significantly change the SEC’s current approach to actions seeking civil penalties for securities fraud.
• This decision may significantly impact the SEC’s overall success rate in securities fraud cases over time, and those defending such cases will benefit from independent judges and juries, the rules of evidence and civil procedure, and other procedural protections. Historically, the SEC has been far more successful in in-house administrative proceedings than in federal court, winning 90 percent of its in-house proceedings compared to 69 percent of cases in federal court. This decision also will likely increase the number of cases that are contested, as opposed to settled before a complaint is filed. When combined, these two impacts may influence the number and type of enforcement actions the SEC pursues.
• As Justice Sotomayor noted in her dissenting opinion, Congress “has enacted more than 200 statutes authorizing dozens of agencies to impose civil penalties for violations of statutory obligations.”⁵ In statutory proceedings seeking civil penalties for claims analogous to common law claims, these agencies will be subject to dismissal motions by defendants claiming that they are entitled to a jury trial. These agencies may be precluded from pursuing civil penalties in these administrative proceedings.

[1] Sec. & Exch. Comm’n v. Jarkesy, No. 22-859, 2024 WL 3187811, at *7 (U.S. June 27, 2024).

[2] Id. at *8-9.

[3] Id.

[4] Id. at *7.

[5] Id. at *30.