On June 27, 2024, the Supreme Court of the United States, in a 6-3 ruling, held that when the Securities Exchange Commission seeks civil monetary penalties from defendants for securities fraud, the Seventh Amendment gives such defendants a right to demand a jury trial, making it unconstitutional to force them into an administrative proceeding administered by one of the SEC’s own Administrative Law Judges. While the Court did not invalidate the use of administrative proceedings for other rule violations, it is clear that this decision will have an impact far beyond the SEC. Chief Justice Roberts delivered the opinion of the Court. SEC v. Jarkesy, et al., No. 22-859, 603 U.S. ____ (2024).
As previously reported, the case before the Court involved the SEC’s investigation into George Jarkesy and his advisory firm, Patriot28 LLC, for alleged securities fraud in connection with the launch of two hedge funds. Acting pursuant to authority granted to it under the Dodd-Frank Act, the SEC elected to pursue civil penalties in an administrative proceeding, rather than sue Jarkesy and his firm in federal district court. Ultimately, an Administrative Law Judge ruled in the SEC’s favor, resulting in a $300,000 in civil penalty and $685,000 in disgorgement. On appeal, the Fifth Circuit held that the SEC’s administrative proceeding had three constitutional deficiencies: (i) Petitioners were deprived of their Seventh Amendment right to a jury trial; (ii) Congress unconstitutionally delegated legislative power by allowing the SEC to choose, without adequate guidance, how to use the power to decide to litigate an action in a federal court or to adjudicate in-house; and (iii) the SEC administrative law judges’ insulation from executive supervision violated the separation of powers doctrine.
After granting certiorari, the Supreme Court agreed with the Fifth Circuit that Petitioners were entitled to a jury trial when the SEC pursued monetary penalties for securities fraud. Even though Congress specifically granted the SEC the right to pursue securities fraud claims in administrative proceedings, with certain differences in the elements required for a common law fraud claim, the Court reasoned that the SEC antifraud claims are “private rights” not “public rights.” In doing so, the Court emphasized that the “public rights” exception, which allows Congress to assign agencies the authority to pursue certain kinds of statutory violations without a jury, is narrow. The Court explained that, while Congress can assign agencies the right to pursue claims for certain types of newly created rights and violations, Congress cannot “withdraw from judicial cognizance any matter which, from its nature, is the subject of a suit at the common law, or in equity, or admiralty.” And ultimately, what matters is the substance of the suit, not where it is brought, who brings it, or how it is labeled. As applied here, the Court reasoned that:
The object of this SEC action is to regulate transactions between private individuals interacting in a pre-existing market. To do so, the Government has created claims whose causes of action are modeled on common law fraud and that provide a type of remedy available only in law courts. This is a common law suit in all but name. And such suits typically must be adjudicated in Article III courts.
Accordingly, the Court held that “a defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator.”
Because the Court found that the right to a jury trial was dispositive of the present action, it did not opine on the remaining two grounds that the Fifth Circuit had relied upon to rule SEC administrative proceedings unconstitutional. Those holdings, which were in some sense broader than the Seventh Amendment holding, thus remain unresolved—and it is unclear whether the Supreme Court may in the future be persuaded to rule a still broader swath of administrative proceedings unconstitutional for other reasons. In the meantime, it is only in administrative proceedings where an agency pursues civil fraud and other actions that are in the “nature of an action at common law” that the Seventh Amendment clearly allows a defendant to demand a trial by jury.
The SEC’s ability to levy financial penalties in administrative proceedings was a powerful tool in the SEC’s enforcement arsenal, but now, after Jarkesy, the SEC will need to file in federal court to pursue financial penalties against defendants in securities fraud actions. And while focused on the SEC, the decision’s logic impacts other agencies that use in-house administrative proceedings to levy financial penalties such as the Commodity Futures Trading Commission, Federal Trade Commission, Environmental Protection Agency, Occupational Safety and Health Administration, and other regulators. Each agency will have to analyze what types of claims can, and cannot, be brought before its own administrative law judges, and begin reevaluating how best to utilize their limited resources.
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