US Supreme Court Holds in Jarkesy That SEC Cannot Seek Civil Penalties for Securities Fraud Without a Jury

The decision has potentially wide-sweeping implications, not only for the SEC, but also for numerous other federal agencies that often rely upon administrative law judges (ALJ) to determine whether to levy civil penalties without a jury trial.

In 2013, the SEC initiated an enforcement action against respondents George Jarkesy, Jr., and his advisory firm Patriot28, LLC alleging that they had engaged in securities fraud. As the SEC often does, it initiated the enforcement action before one of its administrative law judges, rather than choosing the available alternative of proceeding in federal court. The SEC alleged that Jarkesy misled accredited investors in his two hedge funds by (1) misrepresenting investment strategies, (2) lying about the identity of the funds’ auditor and prime broker, and (3) inflating the funds’ claimed value to increase management fees.

In 2014, the SEC presiding administrative law judge rendered an initial decision, and in 2020, the SEC reviewed the ALJ’s decision and entered its final order levying a $300,000 civil penalty, ordering disgorgement, enjoining respondents from causing further fraud violations, and prohibiting Jarkesy from participating in the securities industry.

Respondents petitioned the Fifth Circuit for review, and the Fifth Circuit vacated the SEC order. Among other rulings, a divided panel of the Fifth Circuit held that the SEC had violated respondents’ Seventh Amendment right to a jury trial.

The Supreme Court, in a 6-3 decision, affirmed the Fifth Circuit’s opinion. The Court held that the SEC’s decision to adjudicate the matter in-house before an ALJ, rather than in federal court where respondents could have proceeded before a jury, violated respondents’ Seventh Amendment rights. Chief Justice Roberts authored the opinion. Justice Gorsuch filed a concurrence, which Justice Thomas joined. Justice Sotomayor dissented, joined by Justices Kagan and Jackson.

The majority opinion focuses on the history of the Seventh Amendment and its importance stretching back before the US Constitution. The majority concluded that SEC civil penalties are a type of remedy at common law that could only be enforced in courts of law and discussed the similarities between the elements of federal statutory securities fraud and common law fraud and the available remedies, which the majority held triggered the Seventh Amendment’s entitlement to a jury trial. The majority rejected the SEC’s argument that the “public rights” exception applied, which in some instances permits US Congress to assign the adjudication of an issue to an agency without a jury.

Justice Gorsuch’s concurrence highlighted the view that other constitutional provisions — namely, Article III and the Due Process Clause of the Fifth Amendment — reinforced the Court’s decision.

Justice Sotomayor’s full-throated dissent (joined by Justices Kagan and Jackson) argues that throughout the nation’s history, “Congress has authorized agency adjudicators to find violations of statutory obligations and award civil penalties to the Government as an injured sovereign.” The dissent notes that Congress has enacted over 200 statutes authorizing dozens of agencies to impose civil penalties for violations of statutory violations and that the majority’s opinion would apparently instead require the government to seek civil penalties in federal court before a jury, assuming that the agency has the statutory authorization to bring those actions in federal court.

The dissent also argues that the majority’s decision threatens separation of powers because, under the majority’s decision, “Congress cannot assign a certain public-rights matter for initial adjudication to the Executive because it must come only to the Judiciary.” With regard to the public rights exception to the Seventh Amendment, the dissent argues that over a century of precedent forecloses the majority’s argument and that, even setting aside that precedent, the majority’s argument fails on its own terms.

While the dissent noted that the impact of the Court’s decision on the public rights doctrine will be litigated, the dissenting justices also stated their belief that “[l]ess uncertain, however, are the momentous consequences that flow from the majority’s insistence that the Government’s rights to civil penalties must now be tried before a jury in federal court. The majority’s decision, which strikes down the SEC’s in-house adjudication of civil-penalty claims on the ground that such claims are legal in nature and entitle respondents to a federal jury, effects a seismic shift in this Court’s jurisprudence.”

As the dissent notes, there are more than two dozen agencies that can impose civil penalties in administrative proceedings for hundreds of statutory violations. In addition, many such statutes permit the agency to seek such penalties only in administrative proceedings (i.e., those agencies have no option to proceed in federal court if they are barred from making agency determinations). The constitutionality of those other civil penalty schemes are now in doubt and challenges to the constitutionality of those other statutory schemes are expected. The ruling may also limit the number of securities fraud cases that the SEC pursues given the greater burden posed by the requirement to proceed in federal court before a jury.