Facts
- Congress created the Securities and Exchange Commission (SEC) to enforce federal securities laws through enforcement actions in federal court and, for certain matters, through the SEC’s internal administrative adjudication system.
- The SEC’s in-house system does not use juries; an SEC administrative law judge (ALJ) (and ultimately the Commission) serves as fact-finder and decisionmaker.
- In 2010, the Dodd-Frank Act expanded the SEC’s authority to seek civil penalties through administrative proceedings, allowing the SEC (for the first time) to pursue all civil-penalty enforcement actions in-house rather than in federal court.
- The SEC initiated an in-house administrative enforcement action against George R. Jarkesy, Jr., and his firm, Patriot28, LLC, alleging securities fraud under federal antifraud provisions.
- After an evidentiary hearing, an ALJ found Jarkesy and Patriot28 liable and imposed sanctions including $300,000 in civil penalties, along with additional relief such as disgorgement and industry bars.
- The Commission affirmed the ALJ’s liability findings and sanctions and entered a final order.
- Jarkesy and Patriot28 petitioned for review in the U.S. Court of Appeals for the Fifth Circuit, raising constitutional objections that included the lack of a jury trial.
- The Fifth Circuit vacated the SEC’s final order on constitutional grounds, and the Supreme Court granted certiorari.
Issues
- When the SEC seeks civil penalties for securities fraud, does the Seventh Amendment entitle the defendant to a jury trial?
- Did Congress violate the nondelegation doctrine by authorizing the SEC to choose between bringing certain enforcement actions in federal court or in the agency’s in-house forum?
- Do statutory removal protections for SEC ALJs violate Article II by limiting the President’s ability to supervise executive officers?
Decision
- The Supreme Court affirmed the Fifth Circuit’s judgment vacating the SEC’s order and remanded for further proceedings.
- The Court held, 6–3, that when the SEC seeks civil penalties for securities fraud, the Seventh Amendment entitles the defendant to a jury trial.
- Because the Court resolved the case on the Seventh Amendment ground, it did not decide the nondelegation or Article II removal questions.
Legal Principles
- The Seventh Amendment preserves the right to a jury trial in “Suits at common law,” which turns on (1) whether the claim is analogous to a claim historically tried to a jury in courts of law, and (2) whether the remedy sought is legal rather than equitable.
- Securities-fraud claims based on misrepresentations or concealment of material facts are analogous to common-law fraud claims, which were historically tried to juries.
- Civil monetary penalties are a classic legal remedy because they are punitive and deterrent, not merely compensatory or restorative.
- The “public rights” exception does not permit Congress to assign final resolution to an agency, without a jury, when the government prosecutes a claim that is comparable in substance to traditional common-law fraud and seeks legal penalties.
- When the Seventh Amendment jury-trial right applies, an agency may not finally adjudicate the claim in a nonjury administrative proceeding; the matter must be tried in an Article III court where a jury is available.
Conclusion
Securities and Exchange Commission v. Jarkesy holds that the SEC’s pursuit of civil penalties for securities fraud triggers the Seventh Amendment right to a jury trial because the claim resembles common-law fraud and the remedy is legal; therefore, the SEC may not obtain such penalties through its in-house adjudication system, and the Court affirmed the Fifth Circuit’s vacatur of the agency order while leaving other constitutional challenges undecided.