SEC v. Jarkesy
603 U.S. 109 (2024)
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Rule of Law:
When the Securities and Exchange Commission (SEC) seeks civil penalties against a defendant for securities fraud, which is analogous to common-law fraud, the Seventh Amendment entitles the defendant to a jury trial. Such actions are suits at common law concerning private rights and do not fall within the 'public rights' exception that would permit adjudication in a non-Article III tribunal without a jury.
Facts:
- Between 2007 and 2010, George Jarkesy, Jr., launched two investment funds, raising approximately $24 million from about 120 accredited investors.
- Jarkesy's firm, Patriot28, LLC, served as the investment adviser for these funds.
- Jarkesy and Patriot28 allegedly misrepresented the investment strategies they employed for the funds.
- Jarkesy and Patriot28 also allegedly misled investors about the identity of the funds' auditor and prime broker.
- Jarkesy and Patriot28 were accused of inflating the claimed value of the funds' assets to collect larger management fees.
Procedural Posture:
- The Securities and Exchange Commission (SEC) initiated an in-house administrative enforcement action against George Jarkesy, Jr., and Patriot28, LLC.
- An SEC Administrative Law Judge (ALJ) found that Jarkesy and Patriot28 had committed securities violations and imposed sanctions, including a civil penalty.
- The full SEC Commission reviewed the ALJ's decision and issued a final order largely affirming the findings and imposing a $300,000 civil penalty and other sanctions.
- Jarkesy and Patriot28 (petitioners) petitioned the U.S. Court of Appeals for the Fifth Circuit for review of the SEC's final order.
- A divided panel of the Fifth Circuit granted the petition and vacated the SEC's order, holding that the in-house adjudication violated the Seventh Amendment right to a jury trial.
- The U.S. Supreme Court granted certiorari to review the judgment of the Fifth Circuit.
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Issue:
Does an SEC enforcement action seeking civil penalties for securities fraud, when adjudicated in an in-house administrative proceeding, violate the respondent's Seventh Amendment right to a jury trial?
Opinions:
Majority - Roberts, C. J.
Yes. An SEC enforcement action for civil penalties for securities fraud requires a jury trial under the Seventh Amendment. The Court applies a two-part analysis. First, the action is a 'suit at common law' because the remedy sought—civil penalties—is legal, not equitable. Civil penalties serve punitive and deterrent purposes, which are hallmarks of remedies administered by courts of law. Furthermore, the cause of action, securities fraud, is analogous to common-law fraud, targeting the same basic conduct of misrepresenting or concealing material facts. Second, the 'public rights' exception does not apply. This exception is narrow and covers matters historically resolved by the political branches, such as revenue collection or immigration. A securities fraud action is a quintessential private right dispute, analogous to a traditional action at common law. The Court's decision in Granfinanciera establishes that Congress cannot strip the jury trial right from traditional legal claims by assigning them to an administrative tribunal. The fact that the government is a party is insufficient to convert a private right into a public one. The Court distinguished Atlas Roofing, noting that case involved a 'new cause of action... unknown to the common law,' whereas securities fraud has deep roots in common-law fraud.
Concurring - Gorsuch, J.
Yes. The majority's Seventh Amendment analysis is correct, but the SEC's in-house adjudication scheme also violates Article III and the Fifth Amendment's Due Process Clause. Article III requires that the 'judicial Power' be exercised by independent judges, a requirement not met when the prosecuting agency also employs the adjudicator. The Due Process Clause guarantees a trial with time-honored procedural protections, which are absent in the agency's streamlined process. This modern administrative setup mirrors the British vice-admiralty courts in colonial America, which lacked juries and independent judges and were a primary grievance leading to the American Revolution. The Constitution's structure, including Article III, the Fifth Amendment, and the Seventh Amendment, was designed to prevent such a concentration of prosecutorial and judicial power in the Executive Branch.
Dissenting - Sotomayor, J.
No. The SEC's in-house adjudication does not violate the Seventh Amendment. For nearly two centuries, the Court has consistently held that Congress may authorize agencies to adjudicate 'public rights' and impose civil penalties without a jury. This case falls squarely within the public rights doctrine because it involves the government suing in its sovereign capacity to enforce a statutory obligation and vindicate a public harm. The majority's holding defies this long line of precedent, particularly Atlas Roofing, which upheld a nearly identical scheme for civil penalties under OSHA. The majority improperly relies on Tull, which involved a suit in federal court, and Granfinanciera, which concerned a dispute between private parties. By ignoring the critical fact that the government is a party acting in its sovereign capacity, the majority upends settled law and threatens the constitutionality of hundreds of statutes and the enforcement powers of dozens of federal agencies.
Analysis:
This decision significantly curtails the power of administrative agencies, particularly the SEC, to enforce federal law through in-house adjudications seeking civil penalties. It strengthens the Seventh Amendment right to a jury trial for statutory claims that are analogous to common-law actions. The ruling casts constitutional doubt on the adjudicative authority of numerous other federal agencies that impose civil penalties, potentially forcing Congress to rewrite many enforcement statutes to require litigation in Article III courts. By narrowing the 'public rights' exception and distinguishing Atlas Roofing, the Court signals a major shift in its administrative law and separation of powers jurisprudence, favoring judicial power over executive adjudication.
