SEC v. Jarkesy
603 U. S. ____ (2024) (2024)
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Rule of Law:
When the Securities and Exchange Commission (SEC) seeks civil penalties against a defendant for securities fraud, the Seventh Amendment entitles the defendant to a jury trial because such claims are legal in nature, resembling common law fraud, and the civil penalties are punitive, not merely remedial.
Facts:
- In the aftermath of the Wall Street Crash of 1929, Congress passed a suite of laws (Securities Act of 1933, Securities Exchange Act of 1934, Investment Advisers Act of 1940) to combat securities fraud and increase market transparency, creating the SEC to enforce these acts.
- Originally, the SEC could only obtain civil penalties from unregistered investment advisers in federal court.
- In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which authorized the SEC to impose civil penalties through its own in-house administrative proceedings, making this authority coextensive with its power to seek penalties in federal court.
- Between 2007 and 2010, George Jarkesy, Jr., launched two investment funds, raising approximately $24 million from 120 accredited investors.
- Jarkesy managed Patriot28, LLC, which served as the investment adviser for these funds.
- The SEC alleged that Jarkesy and Patriot28 misled investors by misrepresenting the investment strategies they employed, lying about the identity of the funds’ auditor and prime broker, and inflating the funds’ claimed value to collect larger management fees.
Procedural Posture:
- The SEC initiated an enforcement action for civil penalties against George Jarkesy, Jr. and Patriot28, LLC, opting to adjudicate the matter in-house before an Administrative Law Judge (ALJ) in 2013.
- In 2014, the presiding ALJ issued an initial decision, finding that Jarkesy and Patriot28 had committed securities violations.
- The full SEC reviewed the ALJ's decision and, in 2020, issued its final order, levying a civil penalty of $300,000, ordering disgorgement, and imposing other sanctions.
- Jarkesy and Patriot28 petitioned for judicial review to the United States Court of Appeals for the Fifth Circuit (as petitioners), with the SEC as respondent.
- The Fifth Circuit vacated the SEC's final order.
- The Fifth Circuit denied the SEC's petition for rehearing en banc.
- The Supreme Court granted certiorari upon the SEC's petition (as petitioner), with Jarkesy and Patriot28 as respondents.
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Issue:
Does the Seventh Amendment entitle a defendant to a jury trial when the SEC seeks civil penalties against that defendant for securities fraud in an in-house administrative proceeding?
Opinions:
Majority - Chief Justice Roberts
Yes, the Seventh Amendment entitles a defendant to a jury trial when the SEC seeks civil penalties for securities fraud in an in-house administrative proceeding. The Court found that this action implicates the Seventh Amendment by following the analysis set forth in Granfinanciera, S. A. v. Nordberg and Tull v. United States. The SEC’s antifraud provisions replicate common law fraud, targeting the same basic conduct of misrepresenting or concealing material facts. The civil penalties sought are legal in nature, designed to punish or deter wrongdoers rather than solely to restore the status quo, as evidenced by conditioning availability and size on factors like culpability, deterrence, and recidivism, and the lack of obligation to compensate victims. The 'public rights' exception to Article III jurisdiction does not apply because the present action concerns 'private rights'—matters akin to traditional common law suits—rather than distinctive areas involving governmental prerogatives. Congress cannot bypass the Seventh Amendment by simply creating 'new statutory obligations' or assigning traditional legal claims to an administrative tribunal, nor does the government’s status as a party automatically trigger the public rights exception; the substance of the suit is determinative. The Court distinguished Atlas Roofing Co. v. Occupational Safety and Health Review Comm'n, asserting that case involved 'a new cause of action, and remedies therefor, unknown to the common law,' unlike these securities fraud claims which are 'in the nature of' a common law suit.
Concurring - Justice Gorsuch
Yes, the SEC’s use of in-house hearings to seek civil penalties violates the Seventh Amendment right to a jury trial, a conclusion reinforced by Article III and the Fifth Amendment's Due Process Clause. These three provisions collectively ensure a 'fair trial in a fair tribunal' with an independent judge and traditional procedures, which were lacking in Mr. Jarkesy's administrative proceeding. Justice Gorsuch drew historical parallels to colonial vice-admiralty courts, which lacked juries and independent judges, and were condemned by the Founders as a means of evading individual rights. The public rights exception is a narrow, historically circumscribed doctrine that does not broadly permit Congress to dispense with constitutional protections by merely creating new statutory obligations or involving the government as a party. The in-house administrative process, characterized by limited discovery, relaxed evidentiary rules, and potentially biased adjudicators, deprives defendants of fundamental procedural safeguards that are vital checks on government power.
Dissenting - Justice Sotomayor
No, Congress acted constitutionally in authorizing the SEC to adjudicate statutory claims for civil penalties in-house without a jury trial. The Seventh Amendment applies only in judicial proceedings, and the critical question is whether Congress properly assigned the matter to a non-Article III forum consistent with Article III. Justice Sotomayor argued that longstanding precedent and established government practice consistently affirm that Congress has broad latitude to assign claims belonging to the government in its sovereign capacity (known as 'public rights') to agencies for initial adjudication, subject to judicial review. She asserted that Atlas Roofing Co. v. Occupational Safety and Health Review Comm'n is directly on point, having upheld administrative imposition of civil penalties for 'new cause[s] of action, and remedies therefor, unknown to the common law,' and that the present case involving federal securities laws is materially indistinguishable. The majority misinterprets Tull v. United States (which concerned claims in federal court) and Granfinanciera, S. A. v. Nordberg (which concerned private disputes) and attempts to create arbitrary distinctions from settled law. This decision represents a 'power grab' that undermines the separation of powers, disregards over two centuries of settled government practice, and places the constitutionality of hundreds of statutes and dozens of agencies in peril.
Analysis:
This case significantly redefines the boundaries of agency adjudication, particularly for claims involving civil penalties that resemble common law actions. It reinforces the importance of the Seventh Amendment jury trial right and Article III judicial power as fundamental checks on the legislative and executive branches. The decision will likely lead to a shift of many SEC enforcement actions, and potentially those of other federal agencies with similar adjudicatory powers, from administrative tribunals to federal courts, increasing litigation costs and potentially slowing down regulatory enforcement. It also signals a more restrictive interpretation of the 'public rights' doctrine, demanding a clearer historical basis for non-Article III adjudication, and is expected to trigger constitutional challenges to other administrative penalty schemes across the federal government.
