How Will the Supreme Court’s Jarkesy Decision Impact SEC Enforcement?

The Securities and Exchange Commission’s (SEC) enforcement strategy recently took a significant hit from the U.S. Supreme Court. In SEC v. Jarkesy, 603 U.S. ____ (2024), the Court held that when the SEC seeks civil penalties against a defendant for securities fraud, the Seventh Amendment entitles the defendant to a jury trial. Accordingly, such actions must be brought in federal court.

The SEC’s Enforcement Program

The SEC’s enforcement program has two distinct avenues for pursuing alleged securities violations. Following an investigation, SEC enforcement staff present their findings to the Commission for its review. Should the Commission decide to proceed, it can authorize the staff to file a case in federal court or bring an administrative action. 

In a civil action, a jury finds the facts, an Article III judge presides, and the Federal Rules of Evidence and the ordinary rules of discovery govern the litigation. The SEC may seek a variety of sanctions or remedies. For instance, the agency may seek an injunction, which prohibits further securities violations and can also require audits, accounting for frauds, or special supervisory arrangements. In addition, the SEC can seek civil monetary penalties.

The SEC can also pursue sanctions through an administrative proceeding, which is presided over by an administrative law judge (ALJ). Unlike a civil proceeding, the Federal Rules of Evidence do not apply, and discovery is limited. Once the ALJ considers the evidence presented by SEC and the subject of the proceeding, the ALJ issues an order that includes findings of fact and legal conclusions. Both sides may appeal all or any portion of the initial decision to the Commission.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC gained greater authority to bring enforcement actions via administrative proceedings. Prior to Dodd-Frank, the SEC could only use administrative procedures to pursue enforcements actions against regulated entities, such as investment advisers and brokerage firms. In addition, its remedies were limited to cease-and-desist orders rather than monetary sanctions.

The financial reform law authorized the SEC to impose a range of civil penalties against any entity. Administrative sanctions include cease and desist orders, suspension or revocation of broker-dealer and investment advisor registrations, censures, bars from association with the securities industry, and civil monetary penalties.

Securities Fraud Allegations in SEC v. Jarkesy

In 2011, the SEC initiated an enforcement action for civil penalties against investment adviser George Jarkesy, Jr., and his firm, Patriot28, LLC for alleged violations of the “antifraud provisions” contained in the federal securities laws. The SEC opted to adjudicate the matter in-house using an administrative proceeding.

An administrative law judge determined that Jarkesy and Patriot28 had committed securities violations and levied a civil penalty of $300,000. Jarkesy and Patriot28 petitioned for judicial review. The Fifth Circuit Court of Appeals vacated the order on the ground that adjudicating the matter in-house violated the defendants’ Seventh Amendment right to a jury trial. The Seventh Amendment provides that “[i]n Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved.”

SCOTUS Rules Securities Fraud Defendant Entitled to Jury Trial

The Supreme Court affirmed by a vote of 6-3. The Court held that when the SEC seeks civil penalties against a defendant for securities fraud, the Seventh Amendment mandates that the defendant is entitled to a jury trial. As Chief Justice John Roberts wrote on behalf of the majority, “a defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator.”

The Supreme Court first considered whether the securities fraud claim against Jarkesy is a “suit at common law” to which the Seventh Amendment applies. According to the majority, it “is all but dispositive” that the SEC seeks civil penalties, a form of monetary relief, because money damages are the prototypical common law remedy. As Chief Justice Roberts explained:

[T]he civil penalties in this case are designed to punish and deter, not to compensate. They are therefore “a type of remedy at common law that could only be enforced in courts of law.” That conclusion effectively decides that this suit implicates the Seventh Amendment right, and that a defendant would be entitled to a jury on these claims.

The Court further found that the close relationship between the causes of action against Jarkesy and common law fraud confirms that conclusion. As Chief Justice Roberts noted, both target the same basic conduct — misrepresenting or concealing material facts.

The Supreme Court next turned to the “public rights” exception to the Seventh Amendment, which provides that when Congress creates a “public right,” it can freely “assign the matter for decision to an agency without a jury, consistent with the Seventh Amendment.” In finding the exception did not apply, the Court explained that if a claim is “in the nature of an action at common law, then the matter presumptively concerns private rights, and adjudication by an Article III court is mandatory.”

The Supreme Court also emphasized the similarities between the antifraud provisions of federal securities law and common law fraud, noting that the provisions “target the same basic conduct as common law fraud, employ the same terms of art, and operate pursuant to similar legal principles.” According to Chief Justice Roberts, “securities-fraud claims … are quintessentially about the redress of private harms.”

Implications for SEC Enforcement

The SEC will be forced to revise its enforcement strategies in light of the Jarkesy decision. As a practical matter, federal litigation is generally longer and costlier than administrative proceedings. Federal court also provides defendants with added procedural protections that are not available in administrative cases. These added burdens will likely cause the SEC to more carefully consider what cases it pursues.

The SEC is also not the only agency that will be impacted. There are dozens of federal agencies that similarly impose civil penalties in administrative proceedings. As Justice Sonia Sotomayor highlighted in her dissent, “the Constitutionality of hundreds of statutes may now be in peril, and dozens of agencies could be stripped of their power to enforce laws enacted by Congress.”

How We Can Help

The members of Scarinci Hollenbeck’s Securities Litigation & FINRA Arbitrations Group have decades of combined experience in securities litigation and regulatory defense. Our securities attorneys are dedicated to defending our client’s interests in the challenging and ever-evolving landscape of regulatory investigations. We encourage you to contact us to learn more about our securities litigation and FINRA arbitration legal services, as well as how the Jarkesy decision may impact you.