SEC v. Jarkesy: Defendants Entitled to Jury Trial in SEC Fraud Actions
Seventh Amendment entitles defendants to jury trials when the SEC seeks civil penalties for securities fraud.
In a recent decision, the U.S. Supreme Court held in SEC v. Jarkesy that the SEC's practice of litigating securities-fraud charges before its in-house tribunals violates the Seventh Amendment right to a jury trial.
In 2010, the Dodd-Frank Act greatly expanded the SEC's ability to impose civil penalties through proceedings adjudicated by SEC-appointed administrative law judges ("ALJs") and the SEC Commissioners themselves. To determine whether these proceedings violate the Seventh Amendment, the Court considered: (i) whether the SEC's pursuit of civil penalties for securities fraud implicates claims for which the Seventh Amendment traditionally provides a jury-trial right; and (ii) whether the "public rights" exception to Article III jurisdiction—under which Congress may, consistent with the Seventh Amendment, assign adjudication to an agency without a jury—applies.
Answering the first question, the Court explained that the Seventh Amendment extends to any common-law or statutory claim that is legal (rather than equitable) in nature. Because civil penalties punish and deter (rather than solely compensate), they constitute a prototypical common-law legal remedy, implicating the Seventh Amendment. This conclusion was underscored, the Court explained, by the close relationship between the elements of securities fraud and common-law fraud.
On the second question, the Court held that the "public rights" exception presumptively does not apply where, as here, the suit is in the nature of an action at common law. Rather, the Court reiterated that even when an action originates through a new regulatory scheme, the action's substance—not where Congress has assigned it for resolution—is paramount.
Notably, the Court did not reach two additional grounds decided by the Fifth Circuit: that the SEC's in-house tribunals violate the non-delegation doctrine and that the SEC's ALJs were improperly protected from removal.
Jarkesy's impact is not limited to the SEC and may ripple throughout the federal government; more than two dozen federal agencies impose penalties through administrative proceedings, and only a handful enjoy the option (as the SEC has) to prosecute actions in federal court. Moreover, litigants likely will seek to extend Jarkesy's reasoning to other sorts of agency actions by looking for common-law analogues.
