On June 27, 2024, the Supreme Court held 6-3 in SEC v. Jarkesy that the Seventh Amendment entitles a defendant to a jury trial in SEC enforcement proceedings seeking civil penalties for securities fraud. This decision raises questions for both pending and future SEC enforcement proceedings.
How We Got Here
The SEC may bring an action to enforce securities laws in one of two forums: by filing suit in federal court or adjudicating the matter itself through an in-house administrative proceding governed by the SEC’s Rules of Practice.
In 2013, the SEC charged George Jarkesy with violations of the various anti-fraud provisions of the Securities Act, the Securities Exchange Act, and the Investment Advisers Act and sought civil penalties. The SEC opted to adjudicate the matter in-house rather than in federal court. In 2014, the presiding Administrative Law Judge issued an initial decision, which was then ratified by the SEC in 2020, levying a $300,000 fine against Jarkesy. Jarkesy petitioned the United States Court of Appeals for the Fifth Circuit for judicial review, and the Fifth Circuit ruled that the SEC’s in-house administrative proceeding violated Jarkesy’s Seventh Amendment right to a jury trial. The SEC appealed the decision to the Supreme Court.
On appeal, the Supreme Court affirmed the Fifth Circuit’s ruling, holding the SEC’s in-house enforcement proceeding against Jarkesy seeking civil penalties violated his Seventh Amendment right to a jury trial. In its ruling, the Court highlighted that because the Seventh Amendment preserves trial by jury rights in “suits at common law”–and because civil penalties for fraud are the type of remedy that could only be enforced at common law in courts of law—Jarkesy’s Seventh Amendment rights were implicated. Likewise, the statutory anti-fraud provisions’ resemblance to common law fraud confirmed this conclusion
How Jarkesy Affects Currently Pending Securities Enforcement Proceedings
While no official guidance from the SEC has been issued regarding how the Jarkesy decision impacts pending settlements, it is anticipated that pending settlement agreements will be revised to include language whereby defendants acknowledge and explicitly waive their right to a jury trial.
Post-Jarkesy, the SEC can still enforce the securities laws not seeking civil penalties through both the federal court system and administrative proceedings. In fact, the SEC in recent years has moved away from using administrative hearings, further minimizing the decision’s impact on SEC enforcement actions. The number of proceedings before in-house judges dropped from nearly 200 in September 2018 to just two in March 2024. SEC Chair Gary Gensler confirmed as much in an interview, stating, “if you look at the public docket of our enforcement, the bulk of what we’ve done. . .is on litigated matters, tak[ing] them to the district courts.”
What Comes Next?
While on its face the Jarkesy decision seems limited in scope, the ramifications of the decision are sure to be felt in the administrative law field for years to come. In a dissent, Justice Sonia Sotomayor (joined by Justices Elena Kagan and Ketanji Brown Jackson) warned that there would be “momentous consequences” as a result of the decision, particularly as there are more than two dozen other federal agencies that utilize administrative proceedings in which civil penalties may be imposed. The ruling in Jarkesy may expand beyond the SEC and its antifraud prosecutions into other securities law enforcement adjudications, and potentially into other government agencies such as the Federal Energy Regulatory Commission and the Environmental Protection Agency. If Jarkesy’s reasoning is expanded, federal agencies will likely only be able to bring enforcement actions in federal court, raising the potential for for more limited redress of civil violations.
Further Information:
If you have any questions or would like more information on the how Jarkesy affects SEC enforcement, please contact Jerauld Brydges, Jonathan Jasinski, or Karthik Sekharan.