The Supreme Court ruled Thursday that people accused of civil fraud by the Securities and Exchange Commission have the right to a jury trial before a federal judge, denying the commission’s authority to take enforcement actions and impose fines through its internal courts.
The ruling is a major blow to what has in recent years become one of the primary enforcement mechanisms for fraud in cases brought by the Securities and Exchange Commission, which regulates the securities markets. The SEC’s practice of hauling suspected securities fraudsters before its internal courts, often decided by the SEC itself, who brings the charges, or by administrative law judges who are often seen as the SEC’s stamp of approval, violates the right to a jury trial, Chief Justice John G. Roberts Jr. wrote in a six-justice majority opinion.
“A defendant facing a fraud lawsuit has the right to be tried before an impartial judge and by a jury of peers,” the chief justice wrote.
The SEC allegedly was given the power by Depression-era securities laws to choose whether to bring fraud lawsuits in federal court or to adjudicate charges itself. In the Dodd-Frank financial reform act passed in 2010, Congress expanded the SEC’s authority to bring civil lawsuits in its own courts to charges against unregistered investment advisers.
When the SEC decides fraud charges internally, there is no jury to act as fact-finder, a life-tenured federal judge does not preside, and the cases are governed by a different set of rules on evidence, procedure and discovery. Securities and Exchange Commission v. JarkeshiThe issue in Case 22-859 was whether these administrative courts violated the Seventh Amendment’s guarantee of jury trial in “actions at common law.”
The SEC argued that administrative proceedings are not private lawsuits at common law, but are laws enacted in an effort to protect the so-called “public rights,” and therefore do not require a jury or a federal judge to preside over them. It further argued that many agencies use nonjury arbitration and that more than 20 agencies have the authority to impose fines administratively.
The Court rejected these arguments, interpreting the public’s right exception to the right to a jury trial narrowly. The Court ruled that the exception applies only to matters that have historically been decided exclusively by the executive and legislative branches, such as revenue collection, customs enforcement, immigration, and benefit payments. Congress cannot abrogate the right to a jury trial by merely permitting government agencies to litigate internally. Similarly, it is not enough for the Government to show that allowing government agencies to litigate fraud internally would improve efficiency or make it easier to pursue fraud.
“Too far from it, circumventing the Seventh Amendment would be a game in which the government could strip its subjects of Seventh Amendment protections simply by finding that an agency ruling provides a marginal benefit to the public,” Roberts wrote.
The case could have the effect of limiting the ability of other agencies to adjudicate misconduct accusations in their own internal courts.
The case involved hedge fund manager George Jarkiesy, who was accused of misleading investors. The SEC filed a civil enforcement action against Jarkiesy through an administrative law judge, but the judge ruled against Jarkiesy. After an internal appeal, the SEC ordered Jarkiesy and his company to pay a civil penalty of $300,000 and restitution of $685,000 in allegedly ill-gotten gains.
Jarkesy appealed to the U.S. Court of Appeals for the Fifth Circuit in New Orleans. A three-judge panel ruled against the SEC on three grounds, all of which could potentially hinder enforcement of securities laws as well as a range of other regulations.
The decision is one of several this term challenging executive branch power, a long-time focus of the conservative legal movement. Last month, the Supreme Court upheld the constitutionality of funding for the Consumer Financial Protection Bureau. Earlier this year, the Supreme Court heard arguments on the Chevron doctrine, an important administrative law principle that requires the judiciary to defer to executive branch interpretations of ambiguous statutes. That case has yet to be resolved.
This incident Securities and Exchange Commission v. JarkeshiCase No. 22-859 in the U.S. Supreme Court.
