SEC v. Jarkesy: Supreme Court Requires Jury Trials for SEC Fraud Penalties

The case began in 2013, when the SEC brought an enforcement action against an investment adviser and his firm seeking civil penalties for alleged securities fraud and chose to adjudicate it in-house before one of its administrative law judges, rather than in federal court. The Dodd-Frank Act of 2010 had made the SEC's authority in administrative penalty proceedings coextensive with its authority to seek penalties in federal court. The Fifth Circuit ruled in favour of the respondents, and the SEC appealed.

What the Court decided

The Court held that the action implicates the Seventh Amendment because the SEC's antifraud provisions replicate common law fraud, and that civil penalties are a type of remedy at common law that could only be enforced in courts of law. It further held that the "public rights" exception, which allows certain matters to be decided outside an Article III court without a jury, does not apply, because the case does not fall within the distinctive areas involving governmental prerogatives where that exception has been recognised. The Court did not reach the other issues raised in the case. Three Justices dissented.

Who is affected

The ruling directly affects how the SEC enforces antifraud provisions where it seeks civil penalties: such cases will need to be brought in federal court, where a jury finds the facts and the Federal Rules of Evidence apply. Individuals and firms facing SEC fraud investigations gain the protections of a jury trial. Other federal agencies that impose civil penalties for claims resembling common law causes of action through in-house adjudication will need to consider whether their procedures can withstand similar challenges.

What happens next

The SEC will need to bring contested fraud cases seeking civil penalties before federal courts rather than its administrative law judges. For companies and regulated firms, the practical effect is a more formal and potentially longer process in contested fraud cases, with the procedural safeguards of the federal courts.

Sources

• Supreme Court of the United States: SEC v. Jarkesy, No. 22-859
• US Court of Appeals for the Fifth Circuit: Jarkesy v. SEC, No. 20-61007