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Supreme Court of the United States • 2024

SEC v. Jarkesy

603 U.S. 109

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Takeaway

In short, SEC civil-penalty actions for securities fraud must be tried before an Article III court and jury because they resemble traditional legal fraud actions and do not fall within the narrow public-rights exception.

Background

After Congress enacted the Dodd-Frank Act in 2010, the SEC gained authority to seek civil penalties for securities-law violations either in federal court or through its own administrative proceedings. In 2013, the SEC charged investment adviser George Jarkesy, Jr., and his firm, Patriot28, LLC, with securities fraud. The SEC alleged that they misrepresented the funds' investment strategies, auditor, and prime broker, and overstated the funds' value to collect higher management fees.

The SEC chose an in-house proceeding before an administrative law judge rather than filing in federal district court. The ALJ found violations, and the Commission ultimately imposed a $300,000 civil penalty, ordered disgorgement and cease-and-desist relief, and barred Jarkesy from parts of the securities industry.

The Fifth Circuit vacated the SEC's order. It held that the in-house adjudication violated the Seventh Amendment because the SEC's fraud claims and civil-penalty remedy were legal in nature and did not fall within the public-rights exception. The Fifth Circuit also found unconstitutional the SEC's forum-selection authority and protections against removal of SEC ALJs. The Supreme Court affirmed solely on the Seventh Amendment ground and did not reach the latter two issues.

Issues

Issue #1

Whether the Seventh Amendment applies when the SEC seeks civil penalties for securities fraud.

Holding

Yes. The SEC's action is legal in nature, so a defendant is entitled to a jury trial if the claim is adjudicated in an Article III court.

Reasoning

The Seventh Amendment preserves the jury-trial right in suits at common law. That phrase reaches not only common-law causes of action existing in 1791, but also modern statutory claims that are legal rather than equitable or admiralty claims. Under Tull and Granfinanciera, courts assess both the resemblance between the statutory claim and a common-law action and, more importantly, the nature of the remedy sought.

The civil penalties at issue are legal remedies. Monetary relief is legal when it serves to punish or deter rather than solely to restore the status quo. The securities statutes make penalties depend on culpability, recidivism, deterrence, and similar considerations. They also allow escalating penalty tiers based on fraudulent or reckless conduct and may be imposed even without compensating injured investors. Those features show that SEC penalties are punitive, not merely remedial.

The statutory causes of action also closely resemble common-law fraud. Both target material misrepresentations and omissions, and Congress used common-law fraud terminology in the securities laws. Federal securities fraud is not identical to common-law fraud, but its close relationship to that traditional legal claim reinforces the conclusion that the SEC's action is a suit at law.

Issue #2

Whether the public-rights exception permits the SEC to adjudicate this securities-fraud civil-penalty action without a jury in its own administrative forum.

Holding

No. The action concerns private rights, not public rights, and Congress therefore cannot assign it to agency adjudication without an Article III court and jury.

Reasoning

The public-rights exception permits non-Article III adjudication only in limited categories of matters that historically could be resolved by the political branches. The Court's precedents recognize such categories as revenue collection, customs and immigration matters, public-land administration, relations with Indian tribes, and the conferral of public benefits. The presumption remains in favor of adjudication in Article III courts.

Granfinanciera substantially controlled the case. That decision held that Congress cannot eliminate the jury right merely by placing a traditionally legal claim into a new statutory or administrative framework. The substance of the claim, rather than its statutory label or assigned forum, determines whether it concerns a private right.

The SEC's status as the prosecuting party does not itself convert the case into a public-rights matter. The action regulates transactions among private participants in an existing securities market, targets conduct akin to common-law fraud, and seeks a remedy historically available only in courts of law. It is therefore a common-law suit in substance.

Atlas Roofing did not dictate a different result. That case involved a novel occupational-safety regime, comparable to detailed regulatory standards, rather than a claim rooted in common-law fraud. Later cases make clear that Congress may not avoid the Seventh Amendment merely by creating a statutory regulatory regime and assigning adjudication to an agency. Efficiency or agency expertise cannot justify withdrawing a traditional legal claim from judicial cognizance.

Concurrences

Justice Gorsuch

Reasoning

Justice Gorsuch agreed that the SEC's in-house proceeding violated the Seventh Amendment, but wrote to emphasize that Article III and the Fifth Amendment's Due Process Clause independently support the same result. In his view, the Constitution's protections work together: Article III supplies an independent judge, the Seventh Amendment supplies a jury, and due process requires the customary protections of a fair trial.

He stressed the practical differences between SEC administrative proceedings and federal-court litigation. The agency that authorizes charges also prosecutes them, may review the ALJ's decision, and operates under procedures that offer narrower discovery, limited depositions, compressed schedules, and more flexible evidentiary rules. Judicial review after the agency's final decision is deferential. These features, he argued, illustrate why constitutional protections cannot be avoided by moving a case from court to an agency tribunal.

Justice Gorsuch situated the case in the Founding-era reaction to colonial vice-admiralty courts. British officials often chose juryless, less independent tribunals to obtain favorable outcomes against colonists. The Framers responded through Article III, the Seventh Amendment, and due process guarantees designed to prevent the Government from depriving individuals of property through dependent adjudicators, without juries, or under unfamiliar procedures.

He understood the public-rights exception as narrow and historically bounded. Historically accepted exceptions, such as revenue collection and customs matters, rest on deeply rooted traditions of nonjudicial adjudication. A civil-penalty action resembling common-law fraud has the opposite historical pedigree: it belongs before an independent judge and jury using ordinary judicial procedures.

Dissents

Justice Sotomayor

Reasoning

Justice Sotomayor argued that the controlling question was not simply whether the SEC's claim resembled a common-law action or sought a legal remedy. Because the claim was adjudicated outside an Article III court, the threshold question was whether Congress could assign it to an agency consistently with Article III. In her view, the Seventh Amendment applies only to judicial proceedings, and a constitutionally valid assignment of a public-rights matter to an agency resolves any separate jury-trial objection.

She maintained that the SEC's enforcement action involved a public right because the Government, acting in its sovereign capacity, sought civil penalties for violations of federal statutory duties. Under a long line of cases, Congress may create statutory obligations, prescribe civil penalties for their violation, and authorize executive officials to adjudicate and enforce those penalties subject to judicial review.

In Justice Sotomayor's view, Atlas Roofing squarely controlled. There, the Court unanimously held that Congress could authorize agency adjudication of civil penalties for violations of occupational-safety obligations even though the Government's same claim would have required a jury if brought in federal court. The federal securities laws similarly create a comprehensive regulatory regime and permit the Government to enforce duties designed to protect the public, not merely to vindicate a private party's common-law claim.

She distinguished Tull because it involved a Government action for civil penalties filed in federal court, where the Seventh Amendment plainly applied. She also distinguished Granfinanciera because it concerned a fraudulent-conveyance claim between private parties in bankruptcy. Granfinanciera, she argued, expressly preserved Atlas Roofing's rule for claims in which the Government acts in its sovereign capacity.

Justice Sotomayor warned that the majority's rule unsettles longstanding administrative practice. Congress has authorized numerous agencies to impose civil penalties through administrative proceedings, and the decision could threaten many statutes and enforcement programs. In her view, the majority improperly displaced Congress's policy judgment about when expert administrative adjudication is appropriate and thereby aggrandized judicial power at the expense of the political branches.