In recent years, federal courts have issued a number of opinions limiting the power of administrative agencies. One of these decisions is SEC v Jarkesy. In the case, the U.S. Supreme Court imposed limits on the Securities and Exchange Commission’s (SEC’s) power to seek civil penalties in certain cases through an administrative proceeding. It required that when the SEC seeks penalties, it must file in the U.S. District Court so defendants have the right to a jury trial. Potentially, this ruling can be beneficial for defendants and may have a wider impact on other agencies.
In the case, the SEC brought an enforcement action against defendants George Jarkesy, Jr. and Patriot28, LLC (collectively “Jarkesy”) for securities fraud, seeking civil penalties and other remedies. The action was brought administratively rather than in federal court. The administrative law judge (ALJ) found Jarkesy liable, and the SEC affirmed on appeal.
Jarkesy appealed to the Fifth Circuit Court of Appeals, which vacated the SEC’s decision as unconstitutional. The case went to the U.S. Supreme Court, which found that Jarkesy was unconstitutionally deprived of his right to a jury trial under the Seventh Amendment.
In deciding the case, the Supreme Court looked at the purpose of the civil penalties at issue. It found that the civil penalties for securities fraud were sought as a legal remedy to punish or deter defendants rather than an equitable remedy designed to restore the status quo. Accordingly, defendants should have the right to a jury trial. Further, historically, there has been a close relationship between federal securities fraud and common law fraud, the latter of which requires jury trials.
The Court also rejected the claim that the SEC actions fell within the public rights exception, which permits Congress to handle some matters administratively. Chief Justice Roberts stated that the existing public rights exceptions do not involve punitive penalties for federal violations, and therefore, the exception doesn’t apply to this case.
For these reasons, the Court held Jarkesy had a right to a jury trial, so the action against him had to be brought in federal district court, not as an SEC administrative proceeding.
The SEC has already started to limit its use of administrative proceedings. Therefore, there won’t be many additional changes in the procedure for new fraud cases going forward. However, there are still open questions:
The Supreme Court’s decision is important for defendants because it gives them the right to a jury trial and removes them from an administrative process that many contend is biased.
If you are facing a regulatory investigation or enforcement action, contact us for a consultation to learn how we can help you with your matter.