The Securities and Exchange Commission could lose a key enforcement mechanism, as several US Supreme Court justices seemed open to barring the use of administrative law judges to decide securities fraud cases during argument in SEC v. Jarkesy on Nov. 29.
Jarkesy arises out of an SEC civil enforcement action against George Jarkesy Jr., whom the agency accused of committing fraud in violation of federal securities laws. Following an administrative proceeding, the SEC found Jarkesy liable and ordered him to pay $300,000 in fines and to disgorge nearly $700,000 of ill-gotten profits.
The U.S. Court of Appeals for the Fifth Circuit vacated that decision, siding with Jarkesy on three independent constitutional challenges to the SEC’s enforcement authority. During the nearly two-hour oral argument, the Supreme Court focused almost exclusively on one of those issues: whether the Seventh Amendment bars the SEC from imposing monetary penalties in administrative proceedings without affording defendants the right to trial by jury.
On behalf of the SEC, Principal Deputy Solicitor General Brian Fletcher argued that SEC enforcement actions aren’t “suits at common law,” the only actions to which the Seventh Amendment jury-trial right applies.
Unlike a private plaintiff’s suit for common-law fraud, Fletcher argued, SEC enforcement actions seek to vindicate rights held by the public at large—namely, the right to fair and honest financial markets.
When the government civilly enforces statutory obligations in this way, it acts in a purely executive capacity, and defendants have no right to a jury trial.
Fletcher repeatedly contended that the Supreme Court’s 1977 decision in Atlas Roofing v. Occupational Safety & Health Rev. Comm., which upheld the Occupational Safety and Health Administration’s ability to bring non-jury administrative proceedings and impose civil penalties for workplace hazards, was dispositive.
In authorizing SEC administrative enforcement proceedings, Fletcher emphasized, Congress didn’t simply “federalize” common-law fraud. Instead, as it did with OSHA, it established a comprehensive securities-enforcement regime with new causes of action whose elements and available remedies are distinct from those under the common law.
Counsel for Jarkesy, S. Michael McColloch, contended that the SEC’s enforcement action against Jarkesy is effectively a suit at common law because it alleges all the same elements of common-law fraud.
McColloch insisted that Atlas Roofing isn’t dispositive because, whereas OSHA sought to enforce new statutory obligations markedly distinct from those arising under the common law, the SEC’s enforcement action serves the same essential purpose as a common-law fraud action.
The Seventh Amendment doesn’t permit Congress, merely by codifying and relabeling common-law actions, to authorize monetary penalties through administrative proceedings without a jury, he argued.
Though it’s difficult to predict from the argument how the Supreme Court will rule, several justices appeared to sympathize with Jarkesy’s argument that he had a jury-trial right. Justice Neil Gorsuch, in particular, expressed indignation at the notion that Congress could simply circumvent the Seventh Amendment by authorizing agencies to bring tort claims in administrative proceedings. Justice Clarence Thomas seemed to hold the same view.
On the other hand, Justice Elena Kagan all but declared that Atlas Roofing forecloses Jarkesy’s argument and that any radical overhaul of this settled precedent should be for Congress, not the court, to undertake. Justices Sonia Sotomayor and Ketanji Brown Jackson conveyed similar sentiments.
The remaining justices’ positions were less obvious, but they appeared generally more receptive to Jarkesy’s view of the Seventh Amendment. Chief Justice John Roberts, for instance, suggested that the unprecedented power that agencies have acquired in recent decades might justify greater constitutional protections for the targets of enforcement.
A decision in Jarkesy’s favor could be significant. To be sure, the SEC and other agencies have increasingly opted in recent years to bring enforcement actions in Article III courts rather than in administrative proceedings, largely in response to courts’ growing scrutiny of administrative law judges.
Nonetheless, seeking monetary penalties in non-jury proceedings remains a key means of enforcing federal law. Eliminating agencies’ ability to do so could lead agencies to file even more, if not most, of their enforcement actions in the already-overburdened Article III courts.
Or it could simply result in less enforcement. Either way, the court’s likely—at least partial—affirmance of the Fifth Circuit has potential to upend the last half-century or more of administrative law and dramatically alter the way that federal law is enforced.
The case is Securities and Exchange Commission v. Jarkesy, U.S., No. 22-859, oral argument 11/29/23.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Jeremiah Williams is partner in Ropes & Gray’s litigation and enforcement practice group and was previously senior counsel in the SEC’s Division of Enforcement.
Rory Skowron is an associate in Ropes & Gray’s litigation and enforcement practice group.
Write for Us: Author Guidelines