On June 27, 2024, the Supreme Court issued its opinion in Securities Exchange Commission v. Jarkesy. The Court held that the Seventh Amendment entitles a defendant to a jury trial when the SEC seeks civil penalties for securities fraud, because these cases replicate common law fraud claims. S.E.C. v. Jarkesy, No. 22-859, slip op. at 6 (U.S. 2024). Therefore, these types of claims must be heard by an Article III court. One impact of this ruling is that the SEC’s administrative proceeding (“AP”) enforcement mechanism is no longer available for matters where the SEC brings a fraud claim and seeks civil penalties, and otherwise fails to reach a negotiated settlement with the defendant prior to filing. However, even though Jarkesy did not address the Foreign Corrupt Practices Act (“FCPA”) directly, the case will potentially have some impact on FCPA enforcement because the SEC will likely be unable to use the AP process for contested FCPA matters where a penalty is sought, and instead will be required to file these matters in federal district court. This will pose additional risk and resource calculations for the SEC, as discussed below. 

SEC FCPA Enforcement

Prior to the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in 2010, the SEC used a bifurcated approach in its Foreign Corrupt Practices Act (“FCPA”) cases. The SEC would typically file suit in federal court for civil penalties, while also seeking disgorgement and a cease-and-desist order from an Administrative Law Judge (“ALJ”) through an administrative proceeding (“AP”).[1] 

Since the enactment of Dodd-Frank, the SEC has handled the vast majority of its enforcement actions (including FCPA enforcement actions) solely as APs.[2] In fact, nearly all of these proceedings have been negotiated resolutions where an agreement is reached prior to filing.[3] This limits the adverse or collateral consequences for public company and individual defendants[SPB1] , while avoiding the costs of litigation and addressing harm to investors[SPB2] because these negotiated resolutions are typically announced, filed, and settled on the same day, so there is only one media event that impacts the company and its investors. 

Between 2019 and July 2024, the SEC brought 47 FCPA enforcement actions (20 actions alleged violations of both provisions of the FCPA, 20 alleged violations of the recordkeeping requirements, and 7 alleged violations of the anti-bribery provisions).[4] Almost all these cases were APs; the SEC only litigated one FCPA case in federal district court between 2019 and 2024.[5] 

Jarkesy Procedural History

In 2014, SEC initiated an administrative proceeding against Jarkesy alleging securities fraud and seeking various forms of relief, including monetary penalties. After a hearing, the SEC ALJ’s initial decision found that Jarkesy’s hedge funds committed securities fraud against investors.[6] The ALJ fined Jarkesy and other parties $450,000 and required disgorgement of $1,278,597. The ALJ also permanently barred Jarkesy from participating in the securities industry. Jarkesy initially appealed the ALJ decision using the SEC’s internal appeal process. The SEC eventually modified the ALJ’s order on appeal, reducing the fine to $300,000 and the disgorgement to $684,935.38.[7] Jarkesy then appealed the SEC’s decision to the U.S. Court of Appeals for the Fifth Circuit.[8] 

The Fifth Circuit held that the SEC violated Jarkesy’s Seventh Amendment right to a jury trial.[9] The court reasoned that fraud prosecutions existed at common law and that the SEC’s securities-fraud administrative enforcement proceedings were “akin to those same traditional actions.”[10] The Fifth Circuit also held that it is unconstitutional for the SEC to impose civil monetary penalties in administrative proceedings because Congress delegated power to the SEC without an intelligible principle.[11] The court explained that “Congress has given [the SEC] exclusive authority and absolute discretion to decide whether to bring securities fraud enforcement actions within the agency instead of an Article III court” without “indicating how the SEC should make that call in any given case.”[12] Additionally, the Fifth Circuit held that the statutory removal restrictions for SEC ALJs violated the President’s removal power under Article II.[13] 

The SEC then appealed the Fifth Circuit’s decision to the Supreme Court.[14]

Supreme Court’s Opinion

In its June 27, 2024, opinion, the Supreme Court held that the Seventh Amendment entitles a defendant to a jury trial in SEC securities fraud proceedings because these cases are akin to common law fraud claims. Consistent with the rationale set out by the Fifth Circuit in its ruling, the Court explained that when determining whether the Seventh Amendment applies, “courts must consider whether the cause of action resembles common law causes of action, and whether the remedy is the sort that was traditionally obtained in a court of law.”[15] Of these two factors, the Court explained, the remedy is most important.[16] 

The Court determined that the monetary relief that the SEC generally seeks in its securities fraud proceedings is the kind of relief that is traditionally obtained in a court of law.[17] Additionally, both securities and common law fraud claims “target the same basic conduct: misrepresenting or concealing material facts.”[18] When it chose to use the word “fraud,” Congress incorporated common law fraud principles into the securities laws.[19] Together, these factors make securities fraud proceedings akin to a suit at common law at the time of the founding, and thus defendants in these proceedings are entitled to a jury trial.[20]  

The Court went on to explain that “if a suit is in the nature of an action at common law, then the matter presumptively concerns private rights, and adjudication by an Article III court is mandatory.”[21] While some cases concern public and private rights, the public rights exception only applies in cases that “‘historically could have been determined exclusively by [the executive and legislative branches],’” such as taxation and immigration cases.[22] The Court held that the public rights doctrine does not prohibit application of the Seventh Amendment in securities fraud proceedings simply by virtue of the fact that Congress gave the SEC adjudicatory powers in these cases.[23] The Court again stressed that “if the action resembles a traditional legal claim, its statutory origins are not dispositive.”[24] 

The Court also distinguished Atlas Roofing Company, Inc. v. Occupational Safety and Health Commission from the present case. That case arose under the Occupational Safety and Health Act (“OSH Act”), which the Court explained created “a new cause of action, and remedies . . . unknown to the common law.”[25] Because there was no traditional legal claim under the common law, “Congress could assign the OSH Act adjudications to an agency” without violating the Seventh Amendment.[26] In contrast, the Court held that the securities fraud claim at issue in Jarkesy is analogous to common law fraud, so Congress cannot assign adjudications of these claims to an agency. 

Immediate Impact

As a result of Jarkesy, the SEC must immediately reevaluate each pending matter that has been brought as an AP – both as adversarial matters and as pending negotiated resolutions. Where current APs are in progress or have been filed but stayed pending the Supreme Court’s decision, and where the SEC is seeking monetary penalties for claims that resemble common law fraud, the SEC must, at a minimum, forgo that remedy if they proceed. However, if it continues to pursue contested claims via an AP, because, for example, it believes the claims to be outside the Court’s common-law fraud definition or there are statute of limitation constraints that preclude refiling in federal district court, the SEC will face continued appellate litigation and risk narrowing the availability of the AP process even further. For matters that are currently in negotiation and pending settlement, where the SEC anticipated resolution through a “file and settle” process, the SEC will have to rethink whether it can proceed without obtaining additional written waivers from the settling parties. If the SEC does seek waivers, the settling party may rethink their position based on the changed circumstances, as described more fully below.

Implications for SEC FCPA Enforcement

The Court’s Jarkesy ruling will have implications for the SEC’s enforcement of the FCPA. Applying the standard articulated in Jarkesy, FCPA cases likely fall within the Seventh Amendment’s protections. As with securities fraud cases, the SEC often seeks civil penalties in the form of monetary relief in its FCPA enforcement actions; this relief is legal in nature. While the FCPA does not have as clear a historic analog as securities fraud, at least one court has held that there is a civil tort for bribery,[27] which may have existed in 1789 .[28] Regardless, claims relating to the FCPA’s anti-bribery and recordkeeping provisions resemble a traditional common law claim more than the claim at issue in Atlas Roofing. Together, these factors weigh in favor of applying the Seventh Amendment to SEC’s FCPA enforcement actions. 

Given this, the SEC may return to the bifurcated enforcement system it used before Dodd-Frank. Practically speaking, many FCPA individual and corporate defendants will still choose to settle their cases with the SEC. These negotiated cases can still be filed as APs under Jarkesy because these settling defendants can waive the right to a jury trial or Article III proceeding, so long as appropriate waivers are obtained. Because settling defendants and the SEC both can benefit from using the AP process, the SEC will likely alter its settlement documents slightly but otherwise continue to use APs when a resolution is reached before the SEC decides to file an enforcement action. 

However, the Jarkesy holding could change defendant’s bargaining power prior to reaching a settlement. Defendants who choose not to settle will force the SEC to file in federal court if the SEC seeks monetary penalties. Filing in district court, as opposed to using the administrative process, will add additional variables if the parties eventually settle, including that courts may not agree with the settlement terms the parties negotiate; the applicable law in various circuits and districts may present different challenges for the SEC; and district court judges have varying pretrial and trial procedures that can pose challenges, resource constraints, and litigation risk for the SEC.[29] In some instances involving less significant or less meaningful violations, the SEC may choose not to bring cases at all, since FCPA defendants are typically well resourced and the SEC may be required to fully litigate matters in a more hostile or difficult environment than the in-house court presided over by an ALJ, where the SEC has natural advantages. 

In addition, third-parties or victims may potentially get involved with the proceedings or bring additional claims in federal district court actions, particularly where public discovery disputes or other revelations provide the public or interested parties with information about the underlying conduct. Compared to an AP, it can be more difficult to keep submissions, proceedings, and resolutions confidential in district court, and confidential filing practices vary across the country.

Finally, the risk calculation can vary greatly depending on the court in which the matter is filed, given the array of experience, expertise, and philosophies that district courts can inject into high-profile SEC matters, particularly those involving FCPA violations. This has the potential to add uncertainty and expense for the parties. For example, defendants will get discovery pursuant to the Federal Rules of Civil Procedure in district court actions, compared to the more limited discovery available in faster-moving APs. And, in parallel proceedings where there is an overlapping criminal enforcement investigation or filed action, the SEC may be less able to obtain a stay of a filed district court action because district court judges have varying practices and willingness to grant such stays, as opposed to APs where a set procedure exists for the SEC or criminal authority to request that an ALJ issue a stay in such a matter.[30]

Some defendants will undoubtedly weigh these factors and decide not to settle before the SEC files an action, and then evaluate the matter further once the district court matter is filed and a judge is assigned. This will be particularly true for well-resourced defendants willing to fight allegations that they violated the FCPA. As a result, the Jarkesy decision has the potential to alter the SEC FCPA enforcement landscape and slow down the settlement process, making it more difficult for the SEC to direct the pace of outcomes or control the process when working with criminal enforcement partners. 

[1] See Gideon Mark, SEC and CFTC Administrative Proceedings, 19 J. of Const. L. 45, 54 (Oct. 2016).

[2] See SEC Enforcement Actions: FCPA Cases, U.S. Sec. & Exch. Comm’n (last accessed Dec. 23, 2023), https://www.sec.gov/enforce/sec-enforcement-actions-fcpa-cases.

[3] See SEC Enforcement Actions, supra.

[4] See id.

[5] See id.

[6] John Thomas Cap. Mgmt. Grp., LLC, Exchange Act Release No. 693, 2014 WL 5304908 (Oct. 17, 2014), at *22. 

[7] John Thomas Cap. Mgmt. Grp., LLC, Exchange Release No. 5572, 2020 WL 5291417 (Sept. 4, 2020), at *1. 

[8] See John Thomas Cap. Mgmt. Grp., LLC, Exchange Release No. 5672, 2021 WL 221882 (Jan. 21, 2021).

[9] Jarkesy v. Sec. & Exch. Comm’n, 34 F.4th 446, 449 (5th Cir. 2022). 

[10] Id. at 455. 

[11] Id. at 461-63. 

[12] Id. at 462.

[13] Id. at 463-64. 

[14] Petition for Cert., Securities & Exch. Comm’n v. Jarkesy, No. 22-859 (U.S. 2024). The Court granted the SEC’s petition in June 2023 and heard oral argument in November 2023.

[15] Jarkesy, no. 22-859, slip op. at 3 . 

[16] Id.

[17] Id. at 11. 

[18] Id. 

[19] Id. 

[20] Id. at 13. 

[21] Id. at 14 (citing Stern v. Marshall, 564 U.S.462, 484 2011). 

[22] Jarkesy, no. 22-859, slip op. at 14 (quoting Stern, 564 U.S., at 493). 

[23] Jarkesy, no. 22-589, slip op. at 21. 

[24] Id. at. 22.

[25] Id. at 24 (quoting Atlas Roofing Co., Inc. v. Occupational Safety & Health Comm’n, 430 U.S. 442, 461 (1977)). 

[26] Jarkesy, no. 22-859, slip op. at 25. 

[27] See Continental Mgmt, Inc., v. United States, 527 F.2d 613, 620 (Ct. Cl. 1975).

[28] See James Lindgren, The Elusive Distinction between Bribery and Extortion: From the Common Law to the Hobbs Act, 35 UCLA L. Rev. 815, 839 (1988) (explaining that extortion dates back to the thirteenth century and bribery dates back to the early seventeenth century).

[29] For example, U.S. District Judge Jed S. Rakoff in the Southern District of New York has upended some SEC settlements. Most notably, in 2011, Judge Rakoff refused to approve the proposed consent order in S.E.C. v. Citigroup Glob. Mkts., 827 F. Supp. 2d 328, 335 (S.D.N.Y. 2011), because the order did not serve the public interest. The Second Circuit later held that Judge Rakoff abused his discretion in refusing the approve the proposed order. See S.E.C. v. Citigroup Glob. Mkts., 752 F.3d 285, 289 (2d. Cir. 2014). 

[30] There may be instances where a charged civil defendant seeks a stay because of an ongoing criminal investigation and concerns about their ability to defend the matter without implicating or waiving their Fifth Amendment rights. However, in other instances a defendant may wish to use the civil discovery process to obtain information they could not otherwise receive while a criminal investigation or even a filed criminal case, is pending. In either case, by removing the ability of the SEC to bring these matters in district court the SEC and their law enforcement counterparts will now face additional variables when the SEC brings an FCPA action and a parallel criminal investigation is ongoing.