On June 27, 2024, the Supreme Court ruled in Securities and Exchange Commission v. Jarkesy that the Seventh Amendment prohibited the Securities and Exchange Commission from seeking civil penalties for securities fraud in administrative proceedings, rather than before a jury in federal district court. Jarkesy is a victory for those who have expressed frustration with the SEC’s administrative proceedings. Defendants in such proceedings are entitled to less discovery than in federal court, enjoy fewer protections from the rules of evidence and less public transparency, and must contend with administrative law judges who, according to some, are biased in favor of the agency. In addition, Jarkesy calls into question the constitutionality of a wide swathe of proceedings before federal administrative agencies.

In 2013, the SEC initiated an enforcement action against George Jarkesy, Jr. and Patriot28, LLC, an investment adviser under his control, alleging violations of the antifraud provisions of the federal securities laws. The SEC chose to adjudicate the matter in an administrative proceeding instead of in federal court. In that proceeding, the SEC disclosed the equivalent of 15 to 25 million pages of information collected during its investigation and gave Mr. Jarkesy only 10 months to prepare for his hearing. An administrative law judge found violations of the securities laws, and the SEC agreed, issuing a final order nearly six years later.[1] Among other remedies, the SEC imposed a civil penalty of $300,000. On appeal, the Fifth Circuit vacated the SEC’s order, finding that the agency proceedings violated the Seventh Amendment by depriving the respondents of their right to proceed in federal court before a jury and also ruling in Mr. Jarkesy’s favor on two other constitutional grounds.

The Supreme Court held that the proceeding implicated the Seventh Amendment right to a trial by jury. The holding relied on the nature of the civil penalties sought, which the Court found were designed to punish and deter misconduct in contrast to a purely remedial purpose. The Court noted that several factors for civil money penalties “concern culpability, deterrence, and recidivism.” The Court also relied on the “close relationship” between the federal causes of action and common law fraud. The Court next held that the “public rights” exception to the Seventh Amendment did not allow for administrative adjudication. The Court identified several areas of public rights which could be adjudicated before agencies: the collection of revenue, immigration, the assessment of tariffs, relations with Indian tribes, the administration of public lands and the granting of public benefits—all essentially “governmental prerogatives.” Because the SEC proceeding did not fall into any of those categories, the Seventh Amendment required federal court proceedings with a jury. The Court affirmed without reaching the two additional constitutional problems identified by the Fifth Circuit: that the SEC’s discretion to bring the case within the agency violated the nondelegation doctrine, and that a for-cause restriction on the administrative law judge’s removal violated Article II and the separation of powers.

In dissent, Justice Sotomayor argued that the Court had long allowed claims seeking civil penalties to be assigned to administrative agencies for initial adjudication. The dissent urged a far broader application of the public rights doctrine. The dissenting opinion predicted that “the constitutionality of hundreds of statutes may now be in peril, and dozens of agencies could be stripped of their power to enforce laws enacted by Congress.”

On its face, Jarkesy says only that the SEC must seek civil penalties for fraud in federal court, rather than in administrative proceedings. The opinion does not preclude the SEC from using agency proceedings to pursue non-fraud claims or seek equitable remedies, such as industry bars. However, respondents in a variety of administrative proceedings will likely argue that Jarkesy entitles them to a federal court proceeding before a jury. The Court’s reasoning could be extended to proceedings in other agencies and other types of proceedings before the SEC, especially in the wake of the Court’s acknowledgement that its “opinions governing the public rights exception have not always spoken in precise terms.” It remains to be seen whether Jarkesy truly jeopardized the enforcement of hundreds of statutes in dozens of federal administrative agencies. But regardless of its eventual reach, the decision will have consequences far beyond the narrow context in which it was decided.

[1] Hunton Andrews Kurth LLP represented Mr. Jarkesy and Patriot28 in an earlier challenge to the SEC proceedings in the United States District Court for the District of Columbia.