Supreme Court Decides SEC v. Jarkesy

On June 27, 2024, the U.S. Supreme Court decided SEC v. Jarkesy, No. No. 22-859, holding that the Seventh Amendment entitles a defendant to a jury trial when the Securities and Exchange Commission seeks civil penalties for securities fraud.

In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which authorized the SEC to impose civil penalties for securities violations through in-house proceedings. Shortly after the passage of the Dodd-Frank Act, the SEC began investigating George Jarkesy, Jr., and his firm Patriot28, LLC, for securities fraud related to the launch of two investment funds. According to the SEC, Jarkesy and Patriot28 misled investors by misrepresenting investment strategies, lying about the identity of the funds’ auditor and prime broker, and by inflating the funds’ claimed value to collect larger management fees. The SEC initiated an enforcement action in-house before an administrative law judge where it alleged that these actions violated the antifraud provisions of the Securities Act, the Securities Exchange Act, and the Investment Advisers Act. Following an initial decision issued by the administrative law judge, the SEC issued a final order in 2020 that levied a civil penalty of $300,000 against Jarkesy and Patriot28, ordered them to cease and desist committing or causing violations of the antifraud provisions, directed Patriot28 to disgorge earnings, and prohibited Jarkesy from participating in the securities industry and in offerings of penny stocks. Jarkesy and Patriot28 petitioned for judicial review, and the Fifth Circuit granted their petition and vacated the final order.

Acknowledging the importance of the right to trial by jury, the Supreme Court first found that the claims at issue implicated the Seventh Amendment because of their close relationship to traditional legal claims, specifically, common law fraud. Defendants were therefore entitled to a jury trial unless the “public rights” exception applied. The SEC contended that the exception applied because Congress created “new statutory obligations, impose[d] civil penalties for their violation, and then commit[ted] to an administrative agency the function of deciding whether a violation ha[d] in fact occurred.” The Supreme Court rejected these arguments, reasoning that the action did not fall within any of the distinctive areas involving governmental prerogatives where the Court had concluded that a matter might be resolved outside of an Article III court without a jury. The Court further opined that Congress could not eliminate the Seventh Amendment right by legislating that traditional legal claims be heard by an administrative tribunal nor did the newly enacted regulatory scheme “permit Congress to siphon this action away from an Article III court.” The identity of the Government as prosecutor also did not trigger the public rights exception. Accordingly, the Court concluded that Jarkesy and Patriot28 were entitled to a jury trial in an Article III court.

Chief Justice Roberts delivered the opinion of the Court, in which Justices Thomas, Alito, Gorsuch, Kavanaugh, and Barrett joined. Justice Gorsuch filed a concurring opinion, in which Justice Thomas joined. Justice Sotomayor filed a dissenting opinion, in which Justices Kagan and Jackson joined.