SCOTUS Rules SEC’s In-House Handling of Securities Fraud Cases Violates the Right to Trial by Jury
The Supreme Court today ruled that the Securities and Exchange Commission (SEC) may not impose civil penalties for fraud without filing suit in federal court. Because “the SEC’s antifraud provisions replicate common law fraud,” Chief Justice John Roberts writes for the majority in SEC v. Jarkesy, alleged violators are entitled to a jury trial under the Seventh Amendment.
The decision rejects a perverse system in which the SEC, instead of seeking adjudication by an Article III court, can investigate, charge, prosecute, and penalize people for violating securities laws, with only limited judicial review after the fact. In this case, the SEC accused investment adviser George Jarkesy Jr. and his firm, Patriot28, of misrepresenting his investment strategies, “lying about the identity of the funds’ auditor and prime broker,” and “inflating the funds’ claimed value” to boost his management fees. After an in-house process in which the agency confirmed its own allegations, it imposed civil penalties totaling $300,000. Although the SEC had the option of suing Jarkesy for securities violations in federal court, it chose to handle the matter internally.
Roberts notes the implications of that approach. When the SEC files a lawsuit, “a jury finds the facts,” “a life-tenured, salary-protected Article III judge presides,” and “the litigation is governed by the Federal Rules of Evidence and the ordinary rules of discovery.” But when “the SEC adjudicates the matter in-house, there are no juries.” Instead the SEC, following its own rules, “presides and finds facts while its Division of Enforcement prosecutes the case.”
Such proceedings are overseen by a commissioner or, as in this case, an SEC-employed administrative law judge. Either way, Roberts notes, the full commission can review the resulting “findings and conclusions,” but “it is not obligated to do so.” And while independent judicial review is available “once the proceedings have concluded,” it is “deferential”: The court “must treat the agency’s factual findings as ‘conclusive’ if sufficiently supported by the record, even when they rest on evidence that could not have been admitted in federal court.”
Although that approach was authorized by the Dodd-Frank Act of 2010, Jarkesy argued that it violated the Seventh Amendment, which says “the right of trial by jury shall be preserved” in “suits at common law” where “the value in controversy shall exceed twent
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