Defendants have the right to a jury trial when facing civil penalties for securities fraud, according to the Seventh Amendment. A recent ruling by the U.S. Supreme Court in SEC v. Jarkesy found that the SEC’s practice of bringing securities-fraud charges before its in-house tribunals violates this right. The Dodd-Frank Act of 2010 expanded the SEC’s authority to impose civil penalties through proceedings overseen by SEC-appointed administrative law judges (ALJs) and the SEC Commissioners themselves.
The Court considered two main questions in determining whether these proceedings infringe on the Seventh Amendment. Firstly, it looked at whether the pursuit of civil penalties for securities fraud falls under claims that historically warrant a jury trial. The Court concluded that civil penalties, which serve to punish and deter rather than solely compensate, are a form of common-law legal remedy that triggers the Seventh Amendment. This is supported by the similarities between the elements of securities fraud and common-law fraud.
Secondly, the Court examined the “public rights” exception to Article III jurisdiction, which allows Congress to assign adjudication to an agency without a jury. In this case, the Court found that the exception does not apply when the action is akin to a common-law proceeding. The substance of the action, rather than where Congress has designated it for resolution, is crucial.
The ruling in Jarkesy has broader implications beyond the SEC, potentially affecting other federal agencies that impose penalties through administrative proceedings. While some agencies have the option to prosecute actions in federal court, many do not. It is likely that litigants will try to apply the reasoning of Jarkesy to other types of agency actions by seeking out common-law parallels.
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Overall, the Supreme Court’s decision in SEC v. Jarkesy highlights the importance of upholding defendants’ rights to a jury trial in cases involving civil penalties for securities fraud. This ruling may have far-reaching effects on how similar cases are adjudicated in the future.