Supreme Court Rules Against SEC in Administrative Proceedings Case

On June 27, the U.S. Supreme Court held that that a jury trial is required under the Seventh Amendment in securities fraud cases brought by the SEC. In the case, Securities and Exchange Commission v. Jarkesy, the Commission brought a civil enforcement action against Jarkesy (a private funds investment adviser) for misrepresenting investment strategies, lying to investors, and inflating the funds’ valuation in order to charge higher management fees. The Commission used its in-house adjudication process (a hearing with an Administrative Law Judge (ALJ)) rather than bringing charges in federal district court. Jarkesy appealed to the U.S. Court of Appeals for the Fifth Circuit after the ALJ found Jarkesy liable. The Supreme Court found that the Commission may not try a fraud case in an administrative proceeding, rather those cases must be heard by “Article III” courts, otherwise known as the federal court system. The Commission argued that the right to pursue civil penalties falls under the public rights exemption, but the Court pushed back suggesting this exemption may only be available when the dispute is between the government and a private party itself (i.e. immigration proceedings, tax, public benefits). The Jarkesy decision will not only impact the Commission, but other agencies that use administrative proceedings to impose civil penalties.

Click here to read a client alert on the Supreme Court’s decision in Jarkesy from Ropes & Gray.
Click here to read the Supreme Court’s decision in Jarkesy.