SEC v. Jarkesy raises major questions about the agency’s enforcement authority.
Grygo is the chief content officer for FTF & FTF News.
If major media organizations even bothered to cover the U.S. Supreme Court’s 6-to-3 decision against the Securities and Exchange Commission (SEC) on June 27, the initial takeaway was that the regulatory agency suffered a massive blow to its abilities to take legal action in civil cases, particularly anti-fraud cases.
But that might be too dire a consequence as the SEC appears to have considered its contingencies while the case made its way through the court system.
To recap, the case was sparked by the SEC’s “enforcement action against respondents George Jarkesy, Jr., and Patriot28, LLC, seeking civil penalties for alleged securities fraud,” according to the overview provided by Chief Justice John Roberts. “Relying on the new authority conferred by the Dodd-Frank Act … the SEC chose to adjudicate the matter in-house before one of its administrative law judges, rather than in federal court where respondents could have proceeded before a jury.”
The SEC decided against Jarkesy, but the firm “petitioned for judicial review … A divided panel of the Fifth Circuit granted their petition and vacated the final order [of the SEC ALJ],” the court’s majority opinion notes.
Ultimately, the Supreme Court was asked to consider if the Seventh Amendment “permits the SEC to compel respondents to defend themselves before the agency rather than before a jury in federal court,” according to the majority opinion.
In deciding in favor of Jarkesy and Patriot28, the high court argues that the defendant “facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator. Rather than recognize that right, the dissent would permit Congress to concentrate the roles of prosecutor, judge, and jury in the hands of the Executive Branch. That is the very opposite of the separation of powers that the Constitution demands.”
The majority declared that “Jarkesy and Patriot28 are entitled to a jury trial in an Article III court” based mostly on “the Seventh Amendment ground alone.” The full PDF of the opinion can be found here: https://shorturl.at/BGrFt
Some key practical aspects of the ruling may calm fears that the SEC has less enforcement power.
The lawyers at the firm Sidley Austin published their take on their website and focused on how the decision “will undoubtedly affect administrative enforcement proceedings, both at the Commission and at numerous other federal agencies.” The full impact will come down to a case-by-case basis, they say.
“As a practical matter, in part because of the pending challenges like those in Jarkesy, the SEC has in recent years brought almost all litigated proceedings in federal court. In light of Jarkesy, the SEC very well may continue this practice for any litigated claims where it is authorized to bring the claim in court, not just antifraud claims, to avoid additional litigation risk,” according to the lawyers at Sidley Austin.
“In short, Jarkesy promises to be only the beginning of litigation about the applicability of the Seventh Amendment to administrative proceedings, not only at the SEC but across the federal government,” according to Sidley Austin. The full text of the firm’s take on the decision can be found here: https://shorturl.at/ak4LY
Another law firm, Morgan Lewis, argues in its website posting, that many respondents to the SEC actions “challenged the constitutionality of the SEC’s administrative proceedings in federal court. To avoid such challenges, for years, the SEC’s practice has been to pursue securities fraud cases in federal court. The Jarkesy decision is likely to make that practice permanent.”
But the SEC might be “unlikely to bring fraud claims administratively if it has to forgo seeking a civil money penalty — one of the strongest tools in its arsenal,” according to Morgan Lewis. “The decision also does not affect the use of administrative proceedings in SEC enforcement actions on claims not arising from the common law, such as books and records violations or violations for failure to supervise.”
The Supreme Court Building
In addition, the Jarkesy decision “should not prohibit parties from electing to settle matters involving a financial penalty administratively. This is because parties are generally free to waive constitutional rights, and in fact, SEC offers of settlement virtually always contain such a waiver,” according to Morgan Lewis.
The full text of the Morgan Lewis analysis can be found here: https://shorturl.at/XcJyO
To be honest, while the SEC reviews its options, there may be difficult consequences from this quiet decision beyond the SEC.
In writing for the minority, U.S. Justice Sonia Sotomayor argues that “hundreds of statutes may now be in peril, and dozens of agencies could be stripped of their power to enforce laws enacted by Congress. Rather than acknowledge the earthshattering nature of its holding, the majority has tried to disguise it.”
FTF News reached out to the SEC for comment. But a spokesperson says that the SEC declines to comment upon the matter.
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