U.S. Supreme Court Deals Blow to SEC’s In-House Enforcement Powers

Introduction

On June 27, in a highly anticipated decision, the U.S. Supreme Court ruled 6-3 in Securities and Exchange Commission v. Jarkesy, et al., that when the SEC seeks civil penalties against a defendant for securities fraud, the Seventh Amendment entitles the defendant to a jury trial. This landmark ruling deals a major blow to the SEC’s ability to bring enforcement actions in its in-house administrative forum rather than federal court.

Background

The case arises from the SEC’s enforcement action against George Jarkesy and his firm, Patriot28, LLC. The SEC alleged that Jarkesy and Patriot28 engaged in fraudulent activities, including misrepresenting investment strategies, lying about the identity of Patriot28’s auditor and prime broker, and inflating the value of Patriot28’s funds to collect larger management fees. Relying on the authority granted by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), the SEC opted to adjudicate the matter in-house, leading to, among other sanctions, a $300,000 civil penalty.

The Dodd-Frank Act’s expansion of the SEC’s administrative enforcement powers was a significant change from the agency’s prior practice. Historically, the SEC could impose civil penalties only through federal court actions, where defendants had the right to a jury trial. By allowing the SEC to impose these penalties in-house, without a jury, Congress granted the agency a powerful new tool to police securities fraud.

Jarkesy and Patriot28 were among the first targets of the SEC’s expanded authority. After an administrative law judge found them liable for securities fraud and ordered them to pay a $300,000 civil penalty, they appealed to the SEC, arguing that the agency’s administrative proceedings violated their Seventh Amendment right to a jury trial. The SEC rejected these arguments and affirmed the penalty.

On appeal to the Fifth Circuit, Jarkesy and Patriot28 again pressed their Seventh Amendment argument. They asserted that the SEC’s enforcement action was akin to a traditional common law fraud suit that would require a jury trial if brought in federal court. The SEC countered that under the “public rights” doctrine, Congress could constitutionally assign the adjudication of this type of enforcement action to an administrative agency without a jury.

The public rights exception to the Seventh Amendment has long been a source of tension and confusion. The doctrine holds that Congress can create certain “public rights” and assign their adjudication to non-Article III tribunals, such as administrative agencies, without violating the right to a jury trial. Paradigmatic public rights include those arising “between the Government and persons subject to its authority in connection with the performance of the constitutional functions of the executive or legislative departments.” Crowell v. Benson, 285 U.S. 22, 50 (1932).

But the precise scope of the public rights exception has remained murky. While some cases have suggested that public rights are limited to discrete historical categories like taxation, customs duties, and immigration, others have taken a more expansive view that public rights can encompass any statutory right that Congress creates to vindicate the public interest. See, e.g., Thomas v. Union Carbide Agric. Prods. Co., 473 U.S. 568, 589 (1985).

The Fifth Circuit sided with Jarkesy and Patriot28, holding that the SEC’s enforcement action did not fall within the public rights exception. The court reasoned that securities fraud actions seeking civil penalties were analogous to common law fraud claims that historically required a jury trial. And it rejected the SEC’s argument that the agency’s enforcement scheme was a valid exercise of Congress’s power to create and assign public rights to administrative adjudication.

The SEC petitioned for certiorari, teeing up a major clash over the scope of the public rights doctrine and the constitutionality of the agency’s in-house enforcement powers. With the case before the U.S. Supreme Court, the stage was set for a definitive ruling on whether the Seventh Amendment permits the SEC to impose civil penalties through administrative proceedings without a jury.

The U.S. Supreme Court’s Analysis

In affirming the Fifth Circuit’s ruling, the U.S. Supreme Court applied a two-step analysis from Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989). First, the Court considered whether the SEC’s enforcement action seeking civil penalties was “legal in nature,” such that it would implicate the Seventh Amendment jury trial right if brought in federal court. Second, the Court examined whether the “public rights” exception nonetheless permitted Congress to assign the matter to agency adjudication without a jury.

On the first question, the Court concluded that the SEC’s action was decidedly legal in nature. The Court explained that securities fraud actions under the SEC’s antifraud provisions “replicate common law fraud,” a quintessential legal claim historically tried before juries. SEC v. Jarkesy, No. 22-859, 2024 WL 3187811, at 7 (U.S. June 27, 2024). The Court pointed to the close similarities between the elements. While acknowledging some differences between the two causes of action, the Court emphasized that “the close relationship between federal securities fraud and common law fraud confirms that this action is ‘legal in nature.’” Id. at 10 (citing Granfinanciera, 492 U.S. at 53).

The Court also stressed that the SEC was seeking civil penalties, a traditional legal remedy akin to punitive damages. The Court explained that civil penalties are designed to punish and deter misconduct, not to compensate victims or restore the status quo, placing them squarely on the legal side of the legal-equitable divide. And because civil penalties were “a type of remedy at common law that could only be enforced in courts of law,” the Court concluded that the SEC’s action implicated the Seventh Amendment jury trial right. Id. at 8.

Turning to the public rights exception, the Court held that the SEC’s action did not fall within the limited categories of public rights that can be assigned to agency adjudication without a jury. The Court surveyed its public rights precedents, explaining that the exception has typically applied to matters involving the government’s constitutional functions in areas such as revenue collection, customs, immigration, public lands administration, and public benefits. In contrast, the Court noted, disputes involving “private rights”—the liability of one individual to another—presumptively require adjudication in an Article III court with a jury.

Rejecting the SEC’s argument that its enforcement action qualified as a public right, the Court emphasized that the securities fraud claims at issue “target the same basic conduct as common law fraud, employ the same terms of art, and operate pursuant to similar legal principles.” Id. at 14. Underscoring that "Congress cannot conjure away the Seventh Amendment by mandating that traditional legal claims be taken to an administrative tribunal," the Court held fast to the line between private rights requiring a jury trial and genuine public rights subject to agency adjudication.

The Concurring Opinion

Justice Gorsuch, joined by Justice Thomas, filed a concurrence. Gorsuch argued that the Seventh Amendment, Article III, and the Due Process Clause work together to protect the right to a jury trial and traditional judicial procedures before the government can deprive a citizen of property. He traced the history of jury trials and judicial independence from English common law through the Founding era, emphasizing the importance of these safeguards against arbitrary government action. Gorsuch then critiqued the Court’s public rights jurisprudence, contending that the exception had strayed too far from its historical origins in areas like revenue collection, customs enforcement, immigration, and public benefits administration. He suggested that the Court should confine the public rights exception to those traditional categories and reject the SEC’s attempt to shoehorn securities fraud enforcement into the exception. While agreeing with the majority’s Seventh Amendment holding, Gorsuch’s concurrence would have gone further in curtailing the public rights doctrine and requiring more agency enforcement actions to proceed in Article III courts with full jury trial rights and due process protections.

The Dissenting Opinion

In dissent, Justice Sotomayor, joined by Justices Kagan and Jackson, argued that the majority’s decision is a severe misreading of precedent that will have dire consequences for the administrative state. The dissent contends that the Court’s prior cases have long established that Congress can create new public rights and assign their adjudication to administrative agencies without violating the Seventh Amendment.

The dissent argued that the majority’s cramped interpretation of the public rights exception is at odds with the Court’s repeated approval of agency adjudication schemes. Justice Sotomayor pointed to several cases in which the Court upheld the use of administrative tribunals to impose civil penalties as a valid exercise of Congress’s Article I powers. In the dissent’s view, these cases demonstrate that public rights are not limited to a discrete handful of areas, but rather encompass any statutory right that Congress creates in the public interest pursuant to its constitutional authority.

The dissent warns that the majority’s approach “upends longstanding precedent and the established practice of its coequal partners in our tripartite system of Government” by invalidating the enforcement schemes of numerous federal agencies. Id. at 30. Justice Sotomayor accuses the majority of disguising the “earthshattering nature of its holding” and argues that it will wreak havoc by exposing dozens of agencies to Seventh Amendment attacks. Id. at 45-46.

According to the dissent, whether an agency can adjudicate a public right turns not on the nature of the remedy, but on whether Congress permissibly assigned the matter to the agency under its legislative powers to vindicate the public interest. By fixating on the SEC’s ability to impose civil penalties, the dissent contends, the majority disregards the mountain of case law affirming that public rights are not confined to a limited set of subjects or exercises of congressional power.

The dissent also criticizes the majority for misconstruing Granfinanciera and other decisions of the Court. While those cases examined the legal nature of the claim and remedy to determine whether the right to a jury attached, the dissent argues, that framework only applies when the claim involves a dispute between private parties, not where the government is enforcing a public right. By extending those cases to the SEC’s enforcement action here, the majority collapses the critical distinction between public and private rights.

Ultimately, in the dissent’s view, the majority’s decision is not a principled application of precedent, but a “power grab” that aggrandizes the judicial branch at the expense of the political branches’ policymaking authority. Id. at 46.

Implications for the SEC and Beyond

The decision is a major victory for targets of SEC enforcement actions who have long complained that the agency’s in-house proceedings lack the procedural protections and independent judges of federal court. It will force the SEC to make tough strategic decisions about which cases to bring administratively as opposed to federal court, likely pushing more high-stakes fraud cases into court to preserve the possibility of civil penalties.

At the same time, the Court’s opinion leaves open several key questions. The Court did not define the precise contours of which agency enforcement actions will require a jury trial going forward, and the “public rights” doctrine remains murky. Id. at 12 (noting the public rights doctrine involves “frequently arcane distinctions and confusing precedents”) (internal citation omitted). The ruling also does not impact the SEC’s ability to pursue other remedies administratively, such as cease-and-desist orders or bars from the securities industry. However, losing the powerful tool of civil penalties in its in-house forum is still a significant blow to the agency.

More broadly, the decision may open the door to further constitutional challenges to agency enforcement proceedings, not just at the SEC. Many agencies beyond the SEC have relied on the public rights doctrine to adjudicate civil penalties without juries, and those procedures could now be ripe for attack under the Seventh Amendment.

Conclusion

Only time will tell whether those fears come to pass. For now, the SEC is likely strategizing about how to reshape its enforcement efforts in light of this significant decision curtailing its powers. And other agencies will surely be watching closely and considering the potential fallout for their own in-house adjudicatory schemes. One thing is clear: the U.S. Supreme Court has just balanced the playing field when it comes to SEC enforcement actions.

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