The U.S. Supreme Court’s decision Thursday that individual and corporate defendants in fraud cases have the right to a civil jury trial in cases in which the U.S. Securities and Exchange Commission seeks financial penalties appears to be broad and sweeping but may have only minimal impact on SEC enforcement actions.
In a 6-3 decision, the justices affirmed the opinion of the U.S. Court of Appeals for the Fifth Circuit in SEC v. Jarkesy that defendants have a right to a jury trial under the Seventh Amendment.
Legal experts say that the SEC significantly reduced its use of administrative law judges over the past few years in favor of filing their charges in federal courts, but that the decision could have a significant impact on settlements with the SEC.
The SEC’s case against George Jarkesy, a Texas hedge fund manager and conservative radio talk show host, dates back to 2013 when the government claims that Jarkesy defrauded investors by falsely leading them to believe that KPMG was auditing two funds he launched. The SEC brought their case in an administrative proceeding before an SEC-appointed ALJ. The SEC hit Jarkesy and a co-defendant with $300,000 in penalties and ordered Jarkesy’s fund, Patriot28, to disgorge about $685,000 in ill-gotten gains.
Jarkesy countered that the SEC’s administrative procedures violated his right to a jury trial.
In 2022, the U.S. Court of Appeals for the Fifth Circuit sided with Jarkesy in a 3-0 opinion written by Judge Jennifer Elrod and joined by Judges Eugene Davis and Andrew Oldham.
“It’s a setback for the SEC, to be sure, especially in the broader context of recent losses like the Fifth Circuit’s decision vacating the Private Funds Advisers Rule and litigation challenging its climate disclosure rule,” said Jessica Magee, a partner at Holland & Knight and a former associate director of enforcement at the SEC’s Fort Worth regional office. “Practically though, the SEC has not been filing litigated fraud cases in its own administrative courts for some time.
“I think we will continue to see defendants who would still prefer to have their forthcoming actions filed as fully settled administrative cases — even with penalties — when they believe there are benefits to doing so such as possibly avoiding a press release, receiving a cease and desist order instead of an injunction and the like, and are amenable to waiving their right to a jury trial,” Magee said.
Rebecca Fike, a partner at Vinson & Elkins and a former senior enforcement counsel with the SEC, agreed that the Supreme Court’s decision will “not have as much [impact] as the opinion makes it seem.”
“The Jarkesy case arose 10-plus years ago, soon after Dodd-Frank was passed, to give the SEC the ability to bring actions in administrative proceedings,” Fike said. “The SEC stopped bringing substantive, litigated actions in APs many years ago. While they had not conceded their right to pursue that course of action, the practice was to bring those types of cases in federal court. Because of that practice, this is unlikely to affect any currently pending cases.”
Fike said, however, that the decision “could have implications in settlements.”
“Most defendants seeking to settle a fraud charge prefer the administrative forum over a filing in federal court,” she said. “I think Jarkesy still allows for a settled fraud action seeking civil penalties to be filed in an AP, but if not, or if the SEC decides there is too much risk post-Jarkesy, that would have a large impact.”
“Additionally, the SEC charges a lot of non-fraud cases that also seek civil penalties, and it’s unclear to me if those can still proceed in APs,” Fike said. “Again, there could be a disconnect between what the Supreme Court opinion holds and what the SEC decides to do going forward to minimize risk.”
Toby Galloway, a partner at Winstead and former chief trial counsel for the SEC, said the biggest impact of the decision could be with other federal agencies, such as the Federal Trade Commission or the Environmental Protection Agency.
“The real question is how sweepingly the decision will impact other agencies’ administrative law practices,” Galloway said. “The SEC will have to ponder how to use its administrative tribunals to bar securities industry participants, such as brokers, dealers, investment advisors, and even accountants and attorneys who practice before the commission. If debarment can amount to a civil penalty, the SEC would have to pursue those remedies in federal court, which it lacks statutory authorization to do.”
Galloway said the opinion’s biggest impact could be on other federal agencies.
“As Justice Sotomayor’s dissent notes at page 34 of the decision, ‘there are, at the very least, more than two dozen agencies that can impose civil penalties in administrative proceedings.’ If this ruling is applied broadly, the impact on various other executive agencies will be immense,” he said.