In a split decision, the U.S. Supreme Court struck down the U.S. Securities and Exchange Commission’s (SEC) use of its internal administrative tribunal to hand down civil penalties in enforcement cases.
In its majority opinion, written by Chief Justice John Roberts, the court ruled that the SEC’s use of its own tribunal to impose civil penalties in a securities fraud case violated the right to a trial by jury.
The ruling came in response to an appeal brought by a hedge fund manager, George Jarkesy Jr., and his firm, Patriot LLC, after being sanctioned by an SEC tribunal, which found Jarkesy violated securities laws by misleading investors, and imposed a US$300,000 penalty for those violations along with other sanctions.
That ruling was vacated by the Fifth Circuit Court in a split decision “on the ground that adjudicating the matter in-house violated the defendants’ Seventh Amendment right to a jury trial,” the Supreme Court said — a conclusion that has now been upheld by the high court.
“This case poses a straightforward question: whether the Seventh Amendment entitles a defendant to a jury trial when the SEC seeks civil penalties against him for securities fraud,” the court said.
“The threshold issue is whether this action implicates the Seventh Amendment. It does. The SEC’s antifraud provisions replicate common-law fraud, and it is well established that common-law claims must be heard by a jury,” it said.
The court then considered whether a “public rights” exception to the right to a jury trial, which allows Congress to assign certain matters to agencies for adjudication without a jury trial, applies in this case.
The majority concluded that this exception does not apply in this case “because the present action does not fall within any of the distinctive areas involving governmental prerogatives where the court has concluded that a matter may be resolved … without a jury,” it said.
The dissent argued that the majority was wrong in this conclusion, and that the U.S. constitution doesn’t require civil penalty claims to be heard by a federal jury.
“The majority affirms the Fifth Circuit’s decision, notwithstanding the mountain of precedent against it,” the dissent said. “A faithful application of our precedent would have led, inexorably, to upholding the statutory scheme that Congress enacted for the SEC’s in-house adjudication of federal-securities claims.”
Instead, it maintained that the U.S. Congress has the freedom to assign these cases to a federal agency for adjudication that’s subject to judicial review, and that there are good reasons to allow administrative tribunals like the SEC’s.
“It may yield important benefits over jury trials in federal court, such as greater efficiency and expertise, transparency and reasoned decision-making, as well as uniformity, predictability and greater political accountability,” it said.
“This court has blessed that practice repeatedly, declaring it the ‘settled judicial construction’ all along,” the dissent said. It added that there are dozens of agencies that have been authorized to impose civil penalties for violations of statutory obligations.
“Congress had no reason to anticipate the chaos today’s majority would unleash after all these years,” the dissent said.
The implications of the majority decision, the dissent said, is that “the constitutionality of hundreds of statutes may now be in peril, and dozens of agencies could be stripped of their power to enforce laws enacted by Congress.”