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Supreme Court Rules SEC’s In-House Adjudication Is Unconstitutional

In a recent decision, Securities and Exchange Commission v. Jarkesy, the Supreme Court voted 6-3 to reject the Securities and Exchange Commission’s use of in-house administrative proceedings to adjudicate securities fraud claims.  The Supreme Court specifically ruled that the defendant in a securities fraud case has a Seventh Amendment right to a jury trial when the SEC seeks civil penalties against the defendant. 

The Seventh Amendment guarantees that in “[s]uits at common law . . . the right of trial by jury shall be preserved.” The issue turned on whether the enforcement of the SEC’s antifraud provisions were close in nature to “suits at common law” as defined under the Seventh Amendment.

Chief Justice Roberts, writing for the conservative majority, ruled that the enforcement of the SEC’s antifraud provisions entitled a defendant to a jury trial in those cases when the SEC seeks civil penalties because the SEC’s antifraud provisions resemble common law fraud.  In light of this similarity, the majority ruled that use of in-house courts was not closely tied to distinctive areas involving governmental prerogatives where the Court has previously ruled that a matter can be adjudicated outside of an Article III court without a jury. 

The conservative majority specifically noted that the right to trial by jury is “of such importance and occupies so firm a place in our history and jurisprudence that any seeming curtailment of the right” has been and “should be scrutinized with the utmost care.” (citing Dimick v. Schiedt, 293 U.S. 474, 486).  The Court underscored that “every encroachment upon [the jury trial right] has been watched with great jealousy.” (citing Parsons v. Bedford, 3 Pet. 433, 446).

The implications of the Jarkesy decision on other agency-conducted administrative proceedings is unknown but may be limited to those situations where in-house courts operate in traditional areas of “common law.”  For a vast number of agencies, in-house proceedings often relate to areas within specific regulatory responsibilities and not to areas that may fall within traditional “suits at common law.”

In responding to a stinging dissent from Justice Sotomayor, the Court majority noted that the dissent “would permit Congress to concentrate the roles of prosecutor, judge and jury in the hands of the Executive Branch.”

Justice Sotomayor and Justices Kagan and Jackson criticized the majority’s holding noting that the decision “upends longstanding precedent” that permits federal agencies to internally adjudicate issues involving public rights.  The dissent claims “[t]he majority pulls a rug out from under Congress without even acknowledging that its decision upends over two centuries of settled Government practice.” 

The dissent also complained about the implications of the majority’s decision for other well-established administrative legal proceedings. As the dissent noted, “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. Rather than acknowledge the earthshattering nature of its holding, the majority has tried to disguise it.  . .Today’s decision is a massive sea change.”

Jarkesy’s long road to victory started in 2020 when the SEC’s administrative ruling imposed a civil fine of $300,000.  Jarkesy appealed to the Fifth Circuit, which ruled that the SEC’s in-house adjudication system was unconstitutional, resulting in the Supreme Court’s decision rejecting the SEC’s appeal and affirming the Fifth Circuit’s decision. 

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