As widely reported, yesterday the Supreme Court in a 6-3 decision held that “the Seventh Amendment entitles a defendant to a jury trial when the SEC [Securities and Exchange Commission”] seeks civil penalties against him for securities fraud.” This conclusion aligns with the amicus curiae brief that the Atlantic Legal Foundation filed in the case.
In SEC v. Jarkesy, No. 22-859, the Supreme Court agreed to review a Fifth Circuit opinion holding that SEC “in-house” civil administrative enforcement proceedings conducted by SEC administrative law judges (“ALJs”) are unconstitutional because (i) they deprive respondents (i.e., defendants) of their Seventh Amendment right to a trial by jury; (ii) Congress unconstitutionally delegated legislative power to the SEC by failing to provide an “intelligible principle” governing the Commission’s unfettered choice of whether to proceed against an enforcement target in-house rather than in a federal district court; and (iii) the statutory for-cause-only removal protection afforded to SEC ALJs is unconstitutional. For more detailed case background, click here.
The Court’s June 27 ruling addressed only the first issue. The majority opinion, written by Chief Justice Roberts, explains that although Congress has given the SEC a choice of whether to pursue a civil enforcement target in federal district court or in-house before one of its own ALJs, “[a] defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator.” Criticizing Justice Sotomayor’s dissenting opinion, the majority opinion observes that “[r]ather 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.”
ALF’s amicus brief argued that the harsh penalties that can be imposed on SEC civil enforcement targets for securities law violations—monetary fines, disgorgement of ill-gotten gains, prohibitions against participation in the securities industry and resultant reputational harm—heighten the need for due process of law.
More specifically, ALF’s brief discussed the “patently deficient procedural due process available to corporations and/or individuals when the SEC hales them into an administrative enforcement proceeding conducted in-house by an SEC-employed ALJ, prosecuted by SEC enforcement staff, and if appealed, reviewed and finalized—virtually always in the SEC’s favor—by the Commission.” For example, ALF explained that “[t]he SEC’s Rules of Practice, 17 C.F.R. § 201.100 et seq., are slanted in the agency’s favor, both on their face and as applied by the Commission and its ALJs.” As a result, compared to the robust due process protections afforded to SEC civil enforcement defendants in district courts, individual and corporate respondents in SEC in-house adjudications are provided significantly less due process.
Along the same lines, the majority opinion in Jarkesy explains as follows:
“Procedurally, these forums differ in who presides and makes legal determinations, what evidentiary and discovery rules apply, and who finds facts. Most pertinently, in federal court a jury finds the facts, depending on the nature of the claim. See U. S. Const., Amdt. 7. In addition, a life-tenured, salary-protected Article III judge presides, see Art. III, §1, and the litigation is governed by the Federal Rules of Evidence and the ordinary rules of discovery.
Conversely, when the SEC adjudicates the matter in-house, there are no juries. Instead, the Commission presides and finds facts while its Division of Enforcement prosecutes the case. The Commission may also delegate its role as judge and factfinder to one of its members or to an administrative law judge (ALJ) that it employs. See 15 U. S. C. §78d–1. In these proceedings, the Commission or its delegee decides discovery disputes, see, e.g., 17 CFR §201.232(b), and the SEC’s Rules of Practice govern, see 17 CFR §201.100 et seq. The Commission or its delegee also determines the scope and form of permissible evidence and may admit hearsay and other testimony that would be inadmissible in federal court.”
Justice Gorsuch wrote a concurring opinion, in part
“to highlight that other constitutional provisions reinforce the correctness of the Court’s course. The Seventh Amendment’s jury-trial right does not work alone. It operates together with Article III and the Due Process Clause of the Fifth Amendment to limit how the government may go about depriving an individual of life, liberty, or property.”
Similarly, ALF’s amicus brief argued that “SEC in-house adjudications provide civil enforcement targets significantly less procedural due process than district court proceedings.”
ALF long has been a steadfast advocate in the Supreme Court and lower appellate courts for individual liberty, limited and responsible government, and free enterprise. We are pleased that our amicus brief contributed to this important victory for civil justice, due process, and free enterprise.
