SEC v. Jarkesy Revisions: 6/27/24
The Supreme Court ruled that people accused of securities fraud by the SEC have a constitutional right to a jury trial in federal court, striking down the SEC's practice of deciding such cases in its own internal tribunals where no jury sits.
The decision limits one of the SEC's most-used enforcement tools and raises serious questions about the constitutionality of similar in-house civil-penalty programs at dozens of other federal agencies.
How it got here: The SEC adjudicated the case in-house and fined Jarkesy; the Fifth Circuit vacated that order on Seventh Amendment grounds; the Supreme Court granted certiorari and affirmed.
The Case in Depth
What happened
George Jarkesy, an investment adviser, and his firm Patriot28 raised about $24 million from roughly 120 investors between 2007 and 2010. The SEC accused them of lying about the funds' auditor and prime broker, misrepresenting investment strategies, and inflating the funds' value to collect higher management fees. Rather than suing in federal court — where Jarkesy would have had a jury — the SEC used its own internal enforcement process, ultimately fining Jarkesy $300,000 and barring him from the securities industry.
The question before the Court
Can the SEC skip federal court — and skip a jury — by handling its own securities fraud enforcement cases internally, where the agency's own employees decide whether a violation occurred and how large a fine to impose?
The Court's answer
Yes — when the SEC seeks civil penalties for securities fraud, the Seventh Amendment requires the agency to bring the case in federal court, where the defendant is entitled to a jury trial.
The civil penalties at issue are punitive — their size turns on the defendant's culpability and need for deterrence, not on compensating victims — and such penalties have historically been enforceable only in courts of law. Because the federal securities fraud laws closely mirror common law fraud, using the same terms of art and targeting the same basic conduct, the claims are "legal in nature" and trigger the jury-trial right. The "public rights" exception, which lets Congress route some disputes through agencies without juries, does not apply here: securities fraud enforcement is a private-rights matter rooted in centuries of common law, not one of the historic governmental domains — like tax collection, immigration, or public land grants — where the political branches held exclusive power even before the courts were involved.
Curious how the Court got there? See the step-by-step legal reasoning →
Why it matters
Investment advisers, brokers, and others targeted by the SEC for securities fraud can now demand a jury in federal court rather than facing the agency's own hired judges. This makes SEC enforcement cases more expensive and uncertain. Other agencies — the EPA, CFPB, OSHA, and more — with similar in-house civil-penalty authority face potential legal challenges to their own enforcement programs.
What changes now
The case is sent back to lower courts for further proceedings. The SEC must now bring civil-penalty fraud cases in federal district court, where defendants can demand a jury. The Court did not reach two other constitutional issues the Fifth Circuit also ruled on — whether the SEC's choice of forum violated the nondelegation doctrine, and whether the two layers of removal protection for SEC administrative law judges violated the separation of powers — leaving those questions open for another day. Other agencies whose in-house civil-penalty authority resembles the SEC's may face immediate legal challenges.
What this does not decide
The Court does not rule on whether the SEC's option to choose between federal court and in-house proceedings violates the nondelegation doctrine, or whether insulating SEC administrative law judges from removal violates Article II. The majority also expressly declines to say its logic applies to all agency civil-penalty programs, though the dissent argues the broader implications are unavoidable.
Concurrences and dissents
Concurrence — Justice Gorsuch
Justice Gorsuch, joined by Justice Thomas, wrote separately to emphasize that three constitutional provisions — Article III, the Seventh Amendment, and the Fifth Amendment's Due Process Clause — each independently require the result the majority reaches. He drew a detailed historical parallel between the SEC's in-house proceedings and the British colonial vice-admiralty courts that helped spark the Revolution: both are juryless, presided over by officials dependent on the prosecuting authority, and operate under procedures far less protective than ordinary courts. He also criticized Atlas Roofing as a historical outlier that this Court has been quietly retreating from ever since, and argued that public rights should be defined strictly by historical practice, not by open-ended balancing tests.
Dissent — Justice Sotomayor
Justice Sotomayor, joined by Justices Kagan and Jackson, argued that the majority breaks with nearly two centuries of unbroken precedent holding that Congress may assign the Government's civil-penalty claims to agencies for in-house adjudication without violating the Seventh Amendment. She contended that Atlas Roofing — a unanimous decision directly on point — required upholding the SEC's scheme, and that Granfinanciera (a private-dispute bankruptcy case) has no bearing on cases where the Government is a party in its sovereign capacity. She warned that the ruling threatens the constitutionality of more than 200 statutes and dozens of agencies' enforcement programs, and accused the majority of a 'power grab' that arrogates Congress's policymaking role to the courts.
How the Court got there
The legal reasoning, step by step
- The Seventh Amendment preserves the right to a jury trial in 'Suits at common law,' which the Court has long read to cover any civil claim that is 'legal in nature' — meaning it resembles a common law cause of action or provides a remedy traditionally available only in courts of law. To decide whether a claim is legal in nature, the Court looks at both the cause of action and the remedy, treating the remedy as the more important factor.
- The civil penalties the SEC sought here are punitive, not restorative. Their availability and amount depend on the defendant's culpability, prior violations, and the need for deterrence — not on compensating injured investors. The SEC is not even required to return penalty money to victims. Because the penalties go beyond 'restoring the status quo' and are designed to punish and deter, they are a remedy historically available only in courts of law, not equity, which means the Seventh Amendment attaches.
- The cause of action reinforces that conclusion. Federal securities fraud targets the same basic conduct as common law fraud — misrepresenting or concealing material facts — and Congress deliberately borrowed common law fraud's terms of art when drafting the securities laws. This Court has repeatedly turned to common law fraud principles when interpreting the federal securities statutes, confirming the close ancestral link between the two.
- Because the action implicates the Seventh Amendment, the Court asks whether the 'public rights' exception permits Congress to send the matter to an agency without a jury. This exception — grounded not in constitutional text but in historical practice — covers a narrow set of matters that the political branches historically resolved without courts: collecting revenue, customs enforcement, immigration, public lands, and granting public benefits such as patents and veterans' pensions.
- The 1989 case Granfinanciera v. Nordberg — which held that fraudulent conveyance claims in bankruptcy required a jury even though Congress assigned them to non-jury bankruptcy courts — effectively decides this case. That precedent established that the substance of a suit controls, not where Congress has chosen to send it. Because the SEC's antifraud claims are modeled on common law fraud and provide civil penalties that 'could only be enforced in courts of law,' they involve 'a matter of private rather than public right,' and Congress cannot conjure away the jury-trial right by routing the claims through an agency.
- The 1977 case Atlas Roofing — which upheld OSHA's in-house civil penalty enforcement against a Seventh Amendment challenge — is distinguishable and does not control here. OSHA created a genuinely novel cause of action 'unknown to the common law,' consisting of detailed workplace safety standards (specifying exact angles for trench walls, for example) with no common law ancestor. By contrast, SEC securities fraud is explicitly derived from and interpreted in light of common law fraud. Atlas Roofing itself recognized that a jury is required whenever the statutory claim is 'in the nature of' a common law suit.
Doctrinal impact
Cases affected by this decision
Reaffirms Granfinanciera, S. A. v. Nordberg (492 U. S. 33)
Confirmed as the controlling authority: substance of a suit — not where Congress assigned it — determines the jury-trial right.
Reaffirms Tull v. United States (481 U. S. 412)
Reaffirmed that civil penalties designed to punish are a common law remedy requiring a jury trial.
Distinguishes Atlas Roofing Co. v. Occupational Safety and Health Review Comm'n (430 U. S. 442)
Limited to genuinely novel causes of action unknown to the common law; does not apply where the statutory claim mirrors a common law suit.