SEC v. Jarkesy
In our latest episode, host Kannon Shanmugam, joined by Abigail Frisch Vice, delves into the Supreme Court’s landmark decision in SEC v. Jarkesy, which imposes limits on the SEC’s ability to impose monetary penalties in administrative enforcement proceedings.
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- Transcript
Kannon Shanmugam: Welcome to “Court Briefs,” a podcast from Paul, Weiss. I'm your host, Kannon Shanmugam, the chair of the firm's Supreme Court and Appellate Litigation Practice and co-chair of our Litigation Department. In this podcast, we analyze Supreme Court decisions of interest to the business community.
Well so far this term we’ve discussed a number of relatively minor decisions, but today we’re going to talk about a blockbuster. I’m delighted to be joined here in my office by my colleague, Abby Vice, to talk about the Supreme Court's recent decision in a case called SEC v. Jarkesy. Abby, tell us a little bit about the facts of this case.
Abigail Frisch Vice: Absolutely. So, in 2010, Congress passed the Dodd-Frank Act, which authorized the Securities and Exchange Commission, the SEC, to seek monetary penalties in its in-house administrative proceedings for any violation of securities law. And before that, the SEC had no authority to seek monetary penalties until 1990. And even then, the agency had to go to federal court to seek monetary penalties unless it was proceeding against a registrant.
So, this case arose when investment funds started by the respondent here, George Jarkesy, which were worth $24 million, crashed in the 2008 market collapse. The SEC investigated and ultimately brought securities fraud claims in an administrative proceeding. The SEC claimed that Jarkesy had misrepresented the fund's investment strategies, their auditor and prime broker and their value for the purpose of pumping out management fees. After a trial, the SEC issued its decision, which imposed a lifetime industry ban for Mr. Jarkesy and a $300,000 penalty that was affirmed on internal appeal.
Kannon Shanmugam: So how did this case go from the agency to the Supreme Court?
Abigail Frisch Vice: Well, Mr. Jarkesy petitioned for review of the agency's decision with the United States Court of Appeals for the Fifth Circuit. And the Fifth Circuit rejected the agency's decision, identifying three constitutional flaws in the SEC's in-house proceedings for monetary penalties.
The first was that it violated the Seventh Amendment right to a jury trial. And the second was that it violated the non-delegation doctrine because the agency was allowed to choose between proceeding in-house and proceeding in federal court. And third, the Fifth Circuit concluded that the proceedings violated Article II because the SEC's administrative law judges cannot be removed except for-cause, which is the same protection enjoyed by the supervising agency heads.
Kannon Shanmugam: So, the Supreme Court had a full menu of constitutional grounds to choose from, and ultimately the Court chose one of them. And so, Abby, how did the Court reach the conclusion that this process was unconstitutional?
Abigail Frisch Vice: That's right. The Court, in an opinion by Chief Justice Roberts affirmed the Fifth Circuit's decision vacating the agency's order on the ground that the SEC's order of monetary penalties violated the Seventh Amendment guarantee of a jury trial for “Suits at common law.”
Kannon Shanmugam: So, the Supreme Court doesn't get many cases involving the Seventh Amendment. Abby, walk us through the court's reasoning here.
Abigail Frisch Vice: Absolutely. Well, the Court first explained that the jury trial right is foundational in our nation's legal heritage. Our English ancestors cherished and celebrated it, and threats to that right played an important role in the country's fight for independence. And with that background, the Court proceeded in two parts, first asking whether the Seventh Amendment was implicated at all, and second, asking whether the public rights exception applied.
On the first question, the Court reasoned that the Seventh Amendment required a jury trial here because the SEC's monetary penalty is sought to punish rather than to restore harm done to a victim, and because securities fraud claims bear a close relationship to common law fraud claims. And then on the second question, the Court explained that the public rights exception is narrow, applying only in limited, historically established contexts, and that none of those were present here.
Kannon Shanmugam: So, there were two interesting separate opinions in this case. First, a concurrence by Justice Gorsuch. Abby, what did Justice Gorsuch have to say?
Abigail Frisch Vice: Well, he, joined by Justice Thomas, said that the Court's Seventh Amendment holding was reinforced by two more constitutional provisions, the first being Article III of the Constitution, which designed the federal judiciary to provide independent adjudicators. And second, the Due Process Clause, which historically is understood to require judicial process, which is not like the in-house proceedings where an agency acts as both a judge and the prosecutor.
Kannon Shanmugam: And perhaps not surprisingly, there was a dissenting opinion here. What did the dissenters have to say?
Abigail Frisch Vice: That's right. Justice Sotomayor dissented in an opinion joined by Justices Kagan and Jackson, and she faulted the Court for upsetting not only its own precedent, but also longstanding expectations of the other branches, which, in her view, allowed Congress to pass laws providing administrative rather than judicial proceedings for suits brought by the government in its sovereign capacity.
Kannon Shanmugam: And that brings us very nicely to the question that everybody is asking, what are the implications of this decision?
Abigail Frisch Vice: Well, most immediately, the decision means that if the SEC wants to seek monetary penalties for securities fraud claims, it has to bring those in federal court. And practically, the agency will lose any home court advantage it might get by proceeding with in-house administrative adjudications. It also means that anybody facing those claims will get the benefits of an independent adjudicator, discovery and the federal rules of evidence. Beyond that, though, it isn't clear how far the decision goes. The Court did not expressly overrule any of its precedents, and in fact, it took pains to explain why the decision followed the precedents.
The Court also stuck to the facts of this case when analyzing the nature of the claims brought by the SEC and the remedies it sought, both of which are central pieces of the Seventh Amendment analysis. And the Court, again, didn't reach the arguably broader grounds on which the Fifth Circuit relied, including the non-delegation issue, which is a challenge to the ability to delegate authority to agencies in the first place, and the for-cause removal issue, which is the challenge to the structure of the agency.
Kannon Shanmugam: Great. Well, thank you, Abby. I suspect we're going to be hearing a lot more about this decision in the months to come. If you have any questions about the decision, please feel free to reach out either to Abby or to me. For more information about Paul, Weiss's Supreme Court and Appellate Litigation Practice, please visit us at our website, paulweiss.com, and please subscribe to “Court Briefs” wherever you listen to your podcasts. And if you enjoyed this episode please rate and review us on your favorite platform. We’ll be back very soon, and until next time, thank you for joining us and take care.
