This case concerns a petition for review by the Securities and Exchange Commission (SEC) of a Fifth Circuit decision by a divided panel that held the SEC’s 2013 administrative prosecution of securities fraud claims against hedge fund manager George Jarkesy was unconstitutional on several grounds. First, the Fifth Circuit majority found that Congress had not authorized SEC to adjudicate administrative enforcement proceedings that impose monetary penalties. Second, the majority found that allowing SEC to decide between prosecution for securities fraud in an Article III court and before an administrative law judge (ALJ) employed by SEC is an impermissible delegation of legislative authority without an intelligible principle to constrain the agency’s choice of tribunals. Third, the majority found that SEC cannot provide ALJs with multiple layers of removal protection without impermissibly limiting the president’s executive power, consistent with the Supreme Court’s 2010 decision in Free Enterprise Fund v. PCAOB, 561 U.S. 277 (2010). These three distinct constitutional challenges to SEC’s administrative enforcement practices and the defense of those practices were argued to the Court on November 29, 2023.
The first of these issues—whether the government can obtain monetary penalties in administrative SEC proceedings adjudicated by ALJs without a jury trial opportunity consistent with the Seventh Amendment to the U.S. Constitution—is perhaps the most significant, and it was the subject of the vast majority of argument and questioning by the Supreme Court at oral argument. Under the Seventh Amendment, most defendants in civil cases seeking monetary damages have the right to jury trial, and the exceptions to this right generally require establishing that the types of actions at issue could have been brought in the 18th century in an equity court without a jury. The exception to the Seventh Amendment’s guarantee of a right to jury trial at issue in Jarkesy concerns the Supreme Court’s doctrine of “public rights.” When this exception to the right to a jury trial applies, it is because the right in question is a “public right” that would not have required the kind of suit at common law to which the Seventh Amendment applies.
The SEC’s view is that the Constitution affords Congress broad authority to create new obligations by statute and that since those obligations were nonexistent at common law, they are considered “public rights” that Congress can assign to an agency’s administrative tribunal for adjudication without a jury. The Respondent George Jarkesy seeks the Court’s invalidation of the public rights doctrine on several grounds. First, Jarkesy asserts that a primary catalyst for the American Revolution was the British monarchy’s practice of trying claims for statutory penalties in admiralty courts without a jury. Jarkesy also asserts that the SEC’s alleged fraud claims are much more akin to common law fraud than the earliest public rights cases that established the doctrine. Finally, and most significantly, Jarkesy asserts that the Supreme Court has more recently rejected much of the public rights doctrine decisional law, beginning with Atlas Roofing v. Occupational Safety Comm’n, 430 U.S. 442 (1977), in a line of cases involving the bankruptcy code, such that Congress’ authority to assign new statutory causes of action for adjudication by administrative tribunals is limited to cases in which requiring a jury trial would effectively “dismantle the statutory scheme,” citing Thomas v. Union Carbide Agricultural Products Co., 473 U.S. 568 (1985); CTFC v. Schor, 478 U.S. 833 (1986); and Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989).
Given the widespread use of ALJs for administrative enforcement of regulations by federal agencies without juries, including by the U.S. Environmental Protection Agency, the Supreme Court’s ruling in this case could be one of the most consequential administrative law decisions in the last 50 years.
