Supreme Court Rules that the SEC Cannot Bring Fraud Claims with Civil Money Penalties in Administrative Enforcement Actions

The Supreme Court recently ruled in SEC v. Jarkesy, et al., that the SEC cannot bring an administrative enforcement action when seeking civil money penalties for securities fraud.  The Court held that such an action violates the Seventh Amendment because the defendants are entitled to a jury trial for such claims.

As background, the SEC brought an administrative enforcement action against Jarkesy and an investment fund, which he managed, for misleading investors.  The SEC alleged securities fraud under its statutory antifraud provisions and sought civil money penalties.  In 2020, the SEC released its final order in which it levied $300,000 in civil money penalties, as well as other relief, for the antifraud violations.  The defendants appealed to the Fifth Circuit, which overturned the SEC’s final order, finding that the defendants were entitled to a jury trial under the Seventh Amendment. 

The Supreme Court agreed, explaining that the “SEC’s antifraud provisions replicate common law fraud, and it is well established that common law claims must be heard by a jury” pursuant to the Seventh Amendment.  The Court also explained that the SEC’s antifraud provisions of the federal securities laws provide for civil money penalties, a punitive remedy that could only be enforced in courts of law.  Finally, the Court noted that the claims at issue in this matter do not fall within the “public rights” exception.

The Jarkesy opinion, while limited to the SEC, may have far reaching implications for other federal agencies that also have authority to bring administrative enforcement actions.  If those agencies assert claims that implicate fraud, such claims may necessitate a defendant’s right to a jury trial.  Finally, the Court’s opinion leaves open whether the SEC—and perhaps other agencies—could bring administrative enforcement actions for civil money penalties that do not sound in fraud.  The lack of clear guidance will undoubtedly lead to additional litigation as to what claims and remedies are permissible in administrative enforcement actions.