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Justices limit major SEC tool to penalize fraud

The court ruled on Thursday that the Securities and Exchange Commission’s routine practice of imposing fines in its administrative proceedings, used to penalize securities fraud, violates the Seventh Amendment “right of trial by jury” in all “suits at common law.” Chief Justice John Roberts wrote for a 6-3 majority in Securities and Exchange Commission v. Jarkesy that the SEC cannot continue to handle this cases in house without a jury. The decision will have a far-reaching impact on dozens of federal administrative agencies that use similar processes.

Justice Sonia Sotomayor, joined by Justices Elena Kagan and Ketanji Brown Jackson, dissented. Reading from the bench on Thursday, Sotomayor called the majority’s decision “a devastating blow to the manner in which our government functions.”

The first question in the case is whether the claim that the SEC brought against hedge fund founder and investment adviser George Jarkesy — seeking penalties for misleading statements he made to investors — is a “suit at common law” to which the Seventh Amendment applies. After all, like most administrative claims, it rests on a federal statute, not the common law, and it requires the agency to establish facts that do not match any cause of action known to the common law in 1791 (when the states ratified the Seventh Amendment). Roberts explained, though, that the “right is not limited to the ‘common-law forms of action recognized’ when the Seventh Amendment was ratified,” but rather extends to any “statutory claim if the claim is ‘legal in nature.’”

Here, it “is all but dispositive [that] the SEC seeks civil penalties, a form of monetary relief, [because] money damages are the prototypical common law remedy.” In particular, he explained that “only courts of law issued monetary penalties to ‘punish culpable individuals,” which means that “civil penalties are a type of remedy at common law that could only be enforced in courts of law.” Most importantly here, because “the SEC is not obligated to return any money to victims,” its civil penalties by definition “are designed to punish and deter, not to compensate.” That “effectively decides that … a defendant would be entitled to a jury on these claims.”

The dissent does not quarrel with that analysis to any significant degree. It is the second step, the “public rights” doctrine, on which the justices divide. The “public rights exception” to the Seventh Amendment recognizes, and has recognized for centuries, that when Congress creates a “public right” it freely can “assign the matter for decision to an agency without a jury, consistent with the Seventh Amendment.” The controversial question in this case is how to decide whether the SEC’s claim for civil penalties involves a public right.

For the majority, everything about the doctrine depends on the nature of the SEC’s claim for relief. Thus, Roberts wrote that the “hallmark” of public rights is “whether it is made of the stuff of the traditional actions at common law tried by the courts at Westminster in 1789.” If that is so, “then the matter presumptively concerns private rights, and adjudication by an Article III court is mandatory.” To illustrate, he pointed to early cases upholding the public rights exception that involved the government’s “power to collect revenue,” Congress’s “plenary power over immigration,” and the “exclusive power” of the “political branches” over tariffs as good examples of proceedings that the jury trial right does not reach.

Roberts acknowledged that many of the court’s cases in the area “have not always spoken in precise terms, and present “arcane distinctions and confusing precedents.” For that reason, the court “has not definitively explained the distinction between public and private rights” and he did “not claim to do so” here. He emphasized, though, that the “public rights exception is, after all, an exception,” which “has no textual basis in the Constitution and must therefore derive instead from background legal principles.” Without “close attention” to those principles, he reasoned, “the exception would swallow the rule.”

When Roberts turned to explaining why this particular matter does not involve a public right, he relied heavily on Granfinanciera v. Nordberg, a 1989 decision holding that the public rights exception did not protect a claim in a bankruptcy proceeding to recover a fraudulent conveyance. For Roberts, that “statutory action for fraudulent conveyance” was so similar to the statutory action here that it “effectively decides this case.” For the majority, he wrote, “what matters is the substance of the action, not where Congress has assigned it.” Thus, it cannot matter that Congress put this right in a novel regulatory regime, lest the court “permit Congress to siphon this action away from an Article III court.” Because the “fraud claim in Granfinanciera was also statutory,” the same result should apply here.

Justice Neil Gorsuch, joined by Justice Clarence Thomas filed a substantial concurrence. Collectively the Seventh Amendment, Article III, and the due process clause, Gorsuch explained, should require a jury trial and conventional civil litigation before the government can deprive a citizen of money. Doctrinally, they seem to reach the question the majority avoided, suggesting that the public-rights exception applies only to “the collection of revenue, customs enforcement, immigration, and the grant of public benefits.”

Sotomayor’s lengthy dissent proceeded from an entirely different conception of the public rights doctrine. For her the key point was that the right in question is one that Congress gave to the government: “Today, for the very first time, this Court holds that Congress violated the Constitution by authorizing a federal agency to adjudicate a statutory right that inheres in the Government in its sovereign capacity.”

For Sotomayor, cases where the government itself is the claimant were the easy cases, the very definition of public rights. She agreed with the majority “that aspects of the public-rights doctrine have been confusing,” but pointed out that this was “true for cases involving wholly private disputes, … not for cases where the Government is a party.” The decision of the majority, she wrote, took “a wrecking ball to this settled law and stable government practice.”

As a matter of precedent, the difference among the justices depends a lot on their different views of the 1977 decision in Atlas Roofing Co. v. Occupational Health and Safety Review Commission, validating OSHA penalties against an attack much like the one here. For the dissent, Atlas Roofing is the paradigm, the case that directly and firmly rejected the approach the majority takes here. For the majority, Atlas Roofing was dubious at best, all but overruled by Granfinanciera, and criticized by the numerous authors of law review articles and treatises cited in a lengthy footnote to the majority’s opinion. My guess is that future years will see young professors being awarded tenure for their critical consideration of the topic.

More practically, the majority opinion is likely to have an immediate and notable effect on the federal administrative state. Sotomayor discussed two dozen agencies that impose civil penalties in administrative proceedings, and few if any of them fall within the categories that the majority validates: among the most prominent I would mention the FDA, EPA, FCC, and CFPB. I doubt if any of those agencies will be able to enforce civil penalties reliably in the immediate future. The hit will be especially hard for agencies that depend on revenues from penalties to support their budget – as Congress seems little minded in recent years to offer agencies large new fundings.

The most surprising thing about the decision to me is the consensus Roberts marshaled for his majority. Previous cases in the area in the last few decades have involved fractured and splintered plurality opinions with multiple partial concurrences. Roberts wrote for six of the nine justices and had all six joining every single word of his opinion. That signals, in a powerful way, that the blow Jarkesy strikes at the administrative state is not temporary or lightly considered, and not something from which litigants should hope for any relief or ameliorative clarification any time in the foreseeable future.

Recommended Citation: Ronald Mann, Justices limit major SEC tool to penalize fraud, SCOTUSblog (Jun. 28, 2024, 9:17 AM),