Things just got a little harder for the Securities and Exchange Commission, which henceforth must seek certain civil damages for securities fraud by going to federal court, rather than through its own internal adjudicatory process. That’s the upshot of the US Supreme Court’s decision in Securities and Exchange Commission v. Jarkesy, which held unconstitutional — under the Seventh Amendment — a provision of Dodd-Frank that allowed the SEC to pursue unregistered advisers without a jury trial.
The result, although entirely predictable and probably correct, might play havoc with much more than this tiny corner of the regulatory state.
George Jarkesy ran two small hedge funds with about 100 investors and assets of $24 million. In 2011, the SEC brought an administrative action that resulted in a finding that he’d committed securities fraud. Jarksey appealed to the US Court of Appeals for the Fifth Circuit, which found multiple violations of the Constitution. That’s the decision the Supreme Court just affirmed, on the single ground that the case should have been heard by a jury.
Nothing in Chief Justice John Roberts’s majority opinion disturbs the SEC’s longstanding authority to go after registered investment advisers before its own administrative law judges rather than in federal court. This authority makes sense because registered advisers, who usually have $100 million or more under management, subject themselves to a detailed federal regulatory scheme, in return for immunity from most state-level securities regulations. What concerned the court was Dodd-Frank’s extension of that same power when the adviser in question isn’t registered. How on Earth can that distinction be preserved?
The answer is, um, tricky.
Here’s the relevant part of the Seventh Amendment: “In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved...”
If the courts took this language this literally, the courts would be swiftly overwhelmed. Countless entities, from the National Labor Relations Board to the National Highway Traffic Safety Administration, are empowered to issue civil fines without the bother of trial. To avoid this tidal wave, the Supreme Court has long held that Congress can assign certain adjudications to administrative agencies, provided that “public rights are being litigated.” When the SEC charges a registered adviser with fraud, it’s seeking to vindicate a public right, because regulating those advisers is central to the statutory scheme.
But the law on what makes a right “public” is a mess — or, as Roberts dryly puts it in his opinion for the 6-3 majority, “Our opinions governing the public rights exception have not always spoken in precise terms.” Without going into tedious detail, suffice it to say that the majority found the SEC’s action against Jarkesy to be sufficiently similar to common law fraud to implicate the Seventh Amendment, and, because the fine would not necessarily compensate the victims, sufficiently “punitive” to involve assertion of a “private rather than public right.” Thus, unlike in many other administrative proceedings, here a jury trial was required.
The problem isn’t new. Legal scholars have spent half a century raising questions about sanctions imposed by administrative agencies in the absence of a trial by jury. Back in 1989, the Supreme Court ruled that certain lawsuits filed by bankruptcy trustees against third parties must be tried before juries, even though a federal statute provided otherwise.
But the notion that the Seventh Amendment has exceptions also isn’t new. An article cataloguing them was published in the Columbia Law Review in 1906. As Justice Sonia Sotomayor points out in dissent, even in the early years of the republic, the courts were carving out situations in which a fine could be imposed without the need for a jury.
In short, the principle at issue in Jarkesy is one over which reasonable minds may differ.
But the justices, as too often, could not resist snarking back and forth as they bickered over how to apply the complex and contradictory precedents.
Responding to Sotomayor’s charge that the majority had misinterpreted an earlier decision, Roberts writes that the three dissenters “must be reading from a different case than we are.” The dissent, too, has its innings. A sample: “The majority’s treatment of the public-rights doctrine is not only incomplete, but is gerrymandered to produce today’s result.” (I’d prefer that the justices wrote more respectfully about their disagreements, but the snark at least makes lively reading in a pair of unreasonably dense opinions.)
Despite the snark, the Jarkesy result was no surprise. The entire bar saw this coming. Just last year, the justices ruled unanimously that constitutional challenges to the way an independent agency adjudicates cases can be brought directly before a federal court, without the need to raise them before the agency first. Sooner rather than later, the subjects of administrative justice before other agencies will be demanding that they, too, be given jury trials. Although the SEC’s case against Jarkesy arose under the Dodd-Frank amendment for unregistered entities, there is nothing in the opinion limiting the outcome to that particular situation. Hence it should logically apply to all SEC civil fraud suits.
And then there are the issues the court reserved for later — among them, the use of administrative law judges to adjudicate agency complaints. They’re not appointed for life nor confirmed by the Senate, yet they have sweeping powers and significant protection against removal. And federal courts — including the court of appeals in Jarkesy — have increasingly come to question whether the Constitution allows the same agency to serve as “both prosecutor and judge.”
In short, as the constitutional assault on the administrative state intensifies, it’s unlikely this relatively minor provision of Dodd-Frank will be the last domino to fall.
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