Supreme Court rules that jury trial is required when SEC seeks civil penalties

The Supreme Court on Thursday stripped the Securities and Exchange Commission of one of its powers to unilaterally impose fines on fraudsters, saying the SEC’s targets are entitled to a jury trial.

The agency has long used in-house tribunals, known as administrative law judges, to decide fraud cases and impose penalties. In a 6-3 ruling, however, the high court said that given the nature of the cases and the stakes involved, the defendants are entitled to a jury trial under the Seventh Amendment.

Legal analysts have suggested that the case could stretch beyond the SEC because other agencies, including the Social Security Administration and the National Labor Relations Board, use administrative law judges.

“A defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator,” Chief Justice John G. Roberts Jr. wrote for the court’s six Republican appointees.

The case is one of a series of tests for the justices this year regarding the size and power of the so-called administrative state, the unelected bureaucracy that is increasingly regulating Americans’ lives.

Justice Sonia Sotomayor, writing for the three Democratic appointees who dissented, said the ruling unleashes “chaos.”

“Today, for the very first time, this Court holds that Congress violated the Constitution by authorizing a federal agency to adjudicate a statutory right,” Justice Sotomayor wrote.

Administrative law judges act as quasi-judges, though they are not Senate-confirmed independent judiciary members, as established in Article III of the U.S. Constitution. They are employees of the agencies they serve, and the agencies set the rules of procedure.

They also serve as both judge and jury, deciding facts and law. Their decisions are usually reviewable by the agency and can be appealed to Article III courts, though those judges make deferences to the administrative law judge proceedings.

The case before the justices involved George Jarkesy Jr. and his investment firm, Patriot28.

The SEC concluded that the firm had misled his investors and brought the case before an in-house administrative law judge, rejecting Mr. Jarkesy’s request for a jury trial.

The administrative law judge issued a decision in 2014. The commission then took the case and waited six years before issuing a final order in 2020 imposing a $300,000 fine.

Mr. Jarkesy appealed, and the 5th U.S. Circuit Court of Appeals sided with him.

In the Supreme Court ruling, the justices battled over the country’s founding, the centrality of the right to a jury trial and the courts’ role in overturning a law enacted by Congress.

Justice Sotomayor said more than 200 laws give agencies the power to impose fines, and the high court has always given lawmakers broad latitude in that area.

She said the ruling upends that precedent.

“Make no mistake: Today’s decision is a power grab,” she wrote. “It prescribes artificial constraints on what modern-day adaptable governance must look like.”

Justice Neil M. Gorsuch said Justice Sotomayor’s real tirade wasn’t with her fellow justices but with “the Constitution’s revolutionary promise of popular oversight of government officials — and with those judges who would honor that promise.”

“People like Mr. Jarkesy may be unpopular. Perhaps even rightly so: The acts he allegedly committed may warrant serious sanctions. But that should not obscure what is at stake in his case or others like it,” Justice Gorsuch wrote in a concurring opinion joined by Justice Clarence Thomas.

The ruling is the latest blow to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which a Democratic-led Congress approved in 2010 as a cleanup measure after the 2008 Wall Street collapse. Dodd-Frank gave the SEC the power to decide cases internally.

Justice Gorsuch said the ruling merely returns matters to where they were before Dodd-Frank.

Mr. Jarkesy said the ruling is a win for the Constitution.

“Today is a great day for the Constitution, for the legal process and for the rule of law. It has been a long and arduous path, and I am extremely grateful that the Supreme Court has vindicated my innocence, but the ramifications of this case are so much bigger than one person,” he said.

“If this could happen to me, it could happen to any citizen of this country, and after a decade of gross misconduct and blatantly unconstitutional political attacks from the SEC and their in-house court, today, the United States Supreme Court ruled that the Constitution still matters.”