Securities Fraud Plaintiffs Win Right to Jury Trial

The Securities and Exchange Commission (SEC) can no longer deny a party charged with securities fraud to a jury trial in a federal court.

The Supreme Court just curtailed SEC internal enforcement established by the 2010 Dodd-Frank Act. Critics allege the SEC ramped up enforcement in recent years because its chances of winning cases in-house were better than having them adjudicated in federal court.

Caveat: The SEC can still seek civil fines of up to $725K per violation and restitution from individuals it charges. Many parties will opt to settle their cases in front of an administrative law judge (ALJ) to avoid steep legal costs.

In 2013, the SEC alleged that George Jarkesy, a conservative radio host and hedge fund manager, exaggerated the value of of the funds he managed to attract investors. An ALJ for the SEC ordered Jarkesy to pay nearly a million dollars in fines for violating securities law. Jarkesy demanded a trial by jury and sued the commission.

Eleven years after being charged, Jarkesy came out on top. The High Court ruled 6-3 in favor of Jarkesy, opening the door for future parties whom the SEC pursues to demand a jury trial. The Seventh Amendment guarantees the right to a trial by a jury of one’s peers.

Securities Violations Just One Area Impacted by Ruling

ALJ adjudications are common in enforcement actions by numerous federal agencies. The decision in Jarkesy v. SEC is liable to affect agencies’ ability to penalize violators of laws and regulations in-house.

The Jarkesy ruling “almost certainly will affect a much wider swath of government enforcement cases — not only SEC cases and not just ones alleging fraud and seeking civil penalties,” notes JD Supra. “Other federal agencies now face at least some uncertainty as to their future ability to rely on their administrative courts. For any claim that is ‘akin to’ a common law claim and where the remedy sought is one that traditionally ‘could only be enforced in court of law,’ Jarkesy provides strong support that the defendant has a right to a jury under the Seventh Amendment.”

Among the agencies affected are the:

• Environmental Protection Agency
• Consumer Financial Protection Bureau
• Department of Health and Human Services (includes the Social Security Administration)
• Department of Labor (includes the Occupational Safety and Health Administration), and
• U.S. Postal Service.