The Supreme Court issued a decision earlier today significantly restricting the SEC’s enforcement powers. The Court’s ruling in SEC v. Jarkesy makes it substantially more difficult for the SEC to seek civil monetary penalties against alleged violators of the antifraud provisions of the securities laws. The Court has ruled that the SEC can no longer seek to impose monetary penalties through the Commission’s own administrative processes, and instead must pursue such relief in a court of law where the defendant has the right to a trial by jury. The Court’s decision will likely mean significant changes for the SEC’s enforcement processes, as well as the decision making of firms and individuals within the securities industry as they adapt to the SEC’s enforcement changes.
The underlying case arises from an administrative proceeding in which the SEC charged that Patriot28, an investment adviser, and its manager, George Jarkesy, violated the securities laws in connection with $24 million raised from accredited investors for two investment funds advised by Patriot28 and Jarkesy. The SEC accused them of making misrepresentations in the marketing and operation of the funds, including allegedly false statements about their investment strategies and valuation methodologies. The SEC brought an administrative enforcement action against Patriot28 and Jarkesy, resulting in a civil penalty of $300,000 and disgorgement of Patriot28’s earnings, as well as an order barring Jarkesy from participating in the securities industry and requiring him to cease and desist from further violations of the securities laws.
Prior to today’s decision, the SEC had the option to initiate proceedings of this type either in federal court or through its own internal administrative processes where the case would be presented, and a decision would be rendered, by an Administrative Law Judge, subject to appeal within the SEC itself.
After the SEC confirmed its final order, Jarkesy and Patriot28 filed a Petition for Judicial Review in federal court. The Fifth Circuit Court of Appeals granted their Petition and vacated the SEC’s order, holding, among other things, that the issuance of this order through an in-house administrative process violated petitioners’ constitutional right to a jury trial under the Seventh Amendment.
In rendering this decision, the Supreme Court has altered the landscape by holding that monetary penalties, such as the $300,000 fine imposed upon Jarkesy, are only available through a lawsuit in an Article III federal court, where the defendant has a right to a jury trial. The Supreme Court declined to resolve some additional questions on which the Fifth Circuit had agreed with the petitioners, thus leaving them open for future litigants to explore. These issues include (i) whether Congress violated the non-delegation doctrine by failing to give the SEC clear guidance on when to pursue claims of this type in court, as opposed to administrative proceedings, and (ii) whether the restrictions on the Executive Branch’s ability to remove ALJs without good cause violate the separation of powers.
While this decision is virtually certain to mean major changes in SEC Enforcement litigation, the full legal and practical impact will likely take some time to become clear. On its face, the ruling applies only to monetary penalties, and still leaves room for the SEC and other agencies to pursue other forms of relief (such as bar orders and suspensions) through its administrative processes. Some of these situations will likely lead to future challenges seeking to expand the holding of Jarkesy to other forms of punishment, and the question of whether this ruling applies with equal force to other federal agencies is likely to be a topic of future litigation as well.
From a practical standpoint, it is premature to predict how this ruling will impact the SEC’s enforcement priorities and decision-making process going forward. It is possible the SEC may narrow its focus and may become more willing to resolve issues through settlement rather than litigation, or it may instead move towards a stronger preference for seeking equitable relief and bar orders instead of monetary penalties. WSS will be monitoring the impact of this landmark decision and advising its clients as to the SEC’s reaction to the Jarkesy ruling and how Enforcement is responding to it going forward.
Should you have any questions or wish to discuss the Jarkesy ruling, please contact Michael Schwartzberg or another member of our firm’s Securities Practice Group.
