The U.S. Supreme Court cited Restatement of the Law Third, Torts: Liability for Economic Harm §§ 9 and 13, which discuss common-law fraud, in support of its opinion in SEC v. Jarkesy, No. 22-859 (June 27, 2024), concluding that, when the U.S. Securities and Exchange Commission seeks civil penalties against a defendant for securities fraud, the defendant is entitled to a jury trial under the Seventh Amendment.
The case involved an enforcement action initiated by the Securities and Exchange Commission against the manager of two hedge funds and the manager’s limited-liability company, which acted as the investment adviser for the funds, seeking civil penalties against the defendants for allegedly misleading investors in violation of the “antifraud provisions” of the Securities Act, the Securities Exchange Act, and the Investment Advisers Act. The Commission opted to adjudicate the matter itself, rather than in federal court, and released a final order that, among other things, levied civil penalties against the defendants. A divided panel of the U.S. Court of Appeals for the Fifth Circuit granted the defendants’ petition for judicial review and vacated the order, finding that the Commission’s decision to adjudicate the matter in-house violated the defendants’ Seventh Amendment right to a jury trial.
On appeal, the U.S. Supreme Court affirmed. Chief Justice John Roberts, writing for the majority, initially determined that the action implicated the Seventh Amendment, because the antifraud provisions at issue replicated common-law fraud. The Court cited Restatement of the Law Third, Torts: Liability for Economic Harm §§ 9 and 13 in reasoning that the antifraud provisions targeted “the same basic conduct”—misrepresenting or concealing material facts—as the common law, and it was well established that common-law claims had to be heard by a jury. Justice Roberts reasoned that the civil penalties imposed by the Commission in this case were designed to punish and deter, rather than to compensate, because the Commission was not obligated to return any of the penalties it collected to the defendants’ victims. Noting that, at common law, civil penalties were a type of remedy that could only be enforced in courts of law, the Court concluded that the same was true here.
The Court proceeded to determine that the “public rights” exception to Article III jurisdiction did not apply, because the action did not fall within any of the distinctive areas involving governmental prerogatives for which the Court had concluded that a matter could be resolved outside of an Article III court and without a jury.
Justice Roberts accordingly affirmed, concluding that the defendants were entitled to a jury trial in an Article III court because, under the Seventh Amendment, a defendant facing a fraud suit had a right to be tried by a jury of the defendant’s peers before a neutral adjudicator.
Read the full opinion here.