The Supreme Court's Jarkesy decision is out.  Unsurprisingly, it hands the SEC yet another loss and rules that it cannot pursue relief for securities fraud claims before its administrative law judges because the Seventh Amendment entitles defendants to a jury trial.

Functionally, this significantly impairs the SEC's ability to enforce the securities laws and drives much enforcement activity into federal district courts.  One of the benefits to having a specialized ALJ hear securities claims is that the process becomes much swifter for two reasons.  First administrative adjudication is more efficient.  Second, the SEC doesn't need to explain what securities fraud is to a court used to hearing these claims.  Now, the SEC will have to spend more time and treasure on run-of-the-mill enforcement actions.  As the SEC has limited resources, this will substantially reduce how much they can do.

Much of the opinion revolves around the scope of the "public rights" exception to the Seventh Amendment.  The exception allows administrative tribunals to handle matters that historically could have been resolved by the executive and legislative branches.  The opinion recognizes that the public rights exception at least includes "the collection of revenue; aspects of customs law; immigration law; relations with Indian tribes; the administration of public lands; and the granting of public benefits."

What about securities fraud claims?  The SEC argued that in creating federal securities fraud claims, Congress created "new statutory obligations enforceable through civil penalties and g[a]ve administrative agencies the power to identify violations and impose those penalties."  It also argued that even though "many violations of the federal securities laws could also give rise to common-law fraud claims", it "does not alter th[e] conclusion" that the claims fall within the exception.

The Supreme Court majority, led by Chief Justice Roberts, disagreed and found that "[i]f a suit is in the nature of an action at common law, then the matter presumptively concerns private rights, and adjudication by an Article III court is mandatory."  As it also found that "[t]he SEC’s antifraud provisions replicate common law fraud," it held that the claims must be heard by an Article III court with a right to a jury trial.  It also found that the SEC's civil damages claims were "designed to punish and deter, not to compensate. They are therefore 'a type of remedy at common law that could only be enforced in courts of law.'"

Much of the dispute centered around how to interpret a 1977 Supreme Court case, Atlas Roofing Co. v. Occupational Safety and Health Review Comm'n. There, the Supreme Court found that when Congress creates "new statutory 'public rights,' it may assign their adjudication to an administrative agency with which a jury trial would be incompatible, without violating the Seventh Amendment's injunction that jury trial is to be 'preserved' in 'suits at common law.'" (syllabus).

The Roberts opinion distinguished the Jarkesy situation from Atlas on the ground that "[b]ecause the public rights exception as construed in Atlas Roofing does not extend to these civil penalty suits for fraud, that case does not control."