Court Said In-House Administrative Proceedings Violate Jury Trial Rights

In another decision reached this week, the Supreme Court ruled against the Security and Exchange Commission (”SEC”) in a dispute over the ability of the federal agency to use in-house judicial proceedings to seek civil penalties against defendants accused of engaging in securities fraud. The case, SEC v. Jarkesy, involved a founder of two hedge funds who was investigated by the SEC and ultimately found by an administrative law judge in an in-house proceeding, rather than a jury trial in federal court, to have violated securities law over false claims to investors, misrepresenting his funds’ investment strategy, and overvaluing the funds to increase management fees. After the administrative law judge imposed civil financial penalties against the founder. Many executive agencies, such as the SEC, Social Security Administration, IRS, and others, use administrative law proceedings that are handled by administrative law judges to enforce various laws through civil hearings without a jury. Chief Justice Roberts, writing for the majority, found that the Seventh Amendment entities defendants to a jury trial and that the use of administrative tribunals in Mr. Jarkesy’s case to enforce SEC regulations, rather than through a federal district court, violated his Seventh Amendment rights, at least when it is used to impose civil penalties on defendants. “A defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator,” Roberts wrote. “Rather than recognize that right, the dissent would permit Congress to concentrate the roles of prosecutor, judge, and jury in the hands of the Executive Branch.” The court declined to rule on whether or not the SEC administrative law system was entirely unconstitutional, but expect further challenges to the system in the coming years in many areas of federal enforcement, particularly as the court releases further opinions concerning the administrative agencies authority known as “Chevron Deference.” Anyone subject to administrative proceedings, whether it be an investigation or trial, should seek legal counsel to determine the best way to defend themselves and the challenges available to limit administrative agencies’ enforcement actions.