Jarkesy Case Strips Enforcers of In-House Court Expertise, Speed

The US Supreme Court’s June 27 ruling in Securities and Exchange Commission v. Jarkesy has broad implications for both the SEC’s ability to enforce securities laws and for other administrative agencies using similar adjudicative processes to enforce federal regulations.

A 6-3 majority held that the Seventh Amendment entitles a defendant in a securities fraud case to a jury trial, rather than an administrative law judge, when the SEC is seeking civil penalties. The court found that because SEC antifraud provisions replicate common law fraud, they’re not within the public rights exception to Article III.

The court also lumped all antifraud provisions together, holding them equal in terms of an analogous understanding of common law fraud. It didn’t address whether the ruling unsettles the numerous and distinct pleading standards for the various antifraud provisions that plaintiffs’ lawyers and SEC enforcement attorneys are forced to operate under every day.

Some critics are concerned that the majority’s intent here wasn’t to suddenly protect the Seventh Amendment rights of would-be fraudsters, but to continue systematically deconstructing the power of the administrative state. Others believe that this ruling is narrow and confined to antifraud provisions of the SEC.

Federal litigation is time-consuming and expensive, and federal courts are already understaffed. As of today, there are over 40 federal court vacancies, and these courts will now will be under more strain to hear securities fraud cases. There are significantly more administrative law judges than federal district court judges who can hear vastly more cases. ALJs are also experts, whereas not all federal judges have expertise in federal securities laws.

The ruling also ignores the reality that the SEC itself is outnumbered. It doesn’t have the legal staffing or budget to out-litigate defendants who often bring with them dozens of well-paid lawyers from private defense firms.

As a result, Jarkesy likely will have an indirect chilling effect on SEC enforcement actions. The SEC will have to pick and choose where to best use their already limited resources. Time will tell whether this decision will harm the market by lowering the incentives to follow the law.

These actions also will likely fall to juries. With the utmost respect to the average US juror, most don’t understand the complexities of federal securities laws.

Take, for example, the case filed against Elon Musk for market manipulation in 2018, when he claimed he had secured the funding to take Tesla private. The SEC filed a complaint in federal court, not with an ALJ, alleging Musk’s statements violated Rule 10b-5 of the Securities Exchange Act covering “employment of manipulative and deceptive devices.”

The parties settled, Musk paid $20 million in fines, and he stepped down as chairman of Tesla. Following the settlement, shareholders filed a class action with the same facts and under the same rule: Rule 10b-5. This time, Musk took it to trial, where a jury found him not liable for the same statements for which he’d just paid a $20 million fine. This illustrates how getting ordinary jurors to understand the complexities of federal securities laws is a more onerous task than the Supreme Court may believe.

On an even grimmer note, proponents of this decision likely will argue that it’s confined to the SEC’s ability to extract monetary fines from administrative proceedings. These proponents are the same ones who probably will file amicus briefs in two cases against other federal agencies that relied on the Jarkesy decision before it was even issued.

Meta has challenged the Federal Trade Commission’s authority in a similar way the day that Jarkesy was argued before the Supreme Court. Musk’s company SpaceX has filed a similar suit challenging the National Labor Relations Board’s authority, relying heavily on Jarkesy. Let’s check back in a few years to see whether the ruling stands by its various claims of narrowness.

The case is SEC v. Jarkesy, 2024 BL 219548, U.S., No. 22-859, 6/27/24.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Anat Alon-Beck is associate professor of law at Case Western Reserve University School of Law.

John Livingstone is a research fellow at Case Western Reserve University School of Law.

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