Securities And Exchange Commission v. Jarkesy

144 S.Ct. 2117 (2024)

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Nature of the Case

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Facts

P began investigating Ds for securities fraud. Between 2007 and 2010, Ds launched two investment funds, raising about $24 million from 120 “accredited” investors-a class of investors that includes, for example, financial institutions, certain investment professionals, and high-net-worth individuals. P claimed Ds misled investors in at least three ways: (1) by misrepresenting the investment strategies that Ds employed, (2) by lying about the identity of the funds’ auditor and prime broker, and (3) by inflating the funds’ claimed value so that Ds could collect larger management fees. P initiated an enforcement action, contending that these actions violated its antifraud provisions of the Securities Act, the Securities Exchange Act, and the Investment Advisers Act. P sought civil penalties and other remedies. Exercising its new authority conferred by the Dodd-Frank Act, P opted to adjudicate the matter itself. The presiding ALJ issued an initial decision. P reviewed the decision and then released its final order in 2020. P levied a civil penalty of $300,000 against Ds, directed them to cease and desist committing or causing violations of the antifraud provisions, ordered them to disgorge earnings, and prohibited D from participating in the securities industry and in offerings of penny stocks. Ds appealed. A divided panel of the Fifth Circuit granted their petition and vacated the final order. Applying a two-part test from Granfinanciera, S. A. the panel held that the agency’s decision to adjudicate the matter in-house violated Ds' Seventh Amendment right to a jury trial. It reasoned that the P antifraud claims were “akin to [a] traditional action[ ] in debt,” a jury trial would be required if this case were brought in an Article III court. It then considered whether the “public rights” exception applied and concluded that the exception did not apply. The court also determined that Congress had violated the nondelegation doctrine by authorizing P, without adequate guidance, to choose whether to litigate this action in an Article III court or to adjudicate the matter itself. It then found that the insulation of P ALJs from executive supervision with two layers of for-cause removal protections violated the separation of powers. It vacated the final order and P appealed.