SECURITIES CORNER

The Supreme Court recently held that the in-house proceedings the SEC has used in some civil fraud complaints violate the Constitutional right to a jury trial in civil lawsuits. Previously, the SEC had the choice of bringing an enforcement action in one of two forums: i) either adjudicating the matter itself using an administrative law judge or ii) filing suit in federal court where a jury trial is available. Prior to the passage of Dodd Frank, the SEC could only seek civil penalties in federal court. However, after Dodd Frank, the SEC could choose to seek such penalties in either forum. In the underlying issue before the Supreme Court, the SEC had initiated an enforcement action against a hedge fund and its manager seeking civil penalties for alleged securities fraud and proceeded in-house before one of its administrative law judges. Eventually, a circuit court judge rejected the administrative law judge’s award of penalties, which the SEC appealed.

Ultimately, the Court found the Seventh Amendment entitles a defendant to a jury trial when the SEC seeks civil penalties against them for securities fraud. The SEC’s antifraud provisions replicate common law fraud. It was well established that common law claims must be heard by a jury. This decision could have far-reaching effects on other regulatory bodies that use a similar structure, as this decision suggests alternative forums for bringing enforcement actions outside of federal court are inappropriate under Constitutional law.