News & Insights

Auditor Liability Bulletin

June 28, 2024

Supreme Court Holds Defendants Have Right To Jury Trial When SEC Seeks Monetary Penalties for Securities Fraud


On June 27, 2024, the United States Supreme Court issued its opinion in SEC v. Jarkesy.  The Supreme Court held that when the SEC seeks civil penalties against a defendant for securities fraud, the Seventh Amendment entitles the defendant to a jury trial.  Although not involving auditors, the reasoning of the case may apply to actions brought by other administrative agencies and the case is relevant to SEC enforcement proceedings, which often involve auditors.

An administrative law judge with the SEC initially determined that hedge fund manager George Jarkesy, Jr., and his firm, Patriot28, LLC committed violations of federal securities laws and imposed a $300,000 fine, among other sanctions.  As previously reported in the Auditor Liability Bulletin in 2022, the Fifth Circuit vacated the SEC’s final order and held Jarkesy had a right to make his case before a jury because the SEC’s action seeking civil penalties for securities fraud was a type of traditional legal claim that arose “at common law,” rather than an action to vindicate a public right.  The Supreme Court affirmed the reasoning of the Fifth Circuit adding that Congress incorporated common law fraud prohibitions into federal securities laws by using “fraud” and other common law terms of art when it drafted those laws.  As a result, “the close relationship between federal securities fraud and common law fraud confirms that this action is ‘legal in nature.’”

The Supreme Court also concluded that the “public rights” exception to Article III jurisdiction did not apply because the case did “not fall within any of the distinctive areas involving governmental prerogatives where the Court has concluded that a matter may be resolved outside of an Article III court, without a jury.”

As previously reported in the Auditor Liability Bulletin last month, the SEC postponed its administrative proceeding against a partner at Marcum LLP, while the Jarkesy case was pending.  In that case, the SEC alleged the partner violated the PCAOB’s auditing standards “numerous” times from 2012 through 2022.

The case is Securities and Exchange Commission v. Jarkesy, et al., No. 22-859.  The opinion is available here.