Reprinted with Permission from Law360
The Scope Of SEC Defendants' Jury Trial Right: Part 3
Law360, New York (July 18, 2016, 2:38 PM ET) –
This is the third of four articles examining the scope of the Seventh Amendment jury trial right for civil
defendants in U.S. Securities and Exchange Commission enforcement actions. Our first article explained
why the Seventh Amendment entitles a civil defendant to a jury finding as to those facts that increase the
maximum penalty — the “liability” — to which a defendant is exposed.[1] In the second article, we
discussed how the jury trial right extends to an assessment of the number of distinct violations committed
and how this issue turns on how one defines the “unit of violation” under the federal securities laws.[2] In
this article, we address the issues of reliance and loss (or gain) causation in SEC enforcement actions and
the jury’s role in assessing such. While the received wisdom among practitioners and some courts is that
injury and loss causation have no bearing on an SEC enforcement action and are certainly not issues on
which a jury must pass, this is plainly incorrect.
The SEC Penalty Tiers Require Proof of Loss (or Gain) and Causation
As discussed in an earlier article, the federal securities laws authorize a district court to impos e civil
monetary penalties for securities law violations under a three-tier system. The appropriate penalty tier, and
the corresponding maximum penalty that the court may impose, depends on the presence of additional facts
beyond the elements of the violation. The base penalty for any violation by a natural person is $5,000
($50,000 for a corporation or other entity). If the violation involved fraud or recklessness, then the
maximum penalty increases to $50,000 ($250,000 for a corporation or other entity). And if the violation
involved fraud or recklessness and “resulted in” substantial loss or a significant risk of such loss to others,
then the maximum penalty increases to $100,000 ($500,000 for a corporation or other entity). For each penalty tier, the
maximum penalty is increased to the gross amount gained by the defendant, if any, “as a result of” the violatio n.[3]
The use of “resulted in” and “as a result of” language in the text of the SEC penalty provisions clearly suggests a causatio n
requirement. The U.S. Supreme Court has repeatedly explained in other contexts that such language requires proof of
causation.[4] This means that, in order to secure a third-tier penalty against a securities law violator, the SEC must prove
not only the elements of a securities law violation, but also that the violation caused loss to others or was causally
connected to gain by the defendant. In other words, a defendant faces liability for a third-tier penalty (or a penalty
measured by the defendant’s gain) only if both a violation of the securities laws and a causal connection to either loss (or
gain) are shown.[5] And embedded in the concept of causation is the element of reliance.[6]
Matthew Martens
Jaclyn Moyer
Derek Woodman
