The SEC’s Right to a Jury Trial

September 19, 2016

By: Sara Kropf

We usually think about the right to a jury as one for a defendant facing charges. But it’s worth remembering that agencies are people too. Well, at least when it comes to the right to a jury trial in a civil case.

In a recent Ninth Circuit opinion, the court reversed the judgment in favor of the defendants because the district court refused to allow a trial by jury when the SEC requested it.

In U.S. Securities & Exchange Commission v. Jensen, the SEC went after former CEO Peter Jensen and former CFO Thomas Tekulve of the “now-defunct” Basin Water, Inc.

The SEC filed suit against Defendants in 2011 alleging that they had participated in a scheme to defraud Basin investors by reporting millions of dollars in revenue that were never realized.

The court summarized what happened in the district court (CliffsNotes version: the defendants won a resounding victory):

 The district court granted partial summary judgment to Defendants on the SEC’s claim under Rule 13a–14 of the Securities Exchange Act (Exchange Act), which requires that an issuer’s CEO and CFO certify the accuracy of the issuer’s financial reports. 17 C.F.R. § 240.13a–14. The court held that the rule requires CEOs and CFOs to certify certain financial statements but does not provide a cause of action against officers who certified false statements. The court held a bench trial on the SEC’s remaining claims and found for Defendants on all counts.

The Ninth Circuit’s opinion is straightforward. It can be summarized like this:

  1. Like any other party, the SEC has a right to a jury trial when it seeks a legal remedy in a civil case.
  2. The SEC sought both legal remedies (civil fines) and equitable remedies (injunctions) against the defendants.
  3. When there are both legal and equitable claims in one lawsuit, there is a right to a jury.
  4. Rule #3 applies even when many of the SEC’s claims were equitable in nature.

The first party to ask for a jury trial was Mr. Tekulve, in his answer to the complaint. But when he later tried to withdraw his request for a jury trial, the SEC objected. The district court ignored that objection and agreed to hear the case in a bench trial instead.

The Federal Rules have a specific method by which a jury trial demand may be withdrawn. Rule 38(d) states that “a proper [jury] demand may be withdrawn only if the parties consent.”

Rule 39(a) is the same. It states that when a demand is made for a jury trial, then it must “be designated on the docket as a jury action.” This remains unless either (1) the parties stipulate to a nonjury trial, or (2) “the court, on motion or on its own, finds that one some issues there is no federal right to a jury trial.”

There is an exception to these general rules. We can call it the Crafty Party Exception:

We have recognized a limited exception to the requirements of Rules 38 and 39 “when the party claiming the jury trial right is attempting to act strategically—participating in a bench trial in the hopes of achieving a favorable outcome, then asserting lack of consent to the bench trial when the result turns out to be unfavorable for him.” Solis v. Cty. of Los Angeles, 514 F.3d 946, 955 (9th Cir. 2008). However, this exception is narrow. “Because the right to a jury trial is a fundamental right guaranteed to our citizenry by the Constitution, . . . courts should indulge every reasonable presumption against waiver.” Id. at 953 (quoting Pradier v. Elespuru, 641 F.2d 808, 811 (9th Cir. 1981)).

The court of appeals did not agree that the SEC had engaged in any “strategic” conduct here. And, from the facts in the opinion, it seems like the court was right. The SEC objected to the bench trial from the start and kept on objecting.

 Here, the SEC maintained the consistent position that it did not consent to the withdrawal of the jury demand, beginning on the day the demand withdrawal was filed. It then stated its objection to the court’s order setting the matter for bench trial more than a month before trial.

The court then engaged in a harmless error analysis, describing factual disputes (and credibility determinations) that were appropriate for a jury to decide.

It sounds like the defendants had a resounding win before this judge. With luck, it is a sign of what’s to come in front of a jury. At a minimum, one would hope that the SEC would be willing to engage in some serious settlement discussions since it looks quite possible that it may lose at trial in front of a jury.

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