The U.S. District Court for the District of Columbia on January 8, 2026, rejected arguments by two former investment advisers that they could be permanently banned from the securities industry only after a jury trial.
The Securities and Exchange Commission (SEC) filed suit in the Southern District of California in 2021 alleging that Michael Sztrom and his son, David Sztrom, engaged in a scheme to defraud investors and breached their fiduciary duties. The suit alleged that David provided Michael with the means to advise clients and execute trades on their behalf despite Michael not being registered as an investment adviser.
The Sztroms consented to an entry of final judgment prohibiting them from violating the securities laws and were ordered to pay a civil penalty of $25,000 each. The Sztroms did not have to admit or deny the allegations. Months later, the SEC then began a follow-on administrative proceeding to bar the defendants from the securities industry.
The Sztroms argued in response that the in-house action before an SEC administrative law judge was contrary to the Supreme Court’s holding in SEC v. Jarkesy. Rejecting their argument, the district court granted the SEC’s motion to dismiss the Sztroms’ complaint.
The Supreme Court held in Jarkesy that the SEC must seek monetary civil penalties through the federal courts and not through an internal process, in order to ensure adequate Fifth Amendment due process rights and the Seventh Amendment right to a jury trial. The Sztroms argued that the limitations on seeking monetary civil penalties through administrative proceedings should also apply where the SEC seeks to prevent a defendant from participating in the securities industry. Specifically, they argued that because such a bar would effectively end the defendants’ careers in the industry, the follow-on proceeding concerned private rights that must be first heard by the federal courts.
However, the court held that imposing the industry ban is a remedial sanction imposed in the public interest that may be adjudicated by the SEC under the ruling in Jarkesy.
The district court’s decision also notes that several due process protections are provided through the SEC’s administrative process. First, the respondent must be provided with notice of the follow-on proceeding and the opportunity for a hearing before any remedial sanctions are imposed. Second, the sanctions may be imposed only if the respondent has previously been enjoined by a court from acting in “a securities related capacity” (15 U.S.C. § 80b-3(e)(4), (f)). Additionally, the SEC’s remedial orders may be appealed to the appropriate federal court for consideration.
The holding in Sztrom is a shift away from the recent “weakening of the SEC’s administrative enforcement regime,” as the opinion notes. While the use of SEC administrative proceedings has become more difficult for the SEC, there is no moratorium on the use of follow-on proceedings that support the interest of the investing public. Those subject to SEC enforcement actions should fully consider the scope of the SEC’s regulatory and remedial powers before challenging the process.
[View source.]
