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 In an unusual hearing before a standing room-only audience, trial
lawyers for the U.S. Securities and Exchange Commission sought to
convince the regulator's commissioners of the legality of SEC
administrative proceedings.
The case involved Timbervest LLC, which was seeking to overturn an
August decision by SEC Administrative Law Judge Cameron Elliot
finding the Georgia-based investment firm and top executives liable
for fraud for having failed to disclose conflicts of interest and
various fees.
But the case has drawn interest because Timbervest, like other
defendants in similar cases, has argued that the entire
administrative proceeding was unconstitutional because of the job
protections afforded judges like Elliot.
Many similar types of constitutional challenges by other defendants
have not met with much success.
However, on the same day Timbervest was presenting its appeal, a
federal judge in Atlanta issued a ruling on another case that could
prove to be a turning point.
 U.S. District Judge Leigh Martin May agreed on Monday to halt the
SEC's administrative proceeding against Charles Hill, a real estate
developer accused of insider trading, based on similar
constitutional arguments.
Administrative law judges are considered independent from the
government agencies where they work. Their employing agency can seek
their removal, but such a move must also be reviewed by the Merit
Systems Protection Board.
Timbervest claimed that SEC judges qualify as "inferior officers"
subject to removal by U.S. President Barack Obama. Its lawyers said
the extra layer of job protection afforded to the judges violates
the separation of powers under the Constitution because Obama might
be unable to remove them, even for cause.
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The SEC disagrees, calling administrative law judges "employees,"
not inferior officers, saying that SEC commissioners can review
their decisions and have discretion on when to use the in-house
courts.
The Atlanta judge in Hill's case declared Monday that she believes
SEC judges are likely inferior officers, and therefore the
"plaintiff has established a likelihood of success on the merits" of
his claim.
In its appeal, Timbervest has also challenged Elliot's track record
of ruling against defendants in SEC administrative cases.
The SEC issued an unusual order last week inviting Elliot to say
whether he feels pressure to rule for the regulator.
The SEC will now weigh the arguments and eventually rule on
Timbervest's appeal.
SEC administrative proceedings became more common after the
Dodd-Frank financial reforms became law in 2010.
Defendants complain that the proceedings deprive them of protections
afforded in federal courts.
(Reporting by Sarah N. Lynch; Editing by Lisa Shumaker)
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