|
 The 2nd U.S. Circuit Court of Appeals in New York on Wednesday
will hear arguments over whether to revive a lawsuit by Lynn Tilton,
a private equity chief dubbed the "Diva of Distressed," to block the
SEC from pursuing fraud charges in an in-house administrative
proceeding instead of federal court.
Critics say the proceedings are unfair because there are no juries,
and defense lawyers have a limited ability to depose witnesses and
gather evidence. Some, including Tilton, also say the appointment of
administrative judges, who are on the SEC payroll, is
unconstitutional.
The SEC charged Tilton, 56, and her Patriarch Partners firm in March
with hiding the poor performance of assets underlying three
collateralized loan obligation funds that raised over $2.5 billion.
Tilton and Patriarch deny wrongdoing, and have said their investment
strategy was consistently disclosed. Should the court not intervene,
Tilton faces trial on Oct. 13.
The decision by the 2nd Circuit could prove a major factor in the
SEC's ability to continue pursuing enforcement actions
administratively, invoking the 2010 Dodd-Frank law granting it the
authority to bring more cases before its in-house court.
 The SEC has boosted its percentage of administrative cases to 80.8
percent in 2014 from 69.4 percent in 2013.
Critics said the increase followed a series of prominent jury trial
losses for the SEC, including the 2013 insider trading trial of
billionaire Mark Cuban.
CONSTITUTIONAL CHALLENGES
Many lawsuits challenging in-house proceedings say they violate
Article II of the Constitution because administrative law judges
qualify as executive branch officers, but enjoy job protections that
can make it impossible for the president to remove them.
The SEC contends the judges are merely employees, and in a 3-2
decision, the commission ruled that way on Sept. 3 in an unrelated
case.
Some courts, including the federal appeals court in Chicago, have
often declined to reach the issue, saying that constitutional
challenges must first be made in the administrative proceedings
themselves.
In dismissing Tilton's lawsuit against the SEC in June, U.S.
District Judge Ronnie Abrams in Manhattan likewise said she had no
jurisdiction, saying Congress had designated the regulator and then
a federal appeals court as the "exclusive avenue of review."
[to top of second column] |
In her appeal, Tilton's lawyers noted that two federal judges have
suggested that the appointment of SEC administrative judges was
likely unconstitutional.
Last month, U.S. District Richard Berman in Manhattan blocked the
SEC from going forward with an administrative trial against Barbara
Duka, a former Standard & Poor's executive.
Earlier in the year, U.S. District Judge Leigh Martin May in Atlanta
blocked two other cases, and said the matter could "easily be cured"
if SEC commissioners appointed the judges or presided over the cases
themselves.
The SEC has resisted that approach, and is appealing Berman's and
May's decisions.
Some defense lawyers have said a policy change might be viewed as a
concession by the SEC that judges who handled past administrative
cases never had constitutional authority.
Jodi Avergun, a lawyer at Cadwalader, Wickersham & Taft, said any
change at the SEC could spur challenges to other agencies' use of
in-house proceedings.
"Anything the SEC may do to cure its problems as identified by the
courts may have unintentional collateral impact on all other federal
agencies that have these hearing officers," she said.
The case is Tilton v. Securities and Exchange Commission, 2nd U.S.
Circuit Court of Appeals, No. 15-2103.
(Reporting by Nate Raymond in New York; Editing by Noeleen Walder
and Andrew Hay)
[© 2015 Thomson Reuters. All rights
reserved.]
Copyright 2015 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.
 |
