SEC Fights on Two-Court Front to Defend its In-House Judges

  • New York appeals panel skeptical of opposition to process
  • U.S. judge had ruled SEC practice probably unconstitutional

The Securities and Exchange Commission is pressing to put Lynn Tilton on trial over her management of pools of risky corporate loans even as the legality of the agency’s in-house process hangs in doubt.

Tilton, known as Diva of Distressed, challenged the way the regulator picks in-house hearing officers, claiming the staff appointments are unconstitutional and must be made by SEC commissioners. The case threatens to call into question thousands of past decisions at the agency and other branches of government.

While a judge questioned the SEC’s push to got ahead with Tilton’s hearing as scheduled on Oct. 13, the panel was also skeptical of Tilton’s claim that the proceeding would keep her under a “cloud of error.”

U.S. Circuit Court Judges Jon Newman and Robert Sack pointed out Tilton might win before the SEC administrative judge, with Newman noting even if she lost she could appeal further.

“You’re not really in the dire straits you profess to be," Newman said to Tilton’s lawyer David Zornow.

The Tilton appeal is one of two cases in which federal judges in New York disagreed on how to approach the challenge to the SEC. One federal judge said she didn’t have the authority to hear Tilton’s case. Another, Richard Berman, ruled the SEC process was probably unconstitutional.

Also Wednesday, Berman heard arguments over whether he should temporarily suspend his ruling blocking an SEC proceeding against Barbara Duka, a former Standard & Poor’s executive, while the agency appeals. The judge said he expects to decide quickly on the request.

Tilton and Duka claim the in-house judges lack authority because they’re chosen through the SEC’s normal hiring process while the constitution requires them to be appointed by the commissioners.

“We’re not trying to kill this case, we’re trying to have this case heard one time, by a constitutionally-appointed judge,” Zornow said.

Newman asked the regulator if it would agree to delay Tilton’s SEC
administrative hearing until the appeals panel rules.

"You want us to write a careful opinion, right? Wouldn’t you rather we get it right?” Newman asked. “All I’m suggesting is the environment for getting what you want will be enhanced if you agree to a stay."

U.S. Justice Department lawyer Mark Stern, who represented the SEC, said the agency would oppose any delay.

The SEC administrative legal system, like that of other federal agencies, has
been criticized by defense lawyers who contend it’s unfair, particularly in
complex cases.

The five SEC hearing officers are part of a much larger pool of almost 1,700
administrative judges working in 26 federal departments and agencies, including the National Labor Relations Board, the Federal Energy Regulatory Commission and the International Trade Commission, according to the Federal Administrative Law Judges Conference. By far the largest group of them, 1,449 as of last year, hears Social Security cases.

Compared to federal courts, deadlines are tight and defendants have fewer legal protections and less access to potential evidence. They see the system as biased in favor of the agency. The SEC says its system, in use since the Great Depression, is fair, cheap and efficient.

The cases are Duka v. U.S. Securities and Exchange Commission, 15-cv-00357, U.S. District Court, Southern District of New York (Manhattan); Tilton v. Securities and Exchange Commission, 15-02103, U.S. Court of Appeals for the Second Circuit (New York).

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