Attorneys challenging the legitimacy of U.S. Securities and Exchange Commission civil proceedings because of the way administrative law judges are appointed have taken the first step toward seeking relief in the U.S. Supreme Court.
Lawyers for Lynn Tilton, who heads the New York-based RIA firm Patriarch Partners LLC, have asked Justice Ruth Bader Ginsburg to stay an SEC enforcement proceeding. The SEC’s administrative case received a go-ahead in June from the U.S. Court of Appeals for the Second Circuit, which rejected Tilton’s challenge to the constitutionality of SEC proceedings.
The Tilton hearing involved an administrative law judge (ALJ), who was hired by the SEC but not appointed by its commissioners.
In May 2015, the SEC charged Tilton, Patriarch Partners and its affiliated firms with defrauding clients out of hundreds of millions of dollars by hiding the poor performance of loan assets in three collateralized loan obligation funds.
On June 1, the Second Circuit on June 1 rebuffed Tilton’s argument that the SEC’s administrative judges are “inferior officers” who must by picked by the president, the judiciary or the head of a department under the appointments clause in Article II of the U.S. Constitution.
Tilton was trying to sideline an SEC proceeding in which her company is accused of improperly collecting some $200 million in fees from investors. The circuit, however, held that any challenges to the legitimacy of an ALJ must wait until the SEC proceedings are no longer pending.
The issue has divided lower courts. While Judge Ronnie Abrams of the U.S. District Court for the Southern District of New York refused in 2015 to block the Tilton hearing, her colleague, Judge Richard Berman, enjoined a hearing scheduled for former Standard & Poor’s Rating Services director Barbara Duka, who is accused of failing to disclose a relaxed methodology for calculating debt-service ratios.
In their request for a stay, the Tilton legal team, led by Theodore Olson of Gibson, Dunn & Crutcher, said there was a “reasonable probability” the Supreme Court would take the case and reverse the Second Circuit, whose decision Olson argued was at odds with Supreme Court case law.
The SEC, they said, won 90% of the time before its own ALJs between October 2010 and March 2015, but just 69% of the time in enforcement actions brought in federal court.
Olson said there is a conflict among the lower courts on the issue that, “in the absence of an authoritative resolution by this Court, will continue to arise with frequency given the SEC’s strong preference for bringing enforcement actions before its own ALJs.”
The Supreme Court has not granted certiorari in any case to date raising the inferior-officer issue or the need to complete an SEC proceeding before mounting a constitutional challenge.
The petition for stay is captioned Tilton v. SEC, No. 16A242.