Court rules SEC judges ‘likely unconstitutional’

A federal judge in the US District Court of Northern Georgia ruled that the process of appointing the in-house judges used by the US Securities and Exchange Commission (SEC) is “likely unconstitutional,” according to court documents. The case, brought against the SEC by real estate developer Charles Hill, echoes complaints in an ongoing lawsuit against the regulator by Patriarch Partners founder Lynn Tilton.

US District Judge Leigh Martin May agreed to temporarily halt the SEC’s insider trading case against Hill on Monday, pending her final decision on his argument.

Hill’s primary claim is that the appointment process for administrative law judges (ALJs) is unconstitutional because ALJs are executive branch “officers,” and they should be appointed and evaluated directly by SEC Commissioners. Currently, they are hired by the SEC’s Office of Administrative Law Judges. Judge May stated that Hill had a “substantial likelihood of success” with his argument.

The decision is the first by a federal judge to find that the SEC’s in-house tribunal could breach the Constitution, according to the Wall Street Journal. The outcome of the Hill suit could have a significant impact on the rulings in future SEC enforcement cases: the SEC has won 90 percent of cases before its ALJs in the past five years, but only 69 percent of the cases that went before federal court judges in the same timeframe, according to research by WSJ.

The ruling is already bringing about consequences for the SEC. Tilton has attached the Georgia order of preliminary injunction as evidence in her suit against the regulator, which makes claims very similar to Hill’s (that the appointment process violates Article II of the Constitution).

SEC lawyers responded to Tilton’s filing on Wednesday with a letter stating that Hill’s case was “wrongly decided.” The SEC rejects Judge May’s ruling that ALJs are “constitutional officers” and questions her legal interpretation that defendants in SEC cases should be able to choose between a District Court trial and an administrative proceeding.

Tilton’s in-house fraud trial is scheduled for October 13. She recently filed two motions with ALJ Carol Foelak: one because the Division of Enforcement is uncharacteristically continuing to investigate additional evidence beyond its original case, and another arguing that the SEC’s claims against her are not a matter of fraud, but of contract interpretation.