Court halts SEC case against Tilton

A three-judge panel has halted the SEC’s case against Patriarch partners founder Lynn Tilton to decide if the SEC’s in-house tribunal system is unconstitutional.

The US Court of Appeals for the Second Circuit in New York has temporarily halted administrative proceedings by the US Securities and Exchange Commission (SEC) in its case against Patriarch Partners founder Lynn Tilton.

A three-judge panel imposed a stay against the SEC on Thursday while they consider Tilton’s challenge to the regulator’s decision to try her before an in-house administrative law judge (ALJ). The appeals court did not say when it might lift the stay or rule on the appeal.

Court records did not include a transcript of Tilton’s arguments, which were presented orally before the court on Wednesday.

The SEC charged Tilton in March, alleging that private debt firm Patriarch defrauded investors in three collateralized loan obligation (CLO) funds by providing false and misleading information about loan asset performance. An ALJ was scheduled to hear her case on October 13.

Tilton sued the SEC in April, arguing that the regulator’s administrative process violates the Constitution because ALJs are not appointed directly by SEC Commissioners and are not subject to removal. The SEC decides whether to bring its cases before an ALJ or before a US District Court, where there are greater discovery rights and the right to a jury trial.

In July, a judge dismissed Tilton’s lawsuit, ruling that the court did not have the power or jurisdiction to halt proceedings at the SEC until Patriarch followed the established administrative review process.

The SEC’s in-house enforcement proceedings have been the subject of much back and forth in federal courts of late. Thus far, two judges have ruled that SEC administrative proceedings are “likely unconstitutional” – once in June in the US District Court of Northern Georgia and once in August in the US District Court of Southern New York.

Earlier this month, a divided SEC rejected a claim that its in-house judges are unconstitutional, dismissing investment adviser Raymond Lucia’s argument that the SEC judge who ruled Lucia had misled investors was unconstitutionally appointed to his position.