Patriarch's Tilton Asks Appeals Court to Rule Against Use of SEC-Hired Judges

Sep 16 2015 | 4:30pm ET

By Nate Raymond (Reuters) - A lawyer for New York financier Lynn Tilton on Wednesday urged a federal appeals court to block the U.S. Securities and Exchange Commission from trying her for defrauding investors before an in-house judge hired by the regulator.

David Zornow, Tilton's lawyer, urged the U.S. 2nd Circuit Court of Appeals in New York to ensure that the head of Patriarch Partners did not have to face trial Oct. 13 before an SEC-hired judge whose appointment he said was unconstitutional.

"In that trial, Ms. Tilton's reputation and career will be on the line," he said.

The case is a high-profile challenge to the SEC's use of administrative proceedings, which have increased since the 2010 Dodd-Frank law gave it the power to bring more cases in-house.

Critics say the proceedings are unfair, citing the lack of juries and the limited ability of defendants to gather evidence. Some defendants, like Tilton, also contend the system is unconstitutional.

Tilton's case, though, was dismissed on jurisdictional grounds in June, and Mark Stern, a U.S. Justice Department attorney representing the SEC, asked the three-judge panel to uphold that ruling.

Stern contended U.S. District Judge Ronnie Abrams in Manhattan properly concluded Congress had dictated that such a constitutional challenge first be raised before the SEC's commissioners themselves and then a federal appeals court.

"The issue can be resolved on ultimate review," Stern said.

The judges ordered further briefing through Sept. 30 while leaving unclear how they would rule.

But with time running out before Tilton's fraud trial starts, Circuit Judge Jon Newman questioned why the SEC objected to staying the case pending a ruling as Tilton wanted.

"When we do things quickly, that's when mistakes are made," Newman said. "Wouldn't you rather we got it right?"

In March, the SEC charged Tilton, dubbed the "Diva of Distressed," and Patriarch Partners for hiding the poor performance of assets underlying three collateralized loan obligation funds that raised over $2.5 billion.

Tilton, who denied wrongdoing, subsequently filed a lawsuit that, like some other recent cases, contends the SEC's practice of letting staff rather than commissioners appoint its five administrative law judges is unconstitutional.

Two federal judges have ruled it is likely unconstitutional. Other courts have dismissed the cases, saying the commission itself gets the first go at hearing the issue.

In a 3-2 decision Sept. 3, the commission rejected such a constitutional challenge by an ex-radio show host, Raymond Lucia.

The case is Tilton v. Securities and Exchange Commission, 2nd U.S. Circuit Court of Appeals, No. 15-2103.

In Depth

PAAMCO: Will Inflation Deflate the Asset Bubble?

Jan 30 2018 | 9:49pm ET

As the U.S. shifts from monetary stimulus to fiscal stimulus, market pricing should...


CFA Institute To Add Computer Science To Exam Curriculum

May 24 2017 | 9:25pm ET

Starting in 2019, financial industry executives sitting for the coveted Chartered...

Guest Contributor

Boost Hedge Fund Marketing ROI By Raising Your ROO

Feb 14 2018 | 9:57pm ET

Tasked with delivering returns on client capital, a common dilemma for many alternative...