Federal Judge Halts Another SEC Administrative Proceeding on Constitutionality Concerns

Nov 18 2015 | 8:20pm ET

A U.S. District Court judge in Georgia has granted another preliminary injunction against the SEC’s use of administrative proceedings.

Judge Leigh Martin May agreed to pause an SEC enforcement action against Ironridge Global Partners LLC on the basis that the agency’s use of an in-house court system that hires its own judges is likely unconstitutional under the Appointments Clause of the U.S. Constitution.

Decisions in other federal jurisdictions have reached similar conclusions, halting or delaying several SEC enforcement cases, including high-profile cases against Patriarch Partners founder Lynne Tilton and former Standard & Poors executive Barbara Duka.

Since the financial crisis, the SEC has increasingly used such in-house judges for enforcement actions instead of federal district courts as a way to speed up resolution of enforcement and other proceedings. However, the process has been roundly criticized as unfair to defendants, in part because such cases do not usually involve depositions, interrogatories, juries or rules of evidence, which can put defense teams at a disadvantage, and because the plaintiff – in this case the SEC – also employs the judge. 

Facing pushback on the practice, the SEC announced proposed amendments to the in-house courts, compromising on some of the procedural changes requested by defense attorneys and adding depositions. However, appointment of the administrative law judges adjudicating such cases would remain with the SEC under the new rules. 

San Francisco-based private equity firm Ironridge came under fire by the SEC back in June for allegedly operating an unregistered broker dealer. The firm filed a civil complaint against the SEC shortly afterward, arguing the regulator’s use of administrative law is inherently biased in their favor and the appointments are unconsitutional. 

Judge May apparently agrees. In granting the injunction, Judge May noted that the plaintiffs “have proved a substantial likelihood of success on the merits of their claim.” 

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