High Court Turns Back Bid to Review SEC In-House Forum

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By Phyllis Diamond

The U.S. Supreme Court May 30 rejected financier Lynn Tilton’s bid to decide whether the SEC’s in-house forum passes constitutional muster ( Tilton v. SEC, U.S., No. 16-906, 5/30/17 ).

The federal appeals courts are divided on the question, suggesting that at some point, the justices are likely to take up the issue.

Tilton asked the court to review a ruling by the U.S. Court of Appeals for the Second Circuit that the district courts don’t have jurisdiction over the constitutional question. She also petitioned the court to consider the underlying issue: Is the way the Securities and Exchange Commission appoints its administrative law judges consistent with the Appointments Clause?

Tilton was sued administratively in 2015 for allegedly misleading investors about the value of risky pools of corporate loans. According to the SEC, Tilton’s Patriarch Partners LLC collected nearly $200 million in management fees that would have been improper under the correct valuation.

Tilton in turn sued the commission over the constitutionality of the forum, but the U.S. District Court for the Southern District of New York said it didn’t have jurisdiction to hear the case while the SEC’s administrative case was pending. The Second Circuit affirmed.

Petition for Review

In her Jan. 19 petition for high court review, Tilton argued that the Second Circuit’s decision “conflicts squarely” with a Supreme Court ruling that the federal securities laws don’t preclude district court jurisdiction over an Appointments Clause challenge. She also asked the court to decide whether the SEC’s ALJs are “inferior officers” whose hiring must meet Appointments Clause requirements.

In March, SEC ALJ Carol Fox Foelak declined to stay the in-house case pending Supreme Court review of the constitutional question. “The possibility, not to mention the timing, of any future Supreme Court opinion on the constitutional issue is speculative, and the Commission has not disavowed its previous stance that its proceedings are constitutional,” the ALJ said.

If Tilton is found liable, sanctions could include disgorgement, money penalties, and an industry bar order.

To contact the reporter on this story: Phyllis Diamond in Washington at pdiamond@bna.com

To contact the editor responsible for this story: Seth Stern at sstern@bna.com

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