Stay current on changes and developments in corporate law with a wide variety of resources and tools.
Oct. 21 — Jordan Peixoto, whom the SEC charged with making $47,100 by using inside information to trade on a hedge fund's strategy before it became public, is suing the agency back and claiming the administrative proceeding is unconstitutional.
Peixoto's lawsuit alleges that the Securities and Exchange Commission's administrative proceedings violate the Constitution's Article II provisions on executive power.
The SEC also unfairly chose to bring the case in an administrative proceeding because it would not hold up under judicial scrutiny, Peixoto alleged Oct. 20 in the U.S. District Court for the Southern District of New York.
In September, the SEC alleged that Filip Szymik learned of Pershing Square Management LP's plan to take a $1 billion short position on Herbalife Ltd. from his roommate, then an analyst at Pershing, and Szymik then tipped Peixoto, his friend, who traded on the information.
Szymik agreed to settle the charges against him and pay a $47,100 fine.
The SEC's administrative law judges are executive branch officers, Peixoto said.
“SEC ALJs are not mere recommenders to the Commission or mere employees performing fact-gathering exercises for final review by the Commission; rather, they have enormous and practically unchecked authority,” he argued. “Moreover, there is no obvious constitutional warrant for such unchecked and unbalanced administrative power.”
Because the ALJs also have job protection beyond what ordinary Article II judges have, the proceedings they oversee are unconstitutional, he said.
Peixoto also argued that the SEC brought the case administratively instead of in federal court because it would be easier for the SEC to win without having to prove “to a jury the required elements of an insider trading offense.”
“The SEC could not prove that Mr. Peixoto knew or should have known that Szymik and the analyst had the type of intimate friendship which gives rise to a duty of confidentiality, or that Szymik breached any such purported duty,” he said. “Nor could the SEC establish that Mr. Peixoto knew or should have known that whatever information Szymik conveyed to him was confidential.”
Peixoto said he was being unfairly singled out by having the agency bring an insider trading case in the administrative forum.
“With the exception of [Rajat] Gupta and arguably one other settling defendant, the commission has filed all litigated insider trading proceedings against non-regulated defendants in district court since the passage of Dodd-Frank in July 2010,” he argued.
The SEC dropped an administrative insider trading case against Gupta in 2011 when Gupta agreed to moot his federal court claims.
The SEC knows it is more likely to succeed in administrative proceedings, Peixoto said, citing SEC Enforcement Director Andrew Ceresney, who said in June, “there have been a number of cases in recent months where we have threatened administrative proceedings—it was something we told the other [party] we were going to do and they settled.”
“The Commission is fully aware and has acknowledged that the administrative process is a star chamber where only the Commission emerges as the victor and the defendant is defenseless,” Peixoto argued. “The mere specter of the process renders submission from the defendant because the process is rigged against him.”
During an Oct. 14 panel in Washington, Ceresney said an administrative proceeding is “very fair,” ALJs are “extremely fair and neutral” and there is a robust appeals process to federal circuits.
“I reject the concept that there is a due process violation” in administrative proceedings, Ceresney said then.
The SEC faces several challenges to the constitutionality of its administrative forum.
To contact the reporter on this story: Rob Tricchinelli in Washington firstname.lastname@example.org
To contact the editor responsible for this story: Susan Jenkins at email@example.com
Peixoto's complaint is available at http://go.bloomberg.com/assets/content/uploads/sites/2/peixoto-lawsuit.pdf.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)