Second Circuit Rejects Tilton’s Challenge to SEC Hearings

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By Rob Tricchinelli

June 1 — A divided Second Circuit June 1 became the latest federal appeals court to hold that a respondent in the SEC’s in-house courts must fully litigate a case there before making a constitutional challenge to the forum in federal court, sending “diva of distressed” Lynn Tilton back to an administrative proceeding ( Tilton v. SEC, 2d Cir., No. 15-2103, 6/1/16 ).

She sued the SEC in April 2015 after the agency brought an enforcement case claiming that she and her firm, Patriarch Partners LLC, puffed up the value of collateralized loan obligations and illegally took home millions in fees (63 SLD, 4/2/15).

Tilton fired back with a constitutional challenge to the forum, which Judge Ronnie Abrams of the U.S. District Court for the Southern District of New York threw out in June 2015. Abrams held that the court had no jurisdiction to hear the case while the SEC's administrative case was pending (126 SLD, 7/1/15).

Challenge ‘Precluded.'

“By enacting the SEC's comprehensive scheme of administrative and judicial review, Congress implicitly precluded federal district court jurisdiction over the appellants constitutional challenge,” Judge Robert D. Sack wrote for the majority.

The D.C. Circuit (189 SLD 189, 9/30/15) and Seventh Circuit (164 SLD, 8/25/15) have reached similar conclusions, ruling that respondents must wait until they get an adverse ruling by both an administrative law judge and the full commission before bringing a challenge in federal court.

Tilton's lawsuit is one of dozens challenging the constitutionality of the SEC's administrative proceedings, both in federal court and in the forum itself.

The Tilton decision is a victory for the SEC's defense of the administrative forum, at least temporarily. Other constitutional challenges in other circuits, however, have already followed the steps prescribed by the circuit courts.


Judge Jon Ormond Newman concurred in the decision and Judge Christopher F. Droney dissented.

“Forcing the appellants to await a final Commission order before they may assert their constitutional claim in a federal court means that by the time the day for judicial review comes, they will already have suffered the injury that they are attempting to prevent,” Droney said.

Tilton is “reviewing her legal options,” Patriarch spokesman Richard White said in an e-mailed statement, calling the SEC's underlying allegations “utterly meritless.”

“Ms. Tilton and Patriarch Partners should not be required to contest the SEC's claims before an unconstitutional administrative law judge,” White said, because they are “entitled to a decision on the merits of that issue now.”

Tilton is represented by Skadden, Arps, Slate, Meagher & Flom LLP in New York.

To contact the reporter on this story: Rob Tricchinelli in Washington at

To contact the editor responsible for this story: Phyllis Diamond at

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