A New York City investment firm facing charges at the Securities and Exchange Commission has asked the Supreme Court to bar that agency from continuing to use its administrative law judges to handle cases. Those judges, the firm contended, are the kind of government officials who must be chosen by the president and confirmed by the Senate, but are not selected that way now.
The challenge seeks to put before the Court for the first time what has been a widening campaign by firms that are regulated by the SEC to challenge its internal system of judging. ALJs have significant powers, including the authority to issue sanctions orders. They are chosen by an internal process at the agency, and can only be dismissed by commissioners themselves, for good cause.
The Wall Street firm of Patriarch Partners, its founder and CEO Lynn Tilton, and affiliated firms argued that the use of ALJs results in “stacked-deck proceedings,” because those judges rule against investigated firms 90 percent of the time. One of the potential results of the SEC probe, the firm said, is that Ms Tilton could be barred from the securities industry, even while the SEC case goes forward.
The U.S. Court of Appeals for the Second Circuit has ruled, in a divided decision, that no challenge can be made in court to the use of an ALJ until a case had become final at the agency.
The request for a delay of the Second Circuit Court’s ruling, while the firm pursues an appeal to the Supreme Court, was filed with Justice Ruth Bader Ginsburg earlier this month. Ginsburg has the authority to decide emergency legal matters from the geographic area that is the Second Circuit; she can also refer such matters to the full court.
Patriarch Partners, according to its lawyers, engages in restructuring of companies that have fallen on hard times. Its investment funds raise cash through sales of debt to investors, including sophisticated institutional firms. The funds make loans to distressed companies, and guide those firms’ management to turn around their situation.
Two years ago, after a five-year investigation by the SEC’s staff, the agency charged Patriarch Partners with violations of the Investment Advisers Act. The complaint is that the firm has made inadequate disclosures to those who invest in its indentures.
Ordinarily. the firm said in its filing with the Supreme Court, the SEC would have pursued such a claim in a regular federal district court. But, it added, “consistent with its increasing preference to litigate in its own tribunals,” the agency chose instead to turn over the case to an ALJ>
Since April of last year, Patriarch Partners has been pursuing its challenge to the use of an ALJ in its case, arguing that this type of proceeding suffers from multiple constitutional problems, including the use of judges not named to their jobs under the Constitution’s Appointments Clause.
Under that Clause, government officials who qualify as “inferior officers” must be nominated by the president and confirmed by the Senate. The firm argues that its legal challenge exists wholly apart from the soundness of the charges that the SEC is processing.
The firm is preparing to file an appeal to challenge both the ruling that its lawsuit should await the conclusion of the SEC case, and the question of the constitutionality of the ALJs at the commission. Lower courts, the application said, have been reaching conflicting conclusions about the validity of the ALJs without appointment as the Constitution provides for officers with significant powers to carry out federal policy.
Justice Ginsburg has called for a response from the SEC, due on Wednesday afternoon September 21. No action will be taken by her or by the full Court until the filings are completed.