With no sign of any dissent, the Supreme Court on Tuesday refused to temporarily bar the Securities and Exchange Commission from continuing to use its administrative law judges to review claims of fraud in the investment markets.  Without explanation, the Court turned down a request by a New York City investment firm to stop an enforcement proceeding being handled by an ALJ.

The firm, Patriarch Partners, had told the Court that it plans to go forward with an appeal to the Justices on the question of whether the use of the ALJs is unconstitutional because those judges were not put in office by action of the President and the Senate.  The ALJs are chosen by an internal process at SEC.

The Justice Department, in resisting the Patriarch request, had argued that the firm would be able to press its constitutional challenge later if, at the end of all of the proceedings before SEC, it turns out that some kind of punishment is imposed on the firm and its CEO, Lynn Tilton.  Such a challenge should not be allowed to go ahead until the SEC has finished, the department contended.

Among other arguments, the department asserted that the SEC might even decide not to impose any enforcement order against Patriarch as a way of avoiding having the result questioned as the result of an unconstitutional procedure.

The firm and its CEO have expressed fear that the case now unfolding at the SEC could result in an order banning Tilton for life from the securities industry.  That draconian outcome, it was argued, should not emerge from a constitutionally flawed process.   The firm argued that, when a case goes before an ALJ, the accused firm seldom wins.  An ALJ proceeding, it said, was a “stacked-deck.”

The issue of the constitutionality of ALJs, especially at the SEC, is now under review in two federal appeals courts.  So far, one appeals court has ruled on the issue, in favor of the ALJs.

In the case of Patriarch Partners, the U.S. Court of Appeals for the Second Circuit did not rule on the constitutional issue, since it concluded that federal courts have no jurisdiction to hear such a challenge until after the SEC has finished a proceeding.

The charges against Patriarch and its CEO are that they violated the Investment Advisers Act in making inadequate disclosures to investors in the debt instruments they sell.  The Patriarch funds make loans to distressed companies as a way of restructuring them.