Appeal by ‘Diva of Distressed’ spotlights SEC© in-house court

Publisher: Reuters
Author: Nate Raymond

The U.S. Securities and Exchange Commission’s controversial use of in-house judges to enforce federal securities laws is about to undergo a major test.

The 2nd U.S. Circuit Court of Appeals in New York on Wednesday will hear arguments over whether to revive a lawsuit by Lynn Tilton, a private equity chief dubbed the “Diva of Distressed,” to block the SEC© from pursuing fraud charges in an in-house administrative proceeding instead of federal court.

Critics say the proceedings are unfair because there are no juries, and defense lawyers have a limited ability to depose witnesses and gather evidence. Some, including Tilton, also say the appointment of administrative judges, who are on the SEC© payroll, is unconstitutional.

The SEC© charged Tilton, 56, and her Patriarch Partners firm in March with hiding the poor performance of assets underlying three collateralized loan obligation funds that raised over $2.5 billion.

Tilton and Patriarch deny wrongdoing, and have said their investment strategy was consistently disclosed. Should the in-house court not intervene, Tilton faces trial on Oct. 13.

The decision by the 2nd Circuit could prove a major factor in the SEC’s ability to continue pursuing enforcement actions administratively, invoking the 2010 Dodd-Frank law granting it the authority to bring more cases before its in-house court.

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