Lynn Tilton’s challenge to SEC hearings rejected by appeals court

Patriarch Partners founder Lynn Tilton lost her challenge to the U.S. Securities and Exchange Commission’s use of in-house judges, after arguing the process is unfair and unconstitutional.

The federal appeals court in New York agreed with the lower court that the agency can pursue its case against Ms. Tilton internally. If the fund manager were to lose, then she could appeal to the SEC and, if she lost again, to the federal court.

The SEC’s internal court has come under increased scrutiny since the Dodd-Frank Act expanded the agency’s powers, including pursuing penalties from individuals not registered with the regulator. Critics complain that there is an inherent conflict in using judges who answer to the agency and that the process doesn’t give defendants the same opportunity to uncover evidence in their favor as federal court does.

The SEC has been using administrative judges for decades. The appellate court’s ruling maintains the authority wielded by almost 1,700 administrative judges throughout the U.S. government, working in 26 federal departments and agencies.

Ms. Tilton, a self-proclaimed billionaire once known as the “Diva of Distressed,” was accused by U.S. regulators in March 2015 of misleading investors about the value of risky pools of corporate loans. The SEC alleges that Ms. Tilton and her firm misreported the value of the underlying loans as unchanged even though they hadn’t made interest payments in years, leading to $200 million of fees and other payments, to which Ms. Tilton and Patriarch were not entitled.

“We are extremely disappointed that the Second Circuit, in a 2 to 1 decision, has concluded that it lacks jurisdiction to rule on the merits of Ms. Tilton’s constitutional claim,” Richard White, a spokesman for Patriarch, said in a statement. He called the underlying claims brought by the SEC “utterly meritless.” Ms. Tilton is reviewing her legal options, he said.

The Dodd-Frank law, enacted in 2010, expanded the SEC’s jurisdiction beyond brokers and investment advisers and empowered its judges to issue orders and levy fines that previously had been available only in federal court.

In fiscal 2009, the SEC filed 53% of its enforcement actions in-house. By the end of fiscal year 2014, that figure had grown to 81%. An Atlanta federal judge ruled in June 2015 that the SEC probably overstepped its constitutional authority by tapping an in-house administrative judge to preside over an insider-trading case.

The case is Tilton v. Securities and Exchange Commission, 15-2103, U.S. Court of Appeals for the Second Circuit (Manhattan).