SEC’s Use of In-House Judge in Insider Trading Case is Likely Unconstitutional, Rules Federal Judge

A federal judge has ruled that the decision by the Securities and Exchange Commission to have an in-house judge in an insider trading case was “likely unconstitutional.” In the wake of his decision, U.S. District Judge Leigh Martin May agreed to put a temporary stop to the regulator’s administrative case against Charles Hill unless the case is presided over by a judge who fulfills the requirement for constitutional appointment. The hearing in the insider trading case against Hill was scheduled to begin next week.

Hill, a self-employed Atlanta real estate developer, disputes the regulator’s allegations that he made illicit gains of $744K from trading on a tip a friend purportedly provided about the takeover of Radiant Systems Incorporated. The company was about to be acquired by NCR Corp. for $1.2 billion in 2011.

Hill filed his own lawsuit against the SEC, challenging its decision to have in-house administrative law judge James Grimes preside over his case. Grimes was retained through the SEC’s office of in-house judges instead of having the appointment approved by the regulator’s commissioners. Now Judge May is saying, per Hill’s argument, that the Commission may have broken constitutional protections.

Under the U.S. Constitution, an officer like the administrative law judge must be appointed by those running the SEC, the courts, or the president. Judge May said that the SEC could remedy the issue in dispute by having its commissioners appoint its judges.

The SEC argued that the judges are employees and therefore anyone in the agency is allowed to hire them. Judge May, however, rejected the Commissions’ contention that the agency is best qualified to interpret its own regulations and policies.

This is the first constitutional challenge against the SEC’s judicial system that has successfully reached this point. If other courts decide to uphold May’s initial finding, her ruling could impact the SEC and other government agencies that also use administrative law judges. Legal experts are also wondering whether, if the Commission were to make such a change, the defendants of previous rulings in which an SEC in-house judge had presided might come forward to challenge those decisions.

In the fiscal year that ended last September, the SEC brought over four out of five of its enforcement actions to its in-house forum. According to The Wall Street Journal, the regulator has won 90% of the cases argued before its administrative judges.

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Federal Judge Rules SEC In-House Judge’s Appointment ‘Likely Unconstitutional’, The Wall Street Journal, June 8, 2015

SEC appointment of in-house judges ‘likely unconstitutional’, Investment News/Bloomberg, June 9, 2015

Office of Administrative Law Judges

SEC Announces New Hires in the Office of Administrative Law Judges
, SEC, June 30, 2014