U.S. Second Circuit - The FindLaw 2nd Circuit Court of Appeals Opinion Summaries Blog

Lynn Tilton Loses Bid to Bring Case to Circuit Ct. Over SEC ALJ

The matriarch of Patriarch Partners, the private equity firm, has lost her bid to halt SEC administrative proceedings over her alleged defrauding of investors. Lynn Tilton, founder of Patriarch, will have to go through lower SEC administrative channels first and exhaust those proceedings before getting any type of review by the federal appellate court.

The ruling is no surprise given the increase in the of SEC court proceedings following the Dodd-Frank Act of 2010.

A Setback for Tilton

The U.S. Court of Appeals for the Second Circuit affirmed the lower court ruling that Tilton's case would have to go through the usual administrative proceedings before her challenge could be heard at all at the higher federal appeals court, essentially dismissing her case on jurisdictional grounds. In 2015, Tilton was accused by the SEC of defrauding her investors by misleading them as to how well her investments were doing and skimming about $200 million illicitly off the top.

Unconstitutional Proceedings

Tilton's case is one of a handful of challenges to the SEC's increased use of administrative courts and ALJ's to resolve suits brought by the SEC. The basis for these challenges are arguments by defendants' attorneys -- as well as Tilton's -- that the SEC's power to bring defendants before an SEC ALJ is an overstep of the government's constitutional limitations to the point that it presents an unfairness to defendants.

Appointments Clause Reasoning

Specifically, Tilton's lawyers have tried another attack -- that the Appointments Clause under the Constitution bars the use of SEC ALJs because they are "inferior officers" under that section of the law, meaning that they would need to be appointed by sitting SEC commissioners personally, and not through the streamlined process now used and made popular under Dodd-Frank. That argument was premature, the Second Circuit ruled, as the administrative proceedings had not yet concluded.

The ruling means that the SEC may proceed in its fraud case against Tilton.

Related Resources: