The Securities and Exchange Commission (SEC) could face potential problems after a federal court ruled that its appointment of an in-house judge to preside over administrative insider trading cases was “likely unconstitutional.”
The SEC has an internal tribunal, and it is using its five administrative law judges to preside over insider trading cases instead of sending it to the federal court. The ruling of the federal court is still preliminary, but it could have consequences in the other cases of the Commission and other federal agencies.
JPMorgan’s Erdoes From Delivering Alpha: How The Pandemic Is Triggering Deglobalization
The more connected the world has become, the easier it has become for investors to look outside their home country to find alpha. However, the pandemic has resulted in a shift toward deglobalization. In an interview on CNBC's Delivering Alpha, JPMorgan Asset and Wealth Management CEO Mary Callahan Erdoes, Alibaba Executive Vice Chairman Joseph Tsai Read More
Judge temporarily halts SEC insider trading case
U.S. District Judge Leigh Martin May of the Northern District of Atlanta temporarily halted the administrative, insider-trading case against Charles Hill, who argued that the SEC’s use of its internal tribunal is unconstitutional. Judge May’s final decision on Mr. Hill’s argument is still pending.
The SEC alleged that Mr. Hill made $744,000 in illegal profits after trading in the shares of Radiant Systems based on information from a friend prior to a takeover deal. He denied the allegations of the Commission.
The internal tribunal of the SEC is scheduled to start hearing the insider trading case against Mr. Hill next week. He filed a complaint in the federal court last month to challenge the Commission’s decision to use in-house judge James Grimes to preside over the case.
In his complaint, Mr. Hill cited an article published in the Wall Street Journal indicating that the SEC enjoys an advantage when its in-house judges preside over cases. Since October 2010 until March this year, the Commission won 90% of the cases that were presided over by its in-house judges.
The SEC is facing several complaints filed by individuals challenging its use of an in-house judge instead of sending their cases to the federal court. The Commission filed four administrative proceedings out of five enforcement actions for the fiscal year ended September 30.
On Monday, Judge May said, Mr. Hill has a “substantial likelihood of success” in his legal argument. However, she rejected Mr. Hill’s argument that he was unfairly deprived of his right to a jury trial.
She explained in her preliminary ruling that Constitutions requires the people running an agency, the president or the court to appoint an officer such as a judge.
The Commissioners of the SEC did not appoint James Grimes to serve as an in-house judge. He was hired by the office of the Commission responsible for running its in-house tribunal. The SEC argued that in-house judges are employees. Therefore, any office within the
Commission could hire them.
The SEC is reviewing the preliminary decision of the court, according to its spokesman. The Commission repeatedly emphasized that its in-house tribunal is fair. It also works faster and more efficient than federal courts.