Federal Judge Suspends Insider Trading Case Amid Questions of In-House Judge Appointment Constitutionality

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The Securities and Exchange Commission’s appointment process for administrative law judges is under fire, with a federal judge ruling that it is likely unconstitutional while suspending an insider trading case scheduled to start next week.

The SEC’s in-house administrative courts have been under criticism recently, as critics charge that the forum is biased in the securities regulator’s favor and the rules unfairly strip defendants of procedures available in federal court.

The SEC has five administrative law judges and is bringing an increasing number of cases to its internal tribunal rather than federal court. A litigant in an upcoming insider trading case challenged the constitutionality of the tribunal. The U.S. District Judge considering the injunction halted the trial, set to start next week, pending a final decision on the arguments.

We have not read a copy of the ruling, but from the Wall Street Journal article discussing it, it appears that the basis of the challenge is the appointment process rather than the fairness of the procedure. The judge found the Constitution requires a judge be appointed by the people running the agency. The SEC Commissioners did not approve their hiring. Instead, they were hired through the office of in-house judges.

The SEC is expected to have its Commissioners issue appointments in response. In the meantime, defense attorneys are probably salivating at potential challenges to present, and maybe even past, administrative court actions.

Have questions about how this might affect a tip under the whistleblower program? Contact one of our SEC whistleblower lawyers for additional information. They can be reached by our contact form or by phone at 1-800-590-4116.