The Securities and Exchange Commission commenced administrative proceedings against Lynn Tilton, and companies she owns and controls claiming that, since 2003, the respondents misled investors about the declining value of assets in collateralized loan obligation funds they managed. According to the SEC, the funds, known collectively as the “Zohar Funds,” made loans to distressed companies. Subsequently the distressed companies performed poorly and generally missed or only made partial payments on interest obligations. However, charged the SEC, Ms. Tilton directed that the loans’ valuations be reflected as unchanged since they were originated despite the fact that Tilton’s companies were obligated to provide investors in the funds accurate valuations “reflecting the financial position of each Fund.” Had the respondents correctly valued the funds at a lower amount, the respondents would have been entitled to less management and other fees, and investors would have been entitled to greater control over the funds’ activities, said the SEC. The Commission also charged that each of the Zohar funds issued non-compliant financial statements on a quarterly basis. These financial reports did not comply with generally accepted accounting principles, as required. Separately, the respondents filed a lawsuit against the SEC in federal court in New York City seeking to enjoin the agency from proceeding with the administrative proceeding, and instead require it to proceed against respondents in a federal court. Respondents claim that the administrative proceeding is unconstitutional because, among other reasons, (1) commissioners of the SEC themselves do not appoint the administrative law judges that conduct the SEC’s administrative proceedings, and (2) others besides the President of the United States may remove ALJs from office. These facts violate express requirements of the US constitution, say the respondents.

My View: ​Previously, respondents in another SEC administrative proceeding —Wing Chau and his firm, Harding Advisory LLC— challenged in a federal court the legitimacy of the administrative forum. They lost their challenge there but were invited to raise their constitutional arguments before the  SEC. (Click here for details in the article, "SEC Okay to Prosecute Cases Before Administrative Tribunals Rather Than Federal Court Says US Judge" in the December 8 to 12 and 15, 2014 edition of Bridging the Week.) Some have argued that the US Supreme Court's 2010 decision in Free Enterprise Fund v. Public Company Accounting Oversight Board (click here to access) provides a basis for an attack on the legitimacy of SEC as well as Commodity Futures Trading Commission administrative proceedings. There, the court held that the board's members were insufficiently accountable to the president of the US to comply with the vesting of executive power in the executive branch as contemplated under the US constitution. The question is whether administrative law judges hearing SEC or CFTC enforcement actions are also too far removed from the president of the US to allow him or her to exercise effective oversight as required by the US constitution. (Click here for an overview of this argument in the article, "A Renewed Fight over SEC's Admin Forum Constitutionality" by Thomas Potter in the October 9, 2014 edition of Law360.) We shall see.