Former S&P Exec Can Challenge SEC Courts

MANHATTAN (CN) - A former Standard & Poor's executive accused of misleading regulators about the company's ratings methodology can proceed with a lawsuit calling the SEC's internal court system unconstitutional, a federal judge ruled on Monday.

Barbara Duka, who headed S&P's mortgage division from 2009 to 2011, is one of a growing number of financial executives challenging the SEC's reliance on filing administration actions internally that previously would have gone through federal court system.

Created by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the commission's internal court system has garnered increasing controversy among financial executives who say it tramples on their due-process rights.

Administrative actions do not allow for a trial by jury and take place before an administrative law judge, or ALJ, who can only be removed for "good cause."

Multiple lawsuits - including Duka's - have alleged the SEC's method for tapping ALJs who preside over the cases violates the appointments clause of Article II of the Constitution.

Under that clause, "inferior officers" may only be appointed by the president, courts, or heads of departments.

The SEC has argued that ALJs are employees who do not fall into these categories.

U.S. District Judge Richard Berman disagreed in a terse, six-page opinion.

"The court here concludes that SEC ALJs are 'inferior officers' because they exercise 'significant authority pursuant to the laws of the United States,'" he wrote, quoting the Supreme Court's definition of the term of art in Freytag v. United States.

His ruling notes that a federal judge in Atlanta reached the same conclusion two months ago in the "quite similar" case filed by real estate developer Charles Hill, Jr.

In that case, U.S. District Judge Leigh Martin May wrote that the "ALJ's appointment could easily be cured by having the SEC commissioners issue an appointment or preside over the matter themselves."

Finding the same to be true for Duka's case, Berman gave the SEC a seven-day window to "notify the court of its intention to cure any violation of the Appointments Clause."

After that time, Berman said he will rule on Duka's application for a preliminary injunction.

An SEC spokesman said the commission is reviewing the decision.

Duka's attorney did not immediately respond to a request for comment.

Meanwhile, the Seventh Circuit has not yet ruled on a constitutional challenge to the SEC's internal court system heard before a packed courtroom in June. The SEC's target in that case, Laurie Bebo, was the former head of the senior-housing center Assisted Living Concepts.

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