No In-House SEC Trial of Former S&P Executive

MANHATTAN (CN) - Allegations over the misrepresentation of Standard & Poor's ratings methodology cannot proceed inside the Securities and Exchange Commission's internal court system, a federal judge ruled Thursday.

The new opinion in a challenge by Barbara Duka, who headed S&P's mortgage division from 2009 to 2011, underlines recent findings that the commission's in-house courts violate the appointments clause of the U.S. Constitution.

A product of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the commission's internal court system has sparked controversy among financial executives who accuse it of stripping their due-process rights.

Rather than a jury, proceedings take place before an administrative law judge, or ALJ, who can only be recused for "good cause."

Federal judges in Georgia and New York have said found ALJs appointments unconstitutional because "inferior officers" can be appointed only by the president, courts, or heads of departments.

Manhattan-based U.S. District Judge Richard Berman took this view on Aug. 3, in a ruling that gave the government the opportunity to change its appointments policy to avoid an injunction.

The government balked at the offer, and prosecutors sent Berman a letter one week later, promising that the ALJ courts would decide their own constitutionality internally.

"In at least one proceeding, the commission has heard argument on the constitutional challenge and has also ordered supplemental briefing," prosecutors told Berman. "Although the commission in its adjudicatory capacity may decide in due course whether SEC ALJs' appointments violate the Constitution and, if so, the appropriate remedy for such a violation, as of the filing of this letter, the commission has not issued a decision or otherwise taken any public action on these questions."

In the meanwhile, prosecutors said, the SEC would proceed with the case against Duka absent a court order stopping it.

Berman delivered that preliminary injunction today, just as proceedings against Duka had been set to restart.

The parties face a scheduling conference on Sept. 16.

Duka's lawyer Dan Goldman of the firm Petrillo Klein called the decision "gratifying."

"And, regardless of the courtroom in which we ultimately land, we look forward to vindicating our client, who did nothing wrong," Goldman said.

A spokeswoman for the commission declined to comment on the injunction.

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