Tuesday, February 03, 2015

One of Four Constitutional Thorns in SEC’s Side to Be Quietly Yanked

[This story previously appeared in Securities Regulation Daily.]

By Mark S. Nelson, J.D.

Jordan Peixoto asked a federal judge late last week to voluntarily dismiss the law suit he had filed disputing the constitutionality of the SEC’s administrative law judges (ALJs), who, he said, enjoy too many layers of good cause removal from the president in violation of Article II of the U.S. Constitution and the Supreme Court’s 2010 Free Enterprise opinion. Peixoto had been the target of an SEC order alleging that he engaged in insider trading, but the Commission recently dropped that proceeding due to the unavailability of two witnesses (Peixoto v. SEC, January 30, 2015).

The Commission’s decision and Peixoto’s election not to pursue his federal case against the SEC means that, for now, the SEC will have to deal with one fewer constitutional challenge to its administrative apparatus. According to the SEC’s order initiating the Peixoto matter, Peixoto got a tip from a friend, who got a tip from his friend and roommate, who in turn had breached a fiduciary duty to his employer. The SEC’s enforcement division asked the Commission to dismiss the matter once it learned that Peixoto’s friend and that friend’s roommate had returned to Poland, did not plan to return to the U.S., and could invoke the Fifth Amendment if they did testify.

Three other federal cases remain ongoing against the SEC, all making the same Article II claim, but one of them, Bebo v. SEC, also alleges the unconstitutionality of the SEC’s Dodd-Frank Act authority to impose civil money penalties in administrative proceedings. In the latest suit against the agency, Duka v. SEC, a federal judge is expected to hear arguments about why it should impose a preliminary injunction and temporary restraining order against the SEC early this month. Settlement talks remain ongoing in a third case against the SEC.

The case is No. 14-cv-08364.