Monday, October 17, 2016

‘Turnaround Queen’ reverses course, withdraws latest suit against SEC

By John M. Jascob, J.D., LL.M. and Amanda Maine, J.D.

Lynn Tilton and her Patriarch Partners entities have abandoned their latest constitutional challenge to the SEC's administrative enforcement regime. In a notice filed with the federal district court in Manhattan, Tilton's counsel said that the plaintiffs have decided not to pursue injunctive relief against the Commission, but instead will voluntarily dismiss their action without prejudice. Tilton and her companies must now defend against an SEC administrative proceeding that commences on October 24 (Tilton v. SEC, October 14, 2016).

Forward and back again. The SEC had instituted administrative proceedings against Tilton and Patriarch Partners in March 2015, alleging that they engaged in a deceptive scheme regarding their management of three collateralized loan obligation funds. Tilton initially brought suit against the SEC in the Southern District of New York, challenging the constitutionality of the Commission’s administrative law judges under the Appointments Clause. The Second Circuit ultimately rejected her claims, however, affirming the lower court’s ruling that district courts lack subject matter jurisdiction over the SEC’s administrative proceedings.

In the present action filed on September 9, Tilton took another constitutional tack before the district court, arguing that the SEC’s ALJ regime violated her constitutional rights on equal protection and due process grounds. Among other things, Tilton alleged that the SEC has engaged in a “pattern and practice” of violating respondents’ due process rights, including delaying formal charges while the Commission’s Enforcement staff conducts investigations. In turn, the government argued that the court still lacked subject matter jurisdiction under the Second Circuit’s decision in Tilton I, while rejecting the notion that "pointing to persons who have raised loosely related claims" regarding the SEC’s proceedings demonstrated a "pattern and practice" of due process violations.

Instead of ruling on the issue of subject matter jurisdiction based solely on the five-page summary letters by the parties, the court directed them to "meet and confer" regarding resolution of the jurisdiction question and to submit a joint letter containing their recommendation by October 13. After counsel for the SEC insisted that either no further briefing was necessary or that the Commission would move to dismiss the complaint, however, Tilton and Patriarch Partners decided to abandon their request for an injunction and dismiss their complaint.

The case is No. 16-cv-7048.

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