September 17, 2015 / 8:22 PM / 3 years ago

U.S. appeals court halts SEC fraud case against financier Tilton

NEW YORK (Reuters) - A federal appeals court on Thursday temporarily blocked the U.S. Securities and Exchange Commission from pursuing its case accusing New York financier Lynn Tilton of defrauding her investors.

The brief order by the 2nd U.S. Circuit Court of Appeals in New York puts on hold the regulator’s Oct. 13 in-house administrative proceeding against the head of Patriarch Partners.

Known as the “Diva of Distressed” for her efforts to turn around troubled companies, Tilton had objected to the SEC’s effort to try her in-house rather than in federal court.

Administrative proceedings are handled by judges on the SEC payroll.

Critics say they are unfair to defendants because discovery and depositions are limited, and there are no juries. Tilton and others have also said the appointment of the presiding judges is unconstitutional, and must be made by SEC commissioners.

A federal judge rejected Tilton’s lawsuit to block the SEC case in June, and the 2nd Circuit heard her appeal on Wednesday.

The appeals court did not say when it might lift the stay, or rule on the appeal.

SEC spokeswoman Judith Burns declined to comment, as did Tilton’s lawyer David Zornow.

The SEC charged Tilton and Patriarch with hiding the poor performance of assets underlying their Zohar collateralized loan obligation funds, for which they raised more than $2.5 billion and allegedly collected nearly $200 million of improper fees.

Two federal judges have ruled that SEC administrative proceedings are likely unconstitutional. Other judges have said the commission itself should made that determination.

On Sept. 3, a divided SEC rejected a constitutional challenge by a former radio host, Raymond Lucia. (Reporting by Jonathan Stempel in New York)

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