NEW YORK, Oct 1 (Reuters) - The activist hedge fund manager Joseph Stilwell sued the U.S. Securities and Exchange Commission to stop it from pursuing an imminent enforcement action against him. He also wants a declaration that the appointment of SEC administrative law judges is unconstitutional.
Stilwell, whose Stilwell Value LLC has about $200 million under management and often invests in community banks, filed his lawsuit on Wednesday, less than three weeks after a Manhattan federal judge ordered him to comply with an SEC subpoena.
The SEC had in July issued a Wells notice indicating that staff intend to recommend an enforcement action relating to whether Stilwell failed to disclose loans made among funds that his New York-based firm controlled.
Stilwell has denied wrongdoing, and the Wells notice gave him a chance to mount a defense. In his lawsuit, he said he believed an enforcement action is "imminent," following his two days of "investigative testimony" before the regulator.
SEC spokesman John Nester declined to comment. Stilwell's lawyer Steven Glaser was not immediately available for comment.
The lawsuit is the latest challenge to SEC administrative proceedings, which judges on the regulator's payroll handle.
Through the 2010 Dodd-Frank financial reforms, the SEC gained power to pursue more enforcement cases in-house.
Critics have said this can be unfair to defendants because litigation is sped up, discovery is limited, and defense lawyers generally cannot take depositions.
The SEC has begun using administrative proceedings to handle cases traditionally pursued in courts, such as insider trading.
In one such case, the SEC this week charged two men with possessing confidential information that hedge fund manager William Ackman planned a big, bearish bet against diet supplement company Herbalife Inc.
Stilwell contended in his lawsuit that administrative law judges qualify as executive branch officers under Article II of the U.S. Constitution, subject to removal only for "good cause."
But he said the job protections afforded SEC commissioners and other officials empowered to remove those judges created an "attenuated" removal scheme that can make it impossible for the President to remove a judge if a subordinate objected.
"Because the President cannot oversee SEC ALJs in accordance with Article II, SEC administrative proceedings violate the Constitution," Stilwell said.
In March, Wing Chau, a money manager made famous in Michael Lewis' best-selling book "The Big Short," sued the SEC to stop an administrative proceeding against him. That effort was unsuccessful, hearings were held, and a decision is pending.
Stilwell's lawsuit was assigned to U.S. District Judge Katherine Forrest in Manhattan. Her colleague, Andrew Carter, had ordered compliance with the SEC subpoena.
The case is Stilwell et al v. SEC, U.S. District Court, Southern District of New York, No. 14-07931. (Reporting by Jonathan Stempel in New York; Additional reporting by Sarah N. Lynch and Nate Raymond; Editing by Bernard Orr)