(Adds details from decision, SEC and lawyer comments, case citation)
By Jonathan Stempel
NEW YORK, Aug 12 (Reuters) - A federal judge in Manhattan has handed the U.S. Securities and Exchange Commission a big defeat over its use of in-house judges, halting its case against a former Standard & Poor’s executive because the way SEC judges who handle such cases are appointed is likely unconstitutional.
U.S. District Judge Richard Berman issued a preliminary injunction on Wednesday stopping the regulator’s civil administrative proceeding against Barbara Duka, the former S&P executive, over her role in an alleged fraud involving mortgage debt ratings.
Berman is at least the second federal judge to halt in-house SEC cases because of concern that the regulator’s practice of letting staff rather than commissioners appoint its five administrative law judges may be unconstitutional.
His decision is significant because many SEC cases arise from activities in the financial services industry in Manhattan, and sets a precedent for judges in his court.
Other defendants suing to stop similar cases include financier Lynn Tilton, whose lawsuit is overseen by Berman’s fellow Manhattan judge, Ronnie Abrams.
Berman’s decision is “gratifying,” Duka’s lawyer Guy Petrillo said. “Regardless of the courtroom in which we ultimately land, we look forward to vindicating our client, who did nothing wrong.”
SEC spokeswoman Judith Burns declined to comment.
U.S. District Judge Leigh Martin May in Atlanta has halted two SEC administrative proceedings.
The SEC has been pursuing more enforcement cases in-house, using authority it gained through the 2010 Dodd-Frank law.
Critics say this deprives defendants of protections they enjoy in federal court, and makes it easier for the SEC to win.
Berman said the appointment of SEC judges by staff likely violated Article II of the U.S. Constitution, making it unfair to let its case against Duka proceed.
“The plaintiff has demonstrated irreparable harm along with a substantial likelihood of success on the merits of her claim,” Berman wrote.
Duka said the process gives SEC judges job protections that could make it impossible even for the president to remove them.
On Aug. 3, Berman gave the SEC seven days to fix the problem, suggesting it could be “easily cured” if commissioners were to appoint the judges. No action was taken.
Duka, a former head of S&P’s commercial mortgage-backed securities group, was accused of concealing how S&P had eased its criteria for calculating some ratings in 2011.
S&P, a unit of McGraw Hill Financial Inc, agreed in January to pay $77 million to settle related charges by the SEC and the New York and Massachusetts attorneys general.
The case is Duka v SEC, U.S. District Court, Southern District of New York, No. 15-00357. (Reporting by Jonathan Stempel in New York; Editing by Paul Simao; and Peter Galloway)