A complaint filed yesterday is the second SDNY suit (see our post on the first one, here) to argue that SEC ALJ’s are too insulated from accountability to the executive branch, in violation of Article II of the Constitution. The underlying case involves administrative charges against Jordan Peixoto, who allegedly shorted Herbalife stock in advance of a presentation by the hedge fund Pershing Square accusing Herbalife of being a pyramid scheme. Peixoto allegedly received the information from a friend (Filip Szymik) who was roommates with an analyst at Pershing Square. Peixoto argues that the case was brought administratively to avoid having a jury rule on weak evidence and on a novel application of the insider trading laws:
The SEC brings these insider trading charges administratively, rather than in district court, because it could not carry its burden of proving to a jury the required elements of an insider trading offense in this matter. The SEC could not prove, by Federal Rules of Evidence standards, that Mr. Peixoto possessed the requisite scienter. The SEC could not prove that Mr. Peixoto knew or should have known that Szymik and the Analyst had the type of intimate friendship which gives rise to a duty of confidentiality, or that Szymik breached any such purported duty. Nor could the SEC establish that Mr. Peixoto knew or should have known that whatever information Szymik conveyed to him was confidential. Similarly, the SEC cannot prove the existence of a duty of trust and confidence—another required element of insider trading charges. Szymik and the Analyst provided conflicting, and self-serving, testimony as to whether Szymik promised to keep information he learned from the Analyst confidential. Similarly, the SEC has scant, if any, evidence that Szymik and the Analyst shared the type of intimate friendship that gives rise to a duty of confidentiality. And if Szymik was under no legal duty to keep the information confidential, Mr. Peixoto cannot be held liable for insider trading as a matter of law. . . . The case does not involve the minutiae of securities laws or the inner workings of the securities industry—areas in which SEC ALJs, arguably, have expertise. Rather, the charges against Mr. Peixoto primarily depend on credibility and other fact-finding determinations that are the primary function of jury trials. Nevertheless, the SEC chose to charge Mr. Peixoto in an administrative proceeding. In light of the SEC’s meager and inconsistent evidence against Mr. Peixoto, this is no surprise.
Matt Levine of Bloomberg provides further coverage of the case here and here. The case is before Judge Pauley.