Last week a federal judge ruled the Securities and Exchange Commission's use of an internal administrative judge in a fraud case is "likely unconstitutional."

U.S. District Judge Leigh Martin May, and Obama appointee, ruled to temporarily stop a claim against an Atlanta-based real estate investor that was set to go before an SEC administrative hearing in coming days.

The SEC charged the developer, Charles Hill, with insider trading last February, according to reporting in the Wall Street Journal.

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Hill sued the SEC in U.S. District Court for the Northern District of Georgia, claiming the SEC's administrative courts violate the Constitution, because administrative judges appointed by the SEC and on its payroll try them.

In her ruling, Judge May stayed the SEC's proceeding until she could rule on the constitutionality of the SEC's selection of a judge in the case against Hill, citing a "substantial likelihood of success" in Hill's claim, which said the administrative judge assigned to his case was not approved by the commissioners of the SEC.

That prompted the Department of Justice to release a letter defending the SEC, which was released to a U.S. District Judge in Manhattan, who is considering a similar challenge to the SEC's authority by a private equity manager the SEC has filed fraud claims against.

In the letter, the DOJ asserted that Judge May did not have the jurisdiction to stay the Hill case. Appeals of administrative court findings are first made to the SEC, and then are sent up to appellate courts, explained the DOJ.

The developments are the latest in a series of events that have brought the authority of the SEC's administrative courts into questions.

A Wall Street Journal report published in early May showed the SEC has won 90 percent of the cases brought before its own internal proceedings since 2010, compared to only a 68 percent win rate in claims tried in federal court.

Shortly after that report was published, the SEC's Division of Enforcement released a document detailing how it chooses forums to hear cases.

"There is no rigid formula dictating the choice of forum," according to language in the SEC's document. "The Division considers a number of factors when evaluating the choice of forum and its recommendation depends on the specific facts and circumstances of the case."

Cases brought in the SEC's administrative courts are typically resolved much more quickly than those brought in federal courts, a significant consideration for the agency, according to the SEC.

"Hearings are held more quickly in contested administrative actions than in contested federal court actions. This may allow the Division to use the Commission's limited resources more effectively," according to the document on forum selection.

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.