A Toronto man accused by the U.S. Securities and Exchange Commission of insider trading in Herbalife Ltd on Monday sued the federal regulator to stop it from pursuing its case.
In a complaint filed in Manhattan federal court, Jordan Peixoto said the SEC "intentionally and strategically" singled him out by pursuing an administrative proceeding to force a settlement, rather than sue him in federal court.
He also said the SEC case violates the U.S. Constitution because of how administrative law judges are appointed.
"The administrative process is a star chamber where only the Commission emerges as the victor and the defendant is defenseless," said Peixoto, who seeks a permanent injunction against the SEC. He also denied wrongdoing.
SEC spokesman John Nester declined to comment.
In a Sept. 30 complaint, the SEC alleged that Peixoto made $47,100 in December 2012 by trading illegally in Herbalife put options, after his friend Filip Szymik shared news that hedge fund manager William Ackman was about to reveal a big, bearish bet against the diet supplement company.
Szymik had allegedly learned of the $1 billion bet from his roommate, an analyst at Ackman's Pershing Square Capital Management LP. Peixoto was at the time an analyst at the accounting firm Deloitte & Touche.
The lawsuit by Peixoto is the latest challenge to SEC administrative proceedings, which do not have juries, allow only limited discovery, and are handled by judges on the SEC payroll.
While the 2010 Dodd-Frank financial reforms let the SEC use such proceedings for insider trading cases, Peixoto said it has done so at most three times out of nearly 160 cases.
One of the other cases was against former Rajat Gupta, a former Goldman Sachs Group Inc director and McKinsey & Co global managing director. It was later handled in federal court.
In his lawsuit, Peixoto said administrative law judges qualify as executive branch officers under Article II of the Constitution, subject to removal only for "good cause."
But he said SEC commissioners and other officials empowered to remove those judges enjoyed job protections that could make it impossible for the President to remove an administrative law judge if a subordinate objected, violating Article II.
Activist hedge fund manager Joseph Stilwell made the same argument this month to stop the SEC from pursuing what he called an "imminent" enforcement action against him.
Earlier this year, Wing Chau, a money manager made famous in Michael Lewis' best-seller "The Big Short," unsuccessfully sued to stop an SEC administrative proceeding against him.
In the Herbalife case, Szymik agreed to pay a $47,100 penalty to settle with the SEC, without admitting wrongdoing.
The case is Peixoto v. SEC, U.S. District Court, Southern District of New York, No. 14-08364.
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