A federal appeals court says the S.E.C.’s use of an in-house judge violates defendants’ rights.

A divided federal appeals court panel on Wednesday threw a wrinkle into how the Securities and Exchange Commission prosecutes some enforcement actions by declaring that its administrative proceedings can violate a defendant’s constitutional rights. The U.S. Court of Appeals for the Fifth Circuit, in a 2-1 decision, ruled that the S.E.C. violated a hedge fund…

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