By Jonathan Stempel
NEW YORK (Reuters) - The U.S. Securities and Exchange Commission has been sued by a money manager made famous in Michael Lewis' book "The Big Short," who claims the regulator is violating his constitutional rights in how it is pursuing an enforcement case against him.
Wing Chau and his firm Harding Advisory LLC had been charged by the SEC last October with defrauding investors in a $1.5 billion collateralized debt obligation for which Harding was collateral manager, by failing to reveal that the hedge fund Magnetar Capital LLC had a role in choosing the collateral.
The SEC has said Magnetar took an equity stake in the Octans I CDO and hedged it with a short position, meaning its interests might have conflicted with those of investors who wanted the 2006 CDO to perform well.
In recent years, the SEC has brought several cases involving alleged undisclosed roles in crafting CDOs in federal court, including cases against Goldman Sachs Group Inc
But in a lawsuit made public on Friday, Chau and Harding accused the SEC of "shoehorning" their case into an in-house administrative proceeding - where it can be harder for defendants to raise objections and gather evidence - after having "repeatedly stumbled" in similar cases in federal court.
The SEC is "effectively tying the plaintiffs' hands behind their backs," violating their Fifth Amendment rights to equal protection and due process, according to the complaint filed in Manhattan federal court. "The decision to treat plaintiffs differently is causing and will cause severe prejudice."
Chau and Harding are seeking to permanently halt the administrative proceeding scheduled for March 31.
SEC spokeswoman Christina D'Amico declined to comment.
Alex Lipman, a partner at Nixon Peabody representing Chau and Harding, did not immediately respond to a request for comment.
Lipman has also represented Edward Steffelin, a defendant in the JPMorgan case. The SEC dropped its civil case against Steffelin in November 2012.
Harding is based in Boca Raton, Florida, according to the complaint, which is dated March 18.
In adopting the 2010 Dodd-Frank financial reforms, the U.S. Congress gave the SEC power to seek penalties against a wider array of defendants in administrative proceedings, which are overseen by judges on the regulator's payroll.
Critics have said this can be unfair to defendants because litigation is sped up, discovery is limited, and defense lawyers cannot generally take depositions.
Lewis' book "The Big Short" was a best seller about the recent financial crisis.
Chau sued Lewis in 2011 for defamation for allegedly portraying him and other CDO managers in the book as "villains." A federal judge dismissed that lawsuit in March 2013.
The case is Chau et al v. SEC, U.S. District Court, Southern District of New York, No. 14-01903.
(Reporting by Jonathan Stempel in New York and Aruna Viswanatha in Washington, D.C.; editing by Andrew Hay)