A federal judge ordered the U.S. Securities and Exchange Commission to stop pursuing an enforcement action accusing a large Atlanta investment manager of defrauding public pension funds in that city, adding to pressure on the regulator over its handling of litigation in-house.

The decision made public on Wednesday by U.S. District Judge Leigh Martin May is a victory for Gray Financial Group Inc, founder Laurence Gray and Co-Chief Executive Robert Hubbard.

It is also at least the third federal court decision since June to question the constitutionality of how the SEC's five administrative law judges are appointed.

The SEC accused the defendants of steering pension funds to invest in alternative investments that they knew did not comply with Georgia law and collecting $1.7 million of extra fees.

Since passage of the 2010 Dodd-Frank law, the SEC has relied on its own judges to handle more enforcement cases. But critics say the SEC proceedings are unfair to defendants, who might fare better if sued in federal court.

In temporarily halting the Gray case, May adhered to her separate June 8 ruling in finding that the appointment of SEC judges likely violated Article II of the U.S. Constitution because these judges were appointed not by SEC commissioners, but rather by lesser officials.

"The public has an interest in assuring that citizens are not subject to unconstitutional treatment by the government," and the Gray defendants have "a substantial likelihood of success on the merits," the judge wrote.

Gray recently invested nearly $11 billion.

On Monday, U.S. District Judge Richard Berman in Manhattan delayed a separate SEC case against former Standard & Poor's official Barbara Duka by seven days, so the regulator could advise of its "intention to cure" any constitutional violation regarding its judges.

The SEC is appealing the June 8 ruling in which Judge May halted its insider trading case against Charles Hill. May on Wednesday denied an SEC request to lift the halt during the appeal.