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ALJ May Be a Gentleman, But No Officer, Rules DC Circuit in SEC Appeal: Raymond J. Lucia Companies, Inc. v. SEC
Posted on Categories Court Decisions, Securities/Commodities RegulationTags , ,

By Pete S. Michaels

An Article 2 appointee is an Officer, who must be properly appointed under the Constitution’s Appointments Clause, if the appointee exercises “significant authority pursuant to the laws of the United States.”

Raymond J. Lucia Companies, Inc. vs. SEC, No. 15-1345 (D.C. Cir., 8/9/16).

Buckets of Money

Raymond J. Lucia and Raymond J. Lucia Companies, Inc. filed this petition for review of an SEC Order imposing sanctions for violations of the Investment Advisers Act (IAA) and the rule against misleading advertising. In addition to their challenge of the sanctions determinations, Petitioners argue that the administrative hearing before the SEC was unconstitutional, because the administrative law judge (“ALJ”) who heard the enforcement action was unconstitutionally appointed.  The Commission found that Petitioners had violated the IAA as a result of factual misrepresentations they made in their presentations at free retirement-planning seminars. During these presentations, Petitioners advocated a “Buckets-of-Money” investment strategy, which called for spreading investments among several types of assets that vary in degrees of risk and liquidity.

A Misleading Pitch

The “Buckets-of-Money” presentations were found misleading for three reasons: (1) the investment strategy was presented as so effective that it would have weathered historical periods of market volatility, and nowhere suggested that they were mere abstract hypotheticals; (2) the presentation results were based on flawed assumptions, which underestimated the effect of inflation and overestimated the expected REIT returns, thereby dramatically departing from historical reality; (3) the presentation results could not be replicated and Petitioners failed to provide any documentary support for the result they presented to prospective clients. The Commission found that these misrepresentations were material, because they would have been significant to a reasonable investor in determining whether to adopt the “Buckets-of-Money” investment strategy. Additionally, Petitioners acted with scienter, because their “extreme recklessness” satisfied the intent requirement under the IAA.

Substantial evidence exists to support the Commission’s determination that, by touting their investment strategy through the false promise of “backtested” historical success, petitioners violated the antifraud provisions of the IAA. The SEC’s decision to impose a lifetime industry bar on Raymond J. Lucia was necessary to protect the trading public from further harm, as his conduct, the Commission found, was egregious and recurrent.

No Officer

After making these findings, the Court rejects the Petitioners’ argument that the ALJ rendering the initial decision was a constitutional Officer, who was not appointed in accordance with the Appointments Clause under Article II, Section 2, Clause 2, of the Constitution. The Supreme Court has explained that generally an Article 2 appointee is an Officer, and not an employee who falls beyond the reach of the Clause, if the appointee exercises “significant authority pursuant to the laws of the United States.” The question before the Court was whether Commission ALJs issued final decisions of the Commission. Petitioners argued that the ALJ’s initial decisions become final in some circumstances when the Commission declines review of a decision. Under the Securities Exchange Act, the Commission has the right to determine whether it wishes to order review even when no petition is filed or to decline review. The Court was satisfied that, in either event, the Commission has retained full decision-making powers, and the act of issuing the finality order makes the initial decision of the ALJ the action of the Commission within the meaning of the delegation statute. The Petition is denied.

(P. Michaels)

(SLC Ref. No. 2016-33-06)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA)from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis.

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