A U.S. appeals court upheld the constitutionality of the SEC’s administrative law judges Tuesday against a challenge by national money advice personality Ray Lucia.
The SEC barred Lucia, who had been an advisor and broker for nearly three decades, from the securities industry for life in 2013 for giving false information in dozens of his “Buckets of Wealth” retirement wealth strategy seminars.
The San Diego-based advisor contended the administrative law judges were illegal because the Constitution requires the president to appoint them.
But Judge Judith Rogers, writing for the unanimous court, said the decisions of the administrative law judges were merely advisory and the SEC commissioners, who are presidentially appointed, had the actual say.
“No initial decision of (the SEC’s) ALJs is independently final,” wrote Rogers, who sits on the U.S. Court of Appeals for the D.C. Circuit.
Under an administrative law judge decision that was approved by the SEC, Lucia was thrown out of the securities industry for violating the back-testing prohibition of the Investment Advisers Act through errors in trying to show how the strategy of putting money in different buckets of assets would have succeeded in downturns during 1973/1974 and 1966.
The administrative judge said Lucia misled investors by underestimating inflation and overestimating REIT gains. Rogers agreed with the SEC’s contention that Lucia had repeatedly violated his fiduciary duty.
Despite being barred from the securities industry, Lucia still broadcasts a web-based financial advice show from noon to 3pm EST every weekday. Lucia had a longtime association with economist, lawyer and television personality Ben Stein, who claimed that, as his advisor, Lucia saved Stein from suicide "on many a night."
There is no mention of his banishment on the show’s website, which boasts thousands are being helped by his “widely recognized Bucket (investment) Strategy for retirement.”
The judgment against Lucia is not the first time a federal appeals court has upheld the SEC’s administrative process based on its legal merits. Several other courts have ruled in the SEC’s favor on jurisdictional grounds.
In 2015, U.S. Courts of Appeals for the District of Columbia for the Second Circuit in New York and for the Seventh Circuit in Chicago declined cases challenging the SEC’s administrative judge appointment process after rulings were made, declaring that allowing the cases would circumvent the commission’s procedures.
In the same year, Dawn Bennett, a Maryland advisor and radio host barred by the SEC for misrepresenting her firm’s assets, argued in a Maryland U.S. District Court that the administrative process was unfair on similar grounds, but the case was dismissed because the court found that it had no jurisdiction regarding the SEC’s administrative process.
The victories came after a 2015 U.S. Court of Appeals for the 10th Circuit decision backed the SEC’s administrative process for the same jurisdictional reasons, but included opinions critical of the agency’s expanded judicial power. Even earlier, in remarks about the Dodd-Frank financial reform legislation that instituted the SEC’s administrative proceedings, late U.S. Supreme Court Justice Antonin Scalia also issued cautionary remarks regarding the SEC’s administrative power.
This year, the SEC has won a similar case in the U.S. Court of Appeals for the 11th Circuit, and Finra has defeated a similar challenge to its administrative process in a U.S. District Court in Maryland.
In each case prior to Lucia, federal judges ruled that any appeal of an administrative judge’s decision would have to be heard by SEC commissioners before being made in a federal appeals court.
Thus far, the U.S. Supreme Court has declined appeals from lower courts on the matter, affirming the decisions upholding the administrative process.