SEC settles Lucia enforcement action


White Collar Alert


On June 16, 2020, the Securities and Exchange Commission (SEC) settled its enforcement action against Raymond Lucia, Sr. and his former investment advisory firm, Raymond J. Lucia Companies, Inc. While no sanctions were imposed against the firm, which is no longer registered with the SEC, Mr. Lucia was effectively barred from the industry with a right to re-apply for reentry after three years. He was also fined $25,000.

The settlement ends a long fought legal battle that resulted in the US Supreme Court ruling in Lucia v. SEC that the SEC’s Administrative Law Judges (ALJ) were appointed unconstitutionally. After the Supreme Court remanded the case back to the SEC, a new ALJ judge rejected Lucia’s claims that the case was barred by the statute of limitations, concluding that the original SEC order remained effective since the Supreme Court had not invalidated the order but instead directed that Lucia be provided with the opportunity for a new hearing before a constitutionally appointed ALJ.


The SEC commenced administrative proceedings against Lucia in 2012 over his presentation of slides that purported to show that his investment strategy was backed by empirical proof, described by Lucia as “backtests,” allegedly showing that his strategy could provide inflation-adjusted income for life even under difficult market conditions. The SEC alleged that presentation of these so-called “backtests” was materially misleading and omitted material information, including the lack of support for the data provided. The matter was assigned to an ALJ, who determined that Lucia had violated the Investment Advisers Act. The ALJ’s initial decision permanently barred Mr. Lucia and imposed a $50,000 penalty. His advisory firm was subject to revocation of its license and a $250,000 penalty.

On appeal, Lucia argued that the ALJ’s decision was invalid because the ALJ had not been constitutionally appointed.Lucia asserted that SEC ALJs are “Officers of the United States,” and therefore must be appointed by the SEC itself rather than its staff. The SEC and the DC Circuit Court each rejected his constitutional arguments and affirmed the ALJ’s decision. The Supreme Court granted certiorari and, on June 21, 2018, the Supreme Court reversed and remanded the case for a new hearing in a 7-2 opinion authored by Justice Elena Kagan, as detailed in an earlier alert.

The significance of Lucia

While the settlement of the case may seem almost commonplace, the lengthy battle between Mr. Lucia, his firm and the SEC precipitated a significant Supreme Court decision concerning the Appointments Clause of the Constitution and who constitutes an “Officer of the United States” for the purposes of complying with that constitutional provision. As a result of the decision, President Trump issued an executive order requiring that ALJs be appointed by a head of department and exempting ALJs from civil service hiring requirements. Questions remain despite that order, particularly on an issue raised by Justice Stephen Breyer in his concurring opinion: whether “for cause” removal provisions under the Administrative Procedures Act are unconstitutional. Mr. Lucia’s battle is now over, but the law that his case created remains a subject of ongoing legal dispute.