SEC RESPONDS TO SAN DIEGO INVESTMENT ADVISER RAYMOND LUCIA’S PETITION FOR REHEARING ON CLAIM SEC IN-HOUSE COURTS ARE UNCONSTITUTIONAL

San Diego-based investment adviser Raymond Lucia’s request that the court consider his challenge to the constitutionality of the SEC’s use of in-house courts was recently rejected by a panel of the U.S. Court of Appeals for the District of Columbia Circuit.

Misleading Claims

Lucia, a well-known investment adviser with a long career, was charged by the SEC with conducting misleading investment seminars that promoted a “buckets of money” investing strategy that was purportedly supported by empirical testing, when no such reliable testing had been done. The SEC proceeding resulted in what Lucia’s own attorneys described as a “career-ending lifetime industry bar”.

Lucia petitioned the Circuit Court for rehearing, contending the SEC’s selection of administrative law judges violated the Appointments Clause of the Constitution, and that the Circuit panel erred in finding that the Appointments Clause did not apply because SEC ALJ’s are not “inferior officers” under the Constitution. The SEC has now responded to the petition.

Decision of the SEC Stands

In its response, the SEC stressed that the panel correctly found that ALJ’s are not inferior officers because those ALJ’s cannot exercise final decision-making authority under the pertinent regulatory scheme. Specifically, the SEC addressed Lucia’s reliance on Freytag v. Commissioner, 501 U.S. 868 (1991), with the SEC arguing that Lucia misconstrues the import of that decision. The SEC asserted that, because the tax court judge in the Freytag case had final decision-making authority, the commentary by the Supreme Court in the case Lucia’s counsel relied on in the petition was immaterial; the decisive point of difference is that the tax court judge was an inferior officer due to its final decision-making authority, and an ALJ, without any such authority, is not.

We will update this matter when the D.C. Circuit Court rules.

Jeff Petersen is an attorney licensed in California and Illinois representing clients in a wide variety of SEC investigations and SEC enforcement matters. He can be reached in California at 858.792.3666 and in Illinois at 312.583.7488.