Ten years ago, Ray Lucia was a successful San Diego-based financial advisor who through in-person seminars, webinars, books, radio and TV appearances promoted an uncontroversial and academically recognized method of savings for retirement. His “buckets of money” strategy encouraged dividing and diversifying savings among safer to riskier “buckets” and then spending in retirement from the safer bucket of assets first, leaving the riskier bundles of assets time to grow. He was a popular and well-liked media personality with a thriving family business, a pillar of his church and community with an unblemished personal and professional reputation.
In 2010, as part of a regulatory securities investigation, the Securities and Exchange Commission (SEC) told him for the first time that it objected to his use of “backtest” in his presentations showing hypothetical returns based on a mix of fully disclosed assumptions and historical data, even though those promotional materials had been approved time and again over the preceding years. Furthermore, “backtests” using identical or bolder assumptions were widely used throughout the financial planning industry. None of the nearly 50,000 investors who attended Ray’s seminars ever filed a complaint that “backtest” was misleading or that they suffered losses. Not one to incur the wrath of such a powerful government agency, Ray immediately stopped using the term in 2010 and pulled all promotional materials that did, even though the term “backtest” had never—and still has never—been the subject of any SEC rule or regulation. In a rational world, this would have been the end of the story. The administrative state is not a rational world.
Two years later, the SEC charged Ray Lucia with securities fraud accompanied by an incendiary government press release that trashed his reputation forever. His office was surrounded by TV cameras and reporters, he was branded as a fraudster on the nightly news, radio and newspapers, and publicly shamed in local and national media. Life as he knew it ended. His radio and TV contracts were cancelled, business opportunities for growth evaporated leaving his business and his reputation irreparably damaged. Colleagues in the financial planning world, who had previously sung his praises, ran for cover, for who wants to be tainted by association with a securities fraudster? Only Ben Stein, who knew Ray well, had the cajones to support Ray when he was leveled by these retroactive charges for harmless and common industry-wide conduct. Unbeknownst to Ray, as it is to most Americans who, shockingly, are ten times more likely to land in administrative tribunals than in federal courts, Ray Lucia was about to be sucked into the maw of administrative adjudication in a ruinous and cruelest of all, never-ending quest for what passes for justice in the administrative state.
SEC’s Home Court Advantage
Ray did not know what lay before him, because like most Americans, he assumed that if he were to be charged with a crime that could bar him for life from his chosen profession, permanently revoke his registrations, levy hundreds of thousands of dollars of fines and the sting of being denied his right to associate with his peers, he would be entitled to his day in his local federal court, the presumption of innocence, rules of civil procedure and evidence, the right to have witnesses testify on his behalf, an impartial, unbiased judge, the right to a jury trial and the right of prompt appeal to a court of law.
Not so. What he got was a costly and protracted hearing before an administrative law judge (ALJ) who works for his prosecutor, the SEC, who demanded that he be haled to Washington DC to be heard in proceedings that scrap the Federal Rules of Evidence and Civil Procedure, violate his constitutional right to a jury, operate under a presumption that the SEC will adopt the ALJ’s ruling, and constrict his appellate rights to a federal circuit court that must accept the ALJ’s necessarily constricted and flawed factual record. Most egregious of all, the ALJ had never been constitutionally appointed by the SEC!, something the agency shamefully tried to hide in earlier proceedings. So Ray, at enormous personal cost, decided to take the lawfulness of his ALJ to preside, all the way to the United States Supreme Court—where he won.
The Administrative Law Judge from Hades
Ray’s ALJ, Cameron Elliot, holds the dubious distinction of being called out by name by Justice Kagan, in an unheard-of departure from normal judicial practice—and barred from presiding over Ray’s retrial even if Elliot’s appointment defect were cured. Although Justice Kagan’s stated reason was that the ALJ could not be expected to do anything but rubber-stamp the findings supporting his prior ruling, that rationale holds true for any trial judge who is reversed—yet district judges routinely remain on the case for retrial. While we will never know why the Court’s majority decided to bench ALJ Elliot from his administrative perch, troubling aspects of SEC administrative law judging were brought to the high court’s attention—and should remain in the public’s understanding of this case.
Amicus briefs filed in support of Ray Lucia, including one filed by New Civil Liberties Alliance before Ray became NCLA’s client on remand, urged that SCOTUS take notice that SEC enjoyed a 86% success rate with its in-house ALJs as opposed to a much lower 70% in federal court. The Wall Street Journal’s influential reporting incorporated in amicus briefs also noted that ALJs had been reprimanded for showing insufficient “loyalty” to the agency that employed them if they did not rule in the SEC’s favor, with one ALJ noting that these biased courts erased the presumption of innocence and routinely operated to shift the burden to the charged person to show why the SEC was wrong. ALJ Elliot told parties considering settlement they should know that he had never ruled except in favor of the agency, and he further admitted that he always levied the maximum penalties against respondents who had the temerity to contest the SEC’s charges. A federal judge who issued such threats would be subject to discipline for such flagrantly biased conduct before parties they take an oath to judge with impartiality.
Worse, when Ray Lucia called devoted and loyal clients to testify to the ALJ on his behalf that they had never been misled by his use of the term “backtest,” the SEC served those witnesses with last-minute subpoenas that required them to turn over all of their financial records for the last 5 years from any source whatever, on penalty of perjury. Ray of course told his loyal clients that they did not have to put themselves to such an onerous and privacy- and security-destroying task on his behalf and withdrew them from his witness list. He thus proceeded to judgment before this ALJ without a single client witness to speak in his defense. Such witness intimidation would never be permitted in a real federal court.
And what did this ALJ do? Because Ray’s use of “backtest” did not “meet the definition of ‘backtest’ that I have adopted,” ALJ Elliot held it was “fraud” because it did not conform to his newly adopted definition. For this retroactive, unlegislated and unenacted regulatory crime, he barred Ray Lucia for life from the securities industry, slammed him and his company with $300,000 in fines, and prohibited him from associating with anyone in the financial field, even Ray’s own son. All for use of a word Ray stopped using in 2010. Amazingly, ALJ Elliot admitted in his 2013 decision that no clients had suffered any losses, yet a high penalty ax had to fall on Ray Lucia’s neck.
Pushing the Rock up the Appellate Mountain
The Commission affirmed its ALJ as it does 95% of the time, by a 3-2 vote in Ray’s case, with two commissioners noting in dissent that ALJ Elliot had made up his rule “from whole cloth,” and further that Ray Lucia’s challenge to the power of the ALJ to sit at all had to be decided by an Article III federal court. A DC Circuit panel affirmed that flawed and divided holding, and an en banc rehearing resulted in a 5-5 tie that left the ALJ’s decision and penalties undisturbed. Not until Ray reached the U.S. Supreme Court in 2018 did he receive justice on his contention that SEC ALJs had not been lawfully appointed, an SEC litigation position so erroneous that a few months before the case was heard, the Department of Justice confessed error and reversed its position under which it had oppressed Ray’s constitutional rights for the preceding six years.
The Department of Justice not only reversed its position under which Ray had suffered six years of invalid prosecution, it asked the Supreme Court to also find that the SEC ALJs enjoyed unconstitutional multiple layers of removal protections which were prohibited under a 2010 directly-on-point Supreme Court decision. The court declined to hear that aspect of the challenge, asking instead that lower courts first address that question and let those decisions percolate up for high court review. Justice Kagan ordered that the SEC could retry Ray before a “properly appointed ALJ or the Commission itself.”
This point cannot be stressed too strongly: the SEC insisted on reprosecuting Ray before a still-unconstitutional ALJ despite DOJ arguing to the Supreme Court that SEC’s ALJs enjoy unconstitutional removal protections. To put it another way, the SEC admitted it put Ray through six years of lawless, to-be-vacated proceedings and now we’re going to do it all over again.
Accepting the government’s absurd logic, this means that it is perfectly fine for the SEC to insist that Ray submit to administrative reprosecution and await the day—years in the future—when a real court gets to decide whether his ALJ could lawfully rehear his case at all. Most galling of all, even if Ray were to undergo this years-long challenge and vindicate the position that all parties to this case have admitted violates the Constitution, his prize is that he will then have to be retried yet a third time before the only lawful tribunal left, the Commission itself.
Exhaustion by Administrative Annihilation
Ray Lucia’s insistence that he be tried in a lawful, fair, unbiased court cost him everything. Depleted of resources, Ray turned to NCLA, which represented him pro bono, and promptly challenged in federal court this absurd and lawless reprosecution before an ALJ. Unfortunately courts, too-long inured to administrative deference, were deaf to Ray’s pleas for justice on retrial. That meant he faced another near-decade of pitched battle in parallel proceedings:
A. Administrative proceedings
1) before an unconstitutionally appointed ALJ
2) with an appeal to the Commission which affirms its ALJs 95% of the time
3) followed by an appeal at the Circuit court level that had failed him the first time
4) then, if lucky, another cert petition to the US Supreme Court.
B. Court Proceedings
1) to the San Diego district court, which rejected his removal challenge,
2) an application to the 9th Circuit to stay his administrative proceedings until his appeal could be decided, which was also denied,
3) an appeal at the 9th Circuit which has a two-year delay from filing to decision,
4) a possible en banc of the 9th Circuit, also notably delayed from filing to decision,
5) again, if lucky, another cert petition to the U.S. Supreme Court.
All this to vindicate the position already argued to the Supreme Court by the government that SEC’s ALJs have unconstitutional multiple removal protections!
This is painful to write or read. Imagine what it is like to endure?
A Settlement for Peanuts of a Case that Should Never Have Been Brought in the First Place
SEC’s new press release quietly notes that Ray Lucia has settled this ridiculous case of retroactive prosecution of “backtest” wrongspeak for a mere $25,000 with the right to reapply for admission to his profession immediately upon payment of that fine, and that he neither admits nor denies the charges against him. The price of that settlement is that Ray must also agree to a gag on his future ability to defend himself, something that NCLA is directly challenging at the Commission and in the courts, now on appeal to the Second Circuit.
For Ray nearly 70 years old and broke, with his business destroyed, his life and retirement savings vanished, his health impaired, his reputation in shambles, and prospects of any alternative employment destroyed, this was his only option. The SEC’s original press release was at its inception a permanent occupational death sentence given the reputational cloud cast by ongoing securities fraud charges. Who could blame Ray for not wanting to undertake another near-decade of parallel litigation in administrative and federal courts—with an outcome that was uncertain in all but its ruinous human and financial costs?
Challenges in the Circuits
Ray Lucia’s uphill battle for justice goes on. NCLA is awaiting a decision from the Fifth Circuit on an identical challenge for Michelle Cochran, and further will seek certiorari this summer on a case (Christopher Gibson) out of the Eleventh Circuit to try to change this Kafkaesque nightmare. Courts are starting to wake up. As the trial judge in the Fifth Circuit Cochran case noted:
The court is deeply concerned with the fact that plaintiff already has been subjected to extensive proceedings before an ALJ who was not constitutionally appointed, and contends that the one she must now face for further, undoubtedly extended, proceedings likewise is unconstitutionally appointed. She should not have been put to the stress of the first proceedings, and, if she is correct in her contentions, she again will be put to further proceedings, undoubtedly at considerable expense and stress, before another unconstitutionally appointed administrative law judge.
In a hopeful development, NCLA was able to secure a preliminary injunction for Michelle Cochran staying her administrative proceedings pending decision from the Fifth Circuit on the merits of her appeal, something denied to Ray in the Ninth.
The Fight Goes On
Like many other Americans, Ray woke up one day in 2012 flush with prosperity, good will, a reputation for probity, high regard and success in his chosen profession only to have every bit of that life’s achievement stripped from him by the lash of an SEC press release—that the SEC’s unjust and unconstitutional gag insures will remain the last official government word on his life.
It has been an honor to represent this courageous man. Many Americans trapped in the regulatory maze, facing “No Exit” signs at each turn, have expressed to NCLA their undying admiration of Ray Lucia’s courage and fortitude in fighting for his—and their—constitutional rights and civil liberties.
NCLA remains dedicated to reversing the course of error urged upon the court by the SEC. We will not rest until Americans are free from the threat of such never-ending, to-be-vacated, lawless, and biased proceedings that entrench an out-of-control administrative state’s unconstitutional practices.
 Cochran v. SEC, No. 4:19-CV-066-A, 2019 WL 1359252, at *2 (N.D. Tex. Mar. 25, 2019) (McBryde, J.).