Lucia v. Securities and Exchange Commission

CASE SUMMARY

The New Civil Liberties Alliance filed a complaint seeking declarative and injunctive relief against the U.S. Securities and Exchange Commission (SEC) in the U.S. District Court for the Southern District of California in the case of Ray Lucia and his former company. The suit before Judge Sabraw seeks to prevent Mr. Lucia from being compelled to submit—yet again—to a proceeding before an unconstitutional Administrative Law Judge (ALJ) at the SEC. NCLA also represents Mr. Lucia in the related matter remanded for hearing before “a properly appointed official … or the Commission itself.”

Mr. Lucia suffered irreparable professional, reputational and financial harm from the SEC’s first unconstitutional proceeding. Since then, he’s endured nearly seven years of protracted litigation successfully taking his case all the way to the U.S. Supreme Court based on the argument that the first ALJ he appeared before was improperly appointed.

Rather than retrying the remanded Lucia case before the Commission itself or in federal district court, as it easily could have done, the SEC chose to proceed once again in front of a constitutionally defective ALJ. This time, the SEC knows full well that the ALJ is defective, because the U.S. Solicitor-General conceded as much in filings and argument before the U.S. Supreme Court. The problem is that the ALJ enjoys multiple layers of protection from removal, which the Supreme Court has deemed unconstitutional. Mr. Lucia should not have to endure another years-long, constitutionally flawed ALJ proceeding before getting heard—and vindicated—on his remaining constitutional objections.

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CASE STATUS:
Pending

CASE START DATE:
October 2, 2018

ORIGINAL COURT:
U.S. Securities and Exchange Commission Administrative Proceeding
10/2/2018 proceedings recommenced

JUDICIAL COURT IN WHICH NCLA BROUGHT SUIT:
United States District Court for the Southern District of California, San Diego
11/29/2018

Factual Background

In 2012, Mr. Lucia, who had an unblemished record as a financial advisor, was charged by the SEC which principally objected to his use of the word “backtest” in his seminars advocating an investment strategy of diversification of retirement savings into “buckets” of safer to riskier investments and spending from the safer investments first in order to allow the riskier ones time to grow. This is an uncontroversial and widely-advocated strategy in the retirement planning industry and in academic studies. No law of Congress or rule of the SEC ever defined “backtest” or expressed concern about the use of this word. Prior to 2010, Mr. Lucia used the word “backtest” to illustrate a strategy that combined actual historical data for stock-market returns with hypothetical assumptions about inflation and returns on non-stock investments. When SEC objected to it in 2010, Mr. Lucia immediately stopped using the term, even though it has been freely and widely used in this manner by others in the industry without penalty or objection by the SEC.

Though no investor had suffered losses or even complained to the SEC about Mr. Lucia, two years later, the SEC brought a 2012 administrative trial for his prior but by then long-discontinued use of “backtest” on the newly announced theory that his use of it had constituted “fraud.” SEC chose to bring this disturbingly novel and unfair case before one of the in-house judges employed by the very agency prosecuting Mr. Lucia!

Administrative Law Judges were originally set up to decide minor regulatory matters without the expense and delay of full-blown judicial trials. In recent years their jurisdiction has broadened, and they have been newly empowered to order devastating and career-ending penalties. The SEC and other agencies have admitted that they prefer these forums, no doubt because they enable unaccountable bureaucrats to secure easy “wins” before structurally biased ALJs at the cost of Americans’ civil liberties.

Mr. Lucia was tried before an administrative law judge, Cameron Elliot, who openly boasted that he had never found against the SEC and who also informed persons charged by the SEC and brought before him for judgment that he had never ordered anything less than a lifetime bar—an occupational death penalty—to anyone who contested the SEC’s charges.

Given such blatant bias, it comes as no surprise that ALJ Elliot leveled draconian penalties on Mr. Lucia including hundreds of thousands in fines and a lifetime ban from his chosen profession, including barring him from any future communication with his own son!  Because Mr. Lucia’s use of “backtest” did not “meet the definition of ‘backtest’ that I have adopted,” the biased ALJ called it fraud. 

That impoverishing, six-week so-called trial deprived Mr. Lucia of due process, advance notice that his use of this word would be deemed unlawful, a jury trial, discovery rights, evidentiary protections, and it altered his burden of proof. Worse, the SEC engaged in flagrant witness intimidation by scaring off any witness willing to speak on Mr. Lucia’s behalf by demanding from them production of five years of their own financial records before they could testify.

On appeal to the full SEC Commission, two of the five Commissioners dissented, recognizing that the ALJ had improperly created a new rule out of whole cloth. Ben Stein, who attended Ray Lucia’s seminars, knows the facts behind the case and the injustice meted out by “one agency [when it] arrogates to itself the power to investigate, prosecute, and judge these cases.”

Punishing with Process

NCLA contends that governments must bring only valid cases in a timely fashion before lawful courts that accord due process of law. As for Ray Lucia, even after winning at the highest court in the land on the point that his prosecution was unconstitutional from its inception, he faces unknown, brutalizing years ahead in an administrative wasteland. If he were to win on his removal challenge, which he eventually should, he may have to have his case retried a third time in a federal district court or before the Commission—that is, before the only tribunals in which these charges could ever have lawfully have been brought in the first place. Seven years, over a million dollars in legal fees, a ruined business, a tarnished reputation and an occupational death penalty later compels the conclusion that it is long past time for justice to prevail here.

CASE DOCUMENTS

March 15, 2019 | Lucia v. SEC – Reply Memorandum of Points and Authorities in Support of Plaintiffs’ Motion for Preliminary Injunction

ARGUMENT

I. FREE ENTERPRISE FUND ESTABLISHES JURISDICTION AND SHOWS THAT PLAINTIFFS ARE LIKELY TO PREVAIL ON THE MERITS

A. This Court Has Jurisdiction
In the hopes of avoiding judicial scrutiny of its administrative scheme, the government insists that 15 U.S.C. § 78y (which provides only for review of Commission final orders) is Plaintiffs’ exclusive avenue for judicial review. That is wrong. This court has jurisdiction under Article III and 28 U.S.C. § 1331. As Plaintiffs have explained, yet the government refuses to acknowledge, FEF held that nothing in 15 U.S.C. § 78y ousts that jurisdiction, even implicitly. 561 U.S. at 489. Neither ALJs nor the Commission can decide whether the Commission’s ALJs enjoy impermissible layers of tenure protection because agencies lack power to right such constitutional wrongs. La. Pub. Serv. Comm’n v. F.C.C., 476 U.S. 355, 374 (1986). Notably, the Lucia decision itself calls for lower courts, not ALJs, to address this question. 138 S. Ct at 2050 n.1.

B. Plaintiffs Are Likely to Succeed on the Merits Because FEF Prohibits Multiple Layers of Tenure Protection for ALJs 
Plaintiffs are entitled to a preliminary injunction because Lucia held that SEC ALJs are inferior officers and FEF forbids more than a single layer of tenure protection for “officers of the United States.” 561 U.S. at 492. The multiple layers that protect SEC ALJs from removal make them unaccountable to either the President or his alter ego, a Head of Department. When Congress nests protections in Matryoshka-doll-like fashion— an “officer” who is only removable for cause by another “officer” who is only removable for cause by a department head who is only removable for cause by the President—it effectively immunizes executive officers of the President from removal by the President, defeating the design of Article II. Justice Breyer called this the “embedded constitutional question” in Lucia. 138 S. Ct. at 2060 (Breyer, J., concurring).

Contrary to the government’s submission, the holding of FEF is not limited to “unusual” tenure protections that were specific to the PCAOB. FEF’s concern was with layers of protections when it noted that “[w]e deal with the unusual situation, never before addressed by the Court, of two layers of for-cause tenure … two layers are not the same as one.” FEF at 501. FEF did sever the unusual barriers, but what FEF actually held was that the President may not be separated from officers by more than a single level of for-cause protection:
While we have sustained in certain cases limits on the President’s removal power, the Act before us imposes a new type of restriction—two levels of protection from removal for those who nonetheless exercise significant executive power. Congress cannot limit the President’s authority in this way.

FEF at 514. Nothing in FEF stated that the Court’s holding turned on the specific kind of protections from removal at issue or cabined the Court’s holding to the specific language in Sarbanes-Oxley, and it is disingenuous to suggest otherwise.

The SEC’s argument that the holding of FEF does not apply to ALJs is equally flawed. The Court in FEF had no occasion to apply its holding to ALJs in the case, because ALJs were not at issue. The footnote on which the SEC relies simply made that clear and stated that whether ALJs were “officers of the United States” was “disputed.” See 561 U.S. at 507 n. 10. After Lucia, there is no dispute.

Now that Lucia has established that SEC ALJs are inferior officers, the conclusion that they violate Article II under FEF is unavoidable. The SEC desperately wishes to avoid this conclusion, however, because it has a profound impact on this case. If Lucia means anything, it means that the SEC lacks the power to force Plaintiffs to litigate another void enforcement proceeding.

As Justice Breyer noted in his concurring opinion, 5 U.S.C. § 7521 does not grant the Commission the power to institute removal proceedings at all, because the MSPB has the independent and exclusive power to remove ALJs, 1 and the board itself enjoys removal protections. Lucia, 138 S. Ct. at 2016. Thus, this court cannot adopt SEC’s proposed construction. See Chevron, U.S.A., Inc. v. NRDC, 467 U.S. 837, 842-43 (1984) (“If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.”)

Significantly, the government’s proposed construction of § 7521 does not cure the second level of constitutional infirmity found in the removal protections afforded the Commissioners. “[M]ultilevel protection from removal” preventing removal of the heads of a department violate the Constitution. 561 U.S. at 484. Thus, even if “good cause” protection for ALJs means “any cause,” the President cannot remove the ALJ without going through two layers of decisionmakers who themselves enjoy tenure protection. See FEF, 561 U.S. at 487 (Commissioner removal only for “inefficiency, neglect of duty, or malfeasance in office”); MFS Sec. Corp. v. SEC, 380 F.3d 611, 619-20 (2d Cir. 2004).

The government’s suggestion in footnote 14 of its opposition that this court sever the offending tenure protection provisions of § 7521 to save the SEC’s administrative scheme can only occur if the court assumes jurisdiction and agrees with Plaintiffs on their likelihood of success on the merits. But even severing the “for cause” provisions of § 7521 still leaves the impermissible double layers of tenure protection of the MSPB and the Commission itself in place and thus fails to cure the constitutional defect.

The Department of Justice’s position that an SEC ALJ’s removal protections are unlawful was well-articulated in Lucia. Br. For Resp’t Supporting Pet’r (U. S. Solicitor General), Lucia v. SEC, 2018 WL 125162, at *52-53 (U.S. Feb. 21, 2018). The Solicitor General was right then, and Plaintiffs should prevail now under that view.

Click here to read complete document.

December 31, 2018 | Lucia v. SEC Respondents’ Reply Brief

I. DISCUSSION

“A. This ALJ Cannot Avoid Violating Article II of the United States Constitution by Adopting the Division’s Statutory Interpretation.

In the hopes of avoiding what it recognizes as a dire Article II problem that makes this proceeding unconstitutional, the Division has ignored the Supreme Court’s ruling in this very case and has presented arguments already rejected by the Court. Indeed, the Division relies on two arguments to avoid this “embedded constitutional question,” both of which were presented by the Solicitor General to the United States to the Supreme Court. See Lucia v. S.E.C., 138 S. Ct. 2044, 2060 (2018) (Breyer, J., concurring). But neither argument carried the day before the Court, and, as Justice Breyer noted, the Court’s opinion in Lucia, merely clarified the constitutional problem underlying this proceeding. See id.

Initially, it must be noted that the Division appears to concede that the tenure protections governing this ALJ violate Article II, at least if they are interpreted in their most natural sense. See Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 561 U.S. 477, 483 (2010) (If “the President cannot remove an officer who enjoys more than one level of good-cause protection,” and “[t]hat judgment is instead committed to another officer, who may or may not agree with the President’s determination, and whom the President cannot remove simply because that officer disagrees with him,” then this will contravene the President’s “constitutional obligation to ensure the faithful execution of the laws.”). This is hardly surprising, as the Solicitor General already identified this issue as “raising serious constitutional concerns,” which render these administrative proceedings subject to constitutional infirmity. Brief of Solicitor General for Respondent, Securities and Exchange Commission, Lucia v. S.E.C., 138 S.Ct. 2044, (No. 17- 130) at 45, 46. Indeed, the Division’s sole line of attack is to rely on “constitutional avoidance principles,” to try to salvage the scheme at issue here. (Division Opp. at 14.)”

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December 6, 2018 | Declaration of Raymond J. Lucia, Sr. In Support of Plaintiffs’ Motion for Preliminary Injunction

“I, RAYMOND J. LUCIA, SR. declare under penalty of perjury that the following is true:

1. I am a 68 year-old resident of San Diego, California and a citizen of the United States. I make this declaration in support of Plaintiffs’ Motion for Preliminary Injunction.

2. I began working in the field of retirement planning in the insurance industry in 1974. I became an investment professional advising clients about retirement strategies in approximately 1985. During my roughly 40-year career, I founded several companies, employed scores of people, advised hundreds of clients, wrote three books on retirement planning, and hosted “The Ray Lucia Show,” a nationally syndicated, live call-in, radio and TV show. Until December 15, 2011, I was a registered investment advisor.

3. Before the SEC filed its enforcement proceeding against me in September 2012, neither I nor Raymond J. Lucia Companies, Inc. had ever been fined or disciplined by the SEC or any other regulatory body nor the subject of any disciplinary proceeding.”

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December 6, 2018 | Lucia v. SEC Motion for Preliminary Injunction

“Pursuant to Rule 65 of the Federal Rules of Civil Procedure, Plaintiffs Raymond J. Lucia Companies, Inc. (RJL) and Raymond J. Lucia, Sr. (Mr. Lucia) hereby move for a preliminary injunction enjoining Defendants from carrying out a reinstituted administrative proceeding under the Order Instituting Administrative and Cease-andDesist Proceedings (OIP) issued by Defendant U.S. Securities and Exchange Commission (SEC or Commission) on September 5, 2012.

As set forth more fully in the Memorandum of Points and Authorities in Support of Plaintiffs’ Motion for Preliminary Injunction, a preliminary injunction is appropriate for all of the following non-exclusive reasons:…”

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December 6, 2018 | Lucia v. SEC Memorandum of Points and Authorities in Support of Plaintiffs’ Motion For Preliminary Injunction

PRELIMINARY STATEMENT

“Plaintiffs Raymond J. Lucia Companies, Inc. (RJL) and Raymond J. Lucia, Sr. (Mr. Lucia) recently won a decision from the United States Supreme Court holding that the Administrative Law Judge (ALJ) in his enforcement proceeding before the SEC was not constitutionally appointed under the Constitution’s Article II Appointments Clause. Lucia held that the “‘appropriate’ remedy for an adjudication tainted with an appointments violation is a new ‘hearing before a properly appointed’ official …. To cure the constitutional error, another ALJ (or the Commission itself) must hold the new hearing to which Lucia is entitled.” Lucia v. SEC, 138 S. Ct. 2044, 2055 (2018). The SEC’s reinstituted enforcement action before a new ALJ remains constitutionally flawed because SEC ALJs have impermissible layers of tenure protection.

ALJs are “Officers of the United States” within the meaning of the Appointments Clause of the United States Constitution, Art. II, § 2, cl. 2, because they “hold a continuing office established by law” and exercise “‘significant discretion’ when carrying out … ‘important functions’.” Lucia v. S.E.C., 138 S. Ct. 2044, 2053 (2018). In violation of the President’s removal power, SEC ALJs may only be removed for good cause as determined by the Merit Systems Protection Board (MSPB), 5 U.S.C. § 7521(a), whose members themselves can only be removed by the President for good cause. 5 U.S.C. § 1202(d). SEC Commissioners, who have powers of appointment over ALJs, cannot act without approval from MSPB and themselves enjoy for-cause protection against removal. MFS Sec. Corp. v. SEC, 380 F.3d 611, 619-20 (2d Cir. 2004). These multiple layers of tenure protection violate the U.S. Constitution. This structural constitutional claim cannot be challenged in the enforcement proceeding before the SEC because the ALJ and the Commission lack jurisdiction and power to decide such questions.”

Click here to read complete document.

November 29, 2018 | Lucia v. SEC Motion for An Order Dismissing the Proceedings And Memorandum of Law In Support Thereof
November 28, 2018 | Lucia v. SEC. et al Complaint for Declaratory and Injunctive Relief

Preliminary Statement

“1. This action arises from the SEC’s attempt to subject Raymond J. Lucia Companies, Inc. and Raymond J. Lucia, Sr. to an unconstitutional administrative proceeding before an Administrative Law Judge (ALJ) whose appointment violates Article II of the United States Constitution. In violation of the President’s removal power, SEC ALJs may only be removed for good cause as determined by the Merit Systems Protection Board (MSPB), 5 U.S.C. § 7521(a), whose members themselves can only be removed by the President for good cause. 5 U.S.C. § 1202(d). SEC Commissioners, who have powers of appointment over ALJs, cannot act without approval from MSPB and themselves enjoy for-cause protection against removal. MFS Sec. Corp. v. SEC, 380 F. 3d 611, 619-20 (2d Cir. 2004). These multiple layers of tenure protection violate Article II of the United States Constitution.”

Click here to read complete document.

February 28, 2018 | Amicus Brief- Amicus Curiae in support of petitioners, Raymond J. Lucia, et al v. Securities Exchange Commission (No. 17-130)

SUMMARY OF ARGUMENT

“The petitioners and the Solicitor General have capably explained why SEC administrative-law judges qualify as “officers of the United States,” who must be appointed in accordance with the process described in Article II of the Constitution. See Pet. Br. at 11–42; Resp. Br. at 10–38. NCLA writes as amicus to explain that the ostensible rationale for departing from the Constitution’s appointment process — a desire to produce “independent” administrative-law judges — is inapplicable in this case, as the SEC’s appointment process has failed to secure independent adjudication in any meaningful sense of the word.

SEC ALJs face significant institutional pressures to conform to the Commission’s enforcement policy preferences. Not only must SEC ALJs follow agency rules, interpretations, and policies, but they also lack subjectmatter expertise when appointed. This lack of prior expertise makes SEC ALJs vulnerable to pro-agency bias of various kinds, which they may not even recognize given how the bias is baked into agency precedent.

Avoiding the Appointments Clause has produced neither independence nor expertise among ALJs— quite the contrary. Hearings in front of ALJs at the SEC nowadays are neither impartial nor particularly expert. There is no reason for this Court to fear that declaring administrative-law judges to be “officers of the United States” will undermine the independence (or expertise) of agency adjudication, because the SEC’s administrative-law judges are short of independence and expertise to begin with. More effective and constitutionally permissible paths are available to secure independent judges in SEC proceedings.”

Read Amicus Brief

PRESS RELEASES

November 29, 2018 | NCLA Files Suit Over Unconstitutional SEC Appointees

WASHINGTON, DC, Nov. 29, 2018 — The New Civil Liberties Alliance, a nonprofit civil-rights organization and public-interest law firm, has filed a complaint seeking declarative and injunctive relief against the U.S. Securities and Exchange Commission in the U.S. District Court for the Southern District of California. NCLA represents Ray Lucia(pronounced “loo-chee-aa”) and his former company. The suit seeks to prevent these Plaintiffs from being compelled to submit—yet again—to a proceeding before an unconstitutional Administrative Law Judge (ALJ) at the SEC. NCLA is also seeking a stay in that proceeding today from the ALJ.

Mr. Lucia suffered irreparable professional, reputational and financial harm from the first unconstitutional proceeding. He should not have to endure another years-long, constitutionally flawed ALJ proceeding before getting heard—and vindicated—on his constitutional objections.

“There is a human toll that is rarely considered in cases like this. Even though the SEC’s prior decision has been set aside, Ray Lucia Sr.’s name and reputation are still tainted. Haling a citizen before an unlawful ALJ once is a grave breach of his constitutional rights. Doing it twice is unthinkable,” said Peggy Little, NCLA Senior Litigation Counsel.

The SEC charged Mr. Lucia in 2012. Since then, he’s endured six years of protracted litigation taking his case all the way to the U.S. Supreme Court -and winning- on the argument that the first ALJ he appeared before was improperly appointed. Rather than retrying the Lucia case before the Commission itself, the SEC is proceeding in front of another constitutionally defective ALJ. This time, the problem is that multiple layers of removal protection violate the Constitution’s requirement that the President be able to remove all officers of the United States.

The Solicitor General’s briefing to the Supreme Court in Lucia v. SEC flagged the President’s inability to remove ALJs as constitutionally dubious and asked the Court to decide the issue then, which it declined to do (awaiting further input from lower courts). Despite this glaring constitutional problem, SEC persists in ignoring its due process obligation to bring enforcement actions in a lawful forum.

“The SEC could have brought its original enforcement proceeding in federal district court. Instead, it chose to bring the case before an unconstitutionally appointed in-house judge. And now it is violating Article II of the Constitution again. The process has become the punishment for Ray. Enough is enough,” said Mark Chenoweth, Executive Director and General Counsel of NCLA.

About NCLA
NCLA is a nonprofit civil rights organization founded by prominent legal scholar Philip Hamburger to protect constitutional freedoms from violations by the administrative state. NCLA’s pro bono public-interest litigation and other advocacy strive to tame the unchecked power of state and federal agencies and to foster a new civil liberties movement that will help restore Americans’ fundamental rights. For more information visit us online: NCLAlegal.org

Media Inquiries: Please contact Judy Pino, 202-869-5218 or email Judy.Pino@NCLA.legal

OPINION

November 28, 2018 | Lucia sues the SEC again – challenging ALJ Constitutionality and seeking dismissal

A new lawsuit filed in federal court in California seeks to have further SEC ALJ proceedings against former IA Ray Lucia dismissed, claiming the ALJ system remains unconstitutional because judges can only be fired via the civil service system.

The latest legal twist in this six year-old case follows Lucia’s victory before the U.S. Supreme Court in June (IA Watch, June 22, 2018). That ruling found the SEC ALJ system unconstitutional because of the way the judges are hired. The High Court ordered that the fraud case against Lucia and his former San Diego-based IA, Raymond J. Lucia Companies, be returned to the SEC to be decided by a different ALJ than the one who ruled in 2013.

Two years later, by a 3-2 Commission vote, Lucia (pronounced “loo-chee-aa”) – who has spent decades in the industry – was banned and fined for allegedly misleading investors who came to his seminars and saw hypothetical back-tested performance data presented on PowerPoint slides.

Lucia appealed his case to the U.S. Court of Appeals for the District of Columbia, which ruled against him in 2016. Then Lucia took his case to the High Court.

New issue: How ALJs are dismissed

The new lawsuit, filed by the New Civil Liberties Alliance (IA Watch, Aug. 30, 2018), asserts the Constitution holds that officers like ALJs should be removed by the executive branch, not civil service rules.

Supreme Court Justice Stephen Breyer hinted at this legal argument in dissenting with his colleagues’ ruling in June.

The new lawsuit also claims the SEC has violated “its own rules, deadlines and procedures,” has harmed Lucia’s defense due to the passage of time (the seminars ended in 2010) and the ALJ system is biased because the judges are “beholden to the same entity that has not only promulgated the applicable rules but is also prosecuting the action.” The plaintiffs also seek that the current ALJ proceedings against Lucia be stayed pending the lawsuit’s conclusion.

“Mr. Lucia has lost the ability to make a living in his chosen profession and indeed in any profession. The word ‘fraud’ has destroyed his reputation,” the legal filings read. His defense expenses have topped $1 million, according to court papers (IA Watch, June 28, 2018).

Story published in Regulatory Compliance Watch