SEC Rejects Constitutional Challenge in Securities Fraud Case

The Securities and Exchange Commission (SEC) affirmed a ruling by an administrative law judge (ALJ) in early September. Part of the opinion denied the respondents’ challenge to the ALJ’s authority to rule in their case. In re Raymond J. Lucia Companies, Inc., et al., Admin. Proc. File No. 3-15006, opinion (SEC, Sep. 3, 2015). The respondents claimed that the ALJ lacked authority because his appointment to that position did not comport with the Appointments Clause, U.S. Const. Art II, § 2, cl. 2. Proceedings before the SEC and its ALJs are not criminal in nature, meaning that they cannot directly result in jail time. They are closely related to criminal enforcement of securities laws, however, and can play a major part in the “white collar” side of the practice of criminal law.

The respondents are an investment adviser, formerly registered with the SEC, and the corporation he used for his business activities. The SEC initiated cease-and-desist proceedings against the respondents with an order filed in September 2012. According to that order, the respondent touted a “proprietary wealth management strategy” called “Buckets of Money” (BOM) on a nationally syndicated radio show and a simultaneous podcast. He also promoted the strategy at seminars hosted by his company all over the country, as a commentator on television, and in several published books on investing.

The SEC alleged that the respondent made repeated references to “backtesting” the BOM strategy, which refers to evaluating a financial investment strategy against historical data. The overall allegation of the SEC’s case is that the respondent conducted little, if any, backtesting, but he falsely claimed that the BOM strategy was supported by extensive backtesting. It alleged securities fraud in violation of the Investment Advisers Act of 1940 (“Advisers Act”), 15 U.S.C. §§ 80b-6(1)-(2), (4).

In June 2013, the ALJ issued an initial decision finding that the respondent corporation violated the three charged sections of the Advisers Act and that the individual respondent aided and abetted those violations. The decision revoked both respondents’ registrations as investment advisers and barred the individual respondent from any association with another investment adviser. It imposed civil fines of $50,000 against the individual respondent and $250,000 against the corporation. The respondents petitioned for a review by the SEC commissioners.

The Appointments Clause of the Constitution states that Congress may vest the power to appoint “inferior officers” of the federal government in the President, the federal court system, or the heads of federal departments and agencies. The respondents argued that the ALJ lacked the authority to adjudicate their case because he had obtained his position through the regular federal hiring process, not by appointment of the President, the federal judiciary, or the SEC commissioners.

The SEC rejected the respondents’ constitutional argument, citing a federal appellate case holding that ALJs are government employees, not “inferior officers.” Lucia, op. at 29, citing Landry v. FDIC, 204 F.3d 1125, 1134 (D.C. Cir. 2000). While ALJs can conduct hearings, rule on pre-trial matters, and impose sanctions, they cannot render a final order. Only the commissioners have that authority.

These blog posts are meant to be illustrative only. Unless expressly stated to the contrary herein, these matters are not the result of any legal work of Michael J. Brown, but are used to communicate a particular point of view. Michael J. Brown does not claim credit for any legal work done by any lawyer or law firm either generally or specifically, with respect to the matters contained in this blog.

For over 20 years, board-certified criminal defense attorney Michael J. Brown has fought for the rights of defendants facing charges in the state and federal courts of west Texas. Contact us online or at (432) 687-5157 today to schedule a confidential consultation with a knowledgeable and experienced advocate for criminal justice.

More Blog Posts:

Manager of Mortgage Finance Company Convicted in Federal Court of 28 Counts of Fraud, Texas Criminal Lawyer Blog, October 23, 2013

Trader Waives Indictment and Pleads Guilty in Alleged Fraudulent Stock Scheme, Texas Criminal Lawyer Blog, April 24, 2013

Fifth Circuit Holds that Political Contributions from Convicted Ponzi Schemer Were Fraudulent, Texas Criminal Lawyer Blog, December 26, 2012


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