US Supreme Court to Hear Challenge Against SEC Over In-House Judges

The US Supreme Court has agreed to hear the appeal of an investment adviser who is challenging the liability findings against him in a securities fraud case presided over by a US Securities and Exchange Commission (SEC) administrative law judge. Raymond Lucia, also a former radio host, was accused of misleading prospective investors about his “Buckets of Money” investment strategy by claiming the methodology he used was back-tested when that was not the case. This created a false sense of security especially among retirees who were told that their money would grow.

An SEC ALJ found him liable for fraud, including that he violated the Investment Advisers Act. Lucia was not only barred from the securities industry but also ordered to pay a $300K fine. He appealed the ruling.

Lucia also questioned whether it was constitutional for the SEC to hire administrative law judges and if they should instead be appointed rather than brought in through human resources. In 2016, The U.S. Court of Appeals for the District of Columbia Circuit turned down Lucia’s appeal, finding that contrary to his contention, SEC judges are not officers with the power to make decisions but are, in fact, employees. Also, the Commission has to approve their rulings.

The appeals court agreed with the SEC’s argument that because its judges are not officers, they not fall under the US Constitution’s appointment’s clause. Under the clause, a federal agency head or the US president must appoint such officers.

Critics of the SEC’s ALJs have expressed concern that the regulator has an unfair advantage when its own judges preside over its cases.

However, the 10th US Circuit Court of Appeals, which is based in Denver, ruled in a similar case that the Commission was in violation of the US Constitution because of how it appointed its administrative law judges. Now, Lucia is once again contending the same argument and the nation’s highest court has agreed to look at the SEC’s in-house judge system to determine whether or not the way the justices are chosen is a violation of the US Constitution.

Last November, the US Justice Department announced that it no longer supported the Commission’s ALJ system. Instead, the DOJ said that it views SEC’s judges as officers, not employees. One day after that news, the SEC said it would revise the way it appoints its judges. Lucia’s securities fraud case, however, was not impacted by this change because the ruling in his case took place beforehand.

Oral arguments before the Supreme Court could happen in the Spring.

Securities Fraud

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U.S. Supreme Court takes up challenge to SEC in-house judges, Reuters, January 12, 2018

Lucia v. Securities and Exchange Commission, SCOTUS Blog

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