In Raymond J. Lucia Cos., et al. v. SEC, No. 15-1345 (August 9, 2016), the United States Court of Appeals for the District of Columbia Circuit held that Securities and Exchange Commission (“SEC”) Administrative Law Judges (“ALJs”) were not Officers of the United States requiring appointment in accordance with the Appointments Clause of the U.S. Constitution.  The Court also upheld the SEC’s issuance of a final order based on the ALJ’s initial decision imposing a lifetime industry bar as a sanction against the Appellants Raymond J. Lucia and Raymond J. Lucia Companies, Inc. (“Appellants”).

In September 2012, the SEC instituted a public administrative and cease-and-desist proceeding against Appellants for alleged violations of the Securities Exchange Act of 1934, the Investment Advisers Act of 1940 (“Advisers Act”), and the Investment Company Act of 1940, based on Appellants’ presentation of their “Buckets of Money” (“BOM”) investment strategy to prospective investors.  The SEC ordered an ALJ to conduct a public hearing and issue an initial decision.  The ALJ found that Appellants violated the Advisers Act by misrepresenting the validity of purported backtesting in BOM seminars for prospective investors, and imposed sanctions, including monetary sanctions, revocation of registrations as investment advisers, and a lifetime industry bar of Raymond J. Lucia.  The SEC affirmed the ALJ’s findings that Appellants committed anti-fraud violations and upheld the ALJ’s sanctions.  The SEC also rejected Appellants’ constitutionality argument, finding that ALJs are employees, not Officers covered by the Appointments Clause.

On appeal, Appellants again challenged the constitutionality of the ALJs.  The Appointments Clause requires the President, with the advice and consent of the Senate, to appoint Officers of the United States.  U.S. Const. Art. II, § 2, cl. 2.  Congress also may vest the appointment of inferior Officers in the President alone, in the Courts of Law, or in the Heads of Departments.  Id. "[T]he main criteria for drawing the line between inferior Officers and employees not covered by the Clause are (1) the significance of the matters resolved by the officials, (2) the discretion they exercise in reaching their decisions, and (3) the finality of those decisions," Tucker v. Comm’r, Internal Revenue, 676 F.3d 1129, 1133 (D.C. Cir. 2012).  In performing this analysis, the Court in Lucia relied on Landry v. FDIC, which held that ALJs of the FDIC were not Officers because they could not issue final decisions. 204 F.3d 1125, 1133 (D.C. Cir. 2000).  Like Landry, the ALJ in Lucia had no authority to issue a final decision.  Under 15 U.S.C. § 78d-1, all initial decisions issued by an SEC ALJ must be made final by an affirmative act of the SEC, regardless of whether the SEC decides to undergo a full review of the ALJ’s initial decision.  The SEC has complete discretion and control over the record, as it may choose to affirm, reverse, modify, or simply defer to the ALJ’s initial decision.  However, in any event, the SEC must issue a final order.  Relying on Landry, the Court concluded that SEC ALJs do not meet the criteria of an inferior Officer and are not required to be appointed in accordance with the Appointments Clause. 

Regarding the sanctions imposed, the Court affirmed the SEC’s order, holding that there was substantial evidence to support the SEC’s findings.  The Court noted that the SEC’s judgment with regard to sanctions is entitled to the greatest weight and is not bound by a specific formula.  

This case is the first to hear the merits of a constitutionality argument as it applies to SEC ALJs.  The decision expands the precedent that ALJs are not Officers or inferior Officers covered by the Appointments Clause where they do not have the ability to issue a final order.  The act of issuing a final order, regardless of whether the initial decision was reviewed, was significant to the Court in its determination, as it is this act that symbolizes an SEC decision, as opposed to that of an ALJ.  This case also highlights the significant discretion afforded to the SEC in determining appropriate sanctions for violations of securities laws.


Practice Areas


Jump to Page