(Reuters) - After eight years of litigation with the Securities and Exchange Commission, including a successful U.S. Supreme Court challenge to the appointment process for SEC administrative law judges, the onetime “Buckets of Money” radio host Raymond Lucia has reached a settlement with the commission. The deal announced Tuesday requires Lucia to pay a penalty of $25,000 and to be barred from working as an investment advisor, although the settlement permits him to apply for reinstatement immediately.
Lucia counsel Margaret Little of the New Civil Liberties Alliance said the terms of the settlement reflect the weakness of the SEC’s case. “Ray was at the end of his rope, financially and emotionally,” Little said.
The SEC did not provide a comment on the Lucia settlement.
The deal means Lucia is done fighting with the SEC over the constitutionality of administrative proceedings, which take place before executive branch ALJs instead of federal judges appointed under Article III of the Constitution. As you probably recall, the Supreme Court agreed with Lucia in 2018 (138 S.Ct. 2044) that the ALJ who initially heard his case – and recommended a $300,000 penalty and lifetime ban from the industry – was unconstitutionally appointed.
After the Supreme Court decision, the SEC sought to retry Lucia in a new administrative proceeding before a different ALJ. Lucia brought a new constitutional challenge, contending that under the Supreme Court’s 2010 decision in Free Enterprise Fund v. Public Company Accounting Oversight Board (130 S.Ct. 3138), ALJs are impermissibly insulated from removal by the president. U.S. District Judge Dana Sabraw of San Diego ruled in 2019 that Lucia would have to wait until the conclusion of the second administrative proceeding to bring his new constitutional case. Lucia’s counsel at NCLA appealed Judge Sabraw’s ruling to the 9th U.S. Circuit Court of Appeals, but Little said Lucia decided to settle instead of continuing the appeal because he was weary of what she called “Kafkaesque” and “Sisyphean” litigation.
Importantly, though, the battle over the constitutionality of ALJ removal procedures will continue. At least three other defendants in administrative proceedings brought by executive branch agencies – two in SEC cases and one by the Federal Trade Commission – are still litigating so-called Lucia II appeals. Their contention, in a nutshell, is that tenure protection for ALJs, who cannot be removed from office, under the Administrative Procedure Act, unless the independent Merit System Protection Board finds good cause, violates Article II of the Constitution. The issue could have big consequences for the SEC and other federal agencies: The SEC alone, according to the Enforcement Division’s 2019 annual report, brought more than 650 enforcement actions as administrative proceedings in the 2019 fiscal year. By contrast, it brought 201 cases as civil suits in federal court.
There’s a key bit of context on the removal challenges. When the first Lucia case was before the Supreme Court in 2018, the Justice Department asked the justices to rule on the constitutionality of procedures to remove ALJs in addition to deciding whether ALJ appointment procedures were unconstitutional. (DOJ, remember, sided with Lucia at the Supreme Court, arguing that the bureaucratic appointment process for SEC ALJs violated the Appointments Clause.) DOJ told the Supreme Court that the Administrative Procedure Act’s restrictions on removing ALJs raised “serious separation of powers concerns.” But the Supreme Court’s majority opinion, written by Justice Elena Kagan, specifically declined to address the removal issue because it had not percolated through the lower courts.
Those lower courts still have not considered the merits of defendants’ arguments about the constitutionality of ALJ tenure protections. In the three cases that have reached appellate courts, trial judges have held that the administrative proceedings must run their full course before federal courts can weigh in. The 11th Circuit affirmed that jurisdictional principle last December in Christopher Gibson v. SEC (795 Fed.Appx. 753). The 5th Circuit, on the other hand, may have signaled concerns last September, when it issued an injunction staying the SEC’s administrative proceeding against Michelle Cochran until the completion of Cochran’s appeal of a trial court jurisdictional decision. That appeal is now fully briefed, as is a parallel appeal in the 9th Circuit by Axon Enterprise, which is challenging an FTC administration proceeding. The government argued in the Cochran and Axon cases that federal courts do not have jurisdiction until executive branch agencies have entered final judgments in the administrative proceedings.
The public interest group that represented Lucia, NCLA, is also representing Cochran and Gibson in their challenges to removal protections for ALJs. NCLA’s Little told me the group plans to file a petition for Supreme Court review of the 11th Circuit decision requiring Gibson to complete the administrative proceeding before he can litigate in federal court. If that principle remains intact, Little said, other administrative proceeding defendants will, like Lucia, be worn down by procedural obstacles before they get a shot at vindication.
“That cannot possibly be the right outcome,” Little said.