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Supreme Court case tests power of SEC judges

A loss for the regulator in Lucia v SEC would plunge dozens of cases into uncertainty and could put a halt to the SEC's sanctioning powers.

A case currently being heard by the US Supreme Court could throw the validity of dozens of SEC cases into question and grant the US president much greater power over the country’s financial regulator.

At issue is whether the SEC’s in-house judges – administrative law judges, or ALJs – have been constitutionally appointed. Should the Supreme Court rule against the SEC, “the validity of all administrative proceedings” at the SEC would be in question, according to Thomas Gorman at US law firm Dorsey & Whitney.

“The Commission has dozens of administrative proceedings at various stages being conducted by its ALJs. Other federal agencies with similar administrative schemes have dozens of other cases at various stages. The validity of all those proceedings would be in question,” Gorman said in a note on the case.

Ray Lucia

The case stems from a five-year old judgment by the SEC in which the agency fined investment advisor Raymond Lucia $300,000 and barred him from working in the investment advisory industry. The SEC said he had misled clients with an investment plan labeled “Buckets of Money.”

Lucia – who also has a nationally syndicated radio show in the US – contends that the SEC’s administrative law judges, which were appointed by the regulator’s chief administrative law judge, had no power to sanction him because they were unconstitutionally appointed. Lucia says that under Article II of the Constitution only the president or the SEC head can appoint the judges.

A victory for Lucia – who is being backed by the Trump administration – is also likely to have an impact on the workings of other government agencies such as the Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau which appoint administrative law judges using a similar process. Entrepreneur and investor Mark Cuban filed a brief in support of Lucia, claiming he had also been “a witness and victim of SEC overreach.”

In a brief in support of the SEC and the existing appointment process, lawyers said that should Lucia win his case it would threaten the rule of law and pave the way for the politicization of the legal process in the US.

The use of SEC administrative proceedings in enforcement actions has been tested before, most notably by Lynn Tilton, the founder of a distressed private equity firm. The constitutionality of these proceedings has never previously been considered by the Supreme Court.