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Raymond J. Lucia Companies, Inc. v. U.S. Securities and Exchange Commission

United States District Court, S.D. California

August 21, 2019

U.S. SECURITIES AND EXCHANGE COMMISSION, JAY CLAYTON, in his official capacity as Chairman of the U.S. Securities and Exchange Commission, and MATTHEW G. WHITAKER, in his official capacity as Acting United States Attorney General, Defendants.


          Hon. Dana M. Sabraw United States District Judge.

         Pending before the Court are Defendants' Motion to Dismiss for lack of jurisdiction, [1] and Plaintiffs' Motion for Preliminary Injunction. The motions have been fully briefed. As discussed below, Defendants' jurisdictional arguments are moored to settled and well-reasoned case law. The Court follows those cases, grants Defendants' motion to dismiss and denies as moot Plaintiffs' motion for preliminary injunction.

         I. BACKGROUND

         A. Statutory Background

         Congress authorized the United States Securities and Exchange Commission (“SEC”) to bring civil actions to enforce violations of the Securities Exchange Act of 1934 (“Exchange Act”) and regulations promulgated thereunder. The SEC may bring these civil actions in either a federal district court or in an administrative proceeding. See, e.g., 15 U.S.C. §§ 78u(d), 78u-1(a)(1), 78u-3. In an administrative proceeding, the SEC itself may preside over the proceeding, (17 C.F.R. § 201.110), or it “may, and typically does, delegate that task to an ALJ.” Lucia v. SEC, 138 S.Ct. 2044, 2049 (2018) (citing 15 U.S.C. § 78d-1(a); 17 C.F.R. § 201.110).

         When the SEC delegates review, the ALJ holds an evidentiary hearing and renders an initial decision with factual findings and conclusions of law. 17 C.F.R. § 201.360(a)(1), (b). The SEC may review the ALJ's decision, either upon request or sua sponte. Id. § 201.360(d)(1). Regardless of whether the ALJ's decision is appealed, the administrative process culminates in a final order issued by the SEC. Id. § 201.360(d)(2); Hill v. SEC, 825 F.3d 1236, 1238 (11th Cir. 2016). The aggrieved party may then seek judicial review of the final order in a federal court of appeals pursuant to 15 U.S.C. § 78y(a)(1) of the Exchange Act, which “provides a detailed scheme for appellate court review of final Commission orders.” Hill, 825 F.3d at 1238. Once the aggrieved party files a petition for review, the court of appeals has exclusive jurisdiction to affirm, modify, or vacate the order. 15 U.S.C. § 78y(a)(3).

         B. Factual Background

         Plaintiff Raymond Lucia was a financial planning professional. (Compl. ¶ 16.) He and his company, Plaintiff Raymond J. Lucia Companies, Inc., marketed a retirement savings strategy called “Buckets of Money, ” under which retirement savings were divided among assets of different risk levels and periodically reallocated as those assets changed in value. (Id. ¶ 19.)

         On September 5, 2012, the SEC issued an order instituting proceeding (“OIP”) against Plaintiffs. (Id. ¶ 29.) The SEC alleged that Plaintiffs used misleading presentations to deceive prospective clients and charged Plaintiffs with violating various provisions of the Exchange Act and the Investment Advisers Act of 1940 (“Advisers Act”). (Id. ¶¶ 35, 40.) ALJ Cameron Elliot was assigned to adjudicate the case. (Id. ¶ 40.) ALJ Elliot had not been appointed by the SEC, but by the Chief ALJ. (Id. ¶ 41.) ALJ Elliot issued an initial decision following a hearing on the matter. He concluded Plaintiffs violated the securities law and imposed sanctions. Lucia, 138 S.Ct. at 2049-50.

         Plaintiffs appealed to the SEC arguing, in part, that the administrative proceeding was invalid because ALJ Elliot had not been properly appointed under the Appointments Clause, and thus lacked constitutional authority to perform his job. Id. The SEC affirmed ALJ Elliot's decision. (Compl. ¶ 50.) Plaintiffs then appealed to the D.C. Circuit, which affirmed the SEC's decision. (Id. ¶ 54.) Subsequently, the Supreme Court granted certiorari and reversed the D.C. Circuit's decision. (Id. ¶ 57.) The Supreme Court held that SEC ALJs are “Officers of the United States, ” and as such must be appointed by the President, “Courts of Law, ” or “Heads of Departments” under the Appointments Clause. Lucia, 138 S.Ct. at 2055; Art. II, § 2, cl. 2. Because ALJ Elliot had not been properly appointed, the Court held that Plaintiffs were entitled to a new hearing before “a properly appointed official”- specifically “another ALJ (or by the Commission itself).” Id.

         While the Lucia case was pending before the Supreme Court, the SEC issued a general order, which, among other things, ratified the appointment of its ALJs. (Compl. ¶ 61.)[2] On September 12, 2018, ALJ Carol Fox Foelak was assigned to the case. (Id. ¶ 94.) Plaintiffs moved to dismiss the proceedings before ALJ Foelak, which was denied. See Raymond J. Lucia Cos., Admin. Proc. Release No. 6628, 2019 SEC LEXIS 1744 (A.L.J.) (July 15, 2019 Order). The hearing is scheduled to commence on March 2, 2020. See id., Admin. Proc. Release No. 6657, 2019 SEC LEXIS 2111 (A.L.J.) (August 16, 2019 Order).

         Plaintiffs filed the subject Complaint seeking to enjoin the administrative proceeding before ALJ Foelak on grounds that (1) SEC ALJs have multiple levels of protection against removal which violates Article II of the U.S. Constitution, and (2) the SEC's proceeding “violates its own rules of practice and their mandatory deadlines” and thereby deprives Plaintiffs of due process. (Compl. ¶¶ 100-16.) Plaintiffs contend that because the SEC and its ALJs lack authority to address threshold constitutional challenges, the Court must exercise jurisdiction over these claims.

         After Plaintiffs filed their motion for preliminary injunction, Defendants filed an unopposed Ex Parte Motion to Stay Proceedings During Lapse in Appropriations, which was granted by the Court. Defendants thereafter filed a Notice of Restoration of Appropriations, and on April 4, 2019, the Court held an informal telephonic conference. The parties informed the Court of ongoing settlement negotiations and requested a further stay pending settlement discussions. The parties also agreed that in the absence of settlement, Defendants would file a motion to dismiss on jurisdictional grounds and the Court could simultaneously address that motion along with Plaintiffs' motion for preliminary injunction. Because the case did not settle, the Court addresses the parties' motions.

         II. ...

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