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Regulation and Compliance > Federal Regulation > SEC

‘Buckets of Money’ Advisor Settles With SEC After Long Legal Battle

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After a 10-year battle including a Supreme Court case in which he prevailed over the Securities and Exchange Commission, former RIA Raymond Lucia Sr. and his former advisory firm, Raymond J. Lucia Cos., agreed Tuesday to settle charges related to the marketing of their “Buckets of Money” retirement investing strategy.

Lucia will pay a $25,000 fine and drop a case he has filed against the SEC.

The SEC’s order finds that from 2006 through 2010, presentations of the strategy included slides that claimed to show “backtests” of how it would have performed through a series of historical market conditions.

“The self-described ‘backtests’ were presented as empirical proof that the Buckets of Money strategy provided income for life and growth of principal under difficult market conditions,” the order states.

The order finds that Lucia was responsible for the contents of the presentation, and was personally involved in preparing and reviewing the so-called “backtests.”

The order further finds that “Lucia’s presentation of the ‘backtests’ omitted material information about the effects of certain assumptions, and failed to disclose that the ‘backtests’ did not follow the strategy’s periodic asset reallocation and that one ‘backtest’ had no support for the numbers presented as the results.”

Court Battle

The Supreme Court case, Lucia v. SEC, centered not on Lucia’s conduct but on the way the SEC appointed its judges.

In 2010, the SEC sent Lucia a deficiency letter stating that he and the firm had not done enough testing to show that they had validated the strategy.

Lucia argued, in documents filed with the SEC administrative law system, that the SEC had made no allegations of misappropriation, investor losses or complaints from seminar attendees.

He also argued that he stopped talking about backtesting immediately when the SEC sent him the deficiency letter.

An administrative law judge imposed $300,000 in civil penalties and a lifetime bar from the investment industry. Lucia appealed to the SEC itself, arguing that the administrative law judge who ruled on the matter was not constitutionally appointed.

The SEC, and a three-judge panel at the U.S. Court of Appeals for the D.C. Circuit, rejected Lucia’s appeal.

When Lucia asked all of the appellate court judges at the D.C. Circuit to hear the case together, “en banc,” the 10 available judges split 5-5.

The Supreme Court

The Supreme Court majority held that, under the U.S. Constitution, SEC administrative law judges must be appointed by the president, the head of the SEC, or courts of law.

Justice Elena Kagan, writing in an opinion for the majority, did not find that the SEC’s own administrative law judge system has the authority to appoint administrative law judges.

The remedy was for the Lucia to get a new hearing under a properly appointed judge, Kagan wrote. The SEC had changed how it appointed its judges after the Trump administration had sided with Lucia in the case.

But Lucia was then brought before “yet another ALJ who was and is just as unconstitutional as the first one,” according to the New Civil Liberties Alliance, which says it negotiated the settlement.

SEC Settlement

“Lucia waged a long, contentious battle, refusing to bow to an agency with unlimited resources unwilling to admit that its prosecution efforts had become wholly disproportionate to the alleged infraction,” the alliance said. “Having fought this landmark case all the way to the U.S. Supreme Court once to vindicate his right to be tried before a lawfully appointed administrative law judge (ALJ), this settlement allows Ray to get on with his life.”

Lucia, a retired radio host, neither admits nor denies wrongdoing in the SEC settlement. He was barred from the industry by the SEC in 2013 and has not been affiliated with the firm since around that time.

The alliance states that he’s “immediately eligible to reapply for association with registered entities such as securities brokers as well as to serve as an employee for related entities.”

Lucia sold his business to his son, Raymond Lucia Jr., in 2010. In April, LPL Financial said it would buy Lucia Securities, which has about 20 advisors and $1.5 billion of client assets under management.

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