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

Opinion

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA

10 Case No. 18-cv-2692 DMS (JLB) RAYMOND J. LUCIA 11 COMPANIES, INC., and ORDER: RAYMOND J. LUCIA, SR., 12 (1) GRANTING DEFENDANTS’ Plaintiffs, MOTION TO DISMISS, AND 13 v. (2) DENYING PLAINTIFFS’ 14 MOTION FOR PRELIMINARY U.S. SECURITIES AND INJUNCTION AS MOOT 15 EXCHANGE COMMISSION, JAY CLAYTON, in his official capacity 16 as Chairman of the U.S. Securities and Exchange Commission, and 17 MATTHEW G. WHITAKER, in his official capacity as Acting United 18 States Attorney General,

19 Defendants. 20 21 Pending before the Court are Defendants’ Motion to Dismiss for lack of 22 jurisdiction,1 and Plaintiffs’ Motion for Preliminary Injunction. The motions have 23 been fully briefed. As discussed below, Defendants’ jurisdictional arguments are 24

25 1 Defendants include the United States Securities and Exchange Commission 26 (“SEC”), Jay Clayton in his official capacity as SEC Chairman, and William Barr in his official capacity as U.S. Attorney General. On February 14, 2019, William Barr 27 succeeded Matthew Whitaker as U.S. Attorney General. Pursuant to Rule 25(d) of 1 moored to settled and well-reasoned case law. The Court follows those cases, grants 2 Defendants’ motion to dismiss and denies as moot Plaintiffs’ motion for preliminary 3 injunction. 4 I. 5 BACKGROUND 6 A. Statutory Background 7 Congress authorized the United States Securities and Exchange Commission 8 (“SEC”) to bring civil actions to enforce violations of the Securities Exchange Act 9 of 1934 (“Exchange Act”) and regulations promulgated thereunder. The SEC may 10 bring these civil actions in either a federal district court or in an administrative 11 proceeding. See, e.g., 15 U.S.C. §§ 78u(d), 78u-1(a)(1), 78u-3. In an administrative 12 proceeding, the SEC itself may preside over the proceeding, (17 C.F.R. § 201.110), 13 or it “may, and typically does, delegate that task to an ALJ.” Lucia v. SEC, 138 S. 14 Ct. 2044, 2049 (2018) (citing 15 U.S.C. § 78d-1(a); 17 C.F.R. § 201.110). 15 When the SEC delegates review, the ALJ holds an evidentiary hearing and 16 renders an initial decision with factual findings and conclusions of law. 17 C.F.R. 17 § 201.360(a)(1), (b). The SEC may review the ALJ’s decision, either upon request 18 or sua sponte. Id. § 201.360(d)(1). Regardless of whether the ALJ’s decision is 19 appealed, the administrative process culminates in a final order issued by the SEC. 20 Id. § 201.360(d)(2); Hill v. SEC, 825 F.3d 1236, 1238 (11th Cir. 2016). The 21 aggrieved party may then seek judicial review of the final order in a federal court of 22 appeals pursuant to 15 U.S.C. § 78y(a)(1) of the Exchange Act, which “provides a 23 detailed scheme for appellate court review of final Commission orders.” Hill, 825 24 F.3d at 1238. Once the aggrieved party files a petition for review, the court of 25 appeals has exclusive jurisdiction to affirm, modify, or vacate the order. 15 U.S.C. 26 § 78y(a)(3). 27 / / / 1 B. Factual Background 2 Plaintiff Raymond Lucia was a financial planning professional. (Compl. ¶ 16.) 3 He and his company, Plaintiff Raymond J. Lucia Companies, Inc., marketed a 4 retirement savings strategy called “Buckets of Money,” under which retirement 5 savings were divided among assets of different risk levels and periodically 6 reallocated as those assets changed in value. (Id. ¶ 19.) 7 On September 5, 2012, the SEC issued an order instituting proceeding (“OIP”) 8 against Plaintiffs. (Id. ¶ 29.) The SEC alleged that Plaintiffs used misleading 9 presentations to deceive prospective clients and charged Plaintiffs with violating 10 various provisions of the Exchange Act and the Investment Advisers Act of 1940 11 (“Advisers Act”). (Id. ¶¶ 35, 40.) ALJ Cameron Elliot was assigned to adjudicate 12 the case. (Id. ¶ 40.) ALJ Elliot had not been appointed by the SEC, but by the Chief 13 ALJ. (Id. ¶ 41.) ALJ Elliot issued an initial decision following a hearing on the 14 matter. He concluded Plaintiffs violated the securities law and imposed sanctions. 15 Lucia, 138 S. Ct. at 2049–50. 16 Plaintiffs appealed to the SEC arguing, in part, that the administrative 17 proceeding was invalid because ALJ Elliot had not been properly appointed under 18 the Appointments Clause, and thus lacked constitutional authority to perform his job. 19 Id. The SEC affirmed ALJ Elliot’s decision. (Compl. ¶ 50.) Plaintiffs then appealed 20 to the D.C. Circuit, which affirmed the SEC’s decision. (Id. ¶ 54.) Subsequently, 21 the Supreme Court granted certiorari and reversed the D.C. Circuit’s decision. (Id. 22 ¶ 57.) The Supreme Court held that SEC ALJs are “Officers of the United States,” 23 and as such must be appointed by the President, “Courts of Law,” or “Heads of 24 Departments” under the Appointments Clause. Lucia, 138 S. Ct. at 2055; Art. II, § 25 2, cl. 2. Because ALJ Elliot had not been properly appointed, the Court held that 26 Plaintiffs were entitled to a new hearing before “a properly appointed official”— 27 specifically “another ALJ (or by the Commission itself).” Id. 1 While the Lucia case was pending before the Supreme Court, the SEC issued 2 a general order, which, among other things, ratified the appointment of its ALJs. 3 (Compl. ¶ 61.)2 On September 12, 2018, ALJ Carol Fox Foelak was assigned to the 4 case. (Id. ¶ 94.) Plaintiffs moved to dismiss the proceedings before ALJ Foelak, 5 which was denied. See Raymond J. Lucia Cos., Admin. Proc. Release No. 6628, 6 2019 SEC LEXIS 1744 (A.L.J.) (July 15, 2019 Order). The hearing is scheduled to 7 commence on March 2, 2020. See id., Admin. Proc. Release No. 6657, 2019 SEC 8 LEXIS 2111 (A.L.J.) (August 16, 2019 Order). 9 Plaintiffs filed the subject Complaint seeking to enjoin the administrative 10 proceeding before ALJ Foelak on grounds that (1) SEC ALJs have multiple levels 11 of protection against removal which violates Article II of the U.S. Constitution, and 12 (2) the SEC’s proceeding “violates its own rules of practice and their mandatory 13 deadlines” and thereby deprives Plaintiffs of due process. (Compl. ¶¶ 100–16.) 14 Plaintiffs contend that because the SEC and its ALJs lack authority to address 15 threshold constitutional challenges, the Court must exercise jurisdiction over these 16 claims. 17 After Plaintiffs filed their motion for preliminary injunction, Defendants filed 18 an unopposed Ex Parte Motion to Stay Proceedings During Lapse in Appropriations, 19 which was granted by the Court. Defendants thereafter filed a Notice of Restoration 20 of Appropriations, and on April 4, 2019, the Court held an informal telephonic 21 conference. The parties informed the Court of ongoing settlement negotiations and 22 requested a further stay pending settlement discussions. The parties also agreed that 23 in the absence of settlement, Defendants would file a motion to dismiss on 24 jurisdictional grounds and the Court could simultaneously address that motion along 25 with Plaintiffs’ motion for preliminary injunction. Because the case did not settle, 26 the Court addresses the parties’ motions. 27 1 II. 2 DISCUSSION 3 Generally, federal district courts have “original jurisdiction of all civil actions 4 arising under the Constitution, laws, or treaties of the United States.” 28 U.S.C. 5 § 1331. However, Congress may preclude district court jurisdiction by establishing 6 an alternative statutory scheme for administrative and judicial review. See, e.g., 7 Elgin v. Dep’t of Treasury, 567 U.S. 1, 9 (2012); Thunder Basin Coal Co. v. Reich, 8 510 U.S. 200, 207 (1994). That is the case here. 9 Five circuit courts, including the Second, Fourth, Seventh, Eleventh, and D.C. 10 Circuits, have held the federal securities laws create a detailed review scheme that 11 channels all judicial review of SEC administrative proceedings to the courts of 12 appeals, thus precluding district court jurisdiction. See Bebo v. SEC, 799 F.3d 765, 13 768 (7th Cir. 2015) (alleging SEC’s administrative proceedings are unconstitutional 14 because ALJs are “protected from removal by multiple layers of for-cause 15 protection” and the proceedings violate due process and equal protection); Bennett 16 v. SEC, 844 F.3d 174, 178 (4th Cir. 2016) (alleging SEC’s administrative 17 enforcement proceedings are unconstitutional because of multiple layers of 18 protection against removal); Hill v. SEC, 825 F.3d 1236, 1239 (11th Cir. 2016) 19 (same); Jarkesy v. SEC, 803 F.3d 9, 14 (D.C. Cir. 2015) (alleging SEC’s 20 administrative proceedings are unconstitutional because they violate due process and 21 equal protection); Tilton v. SEC, 824 F.3d 276, 278–79 (2nd Cir. 2016) (alleging 22 SEC’s administrative proceedings are unconstitutional because appointment of ALJs 23 violates Appointments Clause). These courts have declined to enjoin SEC 24 administrative proceedings in the face of constitutional challenges in district courts 25 to the authority of SEC ALJs to preside over those proceedings. Each court held 26 that the statutory review scheme in the federal securities laws precluded district court 27 jurisdiction over the plaintiffs’ claims. See, e.g., Bebo, 799 F.3d at 775 (stating 1 administrative enforcement proceedings to be able to stop those proceedings by 2 challenging the constitutionality of the enabling legislation or the structural authority 3 of the SEC”). The Court agrees with these decisions, which dooms Plaintiffs 4 arguments to the contrary.3 5 Plaintiffs also argue this case is distinguishable from Bebo, Bennett, Hill, 6 Jarkesy and Tilton because those cases “were decided without the benefit of the high 7 court’s assessment [in Lucia] of the significance and consequence of an 8 unconstitutionally appointed judge[.]” (Pls.’ Opp’n at 19.) This argument has been 9 raised before, and rejected by, at least two district courts. See Cochran v. SEC, No. 10 19-066, 2019 WL 1359252, at *2 (N.D. Tex. Mar. 25, 2019) (“[T]hat [the appellate 11 decisions] were decided before Lucia … has no impact on the jurisdictional issue at 12 hand…. The [decisions] hold that [plaintiff] must make her constitutional arguments, 13 no matter how meritorious they are, before the SEC and then before the applicable 14 court of appeals.”); Morris & Dickson Co. v. Whitaker, 360 F. Supp. 3d 434, 444 15 n.6, 447 (W.D. La. Dec. 28, 2018) (“[T]here is no reason to conclude that any 16 strength of [plaintiff]’s Appointment Clause challenge [on the basis of Lucia] alters 17 the question of jurisdiction.”). 18 19

20 3 Plaintiffs’ principal argument in support of district court jurisdiction rests on Free Enterprise Fund v. Public Co. Accounting Oversight Bd., 561 U.S. 477 (2010). 21 However, Free Enterprise has been persuasively distinguished by the circuit courts 22 in Bebo, Bennett, Hill, Jarkesy and Tilton. For example, the petitioners in Free Enterprise had no guaranteed path to judicial review of their claims, while Plaintiffs 23 here are entitled to review of any adverse SEC administrative ruling in the court of 24 appeals. In addition, unlike the petitioners in Free Enterprise, Plaintiffs are already respondents in an ongoing administrative proceeding and need not voluntarily “incur 25 a sanction” to raise their constitutional challenges. See 561 U.S. at 490; see also 26 Bennett, 844 F.3d at 186; Hill, 825 F.3d at 1247–48; Tilton, 824 F.3d at 288–89; Bebo, 799 F.3d at 774; Jarkesy, 803 F.3d at 19–20. The ability of an appellate court 27 to vacate an agency’s judgment and remand for a new hearing, “although imperfect, 1 The Court finds no basis to adopt a holding contrary to the decisions of the 2 circuit and district courts above. This Court lacks jurisdiction. 3 Il. 4 CONCLUSION 5 For these reasons, the Court GRANTS Defendants’ Motion to Dismiss and 6 □□ DENIES as moot Plaintiffs’ Motion for Preliminary Injunction. 7 IT IS SO ORDERED. 8 ||Dated: August 21, 2019 9 in. ym. 44) Hon. Dana M. Sabraw 10 United States District Judge 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28