U.S. appeals court upholds SEC's use of administrative law judges

August 9, 2016 10:25 AM EDT

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By Sarah N. Lynch

WASHINGTON (Reuters) - A U.S. appeals court upheld the Securities and Exchange Commission's use of in-house judges on Tuesday, dealing a blow to former radio host Raymond Lucia who argued that the agency's administrative law judges were unconstitutionally appointed.

The decision by the U.S. Court of Appeals for the District of Columbia Circuit gives legal cover to the SEC, which in recent years has come under attack by defendants who have questioned the fairness of its in-house trials.

To date, a total of five appeals courts have weighed in on various legal challenges to the SEC's administrative courts.

However, none until Tuesday had directly addressed the question of whether the judges are constitutionally appointed, with those other courts ruling instead that constitutional challenges were not ripe for review until the proceedings had ended.

Administrative law judges are independent from the government agencies where they work. Their employing agency can seek their removal, but such a move must also be reviewed by the Merit Systems Protection Board.

Defense attorneys, including attorneys for Lucia, have argued that the appointment of SEC administrative law judges, and the hurdles that can make it impossible for the president to remove those judges, are unconstitutional and violate the separation of powers clause.

"This court could not cast aside a carefully devised scheme established after years of legislative consideration and agency implementation," Chief Judge Judith Rogers wrote in a unanimous decision.

Lucia's attorneys could not be immediately reached for comment. An SEC spokeswoman said the agency is pleased with the court's ruling.

Lucia, a former radio host known for his "Buckets of Money" investment strategy, was hoping to beat back fraud charges.

In late 2013, SEC Administrative Law Judge Cameron Elliot found Lucia liable for fraud after the SEC accused him of misleading investors about the strategy with slide shows depicting historical inflation data, adviser fees and rates of return on real estate investment trusts (REITs).

Elliot barred Lucia from the securities industry and ordered him and his firm to pay $300,000.

Lucia appealed the decision to the SEC commissioners at a hearing last July, in which television personality and comedian Ben Stein made a surprise appearance at SEC headquarters to support his friend.

The SEC, in a 3-2 decision, upheld Elliot's ruling last September and found that administrative law judges are constitutionally appointed, saying they are merely "employees" because their decisions are not final.

(Reporting by Sarah N. Lynch; Editing by Chizu Nomiyama and Phil Berlowitz)



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