Civil Enforcement Actions: Lessons for Investment Advisors

The Securities and Exchange Commission (“SEC”) recently commenced an action against radio personality Ray Lucia, accusing the radio personality of misleading investors to think that his investment strategies helped retirees “generate inflation-adjusted income for life.”  Lucia promotes his investment programs at seminars, a similar method of advertising and marketing used by registered representatives and registered investment advisors nationwide.

According to the SEC, Lucia falsely represented to investors that his investment plan had been tested and was a safe way for retirees to generate income during their retirement years.  According to regulators, Lucia recommended that his clients invest their funds in three different buckets:  cash; safe investments; and risky investments.  The SEC alleges that despite his representations, Lucia performed very little, if any testing of his investment model and as a result, convinced his clients to invest pursuant to his program with a false sense of comfort and security.  Lucia has responded, through his legal counsel, that he did nothing wrong as evidenced by the fact that there are no allegations that investors lost money.

Whether dealing with the SEC, FINRA or state regulatory agencies, civil enforcement actions by securities can come in many forms and be very trying and expensive.  Although most civil enforcement actions involve investor complaints about losing money, on many occasions the regulators have commenced actions without any customer complaints.  Furthermore, although many civil enforcement actions seek monetary awards including restitution and fines, most civil enforcement actions seek a decree permanently banning the registered representative or registered investment advisor from continuing to be employed in the financial services industry.  Unlike customer complaints, civil enforcement actions are usually venued in federal district court and the attorneys’ representing the regulators have unlimited resources in pursuit of their claims.

Therefore, it is essential that registered representatives or registered investment advisors named in civil enforcement actions retain counsel immediately to advise them of their legal rights and appropriate course of action, including potential defenses regarding reliance upon third-parties in their performance of their duties to their clients.  Civil enforcement actions are unlike any other securities-related claim and require a specialized knowledge of the inner-workings of litigation with FINRA, state regulators and the SEC.

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