Raymond J. Lucia, a registered investment adviser and nationally syndicated radio personality, is the subject of formal charges made by the SEC on September 5, 2012 (see In the Matter of Raymond J. Lucia Cos., Inc., et al., admin. Proceeding no. 3-15006) for providing misleading information to his radio audience about his “Buckets of Money” strategy. Mr. Lucia, through his company, conducts investment seminars over the radio and in person across the country.
The SEC, in initiating a cease and desist proceeding against Mr. Lucia, maintains that he falsely stated during his radio program that his “Buckets of Money” strategy was extensively tested on historical data or “back-tested.” The term “back-tested” generally refers to a process involving the application of a strategy to historical data in order to calculate how the strategy would have performed had it been applied in a prior time period. According to the SEC, Mr. Lucia only conducted minimal testing and used an inaccurate hypothetical inflation rate, along with other flawed data during the back-tests. Mr. Lucia’s failure to disclose to prospective clients the fact that only minimal testing was conducted and applied flawed data is, according to the SEC, omissions of a material fact and violations of the “anti-fraud” provisions under the Investment Advisers Act of 1940. The SEC further maintains that Mr. Lucia failed to maintain records to support the performance representations being made during his client presentations, which is a violation of the recordkeeping requirements under the Advisers Act.
Apparently, Mr. Lucia admitted to the SEC that he performed only limited testing in the late 1990s to derive at the back-tested performance numbers and no longer had a record of the calculations. In addition, Mr. Lucia allegedly failed to use an inflation rate accurate to the time tested and failed to disclose the negative effect that the deduction of advisory fees would have in the back-tests.
In addition to a cease and desist order, the SEC is seeking financial penalties and other remedial action against Mr. Lucia and his investment advisory firms. In the meantime, Mr. Lucia’s counsel has stated that the SEC’s complaint contains no allegations of any investors losing money due to the alleged omissions and misstatements.