Ray Lucia's Advisor Registration Revoked; Lucia Barred

Ray Lucia's Advisor Registration Revoked; Lucia Barred

Postby REIT Wrecks » Tue Jul 30, 2013 10:15 am

Earlier this month, an administrative law judge entered an initial order to revoke the investment advisor registration of Ray Lucia and his company, Raymond J. Lucia Companies, Inc. The order also permanently bars Lucia personally from association with any investment advisor, broker or dealer, and he and his company face fines of up to $300,000 for the alleged knowing use of false assumptions in order to make Lucia's "Buckets of Money" strategy look better in his seminar presentations.

The order makes for interesting reading for anyone interested in conflicts of interest in the financial world, and for those who are curious about how heavily Lucia relied on sales of Non-Traded REITs to keep his business running. The order also answers the question as to how -- as an SEC registered fiduciary -- Lucia managed to overlook the flaws in a strategy that apparently relied heavily on illiquid, commission-laden and conflict-ridden Non-Traded REITs. Not surprisingly, the answer may have more to do with Lucia's best interests than with those of his clients.

According to the order, which you can read in full here, Non-Traded REIT sales were the "lifeblood" of Lucia's firm, and they were "very important, even crucial", to Lucia's profitability, and that Lucia "possessed an overwhelming incentive to sell as many of them as possible." The order goes on to say that Non-Traded REIT revenues were so significant to Lucia's bottom line that he made "knowingly false" statements with the intent to "lure" prospective investors into buying them. Finally, the order says that Lucia was aware of his fiduciary obligations to clients and that he "knew that he was violating them by misleading prospective clients for the purpose of selling REITs." This is amazing, almost incredible stuff.

The order also states that the "backtests" used to support Lucia's bucket strategy, some of which were allegedly produced by a recent college graduate who got his job mostly because he was dating Lucia's daughter, were not only inaccurate, but that "the inaccuracies discovered in the slideshow demonstrate that Lucia placed little emphasis on accuracy in the calculations he so enthusiastically presented to prospective investors."

The locus of the SEC's investigation and the judges order revolved around Lucia's use of "misleading" assumptions in his back tests involving, among other items, an artificially low inflation rate, an artificially high rate of return on the REITS, and Lucia's alleged failure to even consider advisor fees & commissions. Apparently, had Lucia used actual historical data instead of made-up data, it would have shown that his "Buckets of Money" strategy was not really the antidote to the stock market volatility and Wall Street treachery that Lucia said it was. In fact, with respect to inflation specifically, Richard Plum, whom Lucia calls "the Professor" in his well scripted seminars, admitted that “of course, [the bucket strategy] would have gone broke" if the real inflation rate was used, but this was apparently ok, because "all the portfolios would have gone broke.” So much for being a zebra with different stripes, never mind all of those frightened retirees who bought into Lucia's pitch.

Lucia's lawyer said that Lucia respectfully disagrees with the initial order and will likely appeal. Based on this initial order, however, his lawyers have their work cut out for them.

Related Post:
Ray Lucia and his Non-Traded REIT Dividend Double Talk

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