Respondents Brief — Steadman v. Securities & Exchange Commission

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~ Suprema Th —

FI 2a ell

No. 79-1266 AUG] 5 1980 |

TS ——- — _—— —__—- — fF ee

Mionaey Ro!

Iu the Supreme Court nf f the United Sta

OCTOBER TERM, 1979

DAK

“AAR CLERK |

CHARLES W. STEADMAN, PETITIONER

Vv.

SECURITIES AND EXCHANGE COMMISSION

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE FIFTH CIRCUIT

BRIEF FOR THE SECURITIES AND

EXCHANGE COMMISSION

WabE H. McCREE, JR.

Solicitor General st

STEPHEN M. SHAPIRO

Assistant to the Solicitor General

Department of Justice

Washington, D.C. 20580

(202) 633-2217

RALPH C. FERRARA

General Counsel

PAUL GONSON

Solicitor

JACOB H. STILLMAN

Associate General Counsel

ROSALIND C. COHEN

Assistant General Counsel

S. LEE TERRY, JR.

ROBERT J. MILLS

Attorneys

Securities and Exchange Commission

Washington, D.C. 20549

In the Supreme Court of the United States

OCTOBER TERM, 1979

No. 79-1266

CHARLES W. STEADMAN, PETITIONER

Vv.

SECURITIES AND EXCHANGE COMMISSION

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE FIFTH CIRCUIT

BRIEF FOR THE SECURITIES AND

EXCHANGE COMMISSION

QUESTION PRESENTED

Whether, in an administrative proceeding before the

Securities and Exchange Commission, violations by a

fiduciary of antifraud provisions of the federal securities

laws must be proven by clear and convincing evidence,

rather than by a fair preponderance of the evidence.

(I)

TABLE OF CONTENTS

TRA DEDEDE AL 18 I NOOSE LEE ROH

a i ee ee

ee EE EERE EEE EEE EEE EE EEE TEESE EEE EE OOH

1. The regulatory scheme .................-..----...-.-----------

2. The proceeding against petitioner ......................

3. The decision of the court of appeals ..................

Summary

Argument

OF CII see eee

ee eee ee ee ee

The Securities and Exchange Commission appro-

priately utilized the preponderance of the evi-

dence standard of proof in this administrative

STII icemiinetinscrtnsanteaSiiicdcntecd fel eee ee

I. A proper balancing of the public and private in-

terests in this case requires use of the prepon-

derance of the evidence standard .................0......

The traditional preponderance of the evi-

dence standard of proof is needed to mini-

mize decisional errors -......2..222.2.22..ceceeeeeeeeeeee-

Use of the traditional preponderance of the

evidence standard is required by considera-

CR OE IID cciriheciccsnitecentceticcccatnctinlticnn

This proceeding does not involve a constitu-

tional right or extraordinary interest that

would dictate use of a higher standard of

OIE sac ceack ea tate eee

A higher standard of proof is not required

simply because this proceeding involves

charges of violations of the antifraud pro-

visions of the federal) securities laws ..........

(IIT)

PREVIOUS PAGE WAS BLANK |

Argument—Continued Page

E. A higher standard of proof is not required

by the fact that this is a disciplinary pro-

IES Te 36

F. A higher standard of proof is not required

merely because circumstantial evidence is

NE Ee Se a ee 38

II. The Administrative Procedure Act contemplates

use of the preponderance of the evidence stand-

ard in administrative proceedings of this kind.. 41

III. The decision whether to employ a standard of

proof greater than the preponderance of the

evidence standard is properly a matter of Com-

mission discretion in the circumstances of this

Cenc scedamnsanesnesonsce 46

a SESS ELST SSI RO 50

EES SESS Se la

TABLE OF AUTHORITIES

Cases:

Aaron Vv. SEC, No. 79-66 (June 2, 1980) ................ 15, 30

Abbett, Sommer & Co., In re, 44 S.E.C. 104, aff’d,

[1970-1971] Fed. Sec. L. Rep. (CCH) { 92,8138,

cert. denied, 401 U.S. 974 0.000... eee 17, 44-45

Addington v. Texas, 441 U.S. 418 ........... 10, 12, 16, 17, 18,

20, 21, 22, 24

Alsbury v. United States Postal Service, 536 F.2d

852, cert. denied, 429 U.S. 828 00000... 18

American Power & Light Co. v. SEC, 329 U.S. 90.. 49

Arnett v. Kennedy, 416 U.S. 134 0000. 25, 28

Associated Securities Corp. v. SEC, 283 F.2d 773.. 22

Baxter v. Palmigiano, 425 U.S. 308 -....0000000000.... Ree 40

eva V. ae, ore F260 187 ...................................... 49

Blaeser Development Corp. v. First Federal Sav-

ings & Loan Ass’n, 375 So. 2d 1118 ..........0......... 33

Blaise D’Antoni & Associates, Inc. v. SEC, 289

F.2d 276, rehearing denied, 290 F.2d 688, cert.

I, ME PA ci ssesscensscsesnctncresnemccconsesces 22

Cases—-Continued P»ge

Blue Chip Stamps v. Manor Drug Stores, 421

EL RR SRG RRS enen me Pate pi er nots MeO ap Nec Mite eyP een eI 29

Boys Markets, Inc. v. Retail Clerks Local 770, 398

8 AR Ia rare Da SER Wetman Aa a ER 45

Brick, In re, 8 S.E.C. Docket 240 ...............-.......---- 38

Bertes ¥.. Laaieer, G41 UB. GFE nn. ean ccrcescsnnevcciccesesscs 15

Butz v. Glover Livestock Commission Co., 411

TT ne ee 48

Cargill, Inc. v. Hardin, 452 F.2d 1154, cert. denied,

I ee I eon nics Bs areca ae clensbieneicen co nipeteninon 18

Ca ee es i aschecasecleescctatnceticticncucsed 45

Charles Hughes & Co. v. SEC, 139 F.2d 434, cert.

ST, Ta RI RI waa cakes eectegrseecddeiicins 31

Cleveland Bar Ass’n V. Fleck, 172 Ohio St. 467, 178

N.E. 2d 782, cert. denied, 369 U.S. 861 ................ 37-38

Collins Securities Corp. v. SEC, 562 F.2d 820....10, 17, 48

Costle v. Pacific Legal Foundation, No. 78-1472

SS Fs MUN areca hres chan ebeetaeacon meine AT

Cowan V. Westland Realty Co., 162 Mont. 379, 512

Fr I eciek 33

Decker, In re, 15 S.E.C. Docket 1342, pet. for re-

view pending, No. 78-2008 (10th Cir.) .............. 44

Delligan’s Estate, In re, 111 Vt. 227, 18 A.2d 282.. 33, 35

DeMammos v. SEC, 23 Ad. L.2d 221, aff’g

tS soll SARE rE yess Re OI Tee ND aT IP 17, 45

Dodd v. Board of Commissioners, 350 So. 2d 700.... 37

Duncan, In re, 541 S.W.2d 564 00... eee eee 37

FCC v. Schreiber, 381 U.S. 279 ......................--.....- 47

Feola v. New York State Bar Ass’n, 37 App. Div.

Sd Ted, SE4-N.¥ BO Gb6 ...i........-20005550.2--........... 37

Fidelity Mutual Life Ass’n v. Mettler, 185 U.S.

REARS Pe Me en te Nr Te ree FA UE EC CN 18

Francois v. Francois, 599 F.2d 1286, cert. denied,

No. 79-6648 (Jan. 7, 1980) .................................. 32

Garrett v. Moore-McCormack Co., 317 U.S. 239.... 32

Geddes v. Anaconda Copper Mining Co., 254 U.S.

PAIS bene y ee EL FNS LRA RO Ue ey DOr 32

General Electric Credit Corp. v. M.D. Aircraft

Sales, Inc., 266 N.W.2d 548 00 33

Goldsmith v. United States Board of Tax Appeals,

RE: ID davcicsancehcetcienneninnasesaadapeinaiaaen 25

Cases—Continued Page

Goodfellow v. Kattnig, 533 P.2d 58 -......................- 33

Greenholtz v. Nebraska Penal Inmates, 442 U.S. 1.. 20, 25

Grissom v. Moran, 154 Ind. App. 419, 290 N.E.2d

SN as anata ancilatieditind 33

Hanly v. SEC, 415 F.2d 589 .........-.............-....022.------ 38

Holiand vy. United States, 348 U.S. 121 -................... 39

Household Finance Corp. v. Altenberg, 5 Ohio St.

ee Ry Te Re TE vince ceivskcccntccenemees 33, 35

Houtchens v. State, 68 S.W.2d 1011 _.............----.... 38

Hughes v. SEC, 174 F.2d 969 .................---..000c00---00- 31

Hurst v. Bar Rules Committee, 202 Ark. 1101, 155

BE II: cosksicecesscshcctaaliccsesnansceshanttinsconmacencsionaliacacsicoviinn 37

Investors Research Corp., In re, 14 S.E.C. Docket

1020, aff’d in part, remanded in part, [Current]

Fed. Sec. L. Rep. (CCH) §| 97,526 -..........--.--.--.. 44

Investors Research. Corp. v. SEC, [Current] Fed.

Sec. L. Rep. (CCH) {| 97,526, pet. for cert. pend-

es a I a ca essentansed 17

Jensen V. Sohler, 601 F.2d 358 ......................2........222 33

Joint Anti-Fascist Refugee Committee v. McGrath,

a 1 cacipgnineeanbe . 25

Kent v. Hardin, 425 F.2d 1346 .....00 18

Lawrence V. SEC, 398 F.2d 276 ..............----.----.-------- 38

Lego v. Twomey, 404 U.S. 477 -...........2....-2100022eeeeeeee 20

Liodas V. Sahadi, 562 P.2d 316, 137 Cal. Rptr. 635.. 33

Little, In re, 40 Wash. 2d 421, 244 P.2d 255 _.......... 37

Local 167, Int’l Brotherhood of Teamsters v. United

pe Reema nn a ee 40

Louisville Bar Ass’n Vv. Hubbard, 282 Ky. 734, 139

I a 37

Lukon v. Pennsylvania R.R., 181 F.2d 327 ............ 39

Mansbach v. Prescott, Ball & Turben, 598 F.2d

EA AEE AUS ER ie el ee APOE aR LTD Ed AE 16

Martinez v. Blum, No. 80-6002 (2d Cir. June 9,

ARNT RW OAD Can [A EN eee OE 18

Mathews Vv. Eldridge, 424 U.S. 319 -...0..00.00000000.... 14, 25, 46

Maxwell Land-Grant Case, 121 U.S. 325 _.............. 35

Mayberry, In re, 295 Mass. 155, 3 N.E. 2d 248 ...... 37

VII

Cases—Continued Page

Medivox Productions, Inc. v. Hoffmann-LaRoche,

Inc., 107 N.J. Super. 47, 256 A.2d 803 _.............. 33

Michalic v. Cleveland Tankers, Inc., 364 U.S. 325.. 39

Mihara Vv. Dean Witter & Co., [Current] Fed. Sec.

i OR 8 eR ek ee er 18

Moog Industries, Inc. v. FTC, 355 U.S. 411 -........2 48

Nedd v. UMW, 556 F.2d 190, cert. denied, 434 U.S.

a a atta 32

New York Life Ins. Co. v. Gamer, 303 U.S. 161...... 18

New York Times Co. v. Sullivan, 376 U.S. 254........ 27

NLRB v. Plasterers’ Local 79, 404 U.S. 116 _.......... 45

Norris & Hirshberg, Inc. v. SEC, 177 F.2d 228.... 31

O’Leary v. SEC, 424 F.2d 908 .........................-.--...-- 48

Ohio Drill & Tool Co. v. Johnson, 498 F.2d 186...... 32

Pacific Gas & Electric Co. v. SEC, 127 F.2d 378... 17

Pawlowski, In re, 240 Ind. 412, 165 N.E.2d 595...... 37

Polcover v. Secretary of the Treasury, 477 F.2d

1223, cert. denied, 414 U.S. 1001 2.0... 18

Pollisky, In re, 43 S.E.C. 458, after remand, 43

Ta eeinninenounnanighenbease 44, 45

Proud v. CAB, 357 F.2d 221 __ .. eEELISA Cpa MRO Da 40

Public Service Corp. v. SEC, 129 F.2d 899, cert.

ny I Rs IE oe ccccneisiccrnnenepesdctsictevachnannenensintons 17

Ray Dodge, Inc. v. Moore, 251 Ark. 1036, 479 S.W.

a oe ainaasiaiibwan 33, 35

Rea Vv. Missouri, 84 U.S. (17 Wall.) 532 —......00.. 39

Rice-Stix Dry Goods Co. v. Montgomery, 164 Ark.

I ces lcneuniewininee 34

Riget ¥. Bucei, 245 So. 2d Gi .................:.................. 33

Se, Te OU, Te ee Ovni... 37

Rogers V. Missouri Pacific R.R., 352 U.S. 500 ......... 39

Ronson Corp. v. Liquifin Aktiengesellschaft, 370

F. Supp. 597, aff’d, 497 F.2d 394, cert. denied,

Se tS a a ec se a 19

S&F Supply Co. v. Hunter, 527 P.2d 217 ................ 32

Santa Fe Industries, Inc. v. Green, 430 U.S. 462.... 15

Schultz, In re, 15 S.E.C. Docket 860, aff’d, 614 F.2d

ERE Ga Ze, LI ewe RI Se NR 44

Sea Island Broadcasting Co. v. FCC, 47 Ad. L. 2d

AE ARES, RT EERE rela Ese Ree OL EN 43

VIII

Cases—Continued Page

Seaton, In re, 18 S.E.C. Docket 400, pet. for

review pending, No. 79-2317 (D.C. Cir.) ............ 44

SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344..19, 29, 39

SEC v. Capital Gains Research Bureau, Inc., 300

NE eisniddecasissttlet tiniigsdschaveticinadasiacanndhancesantmmcanties 30

SEC v. Capital Gains Research Bureau, Inc., 375

I ME it again ea adidaycsannuvesaees 15-16, 24, 29-30, 31

SEC v. Chenery Corp., 318 U.S. 80 .......................... 49

Sars Ws GEUOONE, TO BI GB ncn cscs ences ccenrsccnazeessces 18-19

SEC v. Savoy Industries, Inc., 587 F.2d 1149, cert.

I, I ic 0s snccncunpcupasanicsmenveeuanss 18

Sinelair vy. SEC, 444 F.2d 899 -........2.......0............... 16

Smith v. Rhode Island Co., 39 R.I. 146, 98 A. 1...... 33

State Administrator v. Posler, 390 Mich. 581, 213

FERRE AGIR ie else OHO Tor eA RN ene 37

Superintendent of Insurance V. Bankers Life &

I cs I ic ra iecleenontas 22

TSC Industries, Inc. v. Northway, Inc., 426 U.S.

EIS GALS aie (Se an ae er OE ee 39

ere Ne cient tencsg ines scttscccanaentinone 48

Transamerica Mortgage Advisors, Inc. v. Lewis,

I oes sadurdusdvoieacceue 15, 22

Trask, In re, 46 Hawaii 404, 380 P.2d 751 .............. 37

gp FR gS Ree eee eee 45

Underhill Securities Corp., In re, 42 S.E.C. 689... 45

United States v. American Bell Telephone Co., 167

I tee Te ag ad Oca 35

United States v. Board of Commissioners, 435 U.S.

0 SOE EA aN Ae BF Sl cle DaM dette eels RIDES. 7 Ee Ee 45

United States v. Be | eee 35

United States v. Naftalin, 441 U.S. 768 ........0000...... 24

United States v. Regan, 232 U.S. 87 ........0....00000000... 18, 29

United States v. Ward, No. 79-394 (June 27,

I re a et ae? 18, 29

University Hill Foundation v. Goldman, Sachs &

i A I II aia loco cachet cliecaneuceoeepencacancs 19

Vance v. Terrazas, No. 78-1143 (Jan. 15, 1980).... 12, 14,

27, 40, 41, 47

Vermont Yankee Nuclear Power Corp. v. Natural

Resources Defense Council, 485 U.S. 519 _....... 14, 46, 47

1.4

Cases—Continued Page

Walters v. McLucas, 597 F.2d 1230, cert. denied,

I I a a aeueevpeanitanaduginnins 18

Oe ly ig es IID hci ski ccnp ccvinscscccectinenedénvonie 43

Whitney v. SEC, 604 F.2d 676 .......................00000.... 17

Woodby v. INS, 385 U.S. 276 .......................... 27, 42, 43, 48

ty. Be! 1 ee b> EF | SR ene eee eennn nents 17

Statutes and regulations:

Administrtive Procedure Act, 5 U.S.C. 551 et

8 RAS a OE oe ARIA Roe DROS OURO ea ealiee 3

Ge TT BRAG rcieecesesiiesionin cavenaicvssacrs 41

Wis We WE IED coaieccscesennessacvennsibennsane 41

Section 7(c), 5 U.S.C. 556 (d) .................... 3, 4, 14, 41,

42, 43, 44, 46, 8a

Section 6(b), 6 U.S.C. 667 (ce) .....................0.., 4

Becton 10te), 6 UBC. FOB on... ccicis......000..20002.0 43, 48

Section 10(e) (2), 5 U.S.C. 706(2) _...002200... 4

Investment Advisers Act of 1940, 15 U.S.C. 80b-1

et seq.:

Section 208, 15 U.S.C. 80b-S .............................. 2

Section 203(c) (1); 15 U.S.C. 80b-3(c) (1)... 36

Section 203(e), 15 U.S.C. 80b-3(e) ooo... 2,41, 1la

Section 203(f), 15 U.S.C. 80b-3(f) ....... 2, 41, la, 4a

Section 206(1), 15 U.S.C. 80b-6(1) oo... 5

Section 206(2), 15 U.S.C. 80b-6 (2) 2.000000... 5, 11, 39

Section 209(e), 15 U.S.C. 80b-9(e) ...00.. 19

Section 213(a), 15 U.S.C. 80b-13 (a) 20000000... 45, 48

Investment Company Act of 1940, 15 U.S.C. 80a-

Fe es eticdtrcecid cach acetic acetals atninisbbevabicachandeaatehs 1

Section 1(b), 15 U.S.C. 80a-1(b) ©... 21

Section 9(b), 15 U.S.C. 80a-9(b) _....00....... 2, 3, 41, 4a

Section 15(a) (1), 15 U.S.C. 80a-15(a) (1)... 5,8

Section 17(a), 15 U.S.C. 80a-17(a) 0000... 5,8

Section 17(e), 15 U.S.C. 80a-17(e) 200. 5,8

Section 20(a), 15 U.S.C. 80a-20(a) 000. 5

Section 30(a), 15 U.S.C. 80a-29(a) 00000000... 5, 8-9

Section 34(b), 15 U.S.C. 80a-83(b) 0000000... 5

Section 42(e), 15 U.S.C. 80a-41(e) 000. 19

Section 43(a), 15 U.S.C. 80a-42(a) 2.0... 48

Statutes and Regulations—Continued Page

Securities Act of 1933, 15 U.S.C. 77a et seq.:

Section 11(b), 15 U.S.C. 77k(b) ..................... 36

Section 12(2), 15 U.S.C. 771(2) ........ Rebar 36

Section 17(a), 15 U.S.C. 77q(a) ...........2.e.... 5

Section 17(a) (2), 15 U.S.C. 77q(a) (2) ..... 10-11, 38

Section 17(a) (3), 15 U.S.C. 77q(a) (3) .....10-11, 39

Section 20(b), 15 U.S.C. 77t(b) 2.002... 19

Securities Exchange Act of 1934, 15 U.S.C. 78a

G6 DOES ccckesmeiciienians ssciai.cudlddabecenannendabeneniieadgiaaanaiael 1

Section 6(d) (1), 15 U.S.C. 78f(d) (1) 00.0... 26

Section 9, 1 U.K Fe. .stisnnnticcdinsaioden 43

Section 10(b), 15 U.S.C. 78j(b) ...................... 5

Section 15(b), 15 U.S.C. 780(b) 200000... 2

Section 15(b) (4), 15 U.S.C. 780(b) (4) ......... 41, 5a

Section 15(b) (6), 15 U.S.C. 780(b) (6) ..... 41, 5a, 7a

Section 15A(h) (1), 15 U.S.C. 780-3 (h) (1)... 26

Section 17(a), 15 U.S.C. 78q(a) ...........000000..... 5

Section 21(d), 15 U.S.C. 78u(d) ........0020000222.. 19

Section 25(a), 15 U.S.C. 78y (a) .2.2.22.0.....2....02 48

Pub. Ta. Boo. GOD, BD BE. By ncn cccesccsndicnscecisccnensecss 26

SB UB. SO. hecditaccdaebeeeeee 41

19 U.S.C. (Supp. II) 1592(e) (2) 2.0002. 41

, Bie Soe: | enn err ata 41

BB WIG. CITE | wdsstitccicasscentisavacnecicaeeadacnanane 41

Rules under the Securities and Exchange Act of

1934, 17 C.F.R. 240.0-1 et seq.:

Rule 10b-5, 17 C.F.R. 240.10b-5 oo ceccccceoseee 5

Rule 17m46, 17 Ci. BOSD cccccscsecesenss 5

Securities and Exchange Commission Rules of

Prectaes, UT Ci es kek OD BOE ccseccctcnesssins 3

Rule 2(b), 17 C.F.R. 201.2(b) ........................ 3

Rule Ga), BF Gir ee ORMOND cccicdietelccemes 3

Statutes and Regulations—Continued Page

Rule 7(d), 17 C.F.R. 201.7(d) 000.002.0002... 3

Rule 11(b)-(c), 17 C.F.R. 201.11(b)-(c) ...... 3

meee aaee, 2? C.F .R. 201.11.) ............................ 3

Rule 14(a), 17 C.F.R. 201.14(a) -2000.02.000000.... 3

Rule 14(b), 17 C.F.R. 201.14 (b) -.000...ooo eee... 3

Rule 16(a), 17 C.F.R. 201.16(a) 2000 .. 4

Rule 16(d), 17 C.F.R. 201.16 (d) 2000. 3

Bo Eek oh SE) BS ly GR 4

Rule 17(g) (2), 17 C.F.R. 201.17 (g) (2) 00... 4

Rule 21, 17 C.F.R. 201.21 ................................... 4

SS) RE 47

16 C.F.R. 1026.61(1) 2... nnn... ccc cce cect cecseeeeeeeeee 47

ELE 36

EE | a a 47

De A A 16 b 4 47

AE) © a 47

Miscellaneous:

Annot., 62 A.L.R. 1449 (1929) 200. 33

Annot., 105 A.L.R. 984 (1936) 220000000 38

Annot., 33 L.R.A. (N.S.) 836 (1911) o0000000.. 33

20 Am. Jur., Evidence (1989) _....00000000 33

24 Am. Jur., Fraud and Deceit (1939) _............... 33

Ball, The Moment of Truth: Probability Theory

and Standards of Proof, 14 Vand. L. Rev. 807

Neen, cas casepceensencnscasesenaccene 20

M. Bigelow, The Law of Fraud and the Procedure

Pertaining to the Redress Thereof (1877)........ 34

Comment, Scope of Review or Standard of Proof

—Judicial Control of SEC Sanctions, 93 Harv.

EE |) RR 24

2 T. Cooley, Treatise on the Law of Torts (4th

EES IE 33

2 K. Davis, Administrative Law Treatise (2d ed.

Neen ee an dunnaensvevenscsepisucccesvess 20, 26

Hearings on S. 2849 Before the Subcomm. on

Securities of the Senate Comm. on Banking,

Housing & Urban Affairs, 94th Cong., 2d Sess.

SS 37

XII

Miscellaneous—Continued Page

H.R. Rep. No. 1980, 79th Cong., 2d Sess. (1946) .. 14, 42,

3 L. Loss, Securities Regulation (2d ed. 1961)...... 31

McCormick on Evidence (2d ed. 1972) ............... 27, 32, 34

Note, Appellate Review in the Fede. il Courts of

Findings Requiring More than a Preponderance

of the Evidence, 60 Harv. L. Rev. 111 (1946).. 34, 35

S. Rep. No. 94-75, 94th Cong., 1st Sess. (1975)... 26

S. Rep. No. 94-910, 94th Cong., 2d Sess. (1976).... 36

A. Scott, Trusts (1967) :

Pe a ee dala a 38

AR RRC Rae iy Uae ae nM IED 38

Scott, The Fiduciary Principle, 37 Calif. L. Rev.

Ce ec aectiececiiaciees i csesctneteciadeceinaciotanetl 21

Securities Exchange Act Release No. 11,267, 6

S.E.C. Docket 346 (Feb. 26, 1975)-~....000000..000000.... 38

11C H. Sowards & N. Hirsch, Business Organiza-

tions, Blue Sky Regulation (Pt. 2, 1979) ............ 32

9 J. Wigmore, Evidence (8d ed. 1940) 200.0000... 34, 35

Winter, The Jury and the Risk of Nonpersuasion,

5 Law & Soc. Rev. 335 CRUE UEED: sicciascnicacsccene 20

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. 1-34)

is reported at 603 F.2d 1126. The opinion of the Se-

curities and Exchange Commission (Supp. App. 1-122)

is reported at 12 S.E.C. Docket 1041.

JURISDICTION

The judgment of the court of appeals (Pet. App. 35)

was entered on October 4, 1979. A petition for rehearing

was denied on November 27, 1979. The petition for a

writ of certiorari was filed on February 15, 1980, and

was granted on April 28, 1980. The jurisdiction of this

Court rests on 28 U.S.C. 1254(1).

STATUTES INVOLVED

The relevant statutory provisions are set forth in the

Appendix to this brief.

STATEMENT

This case concerns the standard of proof employed by

the Securities and Exchange Commission in an adminis-

trative proceeding brought against petitioner Steadman,

the president, chairman of the board of directors and sole

owner of an investment adviser serving several mutual

funds registered with the Commission under the Invest-

ment Company Act of 1940, 15 U.S.C. 80a-1 et seq. Pe-

titioner is also the sole owner of several broker-dealer

firms registered with the Commission under the Securi-

ties Exchange Act of 1934, 15 U.S.C. 78a et seq. After

an administrative hearing, the Commission found by a

preponderance of the evidence that petitioner had com-

mitted numerous violations of the federal securities laws.

On review, the court of appeals upheld the Commission’s

use of that standard of proof in this administrative

context.

(1)

1. The Regulatory Scheme

The federal securities laws contain several provisions

empowering the Securities and Exchange Commission to

impose sanctions on fiduciaries who have deviated from

the standards imposed on them by Congress. Under Sec-

tion 15(b) of the Securities Exchange Act of 1934, 15

U.S.C. 780(b), the Commission may impose any of a

specified range of sanctions on brokers or dealers and

associated persons, including censure, curtailment of ac-

tivities, and suspension or revocation of registration. The

Commission may impose such sanctions if it finds, on

the record and after notice and an opportunity for a

hearing, that the sanctions are in the public interest and

that the respondent has, inter alia, willfully violated or

aided and abetted a violation of the federal securities

laws. Section 203 of the Investment Advisers Act af

1940, 15 U.S.C. 80b-3, vests the Commission with com-

parable authority to impose sanctions on investment ad-

visers and associated persons. Sanctions ranging from

censure to revocation of the registration of the adviser

may be imposed.' Similarly, Section 9(b) of the Invest-

ment Company Act of 1940, 15 U.S.C. 80a-9(b), autho-

rizes the Commission to prohibit persons who have will-

fully committed securities law violations from being as-

sociated with a registered investment company, either

permanently or for a specified period of time, and to

impose other sanctions on such persons as it deems ap-

propriate in the public interest.*

1 These sanctions may be imposed based on the willful filing

with the Commission of a misleading report or application

for registration, on a criminal conviction in certain categories

of cases, on the entry of specified injunctive orders, on will-

ful violations of the federal securities laws or inability to

comply therewith, or on willful aiding and abetting of viola-

tions of the federal securities laws. 15 U.S.C. 80b-3(e), (f).

2 These sanctions may be imposed based on the willfu! filing

with the Commission of a misleading registration statement,

Every respondent in an administrative proceeding

brought pursuant to these statutory provisions enjoys

procedural protections designed to assure a fair hear-

ing and an accurate determination of factual questions.

These protections are guaranteed by the Administrative

Procedure Act, 5 U.S.C. 551 et seg., and the Commis-

sion’s Rules of Practice, 17 C.F.R. 201.1 et seg., which

enlarge the rights prescribed under the Administrative

Procedure Act. Thus, a respondent is entitled to receive

timely notice of the charges against him and the ques-

tions of fact and law to be determined (17 C.F.R. 201.6

(a)). He may retain counsel to represent him in con-

nection with the proceeding (17 C.F.R. 201.2(b)), file

an answer to the charges against him and move for a

more definite statement of those charges (17 C.F.R. 201.7

(d)), and have a trial-type hearing presided over by

an impartial administrative law judge (17 C.F.R. 201.11

(b)-(c)). The respondent may present oral or docu-

mentary evidence, cross-examine adverse witnesses, and

object to the admission or exclusion of evidence (17

C.F.R. 201.14(a)). The Commission’s rules provide that

“Te]very party shall have the right to present such oral

or documentary evidence and to conduct such cross-

examination as may be required for a full and true dis-

closure of the facts” (ibid.). Subpoenas are available

for the production of evidence (17 C.F.R. 201.14(b)),

and witness statements in the possession of the Commis-

sion’s staff may be requested for cross-examination pur-

poses (17 C.F.R. 201.11.1). The “burden of proof” in

such a hearing rests on the Commission’s staff. 5 U.S.C.

556(d). At the completion of the hearing, the respond-

ent has the right to submit briefs and proposed findings

of fact and conclusions of law (17 C.F.R. 201.16(d)).

The initial decision of the administrative law judge must

include findings of fact and conclusions of law, with sup-

application or report, on willful violations of the federal

securities laws, or on willful aiding or abetting of violations

of the federal securities laws. 15 U.S.C. 80a-9(b).

“

porting reasons, on all material issues of fact, law, or

discretion presented on the record (5 U.S.C. 557(c); 17

C.F.R. 201.16 (a) ).

A respondent adversely affected by an initial decision

of an administrative law judge may file a petition for

review by the Commission (17 C.F.R. 201.17). Based on

briefs, oral argument, the transcribed record, and any

additional evidence presented, the Commission may re-

verse, affirm, or modify the initial decision of the admin-

istrative law judge based on its independent review of

the record (17 C.F.R. 201.17(g) (2), 201.21). The Ad-

ministrative Procedure Act provides that “[a] sanction

may not be imposed * * * except on consideration of the

whole record or those parts thereof cited by a party and

supported by and in accordance with the reliable, proba-

tive, and substantial evidence” (5 U.S.C. 556(d) ).

After exhausting his administrative remedies, a re-

spondent has the right to file a petition for review of the

Commission’s decision in a court of appeals. The review-

ing court has authority to affirm, modify or set aside the

Commission’s order, in whole or in part, and may also

remand the proceeding to the Commission to receive ad-

ditional evidence. A Commission order may be set aside

by the court of appeals if it is unsupported by substan-

tial evidence, if there has been a prejudicial departure

from a procedure required by law, or if the order is

arbitrary, capricious, or an abuse of discretion (5 U.S.C.

706(2) (A), (D), (E)).

2. The Proceeding Against Petitioner

In June 1971, the Commission instituted an adminis-

trative proceeding against petitioner and certain of his

wholly owned companies, including Steadman Securities

Corporation (“SSC”), an investment adviser registered

with the Commission, and Republic Securities Corpora-

tion (“RSC”), a broker-dealer registered with the Com-

mission. The administrative order initiating the proceed-

ing alleged violations of numerous provisions of the fed-

eral securities laws resulting from petitioner’s manage-

ment (through his wholly owned companies) of several

mutual funds (“the Funds”) registered under the In-

vestment Company Act.*

After a lengthy evidentiary hearing, the Commission

found that, over a seven-year period ranging from De-

cember 1965 to at least June 1972, petitioner repeatedly

had violated antifraud,* reporting,’ conflict of interest,®

and proxy’ provisions of the federal securities laws.

Those violations included petitioner’s willful concealment

from the Funds’ shareholders and directors of his prac-

tice of obtaining badly needed loans for himself and his

companies at the same banks to which he caused the

Funds to transfer, or in which he caused them to main-

tain, large cash deposits in non-interest-bearing checking

accounts (Supp. App. 21-41).

From 1965 to 1968, the Funds maintained checking

accounts at the Riggs National Bank in Washington,

D.C. In 1968, petitioner’s investment adviser firm (SSC)

began an expansion program to acquire management

rights for additional mutual funds. To finance these

8 At its height, petitioner’s investment advisory Ore Tiiza-

tion had some $250 million of investor assets under manage-

ment (Supp. App. 21).

*Section 17(a) of the Securities Act of 1933, 15 U.S.C.

77q(a); Section 10(b) of the Securities Exchange Act, 15

U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-

5; Section 206(1) and (2) of the Investment Advisers Act,

15 U.S.C. 80b-6(1) and (2).

5 Section 17(a) of the Securities Exchange Act, 15 U.S.C.

78q (a), and Rule 17a-5 thereunder, 17 C.F.R. 240.17a-5; Sec-

tions 30(a) and 34(b) of the Investment Company Act, 15

U.S.C. 80a-29(a) and 80a-33(b).

® Sections 15(a) (1), 17(a) and 17(e) of the Investment

Company Act, 15 U.S.C. 80a-15(a) (1), 80a-17(a), and 80a-

17 (e).

7 Section 20(a) of the Investment Company Act, 15 U.S.C.

80a-20 (a).

acquisitions, SSC applied to Riggs for a $2 million loan.

Riggs turned down the request. Petitioner then arranged

a $3 million loan for SSC from the Chase Manhattan

Bank in New York. While the Chase loan was being

negotiated, petitioner recommended to the directors of

several of the mutual funds that the Funds should trans-

fer their bank accounts to Chase. The directors were told

that Chase’s fees were lower than Riggs’ and that there

had been “problems” with Riggs. The directors were

not told about the Chase loan to SSC. The directors there-

after approved the transfer of the Funds’ bank accounts

(Pet. App. 3-4).

Subsequently, Riggs called its personal loans to peti-

tioner, who then obtained a covering loan from the First

National Bank of Washington. That loan was also called

and petitioner was forced to negotiate a 90 day exten-

sion. Two days later, one of the Funds that petitioner

managed purchased a 90 day certificate of deposit from

First National in an amount larger than petitioner’s loan

(Pet. App. 4-5). To repay his loan to First National,

petitioner obtained yet another loan from the National

Bank of Washington. Shortly thereafter, bank accounts

for one of the Funds were transferred to that bank from

St. Louis. The directors of the Fund were not told about

the loan to petitioner when they approved the transfer.

None of the loans to petitioner and his corporations was

disclosed in the mutual funds’ prospectuses (ibid.).

In analyzing these transactions, the Commission ob-

served (Supp. App. 26-28; footnotes omitted) :

[I]t would, we think, have been obvious to anyone

(let alone someone with Steadman’s extensive legal

and financial experience) that the banking relation-

ships were of considerable moment to anyone trying

to formulate rational decisions about the investment

merits of the Steadman-managed funds. Steadman

had a self-interest in cultivating and mollifying the

banks from which he borrowed. That self-interest

[could have] led him to keep unduly large sums un-

necessarily idle in checking accounts to the banks’

benefit but to the funds’ detriment.*

The Commission also found that petitioner willfully con-

cealed these material facts and “intended to deceive”

(Supp. App. 50-53). It added that his “systematic, cal-

culated and protracted concealment of his collateral bank-

ing relationships is enough in itself to brand him an unfit

manager of other people’s money”’ (id. at 52-53).

The record disclosed other repeated and flagrant statu-

tory violations. Petitioner was found to be responsible

for the late filing of required annual reports for three

of the Funds in three consecutive years. The Commis-

sion noted that “[i]nm many instances the reports were

filed so late as to be of minimal value in serving the

purnoses intended by the requirements for filing the re-

ports” (Supp. App. 78). In fact, no reports at all were

filed during 1971 (id. at 78 n.67). Petitioner, who had

received repeated warnings from his auditors about re-

lated deficiencies (id. at 82), nonetheless “chose to save

money” by “flout{ing] basic regulatory requirements”

(id. at 83).°

8The Commission found it unnecessary to determine

whether petitioner actually used the banking accounts as a

quid pro quo for the loans made to him and his companies.

Rather, the Commission concluded (Supp. App. 28) that, re-

gardless of the connection between the loans and the transfer

of the banking accounts, petitioner “had disabled himself

from looking at the funds’ checking account balances in a

wholly disinterested way, with an eye single to the funds’

best interests.” Under these circumstances, petitioner was

required to disclose his serious conflicts of interest. The Com-

mission added that “it is hard to believe that there was no

link at all between the funds’ deposits and the benefits to

Steadman” (Supp. App. 38-39 n.15).

® The Commission added that “[t]he matter would be seri-

ous enough if we were dealing only with the respondents’

failure to file their own reports. But there is much more to

it than that. Many of the reports involved were due not

The Commission also found that petitioner had will-

fully violated, or willfully aided and abetted violations

of, various provisions of the Investment Company Act

intended to prevent self-dealing and conflicts of interest.

For example, petitioner arranged for SSC to defer re-

payment to the Funds of $260,000 in excess advisory

fees that it had received from the Funds (Supp. App.

67-73). The Commission found that “SSC very much

wanted to hold on to the money that it was supposed to

return to the investment companies” (id. at 70) and paid

the Funds an unfairly low interest rate (id. at 71). The

Commission also found that these self-dealing transac-

tions had been concealed (7d. at 72). Similarly, the Com-

mission found that petitioner had caused his brokerage

firm (RSC) to accept and retain certain tender solicita-

tion fees that rightfully belonged to the Funds (id. at

73-77) 2°

from them but from their investment company clients. They

were under fiduciary and contractual duties to those clients

to file the reports on time” (Supp. App. 85).

10In summary, the Commission found that (i) petitioner

violated antifraud, proxy, and reporting provisions by failing

to disclose the bank loans (Supp. App. 33-41) ; (ii) RSC, aided

and abetted by SSC and petitioner, wrongfully accepted and

retained solicitation fees paid by tender offerors to soliciting

brokers for the tender of securities held by the Funds in

violation of Section 17(e) of the Investment Company Act,

15 U.S.C. 80a-17(e) (Supp. App. 73-77); (iii) SSC violated

Section 15(a) (1) of the Investment Company Act, 15 U.S.C.

80a-15(a) (1), by failing promptly to remit to the Funds

excess advisory fees (Supp. App. 67-71); (iv) petitioner and

SSC violated various antifraud and reporting provisions by

failing to disclose to shareholders of the Funds that SSC had

retained these excess fees (Supp. App. 72-73) ; (v) petitioner

and SSC aided and abetted violations of Section 17(a) of the

Investment Company Act, 15 U.S.C. 80a-17(a), by causing

certain of the Funds to buy securities from and sell securities

to other Funds (Supp. App. 85-94); and (vi) petitioner,

SSC, and its subsidiaries violated Section 30(a) of the Invest-

In light of petitioner’s continuing “deceit” and “reckless

disregard of applicable filing requirements” (Supp. App.

95)—conduct that showed that he was a “faithless fidu-

ciary” (id. at 99)—the Commission determined that pe-

titioner should be barred from association with any in-

vestment adviser or registered investment company and

also should be suspended for one year from association

with any br_ker or dealer in securities (id. at 99-113).

The Commission explained that its debarment order was

subject to “modification” in the future if petitioner made

a showing entitling him to relief (id. at 119-120 n.100)."

In making the factual findings that supported its or-

der in this case, the Commission used the preponderance

of the evidence standard of proof (Supp. App. 97-99

n.88). It noted that “in remedial proceedings of this

character a preponderance of the evidence is sufficient

to establish the truth of an allegation” (ibid.).

3. The Decision of the Court of Appeals

Petitioner sought review of the Commission’s decision

in the United States Court of Appeals for the Fifth

ment Company Act, 15 U.S.C. 80a-29(a), and Section 17 (a)

of the Securities Exchange Act, 15 U.S.C. 78q(a), by failing

to file timely reports (Supp. App. 78-85).

11 Tn explaining the relative severity of its order, the Com-

mission stated that “[w]hen the misconduct is as egregious

as it is in this case, we must take effective measures to pro-

tect investors and the public interest from future harm

** *” Tt added that “[l]Jeniency in a case of this character

is bound to encourage irresponsibility, cavalier attitudes to-

ward basic disclosure obligations, and disregard for incon-

venient filing requirements” (Supp. App. 98-99). Neverthe-

less, the Commission gave petitioner 90 days in which to

divest his stock interests in the respondent companies, a

period of time that it found to be sufficient to locate a buyer

and avoid an economic loss (id. at 114). Compliance with

the Commission’s order has been stayed for over three years

pending completion of judicial review.

Circuit, contending, inter alia, that the Commission was

required to utilize the clear and convincing evidence

standard of proof rather than the preponderance of the

evidence standard in evaluating the record. The court of

appeals rejected that contention (Pet. App. 26). In hold-

ing that proof by a preponderance of the evidence was

sufficient, the court declined to follow Collins Securities

Corp. v. SEC, 562 F.2d 820, 824 (D.C. Cir. 1977), which

had required the clear and convincing evidence standard

in a Commission proceeding. Instead of following Collins,

the court of appeals applied the analysis set forth by

this Court in Addington v. Texas, 441 U.S. 418, 423-

433 (1979). Pursuant to Addington, it weighed the re-

spective interests of the parties to arrive at the proper

allocation of the risk of factual error (Pet. App. 26):

Balanced against the risk to Steadman is the risk

that the investing public will be inadequately pro-

tected. The public interest in high standards of con-

duct in the securities business is a great one. If the

burden of proof imposed on the Commission is too

high, its ability to police the industry is impaired.

We cannot say here, as the Court could in Adding-

ton v. Texas, id. at 427, * * * that “the possible in-

jury to the individual is significantly greater than

any possible harm to the state.”

Because the risk to petitioner that an erroneous finding

of fact would lead to his exclusion from the investment

advisory business did not outweigh the risk to investors

that such an error would permit a faithless fiduciary to

continue in his position of trust, the court held that it

was appropriate for both parties to bear the risk of error

equally through use of the preponderance of the evidence

standard (Pet. App. 26).

The court rejected the argument that clear and con-

vincing evidence is required in this context because some

of the charges against petitioner rested on violations of

antifraud provisions of the federal securities laws. The

court noted (Pet. App. 25) that Section 17(a) (2) and

(3) of the Securities Act, 15 U.S.C. 77q(a) (2) and (38),

and Section 206(2) of the Investment Advisers Ac’. ~5

U.S.C. 80b-6(2), relied on by the Commission in this

case,

are commonly called “antifraud” provisions, but the

offenses they define are fraud in the broadest “reme-

dial” sense of that term and require no showing of

intent to injure or injury. See SEC v. Capital Gains

Research Bureau, Inc., 375 U.S. 180, 195 * * *

(1963). The facts necessary to establish a violation

of these sections—nondisclosure of a material fact—

are capable of proof by ordinary direct or circum-

stantial evidence as in any other administrative pro-

ceeding.

The court of appeals expressed concern, however, about

the Commission’s justification for its selection of severe

sanctions in this case. Accordingly, the court remanded

the case to the Commission for a further explanation of

_its rationale for the particular sanctions imposed on pe-

titioner (Pet. App. 27) :

We subscribe to the common-sense notion that the

greater the sanction the Commission decides to im-

pose, the greater is its burden of justification. Where,

as here, the most potent weapon in the Commis-

sion’s “arsenal of flexible enforcement powers” * * *

is used, the Commission has an obligation to explain

why a less drastic remedy would not suffice.

SUMMARY OF ARGUMENT

Selection of the appropriate standard of proof in this

case requires a balancing of the individual interest as-

serted by petitioner and the interest sought to be pro-

tected by the Securities and Exchange Commission. When

both sides to a controversy have approximately equal

interests in avoiding erroneous factual findings, they

should “share the risk of error in roughly equal fashion”

under the traditional preponderance of the evidence

standard of proof. Addington v. Texas, 441 U.S. 418,

423 (1979). In this case, petitioner has presented no

valid reason why his interest in avoiding an erroneous

factual determination outweighs that of the investors

whom the Commission seeks to protect. Those investors

have entrusted petitioner with hundreds of millions of

dollars, and an accurate evaluation of petitioner’s fitness

to continue in his position of trust is of crucial impor-

tance to them. To put petitioner’s personal economic

interest ahead of that of his investor clients would con-

flict with elementary concepts of fiduciary duty embodied

in the federal securities laws.

The traditional standard of proof in civil litigation

is the fair preponderance of the evidence, a standard that

governs in proceedings brought under the antifraud pro-

visions of the federal securities laws and even in civil

penalty proceedings. That standard assures that decis-

ions in every case rest on the most likely and probable

factual inferences. In contrast, petitioner’s proposed

standard would mean that, in cases in which “clear and

convincing evidence” is unavailable, the public would be

denied protection even though each and every prerequisite

for extending that protection was established by the pre-

ponderating weight of the evidence. That result would

conflict with the need for accurate administrative adju-

dications. And considerations of fairness do not require

it. Fairness in the present context is guaranteed to

petitioner by his right to a trial-type hearing, with nu-

merous procedural safeguards, and subsequent judicial

review.

This case bears no resemblance to cases in which this

Court has required clear and convincing evidence. Peti-

tioner’s economic interest is not similar to that of per-

sons threatened with deportation or indefinite confine-

ment in a mental institution. Indeed, petitioner’s inter-

est is substantially less significant than the interest con-

sidered in Vance v. Terrazas, No. 78-1143 (Jan. 15,

1980). That case held that the Due Process Clause does

not require proof by clear and convincing evidence that

an individual intended to surrender United States citizen-

ship. Terrazas provides a fortiori support for the con-

clusion that the Due Process Clause does not require

clear and convincing evidence here.

The fact that clear and convincing evidence has been re-

quired in certain common law fraud cases is not relevant

to the issues presented in this case. This is a statutory

proceeding brought under remedial provisions of the fed-

eral securities laws, which is intended to protect investors

against future harm by removal of a dishonest trustee.

In such a context, common law fraud doctrines are not

pertinent. Moreover, the better considered common law

decisions recognize that it is inappropriate to create

special evidentiary advantages for those accused of fraud

to the detriment of those claiming to be their injured

victims, and therefore these authorities approve use of

the preponderance of the evidence standard in resolving

allegations of fravd.

Nor are petitioner’s contentions supported by the fact

that certain states require clear and convincing evidence

before disbarring attorneys. State authorities examine

attorneys to evaluate their professional competence, char-

acter, and fitness. By judicial order, attorneys are cer-

tified to be officers of the court. In contrast, the Com-

mission does not examine investment advisers to deter-

mine their competence or character. Accordingly, there

is no overriding presumption in favor of their adherence

to professional standards. Moreover, the better reasoned

state authorities recognize that, even in attorney dis-

barment proceedings, the public interest requires that the

decision of the disciplining body be rendered under the

fair preponderance standard, not the clear and convinc-

ing standard.

The fact that Commission adjudications may depend

on circumstantial or inferential proof is not a ground for

requiring clear and convincing evidence. This Court re-

peatedly has recognized that circumstantial evidence con-

tributes to reliable adjudications. Federal courts and

administrative agencies routinely consider circumstantial

evidence, along with direct evidence, under the preponder-

ance of the evidence standard.

II.

In the absence of Due Process constraints, a congres-

sional determination that a particular standard of proof

is applicable is entitled to judicial deference. See Vance

v. Terrazas, supra, slip op. 18-14. In the present con-

text, that standard of proof is the standard contained

in the Administrative Procedure Act. Section 7(c) of

the Act, 5 U.S.C. 556(d), provides that sanctions may

be imposed in administrative proceedings if the evidence

is “reliable, probative, and substantial.” The legislative

history confirms that Congress intended this language to

embody the traditional preponderance of the evidence

standard. See H.R. Rep. No. 1980, 79th Cong., 2d Sess.

37 (1946): “Where there is evidence pro and con, the

agency must weigh it and decide in accordance with the

preponderance.” In reliance on the APA, the Commis-

sion consistently has applied the preponderance of the

evidence standard in its adjudicatory proceedings.

III.

Even if the Administrative Procedure Act did not

prescribe a standard of proof, the Commission’s view

that proof by a preponderance is appropriate should be

upheld. As this Court noted in Mathews v. Eldridge,

424 U.S. 319, 349 (1976), “substantial weight must be

given to the good-faith judgments of the [persons]

charged by Congress with the administration of [the stat-

ute] that the procedures they have provided assure fair

consideration of the * * * claims of individuals.” This

Court also confirmed in Vermont Yankee Nuclear Power

Corp. Vv. Natural Resources Defense Council, 435 U.S. 519,

524 (1978), that the APA prescribes “the maximum pro-

cedural requirements which Congress was willing to have

the courts impose upon agencies Accordingly,

“Talgencies are free to grant additional procedural rights

in the exercise of their discretion, but reviewing courts

are generally not free to impose them if the agencies

have not chosen to grant them.”

In view of these principles, this Court should affirm

the Commission’s reasonable determination that the pre-

ponderance of the evidence standard of proof, which re-

quires securities industry fiduciaries to share equally

with investors the risk of an erroneous factual finding,

is the standard that governs in this administrative

proceeding.

* + & 99

ARGUMENT

THE SECURITIES AND EXCHANGE COMMISSION

APPROPRIATELY UTILIZED THE PREPONDER-

ANCE OF THE EVIDENCE STANDARD OF PROOF

IN THIS ADMINISTRATIVE PROCEEDING

I. A Proper Balancing of the Public and Private Interests

in This Case Requires Use of the Preponderance of

the Evidence Standard

Following an extensive administrative hearing in which

petitioner’s right to present evidence and to confront the

evidence against him was scrupulously respected, the

Commission determined that petitioner had committed

numerous violations of, and that sanctions should be im-

posed under, the federal securities laws, including the

Investment Advisers Act and the Investment Company

Act. As this Court repeatedly has stated, these statutes

were adopted by Congress to establish “federal fiduciary

standards” to govern the conduct of investment ad-

visers.'* Despite the fact that petitioner is a fiduciary

12 Aaron V. SEC, No. 79-66 (June 2, 1980), slip op. 11-12;

Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11,

17 (1979); Burks v. Lasker, 441 U.S. 471, 481-482 n.10

(1979) ; Santa Fe Industries, Inc. v. Green, 480 U.S. 462, 471

n.11 (1977) ; SEC v. Capital Gains Research Bureau, Inc., 375

and was proceeded against under statutory provisions in-

tended to protect investors against misconduct by their

fiduciaries, petitioner claims (Br. 7-15) that the stand-

ard of proof in such a proceeding should allocate a much

greater risk of error to investors than to himself. There

is no support for such a paradoxical contention.

As this Court observed in Addington v. Texas, 441

U.S. 418, 423 (1979), the standard of proof utilized in

a trial-type proceeding “serves to allocate the risk of

error between the litigants.” Under the traditional pre-

ponderance of the evidence standard, the parties bear

roughly the same risk of error. A standard of proof more

stringent than the traditional preponderance standard

protects the favored party against an erroneous decision

that is adverse to him, but increases the overall likeli-

hood of an erroneous decision. This special measure of

protection at the cost of increased error is tolerable only

“when the possible injury to the individual is significantly

greater than any possible harm to the state.” Jd. at 427.

Where, as here, the interests of the fiduciary do not out-

weigh the interests of the class of investors that the gov-

ernment seeks to protect, there is no valid reason for

adopting a standard of proof that would shift the risk

of error from the fiduciary and expose his beneficiaries

to an increased number of decisional errors.

Unless the premise is accepted that the securities laws

are designed to protect those with fiduciary obligations

rather than their investor beneficiaries—or, stated other-

wise, that it is better that several dishonest trustees re-

main in their position of trust than that one honest

trustee should be mistakenly removed—there is no plau-

sible basis for holding that the Commission must utilize

U.S. 180, 191-192 (1963). It has likewise been recognized in

proceedings under the Securities Act and the Securities Ex-

change Act that fiduciary obligations rest on broker-dealers.

See, e.g., Mansbach v. Prescott, Ball & Turben, 598 F.2d

1017, 1026 (6th Cir. 1979); Sinclair v. SEC, 444 F.2d 399,

400 (2d Cir. 1971).

a standard of proof more stringent than the preponder-

ance standard. In the present context, a standard of

proof that asks the fiduciary “to share equally with so-

ciety the risk of error” (Addington v. Texas, supra, 441

U.S. at 427) is generous to the fiduciary and cannot

be questioned on grounds of accuracy or fairness.

A. The Traditional Preponderance of the Evidence

Standard of Proof is Needed to Minimize Decisional

Errors

Contrary to petitioner’s contention (Br. 7, 10, 14-15),

use of a “clear and convincing evidence” standard of

proof would not contribute to factual accuracy. To the

contrary, the preponderance standard of proof is the

standard best calculated to arrive at correct factual de-

terminations. Moreover, contrary to the assertion of

amicus Securities Industry Association (SIA Br. 8), the

overwhelming weight of judicial precedent supports the

proposition that the preponderance standard governs here.

With the exception of certain recent decisions of a

single court of appeals (see Collins Securities Corp. Vv.

SEC, 562 F.2d 820 (D.C. Cir. 1977); Whitney v. SEC,

604 F.2d 676 (D.C. Cir. 1979)), the lower courts con-

sistently have held that administrative adjudications un-

der the federal securities laws do not require a standard

of proof greater than the preponderance standard.'* The

lower courts have reached the same result in other ad-

13Tn addition to the decision of the Fifth Circuit in the

present case, see Investors Research Corp. v. SEC, [Current]

Fed. Sec. L. Rep. (CCH) {| 97,526 at 97,753 n.41 (D.C. Cir.

1980), petition for cert. pending, No. 80-128; Abbett, Sommer

& Co. v. SEC, [1970-1971] Fed. Sec. L. Rep. (CCH) % 92,813

(D.C. Cir. 1970), cert. denied, 401 U.S. 974 (1971) ; DeMam-

mos V. SEC, 23 Ad. L.2d 221 (2d Cir. 1967), aff’g 43 S.E.C.

333, 337 (1967); Wright v. SEC, 112 F.2d 89, 94 (2d Cir.

1940). See also Public Service Corp. v. SEC, 129 F.2d 899,

902 (3d Cir.), cert. denied, 317 U.S. 691 (1942) ; Pacific Gas

& Electric Co. v. SEC, 127 F.2d 378, 382 (9th Cir. 1942).

ministrative contexts, concluding that a preponderance

of the evidence is sufficient."

It is likewise well established that issues of fact in

civil actions generally are determined in accordance

with the preponderance of the evidence.** Not only has

the traditional civil standard—the preponderance of evi-

dence—been routinely employed by federal courts in civil

actions arising under the securities laws,’® but its use

14 See Martinez v. Blum, No. 80-6002 (2d Cir. June 9,

1980), slip op. 3429 (rejecting the contention that termina-

tion of AFDC benefits must be supported by clear and con-

vincing evidence) ; Walters v. McLucas, 597 F.2d 1230, 1282

(9th Cir.), cert. denied, 444 U.S. 932 (1979) (approving

the preponderance of the evidence standard in an FAA

proceeding to revoke a private pilot’s license based on viola-

tions of aviation regulations and a prior drug conviction) ;

Alsbury v. United States Postal Service, 5380 F.2d 852, 855

(9th Cir.), cert. denied, 429 U.S. 828 (1976) (discharge of

postal employee for unlawful removal of government prop-

erty) ; Polcover v. Secretary of the Treasury, 477 F.2d 1223,

1231 (D.C. Cir.), cert. denied, 414 U.S. 1001 (1973) (removal

of IRS agent from employment for accepting bribe) ; Cargill,

Inc. V. Hardin, 452 F.2d 1154, 1169 (8th Cir. 1971), cert.

denied, 406 U.S. 932 (1972) (manipulation of price of wheat

futures); Kent v. Hardin, 425 F.2d 1846, 1349 (5th Cir.

1970) (suspension of commodities broker).

15 See Addington v. Texas, 441 U.S. 418, 423 (1979); New

York Life Ins. Co. v. Gamer, 303 U.S. 161, 171 (1938);

Fidelity Mutual Life Ass’n v. Mettler, 185 U.S. 308, 317

(1902). It makes no difference that a civil proceeding is

“penal” in nature. As this Court held in United States v.

Regan, 232 U.S. 37, 48-50 (1914), in penalty proceedings “the

true measure of persuasion is * * * the preponderating weight

of the evidence.” See also United States v. Ward, No. 79-394

(June 27, 1980), slip op. 5-6.

16 See Mihara v. Dean Witter & Co., [Current] Fed. Sec.

L. Rep. (CCH) {97,508 at 97,662 (9th Cir. 1980); SEC v.

Savoy Industries, Inc., 587 F.2d 1149, 1168-1169 (D.C. Cir.

1978), cert. denied, 440 U.S. 913 (1979); SEC v. Gilbert, 79

in Commission actions to enjoin violations of the registra-

tion and antifraud provisions of the federal securities

laws has been expressly approved by this Court. See

SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 355

(1943). As the Court held in Joiner, “[w]here * * *

proof is offered in a civil action, as here, a preponderance

of the evidence will establish the case * * *.”™

Very weighty interests—interests at least as substan-

tial as the economic interests asserted by petitioner—

are customarily adjudicated in civil proceedings under

the preponderance of the evidence standard. No one has

ever doubted that in a class action for treble damages

brought under the antitrust laws, or in a corporate di-

vestiture proceeding brought under the Federal Trade

Commission Act, or a school desegregation case brought

under the Fourteerth Amendment, the standard of proof

is the preponderance of the evidence. Indeed, the deci-

sions of this Court recognize that the preponderance

of the evidence standard governs even in certain phases

of criminal proceedings that may be fundamental to the

F.R.D. 683, 686 (S.D.N.Y. 1978); University Hill Founda-

tion v. Goldman, Sachs & Co., 422 F. Supp. 879, 897 (S.D.N.Y.

1976) ; Ronson Corp. v. Liquifin Aktiengesellschaft, 370 F.

Supp. 597, 602 (D.N.J.), aff’d, 497 F.2d 394 (8d Cir.), cert.

denied, 419 U.S. 870 (1974).

17 The present enforcement case was brought as an admin-

istrative proceeding before the Commission. The Commission

is also authorized by statute to bring enforcement cases as

injunctive actions in federal court, and may determine, in its

discretion, the forum or forums in which to proceed. See

Section 20(b) of the Securities Act, 15 U.S.C. 77t(b) ; Section

21(d) of the Securities Exchange Act, 15 U.S.C. 78u(d) ; Sec-

tion 42(e) of the Investment Company Act, 15 U.S.C. 80a-

41(e); Section 209(e) of the Investment Advisers Act, 15

U.S.C. 80b-9(e). An injunction restrains future unlawful

conduct. If it appears that an appropriate sanction in the

public interest would be the temporary or indefinite removal

of a person from a position of trust in the securities industry,

an administrative proceeding is the appropriate vehicle.

outcome of the litigation. For example, the voluntariness

of a confession need be shown only by a preponderance

of the evidence. See Lego v. Twomey, 404 U.S. 477

(1972).

The reason for this is plain. The preponderance stan-

dard insures that the adjudication rests on the most

likely and probable view of the facts.'* Applying a higher

standard, such as the clear and convincing evidence

standard, would mean that even though the party seek-

ing a remedy had established that it was more likely than

not that each and every prerequisite for the remedy was

satisfied, the remedy must be denied if “clear and convinc-

ing’ evidence was not available. As Professor Davis has

recently observed, this is “inconsistent with accuracy.”

2 Administrative Law Treatise 319 (2d ed. 1979). Such

a result should be avoided since “the function of legal

process is to minimize the risk of erroneous decisions.”

Addington v. Texas, supra, 441 U.S. at 425; accord,

Greenholtz v. Nebraska Penal Inmates, 442 U.S. 1, 18

(1979).

In sum, acceptance of petitioner’s claim in this case

would interject serious inaccuracy in the administra-

tive process. As we demonstrate below, it would also con-

flict with elementary considerations of fairness.

B. Use of the Traditional Preponderance of the Evi-

dence Standard is Required by Considerations of

Fairness

At bottom, petitioner’s argument is that even though

his proposed standard of proof would increase the total

number of decisional errors, it should be adopted because

18 “Wile want the correct result as often as possible and

that means that preponderance of the evidence is only 50%

plus. Imposing a greater disadvantage [on one party] would

tend to cause more incorrect decisions than correct ones.”

Winter, The Jury and the Risk of Nonpersuasion, 5 Law &

Soc. Rev. 335, 337 (1970-1971). See also Ball, The Moment of

Truth: Probability Theory and Standards of Proof, 14 Vand.

L. Rev. 807, 816-817 (1961).

it reduces the likelihood of a particular kind of error—

incorrect decisions that are adverse to investment ad-

visers. According to this argument, it is appropriate

that investors bear a disproportionate risk of error be-

cause investment advisers have a substantial economic

stake in continuing their business operations and avoid-

ing sanctions (Br. 5, 15). This line of argument, how-

ever, stands the traditional concept of fiduciary duty on

its head and runs counter to the basic purpose of the

federal securities laws. Moreover, the argument ignores

the fact that fairness to investment advisers is assured

by the comprehensive procedural safeguards prescribed

by Congress and the Commission in cases of this kind.

1. Under the analysis of Addington v. Texas, supra,

441 U.S. at 423-427, selection of the appropriate standard

of proof requires a balancing of the individual interest

and the interest sought to be protected by the govern-

ment. The Court noted in Addington that “the individ-

ual should not be asked to share equally with society the

risk of error when the possible injury to the individual is

significantly greater than any possible harm to the state”

(id. at 427). However, when both sides to the controversy

have approximately equal interests in avoiding errors,

they should “share the risk of error in roughly equal

fashion” (td. at 423). The Court also noted that “stan-

dards of proof are important for their symbolic meaning

as well as for their practical effect” (id. at 426).

In this case, it is not difficult to identify the correct bal-

ance of interests. Petitioner is a fiduciary and the proceed-

ing against him seeks to protect his beneficiaries against

continuing deception and flagrant disregard of legal re-

quirements. The fiduciary principle requires that the in-

terests of petitioner’s beneficiaries come first. This is

the substance of the common law of fiduciary duty '® and

is also basic to the federal securities laws.*° In short,

19 See Scott, The Fiduciary Principle, 37 Calif. L. Rev. 539, .

540 (1949).

20 Congress declared in Section 1(b) of the Investment

Company Act, 15 U.S.C. 80a-1(b), that the public interest is

considerations of fairness strongly support use of the

traditional preponderance of the evidence standard in

this context. Indeed, application of that standard to a

fiduciary charged with self-dealing is generous. Tradi-

tionally in such cases the fiduciary bears the burden of

proof (see page 32, infra). Imposition of a clear and

convincing evidence standard here, which would create

special evidentiary protections for investment advisers at

the expense of their beneficiaries, would undermine the

purpose of the federal securities laws and convey a wholly

inappropriate “symbolic meaning” to investors and securi-

ties professionals. alike. Addington v. Texas, supra, 441

U.S. at 426.72

adversely affected when investment companies “are orga-

nized, operated, managed, or their portfolio securities are

selected, in the interest of directors, officers, investment ad-

visers, depositors, or other affiliated persons thereof, * * *

rather than in the interest of all classes of such companies’

security holders.” Congress there also declared that it is con-

trary to the public interest to deny investors in investment

companies “‘adequate, accurate, and explicit information, fairly

presented, concerning the character of such securities and

the circumstances, policies, and financial responsibility of such

companies and their management * * *.”” Moreover, Congress

intended Commission administrative proceedings to be pro-

phylactic proceedings to ensure adherence to high standards

of integrity. See Blaise D’Antoni & Associates, Inc. v. SEC,

289 F.2d 276, 277 (5th Cir.), rehearing denied, 290 F.2d 688,

cert. denied, 368 U.S. 899 (1961) ; Associated Securities Corp.

v. SEC, 283 F.2d 778, 775 (10th Cir. 1960). In this context,

“broad discretionary powers in the [Commission] ‘have been

found practically essential.’ ”’ Superintendent of Insurance V.

Bankers Life & Cas. Co., 404 U.S. 6, 12 (1971). As this

Court has emphasized, the “federal fiduciary standards” that

govern the conduct of investment advisers were intended by

Congress to be “enforceable fiduciary obligations.” Trans-

america Mortgage Advisors, Inc. v. Lewis, supra, 444 U.S. at

17.

21 Since the trier of fact here is a government agency

rather than a lay jury, there is no need to impose a clear

Turning from legal principle to the respective eco-

nomic interests in this case, it is also plain that the in-

terests of investment advisers do not outweigh those

of public investors. Petitioner undoubtedly has a strong

interest in avoiding an erroneous factual determination

that could lead to his debarment. But that interest

scarcely outweighs the interest of public investors—who

at one point entrusted petitioner with $250 million

—in obtaining an accurate evaluation of the fitness

of their fiduciary to continue in his position of trust.

As the court of appeals explained (Pet. App. 26): “The

public interest in high standards of conduct in the se-

curities business is a great one.” In these circumstances,

petitioner can hardly complain that the law requires him

to “share the risk of error in roughly equal fashion”

(441 U.S. at 423).

As the court of appeals observed, there is a substan-

tial risk that the investing public would be inadequately

protected under a clear and convincing evidence standard

(Pet. App. 26). Contrary to the sugestion in petitioner’s

brief that application of the more stringent standard

would not significantly impede the enforcement of the

securities laws (Br. 8-10), the Commission would not be

likely to expend its limited resources in initiating meri-

torious cases in which it was possible that clear and con-

vincing evidence would not be available. And, in those

cases that were brought, the Commission would be forced

to withhold sanctions needed to protect investors even

though every prerequisite for relief was established by a

fair preponderance of the evidence, should that evidence

not clearly and convincingly show each required element.

In this context, the potential harm to petitioner is not

and convincing evidence standard to impress upon the agency

the importance of the proceeding. In fact, the Commission

expressly recognized the serious consequences of the pro-

ceeding and the need for procedural fairness: “Though these

proceedings are not criminal, they are intensely serious. And

we take them very seriously indeed” (Supp. App. 105-106

n.91).

“significantly greater” than the harm to the investing

public (Addington v. Texas, supra, 441 U.S. at 427),

and the traditional preponderance of the evidence stan-

dard accordingly applies. See Comment, Scope of Review

or Standard of Proof—Judicial Control of SEC Sanctions,

93 Harv. L. Rev. 1845, 1854 (1980).”

2. Petitioner’s claim that this Court should impose an

extraordinary standard of proof to promote fairness is

particularly untenable in view of the broad range of

procedural safeguards that are afforded to respondents in

administrative proceedings before the Commission. In the

present case, for example, petitioner had a full hearing,

was represented by sophisticated counsel, and exercised

his right to cross-examine and confront opposing wit-

nesses. He received the benefit of the imposition on the

Commission’s staff of the burden of proving that he will-

fully violated the federal securities laws. He had the right

to testify in his own behalf—which he chose not to exer-

cise—and to present other evidence in his defense. He

appealed his case to the Commission and received an inde-

pendent review of the factual record. He also utilized his

right to brief the legal and factual issues in the case and

22 Vigorous government enforcement of the federal securi-

ties laws to protect the clients of investment advisers is par-

ticularly important in view of the limited availability of

private remedies. See, e.g., Transamerica Mortgage Advisors,

Inc. Vv. Lewis, supra. The economic consequences of lax en-

forcement in this area can scarcely be overstated. According

to estimates prepared in connection with the Commission’s

budget submission to Congress for the fiscal year ending Sep-

tember 30, 1982, assets currently under advisement by regis-

tered investment advisers total approximately $600 billion.

Evidentiary rules that would prevent the Commission from

disciplining dishonest fiduciaries in this industry would sub-

vert the congressional purpose to “ ‘achieve a high standard

of business ethics * * * in every facet of the securities in-

dustry.’ ”’ United States v. Naftalin, 441 U.S. 768, 775 (1979) ;

SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180,

186-187 (1963).

present oral argument. Following the Commission’s deci-

sion, he obtained judicial review that afforded him a re-

newed opportunity to contest the substantiality of the evi-

dence, the propriety of the Commission’s procedures, the

correctness of the Commission’s interpretation of the fed-

eral securities laws, and the sufficiency of the Commis-

sion’s justification for the sanctions imposed.

This extended hearing procedure guaranteed the ac-

euracy and fairness of the ultimate result. As Justice

Frankfurter observed in his concurring opinion in Joint

Anti-Fascist Refugee Committee v. McGrath, 341 U.S

128, 171-172 (1951): “No better instrument has been de-

vised for arriving at truth than to give a person in

jeopardy of serious loss notice of the case against him

and opportunity to meet it.” While the decisions of this

Court confirm that “some form of hearing is required be-

fore an individual is finally deprived of a property in-

terest” (Mathews v. Eldridge, 424 U.S. 319, 333 (1976) ),

the procedural requirements in such a hearing are “flex-

ible” (id. at 334). This Court has recognized that “[a]t

some point the benefit of an additional safeguard to the

individual affected by the administrative action * * * may

be outweighed by the cost” (id. at 348). “All that is

necessary is that the procedures be tailored, in light of

the decision to be made, to ‘the capacities and circum-

stances of those who are to be heard,’ * * * to insure

that they are given a meaningful opportunity to present

their case” (id. at 349). See Arnett v. Kennedy, 416

U.S. 134, 155 (1974) (dismissal of federal employee) ;

Goldsmith v. United States Board of Tax Appeals, 270 U.S.

117, 123 (1926) (denial of admission to practice and dis-

barment of accountants). See also Greenholtz v. Ne-

braska Penal Inmates, supra, 442 U.S. at 12-13, noting

that due process “is flexible and calls for such procedural

protections as the particular situation demands.”

In sum, petitioner had the opportunity to assure that

the determination in this case was not based on a mis-

taken understanding of the facts. The extensive pro-

cedural protections granted to him resulted in a disposi-

tion that was both fair and accurate. His claim that, in

addition to these procedural safeguards, he was entitled

to a standard of proof that would distort the accuracy of

the fact-finding process is an extravagant assertion that

finds no support in the requirements of the Due Process

Clause or the federal securities laws.”*

C. This Proceeding Does Not Involve a Constitutional

Right or Extraordinary Interest That Would Dic-

tate Use of a Higher Standard of Proof

As previously noted, this Court’s decisions recognize

that the fair preponderance of the evidence standard gov-

erns in most civil cases, including civil cases involving

allegations of fraud under the federal securities laws and

23 Under the Securities Exchange Act, national securities

exchanges and national securities associations, in addition to

the Commission, are authorized to conduct proceedings to

resolve charges that securities industry personnel have vio-

lated the securities laws, including the antifraud provisions,

and to impose sanctions, including suspension or debarment

from positions in the industry. The legislative history of the

1975 Amendments to the Securities Exchange Act, Pub. L.

No. 94-29, 89 Stat. 97, demonstrates that Congress deliberately

prescribed for these disciplinary hearings only those proce-

dures basic to “fundamental standards of due process.” S. Rep.

No. 94-75, 94th Cong., 1st Sess. 29 (1975). A requirement that

self-regulatory bodies conducting disciplinary proceedings ap-

ply a standard of proof more stringent than the traditional

preponderance of the evidence was not one of the require-

ments that Congress deemed necessary to satisfy due process.

Rather, self-regulatory organizations are required to lodge

specific written charges; give notice of those charges; provide

an opportunity to defend; compile a record; and specify in

any adverse determination the acts that constitute the viola-

tion, the statutory provision violated, the sanction imposed,

and the reasons therefor. See Sections 6(d) (1) and 15A (h)

(1) of the Securities Exchange Act, 15 U.S.C. 78f(d) (1) and

780-3(h) (1). See also 2 K. Davis, Administrative Law

Treatise 325-328, 499-504, 509-512 (2d ed. 1979).

even civil cases seeking to impose substantial penalties

on those who violate the law. See pages 17-19, supra;

see also McCormick on Evidence § 399 (2d ed. 1972).

Those exceptional situations in which a higher standard

has been employed differ fundamentally from the present

case and highlight the inappropriateness of using a clear

and convincing evidence standard here. For example, the

First Amendment rights of newspapers demand proof by

clear and convincing evidence before a publisher may be

found liable for reckless or knowing defamation. New

York Times Co. v. Sullivan, 376 U.S. 254, 280, 285-286

(1964). Plainly, the public interest in removing faithless

trustees far exceeds the public interest in providing pri-

vate compensation in libel cases. Similarly, clear and con-

vineing evidence is required before an individual is

stripped of personal freedom and confined indefinitely in

a mental institution (Addington v. Texas, supra), and

before an individual can be forced to endure the “drastic

deprivations” of deportation (Woodby v. INS, 385 U.S.

276, 285 (1966)). The effect on petitioner of indefinite

debarment from a segment of the securities industry can-

not be compared to the drastic deprivations in those cases.

Nor can the compelling societal interest in obtaining a

correct evaluation of the honesty of a trustee managing

hundreds of millions of dollars of other people’s money

be compared to the societal interest in expelling an in-

dividual alien or committing a citizen to a mental insti-

tution.

This Court’s latest pronouncement on the clear and

convincing evidence standard demonstrates that there

is no merit to petitioner’s claim that the severity of the

sanction against him requires such a standard of proof.

In Vance v. Terrazas, No. 78-1143 (Jan. 15, 1980), slip

op. 13-14, this Court held that the Due Process Clause

does not require the clear and convincing evidence stan-

dard even when the proceeding has a potential result as

harsh as expatriation. The Court explained in Terrazas

that, while “in criminal and involuntary commitment

contexts we have held that the Due Process Clause im-

poses requirements of proof beyond a preponderance of

the evidence,” expatriation proceedings “are civil in na-

ture and do not threaten a loss of liberty.” A fortiori,

the interest of petitioner in maintaining his position in

the securities industry is not so compelling as to require

an extraordinary standard of proof. Petitioner’s asser-

tion that his right to pursue his “chosen occupation” is

at risk (Br. 8) is far less weighty than Terrazas’ asser-

tion that his right to remain a United States citizen was

at risk.

The Commission’s order in this case bars petitioner

from future association with investment advisers and in-

vestment companies. He has profitably engaged in that

occupation in the past but repeatedly has failed to main-

tain the standards of honesty that are the preconditions

for retaining his position of trust. See generally Arnett

v. Kennedy, supra, 416 U.S. at 151-157. The sanction im-

posed in this case can be modified by the Commission if

petitioner establishes that it is no longer needed to pro-

tect the public interest (see note 37, infra).

Imposition by this Court of an extraordinary standard

of proof in the present case would have a fundamentally

unsettling effect on civil litigation in general and ad-

ministrative proceedings in particular. In most impor-

tant cases, arguments can be made that the proceeding in-

volves .a potential “stigma” (for example, a case of de-

ceptive advertising under the Federal Trade Commission

Act), that the proceeding threatens loss of the right

to pursue one’s “chosen occupation” (for example, the

discharge of a federal employee based on dishonest acts

or the revocation of a pilot’s license based on reckless

conduct), or that the proceeding involves significant

“financial losses” (for example, a civil divestiture suit

brought by the Department of Justice). These consid-

erations do not, however, give rise to the special concern

for personal liberty or protection of fundamental rights

that has led the Court to require clear and convincing

evidence in past cases. Indeed, even where “civil suits

involve the proof of acts which expose the party to a

criminal prosecution * * * proof by a reasonable pre-

ponderance of the evidence is sufficient.” United States

v. Regan, 232 U.S. 37, 49 (1914), cited with approval in

United States v. Ward, No. 79-394 (June 27, 1980), slip

op. 5-6.

D. A Higher Standard of Proof is not Required Simply

Because This Proceeding Involves Charges of Vio-

lations of the Antifraud Provisions of the Federal

Securities Laws

Petitioner also argues (Br. 15, 24) that clear and

convincing evidence is required because he was charged

with violating antifraud provisions of the federal securi-

ties laws. That argument is meritless for reasons that

already have been mentioned. This Court has held that

a “preponderance of the evidence” suffices in a civil pro-

ceeding alleging antifraud violations. See SEC v. C.M.

Joiner Leasing Corp., supra, 320 U.S. at 355. There is,

moreover, a still more fundamental defect in petitioner’s

argument. This proceeding presents no analogy to a com-

mon law fraud action. This is a statutory proceeding de-

signed to protect investors against future harm. Finally,

even if common law fraud cases were relevant here, the

better considered decisions in that context recognize that

the preponderance of the evidence standard governs.

1. The antifraud provisions of the federal securities

laws are not coextensive with common law doctrines of

fraud and deceit. See generally Blue Chip Stamps v.

Manor Drug Stores, 421 U.S. 723, 744-745 (1975). Con-

gress enacted the federal securities laws to remedy in-

adequacies in the common lew. “A fundamental purpose,

common to [the federal securities] statutes, was to sub-

stitute a philosophy of full disclosure for the philosophy

of caveat emptor and thus to achieve a high standard of

business ethics in the securities industry.” SEC v. Cap-

ital Gains Research Bureau, Inc., supra, 375 U.S. at 186.

Far from limiting its protections to those provided at

common law, the Investment Advisers Act reflects “ ‘a

congressional intent to eliminate, or at least to expose,

all conflicts of interest which might incline an investment

adviser—consciously or unconsciously—to render advice

which was not disinterested.’” Aaron v. SEC, No. 79-66

(June 2, 1980), slip op. 11-12, quoting SEC v. Capital

Gains Research Bureau, Inc., supra, 375 U.S. at 191-192.

In Capital Gains, an injunctive action brought by the

Commission against an investment adviser who had com-

mitted antifraud violations, the defendants argued that

the Commission must prove the violations by clear and

convincing evidence. A panel of the court of appeals ac-

cepted that argument. SEC v. Capital Gains Research

Bureau, Inc., 300 F.2d 745, 747 (2d Cir. 1961). While

this Court did not address that specific issue when it

reversed the decision of the court of appeals, it rejected

the entire premise on which the argument was based—

i.e., that the antifraud provisions of the federal securi-

ties laws, particularly those in the Investment Advisers

Act, are circumscribed by rigid common law fraud doc-

trines. The Court explained (375 U.S. at 194-195) (em-

phasis supplied) :

Courts have imposed on a fiduciary an affirmative

duty of “utmost good faith, and full and fair dis-

closure of all material facts,” as well as an affirma-

tive obligation. “to employ reasonable care to avoid

misleading” his clients. * * *

We cannot assume that Congress, in enacting legis-

lation to prevent fraudulent practices by investment

advisers, was unaware of these developments in the

common law of fraud. Thus, even if we were to

agree with the courts below that Congress had in-

tended, in effect, to codify the common law of fraud

in the Investment Advisers Act of 1940, it would

be logical to conclude that Congress codified the com-

mon law “remedially” as the courts had adapted it

to the prevention of fraudulent securities transac-

tions by fiduciaries, not “technically” as it has tra-

ditionally been applied in damage suits between

parties to arm’s-length transactions involving land

and ordinary chattels.**

In an earlier case, the D.C. Circuit correctly rejected

the argument that common law doctrines of fraud apply

in administrative proceedings instituted by the Com-

mission to revoke the registration of broker-dealers who

violate the antifraud provisions of the federal securities

laws. To accept such an argument, the court noted,

“would be to adopt the fallacious theory that Congress

enacted existing securities legislation for the protection

of the broker-dealer rather than for the protection of the

public.” Norris & Hirshberg, Inc. v. SEC, 177 F.2d 228,

233 (D.C. Cir. 1949).

These considerations apply here and require rejection

of petitioner’s argument that clear and convincing evi-

dence must be presented in an administrative proceeding

of this kind.

2. Petitioner’s reliance on common law fraud decisions

is also unavailing because the better considered common

law authorities approve the preponderance of the evi-

dence standard rather than the clear and convincing evi- .

dence standard. As this Court observed in SEC v. Capi-

tal Gains Research Bureau, Inc., supra, 375 U.S. at 194:

There has also been a growing recognition by com-

mon-law courts that the doctrines of fraud and de-

ceit which developed around transactions involving

land and other tangible items of wealth are ill-suited

to the sale of such intangibles as [investment] ad-

vice and securities, and that, accordingly, the doc-

trines must be adapted to the merchandise in issue.

24 Accord, Hughes v. SEC, 174 F.2d 969 (D.C. Cir. 1949) ;

Charles Hughes & Co. v. SEC, 189 F.2d 434 (2d Cir.), cert.

denied, 321 U.S. 786 (1943) ; see 3 L. Loss, Securities Regula-

tion 1485 (2d ed. 1961).

Thus, some state courts have declined to apply a more

stringent standard of proof in cases involving allegations

of fraud when securities were involved or when viola-

tions of state blue sky laws were at issue.** Moreover,

it is generally recognized that a high standard of proof

is not appropriate in cases involving claims of breach

of fiduciary duty. Once a fiduciary relationship and self-

dealing by the fiduciary have been shown, the burden

shifts to the fiduciary to prove that the transaction was

lawful and that he has not abused the relationship.”°

Furthermore, even outside the area of securities fraud

and fraud by fiduciaries, “/t]he policy of placing such

a special burden [the clear and convincing evidence re-

quirement] on one who claims to be the victim of fraud is

debatable.” McCormick on Evidence, supra, § 340, at 797

n.74. The better reasoned state court decisions hold that

there is no sound reason for according special evidentiary

25 See, e.g., S&F Supply Co. v. Hunter, 527 P.2d 217, 220-

221 (Utah 1974) (to obtain redress under state antifraud

provisions plaintiff must show elements of the violation by a

preponderance of the evidence). See also 11C (Part 2) H.

Sowards & N. Hirsch, Business Organizations, Blue Sky

Regulation § 6.01, at 6-4 to 6-5 (1979) (footnote omitted) :

The nature of the blue sky laws virtually demands that

they be liberally interpreted in order to effectuate the

antifraud purposes. This * * * has altered the principle

governing the weight of evidence in civil cases. * * *

[F]raud actions brought under the blue sky laws have

been decided in some states according to a fair pre-

ponderance of the evidence, which has been described as

a probability of belief by triers of fact.

26 Garrett v. Moore-McCormick Co., 317 U.S. 239, 247

(1942) ; Geddes v. Anaconda Copper Mining Co., 254 USS.

590, 599 (1921) ; Francois v. Francois, 599 F.2d 1286, 1290-

1293 (3d Cir. 1979), cert. denied, No. 79-5548 (Jan. 7, 1980) ;

Nedd v. UMW, 556 F.2d 190, 210 (3d Cir. 1977), cert. denied,

434 U.S. 1013 (1978) ; Ohio Drill & Tool Co. v. Johnson, 498

F.2d 186, 195 (6th Cir. 1974). -

benefits to those accused of fraud at the expense of those

claiming to be their injured victims, and they have ex-

plicitly adhered to the preponderance of the evidence

standard of proof when fraud is at issue.*’ Likewise, a

substantial number of authorities, including those avail-

able at the time when the federal securities laws were

enacted, acknowledge that the preponderance of the evi-

dence standard applies in most civil actions involving al-

legations of fraud.** As one commentator explained:

Parties engaged in fraudulent schemes always resort

to the use of legal forms, as far as possible, to cover

their purposes; and hence it would often be expecting

27 ARKANSAS: Ray Dodge, Inc. v. Moore, 251 Ark. 1036,

1041, 479 S.W2d 518, 521-522 (1972); CALIFORNIA:

Liodas v. Sahadi, 562 P.2d 316, 321-323, 1387 Cal. Rptr. 635,

639-643 (1977); COLORADO: Goodfellow v. Kattnig, 533

P.2d 58, 60 (Colo. App. 1975); FLORIDA: Rigot v. Bucci,

245 So.2d 51, 53 (1971) ; Blaeser Development Corp. v. First

Federal Savings & Loan Ass’n, 375 So.2d 1118 (Fla. App.

1979) ; INDIANA: Grissom v. Moran, 154 Ind. App. 419,

427, 290 N.E.2d 119, 123 (1972); MONTANA: Cowan V.

Westland Realty Co., 162 Mont. 379, 388, 512 P.2d 714, 716

(1973); NEW JERSEY: Medivox Productions, Inc. V.

Hoffmann-LaRoche, Inc., 107 N.J. Super. 47, 69, 256 A.2d 803,

814-815 (1969); OHIO: Household Finance Corp. v. Alten-

berg, 5 Ohio St.2d 190, 214 N.E.2d 667 (1966); RHODE

ISLAND: Smith v. Rhode Island Co., 39 R.I. 146, 153-154,

98 A. 1, 4 (1916); SOUTH DAKOTA: General Electric

Credit Corp. v. M.D. Aircraft Sales, Inc., 266 N.W.2d 548, 550

(1978); VERMONT: In re Delligan’s Estate, 111 Vt. 227,

234-235, 18 A.2d 282, 287 (1940). See also Jensen v. Sohler,

601 F.2d 353, 354-355 (8th Cir. 1979).

23 See, e.g., 20 Am. Jur., Evidence §§ 1248, 1255 (1939) ; 24

Am. Jur., Fraud and Deceit §§ 278, 279 (1939); Annot., 62

A.L.R. 1449 (1929) (majority rule requires a preponderance

of the evidence to establish fraudulent, dishonest or criminal

misappropriation of property); Annot., 33 L.R.A. (N.S.)

836 (1911). See also 2 T. Cooley, Treatise on the Law of

Torts § 349, at 552-554 (4th ed. 1932).

too much to look for clear and undisputed evidence

of fraud. The law therefore does not require it * * *.

It is settled law that, upon the trial of a civil action

in which the claim or defence is based on alleged

fraud, the issue may be determined in accordance

with the preponderance or weight of evidence, ex-

cept in cases of resulting trusts arising on verbal

agreements to buy for another.

M. Bigelow, The Law of Fraud and the Procedure Per-

taining to the Redress Thereof 474 (1877) (footnotes

omitted, emphasis supplied).

3. While decisions in non-statutory fraud cases involv-

ing private parties have sometimes employed a clear and

convincing evidence standard, particularly when certain

types of equitable relief have been sought,” the use of the

higher standard generally has rested on historical con-

siderations that have no pertinence here. The practice

of requiring a more stringent standard of proof appears

to have arisen in actions in which the chancellor was

requested to grant relief on claims that were unenforce-

able at law for failure to comply with the Statute of

Frauds or the Statute of Wills, and was subsequently

applied in actions seeking to set aside or alter the terms

of written instruments. A higher standard of proof

was employed in such cases because they were believed

to involve special dangers that claims might be fabri-

cated. See Note, Appellate Review in the Federal Courts

of Findings Requiring More than a Preponderance of the

Evidence, 60 Harv. L. Rev. 111, 112 (1946). The con-

cern of the courts in these circumstances was the need

to protect the sanctity of written instruments and the

reliance placed upon such documents. See Rice-Stix Dry

Goods Co. v. Montgomery, 164 Ark. 161, 171, 261 S.W.

325, 329 (1924), quoted in McCormick on Evidence,

supra, § 340, at 797 n.74 (emphasis supplied) :

[I]n actions at law one who has the burden of proof

to establish fraud meets the requirements of the rule

29 See 9 J. Wigmore, Evidence § 2498 (8d ed. 1940).

when he proves the fraud only by a preponderance

of the evidence. The same rule likewise prevails in

equity, except in those cases where the rescission,

cancellation, or reformation of a writing for fraud

of one party and mistake of the other, or mutual

mistake, is the relief sought, in which latter case, as

we have stated, the proof of fraud or mistake must

be clear, unequivocal, and decisive.”

Early decisions of this Court express similar concerns

in determining the standard of proof needed for over-

turning land patents granted by the United States.*

The concerns expressed in these cases have no rele-

vance here. Regulation under the securities laws of the

conduct of investment advisers poses no danger to the

sanctity of written documents or official acts. More fun-

damentally, imposition of a standard of proof borrowed

from inapposite common law cases would undermine the

important purposes of the federal securities laws, which

Congress enacted to remedy inadequacies in common law

protections. It is inconceivable that Congress would have

intended to distort the fact-finding process under these

statutes so that fiduciaries charged with fraud could re-

tain their position of trust even though the preponder-

80 Accord, Ray Dodge, inc. v. Moore, 251 Ark. 1036, 1041,

479 S.W.2d 518, 521 (1972) (“Clear and convincing evidence

of fraud is required to cancel or reform a solemn writing, but

not to establish fraud in obtaining a contract by fraudulent

misrepresentation.”) ; Household Finance Corp. v. Altenberg,

5 Ohio St.2d 190, 214 N.E.2d 667 (1966); In re Delligan’s

Estate, 111 Vt. 227, 234-235, 138 A.2d 282, 287 (1940). This

same rationale, i.e., the protection of written documents, is

apparent in most of the instances in which Wigmore states

that “ ‘clear and convincing proof’ is commonly applied.” 9

J. Wigmore, Evidence § 2498 (3d ed. 1940) ; see Note, supra,

60 Harv. L. Rev. at 112.

31 See, e.g., United States v. Budd, 144 U.S. 154, 161-162

(1892) ; Maxwell Land-Grant Case, 121 U.S. 325, 382 (1887).

See also United States v. American Bell Telephone Co., 167

U.S. 224, 240-241 (1897) (patent on invention granted by the

United States).

ating weight of the evidence showed that every prerequi-

site supporting their removal had been established.*”

E. A Higher Standard of Proof is not Required by the

Fact That This is a Disciplinary Proceeding

Petitioner also argues that he has a “right” to pursue

his “chosen occupation” (Br. 8), and, like an attorney

subject to disbarment, cannot be deprived of that right

without proof of misconduct by clear and convincing evi-

dence (Br. 24).

However, disciplinary proceedings brought by the Com-

mission against investment advisers and other securities

industry fiduciaries bear little resemblance to disci-

plinary proceedings against lawyers brought by state

bar authorities. Commission disciplinary proceedings are

an important factor in the regulation of the public

securities markets. Investment advisers, unlike lawyers,

may enter into this sensitive industry without graduate

education, without examination by governmental authori-

ties to establish their knowledge in the field, and with-

out examination by any committee on fitness and char-

acter. In contrast to the legal profession, “anyone can

become registered to give [investment] advice to others,

regardless of whether that person has any prior educa-

tion, training, or experience in financial matters, and

regardless of whether he is financially able to perform

the services contracted for.” * Thus, “[u]nder the law

82 Congress’ views on the need to avoid standards of proof

that frustrate investor protection can be discerned from

Sections 11(b) and 12(2) of the Securities Act, 15 U.S.C.

77k(b), 771(2). Under those antifraud provisions, persons

charged by investors with misrepresentation must bear the

burden of proof to establish their lack of culpability.

33S. Rep. No. 94-910, 94th Cong., 2d Sess. 2 (1976). The

only steps a person need take to register as an investment

adviser are to file an application and pay a filing fee. See 15

U.S.C. 80b-3(c) (1) ; 17 C.F.R. 275.203-3.

as it exists today, any person of any qualification or lack

thereof can become a portfolio manager of vast sums

of money.” ** This stands in sharp contrast to the case

of the attorney who, “upon admission to the bar, [is]

certified by the court to have then attained high moral

and professional standards.” In re Little, 40 Wash.2d

421, 430, 244 P.2d 255, 259-260 (1952). In light of

this judicial certification, the court in Little stated that

“ijt is to be presumed that he has maintained [those

standards] and has performed his duty as an officer of

the court in accordance with his oath.” bid.

In short, the ease of entry into the investment advisory

field, which differs fundamentally from the legal pro-

fession, highlights the importance of enforcing federal

fiduciary standards through administrative proceedings

utilizing the standard of proof most consistent with an

accurate evaluation of the evidence. This conclusion is

reinforced by the fact that many jurisdictions recognize

that the public interest requires use of the preponder-

ance of the evidence standard in attorney disbarment

proceedings.

% Hearings on S. 2849 Before the Subcomm. on Secu-

rities of the Senate Comm. on Banking, Housing & Urban

Affairs, 94th Cong., 2d Sess. 76 (1976).

35 ALABAMA: Dodd v. Board of Commissioners, 350 So.2d

700, 705 (1977) ; ALASKA: In re Robson, 575 P.2d 771, 776-

777 (1978) ; ARKANSAS: Hurst v. Bar Rules Committee, 202

Ark. 1101, 1110, 155 S.W.2d 697, 701 (1941) ; HAWAII: In re

Trask, 46 Hawaii 404, 410-411, 380 P.2d 751, 755 (1963) ;

INDIANA: In re Pawlowski, 240 Ind. 412, 432-433, 165 N.E.

2d 595, 605 (1960); KENTUCKY: Lowisville Bar Ass’n V.

Hubbard, 282 Ky. 734, 742, 139 S.W.2d 773, 777 (1940);

MASSACHUSETTS: In re Mayberry, 295 Mass. 155, 166-

167, 3 N.E.2d 248, 253 (1936) ; MICHIGAN: State Adminis-

trator v. Posler, 390 Mich. 581, 213 N.W.2d 183 (1973);

MISSOURI: In re Duncan, 541 S.W.2d 564, 568-569 (1976) ;

NEW YORK: Feola v. New York State Bar Ass’n, 37 App.

Div.2d 789, 324 N.Y.S.2d 654 (1971) ; OHIO: Cleveland Bar

Finally, although petitioner claims that he has a

“right” to serve as an investment adviser, Congress has

declared that he enjoys no life tenure. Like other trus-

tees, he can be removed for dishonesty.** And the order

of removal is properly continued until he establishes that

his reinstatement is consistent with the public interest.*’

F. A Higher Standard of Proof is not Required Merely

Because Circumstantial Evidence is Relied Upon

Petitioner also argues (Br. 16-19) that reliance on

inferential or circumstantial evidence to prove mental

state in a proceeding of this kind makes the traditional

preponderance of the evidence standard inappropriate.

Petitioner overstates the importance of circumstantial

evidence in cases of this kind. Petitioner’s violations, as

evidenced by the repeated transfer of accounts from bank

to bank, the loans, the nondisclosures, the failure to file

timely reports, and the other conduct found by the Com-

mission to have occurred in this case, were established by

direct evidence, No inferential reasoning was required to

prove this conduct.**

Ass’n V. Fleck, 172 Ohio St. 467, 469, 178 N.E.2d 782, 784

(1961), cert. denied, 369 U.S. 861 (1962) ; TEXAS: Houtch-

ens V. State, 63 S.W.2d 1011, 1015 (Tex. App. 1933). See also

Annot., 105 A.L.R. 984, 985 (19386).

36 See II A. Scott, Trusts § 107, at 840-844 (1987) (a

trustee “will be removed if his conduct is such as to show

his unfitness to administer the trust’’). See also III A. Scott,

Trusts § 187.1, at 1509 (1967).

87 See Pet. App. 28 n.17; Supp. App. 119 n.100; see also

Hanly v. SEC, 415 F.2d 589, 598 (2d Cir. 1969) ; Lawrence

v. SEC, 398 F.2d 276, 281 (1st Cir. 1968); Securities Ex-

change Act Release No. 11267, 6 S.E.C. Docket 346 (Feb. 26,

1975) (“application for relief from disqualification”) ; In re

Brick, 8 S.E.C. Docket 240, 247-248 n.38 (1975).

88 Where, as here, findings of violations are made under the

antifraud provisions of Section 17(a) (2) and (3) of the Secu-

Moreover, partial reliance on circumstantial or inferen-

tial evidence does not require a higher standard of proof,

since, as this Court has recognized, “[c]ircumstantial evi-

dence is not only sufficient, but may also be more certain,

satisfying and persuasive than direct evidence.” Michalic

v. Cleveland Tankers, Inc., 364 U.S. 325, 330 (1960) .*°

Indeed, this Court recognized the value of such proof

in SEC v. C. M. Joiner Leasing Corp., supra, 320 U.S.

at 355, when it held that economic inducements sur-

rounding the sale of leaseholds were circumstantially

relevant in determining whether those instruments were

securities. See also TSC Industries, Inc. v. Northway,

Inc., 426 U.S. 4388, 463 & n.24 (1976) (fraudulent mar-

ket manipulation may be proven “by circumstantial as

well as direct evidence’).

Of course, in cases of this kind the Commission must

find, in addition to the elements of the underlying viola-

tion, that the conduct was “willful.” But, contrary to

petitioner’s suggestion (Br. 17-19), the meaning of the

willfulness requirement is not at issue here. The essen-

tial point is that willfulness, like any other relevant

fact in an administrative proceeding, is subject to reli-

rities Act and Section 206(2) of the Investment Advisers Act,

proof of scienter is not required to establish the violations.

Aaron V. SEC, supra; Capital Gains Research Bureau, Inc. V.

SEC, supra. Thus, the primary element to be proven in the

proceeding—the underlying violation of the securities laws—

does not require proof of mental state.

39 See also Rogers v. Missouri Pacific R.R., 352 U.S. 500,

508 n.17 (1957); Holland v. United States, 348 U.S. 121,

139-140 (1954) ; Rea v. Missouri, 84 U.S. (17 Wall.) 532, 543

(1873) ; Lukon v. Pennsylvania R.R., 131 F.2d 327, 329 (3d

Cir. 1942) (circumstantial evidence “has probative value

equal to that of testimonial evidence’).

able proof under a preponderance standard. Indeed, a

party concerned about the accuracy of the agency’s deter-

mination as to willfulness is free to present evidence,

including his own direct testimony, concerning that mat-

ter. Petitioner had the opportunity to provide such direct

evidence, but declined to do so (Supp: App. 51). A party

having direct evidence in his sole possession—but who

refuses to divulge it—cannot complain of the agency’s

reliance on probative inferential evidence. See generally

Baxter v. Palmigiano, 425 U.S. 308, 318-319 (1976) ;

Local 167, Int’l Brotherhood of Teamsters v. United

States, 291 U.S. 298, 298 (1934); Proud v. CAB, 357

F.2d 221, 223-224 (7th Cir. 1966).

In short, there is nothing unusual or improper about

relying on circumstantial evidence to prove state of mind

in a civil proceeding. This is a commonplace inquiry in

federal courts and federal administrative agencies, and

the task is traditionally performed pursuant to the pre-

ponderance of the evidence standard of proof.*°

40In Vance v. Terrazas, supra, slip op. 14, this Court ap-

proved the preponderance of the evidence standard in a case

requiring proof of specific intent to relinquish citizenship.

The Court noted that the government’s duty to prove the

state of mind element was “in itself a heavy burden” that

militates in favor of using the preponderance standard of

proof.

If petitioner were correct in asserting (a) that inferential

and circumstantial evidence is inherently speculative and

unreliable, and (b) that the government must present clear

and convincing evidence of state of mind (Br. 19), then it

would logically follow that the government could rarely (if

ever) obtain an order to protect the public. If the respon-

dent investment adviser—like petitioner—refused to provide

“direct” testimony concerning his state of mind, then the

only evidence in the case would be circumstantial evidence,

II. The Administrative Procedure Act Contemplates Use

of the Preponderance of the Evidence Standard in

Administrative Proceedings of This Kind

This Court recognized in Vance v. Terrazas, supra,

that when Congress specifies a standard of proof, that

legislative judgment ordinarily controls. The Court em-

phasized the “traditional powers of Congress to pre-

scribe rules of evidence and standards of proof’ (slip

op. 13) and noted that “a congressional judgment * * *

that the preponderance standard of proof provides suffi-

cient protection” is entitled to deference (id. at 14).

While Congress has mandated a more stringent evi-

dentiary standard than preponderance of the evidence

in certain federal statutes,*! it has not done so in the

federal securities laws. Adjudicatory proceedings under

those laws, however, are governed by Section 7(c) of the

Administrative Procedure Act (“APA”), 5 U.S.C. 556

(d).4* Section 7(c) provides in pertinent part (emphasis

supplied) :

Except as otherwise provided by statute, the propo-

nent of a rule or order has the burden of proof. * * *

A sanction may not be imposed or rule or order is-

sued except on consideration of the whole record or

those parts thereof cited by a party and supported

by and in accordance with the reliable, probative,

and substantial evidence,'*!

which, by petitioner’s hypothesis, would be speculative and

unreliable and insufficient under the clear and convincing

standard of proof.

41 See, e.g., 8 U.S.C. 1448(a); 19 U.S.C. (Supp. II) 1592

(e) (2) ; 25 U.S.C. (Supp. II) 1912(e) ; 38 U.S.C. 354(b).

42 See Sections 5 and 7 of the APA, 5 U.S.C. 554(a) and

556(a); Sections 15(b) (4) and 15(b) (6) of the Securities

Exchange Act, 15 U.S.C. 780(b) (4) and 780(b) (6) ; Sections

2038(e) and 2038(f) of the Investment Advisers Act, 15

U.S.C. 80b-3(e) and 80b-3(f); Section 9(b) of the Invest-

ment Company Act, 15 U.S.C. 80a-9(b).

#3 Section 7(c) is directed to two distinct questions—the

type of evidence to be received (evidence that is separately

Nothing on the face of this statute suggests that Congress

intended to apply the extraordinary “clear and convinc-

ing evidence” standard of proof. To the contrary, the

words “reliable,” “probative,” and “substantial” show

that Congress meant to endorse the traditional prepon-

derance standard—the standard that produces adjudica-

tions in every case that are consistent with the most

probable and likely factual inferences. In discussing

Section 7(c), the House Report that accompanied the

APA explained (H.R. Rep. No. 1980, 79th Cong., 2d

Sess. 37 (1946) (emphasis supplied) ) :

[Wjhere a party having the burden of proceeding

has come forward with a prima facie and substan-

tial case, he will prevail unless his evidence is dis-

credited or rebutted. In any case the agency must

decide “in accordance with the evidence.” Where

there is evidence pro and con, the agency must weigh

it and decide in accordance with the preponderance.

See also the dissenting opinion of Justices Clark and

Harlan in Woodby v. INS, supra, 385 U.S. at 288-289

n.1, which explains that the APA standard of “reliable,

probative, and substantial’ evidence has “traditionally

been held satisfied when the agency decides on the pre-

ponderance of the evidence.” The majority in Woodby

did not disagree with that analysis.** Moreover, the same

described in Section 7(c) as not “irrelevant, immaterial, or

unduly repetitious”) and the standard of proof that must be

satisfied to support a sanction (“reliable, probative, and sub-

stantial evidence’). See H.R. Rep. No. 1980, 79th Cong., 2d

Sess. 538 n.16 (1946).

“ The majority in Woodby required a higher standard of

proof in the deportation proceeding before the Court. How-

ever, that proceeding was not governed by the APA (see 385

U.S. at 287-288 (Clark, J., dissenting) ). The majority con-

cluded in Woodby that the Immigration and Nationality Act

did not prescribe a standard of proof; instead, the Act pre-

scribed a standard of judicial review. In these circumstances,

court that decided Collins and Whitney has also recog-

nized that the APA prescribes the preponderance of the

evidence standard.*®

Enactment of the APA confirmed the use of the pre-

ponderance of the evidence standard that the Commission

had applied in earlier cases.** Following the passage

the Court held that it was appropriate for the judiciary to

devise an appropriate standard of proof (385 U.S. at 284).

Unlike the Immigration Act, the APA has always contained

a separate judicial review section designated as such. See

Section 10(e), 5 U.S.C. 706. That provision is worded dif-

ferently from Section 7(c). Both the language of Section

7(c) and its legislative history (see pages 41-42, supra) con-

firm that it prescribes a standard of proof.

45 In Sea Island Broadcasting Co. v. FCC, 47 Ad. L.2d 831

(1980), the D.C. Circuit noted that “the ‘preponderance of

evidence’ standard is the traditional standard in civil and

administrative proceedings.” The Court added: “It is the

one contemplated by the APA, 5 U.S.C. 556(d).” Jd. at 835

& n.6, citing H.R. Rep. No. 1980, 79th Cong., 2d Sess. 37

(1946). Although the court recognized that the administra-

tive proceeding under review (a broadcast license revocation

proceeding) was governed by the APA, it nevertheless con-

cluded that the agency must apply the clear and convincing

evidence standard. The court stated that, in its view, the

proceeding was comparable to a broker-dealer disciplinary

proceeding and therefore was governed by its earlier decisions

in Collins and Whitney. In so ruling, the court made no

attempt to justify its conclusion that the FCC must deviate

from the statutory standard prescribed in the APA. 47 Ad.

L.2d at 835-837.

46 As early as 1938, the Commission had rejected the argu-

ment that in a proceeding to determine whether to suspend,

expel or otherwise sanction a brokerage firm and its princi-

pals for, inter alia, manipulation of security prices in viola-

tion of Section 9 of the Securities Exchange Act, 15 U.S.C.

78i, a standard of proof greater than the preponderance of

the evidence standard is required. In re White, 3 S.E.C. 466,

539, 540 (1938).

of the APA, the Commission considered the question anew

in a proceeding leading to the revocation of the registra-

tion of a broker-dealer. In re Pollisky, 43 S.E.C. 458

(1967). In determining that a more stringent standard

such as that applicable in deportation cases was inappro-

priate, the Commission relied on the analysis in Woodby

v. INS, supra, and on the traditional interpretation of

the language in Section 7(c) of the APA. 43 8.E.C. at

459-460; see also 43 S.E.C. 852, 861 (1968) (after re-

mand). The Commission noted (id. at 460; footnotes

omitted) :

While the Exchange Act does not address itself

specifically to the question of what degree of proof

is required in an administrative proceeding, the Ad-

ministrative Procedure Act (“APA”), which is ap-

plicable to proceedings under the Exchange Act, does.

Section 7(c) of the APA provides that no rule or

order shall be issued by an administrative agency

except as supported by “the reliable, probative and

substantial evidence.”’ The standard has traditionally

been held to be satisfied when the agency decides on

the “preponderance of the evidence.”

In accordance with Section 7(c) of the APA, the Com-

mission repeatedly has employed or approved the use of

the preponderance standard in administrative proceedings

brought against securities industry personnel.*’

In sum, this Court need not engage in an analysis of

the relative advantages of the “preponderance of the evi-

47 See, e.g., In re Seaton, 18 S.E.C. Docket 400, 401 n.6

(1979), petition for review pending, No. 79-2317 (D.C. Cir.) ;

In re Decker, 15 S.E.C. Docket 1342 (1978), petition for

review pending, No. 78-2008 (10th Cir.) ; Jn re Schultz, 15

S.E.C. Docket 860 (1978), aff’d, 614 F.2d 561 (7th Cir. 1980) ;

In re Investors Research Corp., 14 S.E.C. Docket 1020, 1026

n.30 (1978), aff’d in part, remanded in part, [Current] Fed.

Sec. L. Rep. (CCH) {| 97,526 (D.C. Cir. 1980); In re Abbett,

Sommer & Co., 44 S.E.C. 104, 113-114 (1969), aff’d, [1970-

1971] Fed. Sec. L. Rep. (CCH) {92,818 (D.C. Cir. 1970),

dence” and “clear and convincing evidence” standards in

this context. Congress has already done so and has chosen

the preponderance standard.

cert. denied, 401 U.S. 974 (1971) ; In re Cea, 44 S.E.C. 8, 25

(1969) ; In re Pollisky, 43 S.E.C. 458 (1967), after remand,

43 S.E.C. 852, 860-861 & nn. 18-24 (1968) ; In re DeMammos,

43 S.E.C. 333, 337, aff’d, 23 Ad. L.2d 221 (2d Cir. 1967) ; In re

Underhill Securities Corp., 42 S.E.C. 689, 695 (1965). In cer-

tain situations subsequent to the D.C. Circuit’s decision in

Collins, the Commission has utilized the clear and convincing

evidence standard in deference to the view of that court, which

has venue of petitions for review of Commission orders. See,

e.g., 15 U.S.C. 80b-18 (a).

Petitioner argues (Br. 26-27) that the fact that Congress

has failed to enact legislation (in addition to the APA) that

would approve use of the preponderance of the evidence stan-

dard in Commission proceedings “strengthens the inference”

that Congress intended to require the clear and convincing

evidence standard. Congressional intent cannot, however, be

discerned from legislative inaction. Boys Markets, Inc. v. Re-

tail Clerks Local 770, 398 U.S. 235, 241-242 (1970). See also

United States v. Board of Commissioners, 4835 U.S. 110, 135,

149 (1978) ; NLRB v. Plasterers’ Local 79, 404 U.S. 116, 129-

130 (1971). Furthermore, congressional action in this field

was totally unnecessary following enactment of the APA in

1946. No circuit, except the D.C. Circuit within the last three

years, has departed from the preponderance standard em-

bodied in the APA (see notes 13-14, supra).

Petitioner also contends (Br. 25) that the silence of Con-

gress as to a standard of proof in administrative disciplinary

proceedings under the securities laws reflects an intention

to adopt the clear and convincing evidence standard utilized

in certain common law contexts. Petitioner points to nothing,

however, which suggests that Congress had in mind the

standard of proof used in those unrelated situations. See

generally TVA v. Hill, 4837 U.S. 158, 192 (1978).

III. The Decision Whether to Employ a Standard of Proof

Greater Than the Preponderance of the Evidence

Standard is Properly a Matter of Commission Discre-

tion in the Circumstances of This Case .

1. As we have demonstrated above, Section 7(c) of

the APA prescribes a preponderance of the evidence

standard of proof. But, even if the APA did not pre-

scribe a standard of proof, the Commission’s decision to

utilize the preponderance standard should be upheld. Since

neither the Due Process Clause nor any other statute re-

quires proof by more than a fair preponderance of the

evidence, the decision whether to apply a higher standard

is a discretionary decision of the administrative agency.

As this Court explained in Mathews v. Eldridge, supra,

424 U.S. at 348-349 (an adjudicatory proceeding involv-

ing termination of disability benefits) :

We reiterate the wise admonishment of Mr. Justice

Frankfurter that differences in the origin and func-

tion of administrative agencies “preclude wholesale

transplantation of the rules of procedure, trial, and

review which have evolved from the history and ex-

perience of courts.” FCC v. Pottsville Broadcasting

Co., 309 U.S. 184, 143 (1940). * * * In assessing

what process is due in this case, substantial weight

must be given to the good faith judgments of the

individuals charged by Congress with the adminis-

tration of [the statute] that the procedures they

have provided assure fair consideration of the * * *

claims of individuals. * * * This is especially so

where, as here, the prescribed procedures not only

provide the [individual] with an effective process

for asserting his claim prior to any administrative

action, but also assure a right to an evidentiary

hearing, as well as to subsequent judicial review,

before the denial of his claim becomes final.

Later, in Vermont Yankee Nuclear Power Corp. v. Na-

tural Resources Defense Council, 485 U.S. 519, 524

(1978), this Court noted in a rulemaking proceeding that

the procedural safeguards prescribed in the APA are

“the maximum procedural requirements which Congress

was willing to have the courts impose upon agencies

** *” Accordingly, “[a]gencies are free to grant ad-

ditional procedural rights in the exercise of their discre-

tion, but reviewing courts are generally not free to im-

pose them if the agencies have not chosen to grant them.”

The Court added that “this Court has for more than four

decades emphasized that the formulation of procedures

was basically to be left within the discretion of the agen-

cies to which Congress had confided the responsibility for

substantive judgments” (ibid.). See also Costle v. Pa-

cific Legal Foundation, No. 78-1472 (Mar. 18, 1980),

slip op. 16.*8

The Court observed in Vermont Yankee that adminis-

trative agencies “ ‘should be free to fashion their own

rules‘of procedure and to pursue methods of inquiry cap-

able of permitting them to discharge their multitudinous

duties’” absent “constitutional constraints or extremely

compelling circumstances.” 435 U.S. at 543.4° Neither

of these restrictions is present here. Vance v. Terrazas,

supra, slip op. 13-14, confirms that the Due Process

Clause does not require clear and convincing evidence in

this context. And petitioner has failed to show any “com-

pelling” reason why the risk of error in this case should

not be borne equally by himself and the investors who

48 This judicial deference “is an outgrowth of the congres-

sional determination that administrative agencies and admin-

istrators will be familiar with the industries which they regu-

late and will be in a better position than federal courts or

Congress itself to design procedural rules adapted to the

peculiarities of the industry and the tasks of the agency in-

volved.” FCC v. Schreiber, 381 U.S. 279, 290 (1965).

49 The appropriate standard of proof is a procedural mat-

ter that many agencies address in their own rules of prac-

tice. See 16 C.F.R. 3.51(b) (3) (Federal Trade Commis-

sion) ; 16 C.F.R. 1025.51(b) (Consumer Product Safety Com-

mission) ; 18 C.F.R. 1.38(k) (2), 1.40(i) (2) (Federal Energy

Regulatory Commission) ; 29 C.F.R. 101.10(b) (1) (National

Labor Relations Board).

have entrusted him with their money. Under these cir-

cumstances, the administrative agency’s decision to use

the preponderance standard should be affirmed.”

2. That the standard of proof in Commission adjudi-

cative proceedings is not greater than the preponderance

of the evidence does not mean that parties are afforded

inadequate protection from unfair or erroneous agency

action. As the court of appeals correctly concluded (Pet.

App. 27-28), such protection is properly achieved not by

requiring the Commission to apply a higher standard

of proof, but by meaningful judicial review pursuant to

Section 10(e) of the Administrative Procedure Act, 5

U.S.C. 706. See also 15 U.S.C. 78y(a), 80a-42(a), and

80b-13(a). Section 10(e) permits a reviewing court to

set aside agency action that is arbitrary or capricious

or that is not supported by substantial evidence.* Mean-

5° In imposing a clear and convincing evidence standard in

cases of this kind, the D.C. Circuit’s Collins decision errone-

ously relied on this Court’s statement in Woodby v. INS,

supra, that the standard of proof “is the kind of question

which has traditionally been left to the judiciary to resolve.”

562 F.2d at 824 (quoting 385 U.S. at 185). As previously

noted (see note 44, supra), Woodby was not decided under

the APA. Instead, it was decided under a statute that pre

scribed no standard of proof. Moreover, that case involved

the “extreme deprivatidn” of deportation. In the present case,

by contrast, the agency’s standard of proof rests on the stan-

dard contained in the APA and no deprivation comparable to

deportation is at issue.

51 The Commission, like any other administrative agency,

enjoys discretion in selecting a remedy that is appropriate to

protect the public interest. When the agency adequately ex-

plains the reasons for the sanction that it selects, its decision

will not be disturbed in the absence of a “patent abuse of

discretion.” Moog Industries, Inc. v. FTC, 355 U.S. 411, 414

(1958). Accord, Butz v. Glover Livestock Commission Co.,

411 U.S. 182, 185-187 (1973) ; O’Leary v. SEC, 424 F.2d 908,

911-912 (D.C. Cir. 1970) ; Tager v. SEC, 344 F.2d 5, 8-9 (2d

ingful review of the rationale for the severity of a sanc-

tion imposed by the Commission is assured by the re-

quirement that the Commission “articulate carefully the

grounds for its decision” (Pet. App. 27-28, 33-34).

Cir. 1965); Berko v. SEC, 316 F.2d 137, 141-142 (2d Cir.

1963). This Court emphasized in American Power & Light

Co. v. SEC, 329 U.S. 90, 118, 116, 118 (1946), that the

choice of sanctions is uniquely a matter for agency determi-

nation. The Court stated that ‘“‘where Congress has entrusted

an administrative agency with the responsibility of selecting

the means of achieving the statutory policy, ‘the relation of

remedy to policy is peculiarly a matter for administrative

competence,’ ” and that a reviewing court would “imping[e]

upon the Commission’s rightful discretion were [it] to con-

sider the various alternatives in the hope of finding one that

[it] consider[s] more appropriate.” Jd. at 112, 118. In up-

holding an onerous order in that case, this Court did not sug-

gest that a severe remedy requires extraordinary evidentiary

standards.

52 See generally SEC v. Chenery Corp., 318 U.S. 80, 87, 94-

95 (1948).

CONCLUSION

The judgment of the court of appeals should be

affirmed.

Respectfully submitted.

WADE H. MCCREE, JR.

Solicitor General

STEPHEN M. SHAPIRO

Assistant to the Solicitor General

RALPH C. FERRARA

General Counsel

PAUL GONSON

Solicitor

JACOB H. STILLMAN

Associate General Counsel

ROSALIND C. COHEN

Assistant General Counsel

S. LEE TERRY, JR.

ROBERT J. MILLS

Attorneys

Securities and Exchange Commission

AUGUST 1980

APPENDIX

1. Sections 203(e) and (f) of the Investment Advisers

Act of 1940, 15 U.S.C. 80b-3(e) and (f), provide:

(e) The Commisison, by order, shall censure,

place limitations on the activities, functions, or op-

erations of, suspend for a period not exceeding twelve

months, or revoke the registration of any invest-

ment adviser if it finds, on the record after notice

and opportunity for hearing, that such censure, plac-

ing of limitations, suspension, or revocation is in the

public interest and that such investment advisers,

or any person associated with such investment ad-

viser, whether prior to or subsequent to becoming

so associated—

(1) has willfully made or caused to be made

in any application for registration or report

required to be filed with the Commission under

this title, or in any proceeding before the Com-

mission with respect to registration, any state-

ment which was at the time and in the light of

the circumstances under which it was made false

or misleading with respect to any material fact,

or has omitted to state in any such application

or report any material fact which is required to

be stated therein.

(2) has been convicted within ten years pre-

ceding the filing of any application for registra-

tion or at any time thereafter of any felony or

misdemeanor which the Commision finds—

(A) involves the purchase or sale of any

security, the taking of a false oath, the

making of a false report, bribery, perjury,

burglary, or conspiracy to commit any such

offense ;

(B) arises out of the conduct of the busi-

ness of a broker, dealer, municipal secur-

ities dealer, investment adviser, bank, in-

surance company, or fiduciary;

extortion, forgery, counterfeiting, fraudu-

lent concealment, embezzlement, fraudulent

conversion, or misappropriation of funds or

securities; or

(D) involves the violation of section 152,

1341, 1842, or 13843 or chapter 25 or 47

of title 18, United States Code.

(3) is permanently or temporarily enjoined

by order, judgment, or decree of any court of

competent jurisdiction from acting as an in-

vestment adviser, underwriter, broker, dealer, or

municipal securities dealer, or as an affiliated

person or employee of any investment company,

bank, or insurance company, or from engaging

in or continuing any conduct or practice in con-

nection with any such activity, or in connection

with the purchase or sale of any security.

(4) has willfully violated any provision of the

Securities Act of 1933, the Securities Exchange

Act of 1934, the Investment Company Act of

1940, this title, or the rules or regulations under

any such statutes or any rule of the Municipal

Securities Rulemaking Board, or is unable to

comply with any such provision.

(5) has willfully aided, abetted, counseled,

commanded, induced, or procured the violation

by any other person of any provision of the

Securities Act of 1933, the Securities Exchange

Act of 1934, the Investment Company Act of

1940, this title, the rules or regulations under

any of such statutes, or the rules of the Muni-

cipal Securities Rulemaking Board, or has failed

reasonably to supervise, with a view to pre-

venting violations of the provisions of such

statutes, rules, and regulations, another person

who commits such a violation, if such other per-

son is subject to his supervision. For the pur-

poses of this paragraph (5) no person shall be

deemed to have failed reasonably to supervise

any person, if—

(A) there have been established proce-

dures, and a system for applying such pro-

cedures, which would reasonably be ex-

pected to prevent and detect, insofar as

practicable, any such violation by such

other person, and

(B) such person has reasonably dis-

charged the duties and obligations incum-

bent upon him by reason of such procedures

and system without reasonable cause to be-

lieve that such procedures and system were

not being complied with.

(6) is subject to an order of the Commission

entered pursuant to subsection (f) of this sec-

tion barring or suspending the right of such

person to be associated with an investment ad-

viser which order is in effect. with respect to

such person.

(f) The Commission, by order, shall censure or

place limitations on the activities of any person as-

sociated or seeking to become associated with an

investment adviser, or suspend for a period not ex-

ceeding twelve months or bar any such person from

being associated with an investment adviser, if the

Commission finds, on the record after notice and

opportunity for hearing, that such censure, placing

of limitations, suspension, or bar is in the public

interest and that such person has committed or omit-

ted any act or omission enumerated in paragraph

(1), (4), or (5) of subsection (e) of this section or

has been convicted of any offense specified in para-

graph (2) of said subsection (e) within ten years

of the commencement of the proceedings under this

subsection, or is enjoined from any action, conduct,

or practice specified in paragraph (3) of said sub-

section (e). It shall be unlawful for any person

as to whom such an order suspending or barring him

from being associated with an investment adviser

is in effect willfully to become, or to be, associated

with an investment adviser without the consent of

the Commission, and it shall be unlawful for any

investment adviser to permit such a person to be-

come, or remain, a person associated with him with-

out the consent of the Commission, if such invest-

ment adviser knew, or in the exercise of reasonable

care, should have known, of such order.

2. Section 9(b) of the Investment Company Act of

1940, 15 U.S.C. 80a-9 (b), provides:

The Commission may, after notice and opportunity

for hearing, by order prohibit, conditionally or un-

conditionally, either permanently or for such period

of time as it in its discretion shall deem appropriate

in the public interest, any person from serving or

acting as an employee, officer, director, member of

an advisory board, investment adviser or depositor

of, or principal underwriter for, a registered invest-

ment company or affiliated person of such investment

adviser, depositor, or principal underwriter, if such

person—

(1) has willfully made or caused to be made

in any registration statement, application or re-

port filed with the Commission under this title

any statement which was at the time and in the

light of the circumstances under which it was

made false or misleading with respect to any

material fact, or has omitted to state in any

such registration statement, application or re-

port any material fact which was required to

be stated therein; or

(2) has willfully violated any provision of

the Securities Act of 1933, or of the Securities

Exchange Act of 1934, or of title II of this Act,

or of this title, or of any rule or regulation un-

der any of such statutes; or

(3) has willfully aided, abetted, counseled,

commanded, induced, or procured the violation

by any other person of the Securities Act of

1933, or of the Securities Exchange Act of

1934, or of title II of this Act, or of this title,

or of any rule or regulation under any of such

statutes.

3. Sections 15(b) (4) and (6) of the Securities Ex-

change Act of 1934, 15 U.S.C. 780(b) (4) and (6),

provide:

(4) The Commission, by order, shall censure,

place limitations on the activities, functions, or op-

erations of, suspend for a period not exceeding

twelve months, or revoke the registration of any

broker or dealer if it finds, on the record after

notice and opportunity for hearing, that such cen-

sure, placing of limitations, suspension, or revocation

is in the public interest and that such broker or

dealer, whether prior or subsequent to becoming such,

or any person associated with such broker or dealer,

whether prior or subsequent to becoming so. as-

sociated—

(A) has willfully made or caused to be made

in any application for registration or report

required to be filed with the Commission under

this chapter, or in any proceeding before the

Commission with respect to registration, any

statement which was at the time and in the

light of the circumstances under which it was

made false or misleading with respect to any

material fact, or has omitted to state in any

such application or report any material fact

which is required to be stated therein.

(B) has been convicted within ten years pre-

ceding the filing of any application for registra-

tion or at any time thereafter of any felony or

misdemeanor which the Commission finds—

(i) involves the purchase or sale of any

security, the taking of a false oath, the

making of a false report, bribery, perjury,

burglary, or conspiracy to commit any such

offense;

(ii) arises out of the conduct of the »usi-

ness of a broker, dealer, municipal securi-

ties dealer, investment adviser, bank, in-

surance company, or fiduciary;

(iii) involves the larceny, theft, robbery,

extortion, forgery, counterfeiting, fraudu-

lent concealment, embezzlement, fraudulent

conversion, or misappropriation of funds, or

securities; or

(iv) involves the violation of section 152,

1341, 1342, or 1348 or chapter 25 or 47

of Title 18.

by order, judgment, or decree of any court of

competent jurisdiction from acting as an in-

vestment adviser, underwriter, broker, dealer,

or municipal securities dealer, or as an affiliated

person or employee of any investment company,

bank, or insurance company, or from engaging

in or continuing any conduct or practice in con-

nection with any such activity, or in connection

with the purchase or sale of any security.

(D) has willfully violated any provision of

the Securities Act of 1933, the Investment Ad-

visers Act of 1940, the Investment Company Act

of 1940, this chapter, the rules or regulations

under any of such statutes, or the rules of the

Municipal Securities Rulemaking Board, or is

unable to comply with any such provision.

(E) has willfully aided, abetted, counseled,

commanded, induced, or procured the violation

by any other person of any provision of the

Securities Act of 1933, the Investment Advisers

Act of 1940, the Investment Company Act of

1940, this chapter, the rules or regulations un-

der any of such statutes, or the rules of the

Municipal Securities Rulemaking Board, or has

failed reasonably to supervise, with a view to

preventing violations of the provisions of such

statutes, rules, and regulations, another person

who commits such a violation, if such other per-

son is subject to his supervision. For the pur-

poses of this subparagraph (E) no person shall

be deemed to have failed reasonably to super-

vise any other person, if—

(i) there have been established proce-

dures, and a system for applying such pro-

cedures, which would reasonably be expected

to prevent and detect, insofar as practic-

able, any such violation by such other per-

son, and

(ii) such person has reasonably dis-

charged the duties and obligations incum-

bent upon him by reason of such proce-

dures and system without reasonable cause

to believe that such procedures and system

were not being complied with.

(F) is subject to an order of the Commission

entered pursuant to paragraph (6) of this sub-

section (b) barring or suspending the right of

such person to be associated with a broker or

dealer.

* * * * *

(6) The Commission, by order, shall censure or

place limitations on the activities or functions of

any person associated, or seeking to become as-

sociated, with a broker or dealer, or suspend for a

period not exceeding twelve months or bar any such

person from being associated with a broker or dealer,

if the Commission finds, on the record after notice

and opportunity for hearing, that such censure,

placing of limitations, suspension, or bar is in the

public interest and that such person has committed

or omitted any act or omission enumerated in sub-

paragraph (A), (D), or (E) of paragraph (4) of

this subsection, has been convicted of any offense

specified in subparagraph (B) of said paragraph

(4) within ten years of the commencement of the

proceedings under this paragraph, or is enjoined

from any action, conduct, or practice specified in

subparagraph (C) of said paragraph (4). It shall

be unlawful for any person as to whom such an

order suspending or barring him from being asso-

ciated with a broker or dealer is in effect willfully

to become, or to be, associated with a broker or

dealer without the consent of the Commission, and

it shall be unlawful for any broker or dealer to per-

mit such a person to become, or remain, a person

associated with him without the consent of the Com-

mission, if such broker or dealer knew, or in the

exercise of reasonable care should have known, of

such order.

4. Section 7(c) of the Administrative Procedure Act,

5 U.S.C. 556 (d), provides in pertinent part:

Except as otherwise provided by statute, the pro-

ponent of a rule or order has the burden of proof.

Any oral or documentary evidence may be received,

but the agency as a matter of policy shall provide

for the exclusion of irrelevant, immaterial, or un-

duly repetitious evidence. A sanction may not be

imposed or rule or order issued except on considera-

tion of the whole record or those parts thereof cited

by a party and supported by and in accordance with

the reliable, probative, and substantial evidence.* * *

* U. S. GOVERNMENT PRINTING OFFICE; 1980 326010 50

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.