# Respondents Brief — Steadman v. Securities & Exchange Commission > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385006_2203%3A5 ## Record - **Collection:** Supreme Court brief - **Document type:** Respondents Brief - **Published:** January 1, 1981 - **Citation:** 450 U.S. 91 ## Text ~ 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...... A. 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 | 15 15 17 20 26 29 : 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 Vv 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 VI 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 xX 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 XI 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, 43 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) 2 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, 3 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). A “ 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- 5 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). 6 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- 7 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 8 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- 9 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. 10 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 11 (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 I. 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 12 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 13 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- 14 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 15 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 16 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). 17 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). 18 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 19 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. 20 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). 21 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 22 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 23 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). 24 “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). 25 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- 26 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). 27 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 28 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 29 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- 30 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 31 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). 32 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). - 33 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). 34 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). 35 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). 36 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. 37 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 38 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- 39 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’). 40 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, 4} 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 42 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, 43 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). 44 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), 45 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). 46 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 47 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). 48 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 49 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). 50 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 la 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- itie [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385006_2203%3A5. Public record. Not legal advice.