Amicus Brief — Steadman v. Securities & Exchange Commission

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~ uprema Court, U. &

KF1lLED

JUL 25 1960

No. 79-1266

RS — eee

— -_—----—_—_—___—_

| _RICHAEL RODAK, JR, CLEI

’

— —4

IN THE

Suprene Court of the United States

OCTOBER TERM, 1980

CHARLES W. STEADMAN,

Petitioner,

SECURITIES AND EXCHANGE COMMISSION,

Respondent.

On Writ of Certiorari to the United States

Court of Appeals for the Fifth Circuit

BRIEF FOR SECURITIES INDUSTRY ASSOCIATION

AS AMICUS CURIAE

Of Counsel: ARTHUR F. MATHEWS

RoBerRT B. McC

WILLIAM J, FITZPATRICK BERT B, MCCAW

DAVID M. BECKE

General Counsel Saget nett

JANE TUCKER DANA

Lisa DESoto WILMER & PICKERING

Assistant General Counsel 1666 K Street, N.W.

SECURITIES INDUSTRY phe ba 1).C. 20006

ASSOCIATION (202) 872-6000

20 Broad Street + Counsel for Securities

New York, New York 10005 Industry Association

July 15, 1980

No. 79-1266

IN THE

Supreme Court of the United States

OCTOBER TERM, 1980

CHARLES W. STEADMAN,

" Petitioner,

SECURITIES AND EXCHANGE COMMISSION,

Respondent.

On Writ of Certiorari to the United States

Court of Appeals for the Fifth Circuit

BRIEF FOR SECURITIES INDUSTRY ASSOCIATION

AS AMICUS CURIAE

QUESTIONS PRESENTED

1. Whether, in disciplinary proceedings before the

Securities and Exchange Commission, which frequently

result in permanent exclusion from the securities indus-

try as well as other harsh sanctions, willful violations of

anti-fraud provisions of the federal securities laws must

be proved by clear and convincing evidence, rather than

by a mere preponderance of the evidence.

2. Whether the Administrative Procedure Act require-

ment that the Securities and Exchange Commission

justify with particularity the sanctions it imposes is an

adequate substitute for clear and convincing evidence to

support a Commission finding of willful securities fraud

violations.

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED 002.2... oeeeeeceeeeeeeeeeeeeeeeeeees i

TABLE OF AUTHORITIES .2....2.222--.--c-cceenenceeesee-s- iv

INTEREST OF THE SIA AS AMICUS CURIAE........ 1

IIIS) ciation i eeesetiinitiniedeiealeeheahatinaiigitcane 2

SUMMARY OF ARGUMENT ......0W ee 3

OTE 520i siarnenbienh nlsdh dip Ace etinaigtCipitnicieeainnnateghetnuseniantn “

I. THE INTERESTS OF RESPONDENTS IN

SEC “QUASI-CRIMINAL” DISCIPLINARY

PROCEEDINGS IN WHICH THEY FACE

SEVERE SANCTIONS REQUIRE THE USE

OF THE “CLEAR AND CONVINCING”

ee re CO I nineteen 12

II. THE INTERESTS OF RESPONDENTS IN

SEC PROCEEDINGS IN WHICH THEY ARE

CHARGED WITH WILLFUL FRAUD RE-

QUIRE THE USE OF THE “CLEAR AND

CONVINCING” STANDARD OF PROOF ....._.. 20

III. ALTHOUGH THE COURT OF APPEALS COR-

RECTLY REQUIRED THE SEC TO JUSTIFY

THE PARTICULAR SANCTIONS IT IM-

POSES, THIS REQUIREMENT IS NOT A

SUBSTITUTE FOR CLEAR AND CONVINC-

ING EVIDENCE OF A WILLFUL VIOLA-

TIE sepa losis cna eanipeceisicebiiesegeoipasaaccnegstaniopienbannniaitaniselibeen

(iii)

PREVIOUS PAGE WAS BLANK

TABLE OF AUTHORITIES

CASES: Page

Aaron Vv. SEC, 446 U.S. ——, 48 U.S.L.W. 4609

(U.S. June 2, 1980) (No. 79-66) .............00......... 19, 22

Addington V. Texas, 441 U.S. 418 (1979) ............ 9, 10, 13,

17, 23, 28

In re Adriaans, 28 U.S. App. D.C. 515 (1907)...... 14

American Power Co. v. SEC, 329 U.S. 90 (1946).. 28

Arthur Lipper Corp. v. SEC, 547 F.2d 171 (2d

Cir. 1976), cert. denied, 434 U.S. 1009 (1978) ..15, 16, 25

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

RI I I ica caissnticnnvtnenesadecscnomcesubebaninneine 6

Baldwin v. New York, 399 U.S. 66 (1970).............. 27

In re Ballay, 482 F.2d 648 (D.C. Cir. 1978) ............. 10

Baumgartner v. United States, 322 U.S. 665

Cs EASE LATER A ATRIA DREISER OI ETLEN Oe 10

Beck v. SEC, 413 F.2d 832 (6th Cir. 1969), after

remand, 430 F.2d 673 (6th Cir. 1970) o.oo. 17, 25

Berko v. SEC, 316 F.2d 187 (2d Cir. 1968) ............. 17

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

F.2d 276 (5th Cir.), cert. denied, 368 U.S. 899

SI ere ia ee he ee 17

Blue Chip Stamps v. Manor Drug Stores, 421 U.S.

IRENA ESR St a ect etm ee ED 20, 21, 27

Borowicz Vv. Chicago Mastic Co., 367 F.2d 751 (7th

ST i a Toda deensbaeeaneeaaentins 22

Butz v. Glover Livestock Commission Co., 411 U.S.

I I a i cumeabitcopaince 28

Charlton v. FTC, 543 F.2d 903 (D.C. Cir. 1976).... 14,15

Chatham v. SEC, 604 F.2d 1368 (D.C. Cir. 1978).. 8

Chaunt v. United States, 364 U.S. 350 (1960)........ 10

Chiarella v. United States, 445 U.S. ——, 100 S. Ct.

RMF i oc Uap ON nena A 19

Citizens to Preserve Overton Park v. Volpe, 401

SERGI oe alceny erie ePIC. RAPE lT OOS AP 25

Codispotti v. Pennsylvania, 418 U.S. 506 (1974)... 27

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

ea I ctl 2, passim

Delikosta v. Califano, 478 F. Supp. 640 (S.D.N.Y.

Eo siah Adee de daatiotieicdasiinaiccnsceossneanaiaaaenbeuienzilanen 7-8

TABLE OF AUTHORITIES—Continued

In re Donaghy, 402 Ill. 120, 88 N.E. 2d 560

(GR a ap ROME ete elt SEM SEEN a OC

Duncan V. Louisiana, 391 U.S. 145 (1968) ...........

Ernst & Ernst v. Hochfelder, 425 U.S. 185

(1976) .......... DBA ie et MD ee Ne ce Aes ne 19

In re Fisher, 179 F.2d 361 (7th Cir.), cert. denied,

os RR Acai tines eee

Foremost-McKesson, Inc. Vv. Provident Securities

Sis I CR I I od cs eniaes

Frank v. United States, 395 U.S. 147 (1969) ..........

Gardner V. Broderick, 392 U.S. 273 (1968) .............

Garrity v. New Jersey, 385 U.S. 493 (1967)...........

Gertz v. Robert Welch, Inc., 418 U.S. 823 (1974)....

Gonzales v. Landon, 350 U.S. 920 (1955) (per

on cecansi esters aes

Henkle v. Royal Exch. Assurance Co., 27 Eng. Rep.

I 9 ten caus

Holt v. United States, 218 U.S. 245 (1910) .............

Intercontinental Industries, Inc. Vv. American

Stock Exchange, 452 F.2d 935 (5th Cir. 1971),

cert. denied, 409 U.S. 842 (1972) ........................

International Brotherhood of Teamsters v. Daniel,

rn I Cn amccnanebnnens

Investors Research Corp. v. SEC, [1979-80 Trans-

fer Binder] Fed. Sec. L. Rep. (CCH) {| 97,366

(D.C. Cir., Apr. 29, 1980), language modified,

[Current] Fed. Sec. L. Rep. (CCH) { 97,526

Pee is INE Be UID pc nce ccdevecnovcakiwasemesvoresians

Johannessen Vv. United States, 225 U.S. 227

AEE IREES Rs AARP RS AIOE ESET Se ROU SOP

Kivitz v. SEC, 475 F.2d 956 (D.C. Cir. 1973),

rev’g Murray A. Kivitz, 44 S.E.C. 600 (1971)..

Klopp v. SEC, 427 F.2d 455 (6th Cir. 1970), rev’g

Paine, Webber, Jackson & Curtis (Klopp), 48

I SR) ea ccs

Lalone Vv. United States, 164 U.S. 255 (1896) ....11

Lefkowitz v. Cunningham, 431 U.S. 801 (1977)...

Lefkowitz v. Turley, 414 U.S. 70 (1978)..................

Mathews vV. Eldridge, 424 U.S. 319 (1976) ...............

Page

, 21, 22

19, 23

,» 22, 23

TABLE OF AUTHORITIES—Continued

Page

Mullaney v. Wilbur, 421 U.S. 684 (1975) ....000000..... 9

Nassar & Co. v. SEC, 566 F.2d 790 (D.C. Cir.

TROP D nnndeconanistahinialetiahcahctecinid aes ch ier eerie ae ae 8, 25

Nishikawa Vv. Dulles, 356 U.S. 129 (1958) ............. 10, 12

Pierce Vv. SEC, 289 F.2d 160 (9th Cir. 1956)........... 6,17

Piper v. Chris-Craft Industries, Inc., 4830 U.S. 1

RUPEE skputdcsangakssossintiisuceigeosaciceccsnsseaeenasaaemneine 19

Reliance Insurance Co. Vv. Barron’s, 442 F. Supp.

EM , , ) FRR hee 21

Rosenbloom v. Metromedia, Inc., 403 U.S. 29

9g | URS e UR Perens cx Ree May neat meer 19 NN! 10

In re Ruffalo, 390 U.S. 544 (1968) ..........00000cee.. 14

In re Ryder, 263 F. Supp. 360 (E.D. Va.), aff'd,

381 F.2d 718 (4th Cir. 1967) ............0002.:.22....:...... 14

Sartain v. SEC, 601 F.2d 1866 (9th Cir. 1979)... 8

Schneiderman v. United States, 320 U.S. 118

ERIE kas Shecseccesecscesiitconsdel neblarhtetreacsiicd cotetateas aii ice a 10, 12

Schwebel v. Orrick, 153 F. Supp. 701 (D.D.C.

1957), aff'd, 251 F.2d 919 (D.C. Cir.), cert. de-

SOU, Te Cie IE CID eedeicinoccneeepteeccees 5

Sea Island Broadcasting Corp. v. FCC, No. 76-

1786. (D.C. Cir., gan. 14, 1960) ........................... 8, 21, 24

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

pS: i a RR IL SLR nh EATS Cia Pt 24

SEC v. Sloan, 486 U.S. 108 (1978) -.-...-..--.000002... 8,17, 19

Shore Vv. Parklane Hosiery Co., 565 F.2d 815 (2d

Cir. 1977), aff’d, 489 U.S. 322 (1979) ......0000000.... 21, 27

Shultz v. SEC, 614 F.2d 561 (7th Cir. 1980) _........ 8

Silver v. New York Stock Exchange, 373 U.S. 341

IED dcccdetinncseethsindibncdedauniclbee tie taa i yeas 8

Speiser v. Randall, 357 U.S. 518 (1958) ...0.00.......... 9

Spevack v. Klein, 385 U.S. 511 (1967) —....000000000..... 14

Tippett v. Maryland, 486 F.2d 1153 (4th Cir.

1971), cert. dismissed sub nom. Murel v. Balti-

more City Criminal Court, 407 U.S. 355 (1972).. 10, 28

Townshend (The Marquis) v. Strangroom, 31 Eng.

Oe Bt Me ) Se se eee 23

Touche Ross & Co. v. Redington, 442 U.S. 560

CRUD scscinesshiceceicinsicasescinsusscetleonlsesiieliasiseiouiuetadaislea aakeannanie: 19

vii

TABLE OF AUTHORITIES—Continued

Page

Touche Ross & Co. v. SEC, 609 F.2d 570 (2d Cir.

SS SE 5

Transamerica Mortgage Advisers, Inc. v. Lewis,

ee 19

Troeder Vv. Lorsch, 150 F. 710 (1st Cir. 1906) ........ 22

Ultramares Corp. v. Touche, 255 N.Y. 170, 174

Cee. Lsaasectotnsncadanbsoscsons 21

Uniformed Sanitation Men Association v. Commis-

sioner of Sanitation, 392 U.S. 280 (1968) .......... 13

United Housing Foundation, Inc. v. Forman, 421

EE 19, 20

United States v. Fatico, 458 F. Supp. 388 (E.D.

N.Y. 1978), aff’d, 603 F.2d 1053 (2d Cir. 1979),

cert. denied, 100 S. Ct. 1018 (1980) ........0....... 9,16, 11

United States v. Lovett, 328 U.S. 303 (1946)........... 14

United States v. Schipani, 289 F. Supp. 43 (E.D.

N.Y. 1968), aff’d, 414 F.2d 1262 (2d Cir. 1969),

cert. denied, 397 U.S. 922 (1970) .................-.....- 11

United States v. Utah Construction & Mining Co.,

Teen ee sc aseneenasacesecccccccece 21

Villani v. New York Stock Exchange, 348 F. Supp.

1185 (S.D.N.Y. 1972), modified, 367 F. Supp.

1124 (S.D.N.Y.), aff'd on other grounds sub

nom. Sloan v. New York Stock Exchange, 489

8 | IT 19

Whitney v. SEC, 604 F.2d 676 (D.C. Cir. 1979)... : i

passim

In re Winship, 397 U.S. 358 (1970) ......00000000.. 9,10, 11, 28

Woodby v. INS, 385 U.S. 276 (1966) _...........-.... 5, passim

Wright v. SEC, 112 F.2d 89 (2d Cir. 1940) ............ 6

ADMINISTRATIVE DECISIONS:

Abbett, Summer & Co., 44 S.E.C. 104 (1969),

aff'd sub nom. Abbett, Summer & Co. v. SEC,

[1970-71 Transfer Binder] Fed. Sec. L. Rep.

(CCH) 4 92,813 (D.C. Cir. 1970) (per curiam),

cert. denied, 401 U.S. 974 (1979) -...0.0......0.0cee. 6

Aircraft Dynamics International Corp., 41 S.E.C.

ESS ee 6

viii

TABLE OF AUTHORITIES—Continued

Allen & Co., [1979 Transfer Binder] Fed. Sec. L.

Rep. (CCH) § 82,174 (Aug. 2, 1979) (initial

CS EIN ARM et ir ES eae Stee Ares de eR ER

William R. Carter, [1979 Transfer Binder] Fed.

Sec. L. Rep. (CCH) § 82,175 (March 7, 1979),

appeal pending before SEC 0.............22...202022000-----

Richard N. Cea, 44 §.E.C. 8 (1969) .........----------....

Clinton Engines Corp., 41 S.E.C. 408 (1968)........

Harold Collins, [1977-80 Transfer Binder] Comm.

Fut. L. Rep. (CCH) { 20,910 (1979) ......00...........

Compania Salvadorena de Cafe, S.A., CFTC

Docket No. 79-34, 518 Sec. Reg. & L. Rep.

(BNA) A-16 (Aug. 29, 1979) 2.000002

James De Mammos, 43 S.E.C. 333 (1967), aff’d

mem. (2d Cir., Oct. 18, 1967) ..............................

Hammon Capital Management Corp., [1979-80

Transfer Binder] Fed. Sec. L. Rep. (CCH)

F BR BGD CoM. Te, TOGO anna cicevvcsniccnseieccecedinn...

Harris Clare & Co., 43 S.E.C. 198 (1966) ..............

Hinkle Northwest, Inc., SEC 1934 Act Release

No. 15,888 (Nov. 16, 1978) ............0.....00000000..

International Research & Management Corp., SEC

Investment Advisers Act Release No. 617

RI I

J.A.B. Securities Co., SEC 1934 Act Release No.

16,948 (June 25, 19079).............2:...2.00.0....,.cccccccccenee

Keating, Muething & Klekamp, [1979 Transfer

Binder] Fed. Sec. L. Rep. (CCH) { 82,124

6 Fe | SR MATa ncn lip Rare eur ey a

MacRobbins & Co., 40 S.E.C. 497, remanded on

other grounds sub nom. Berko v. SEC, 297 F.2d

Oe GI a cai othe

Norman Pollisky, 43 S.E.C. 458 (1967) 0.000000...

Thomas A. Sartain, SEC 1934 Act Release No.

16,561 (Feb. 8, 1980) -.............. LTS DUN se

Morris Mac Schwebel, 40 S.E.C. 347 (1960) ..........

Underhill Securities Corp., 42 S.E.C. 689 (1965)...

Harold T. White, 3 S.E.C. 466 (1988) 0000000000000...

Page

TABLE OF AUTHORITIES—Continued

STATUTES:

Administrative Procedure Act:

5 USC. $061C10) (1976) .-.............................

5 U.S.C. §551(18) (1976) -....000 ee

ee I I cigs ceases menceviipnamniinegitinan

Rat Oe Pe I cts icicccciapetilicecemscctnascons

Investment Advisers Act of 1940, 15 U.S.C. § 80b-3

Se a TSE A TEES AT ESR LPC Ca

Investment Company Act of 1940:

IS Sees S|: |) nnn ene nanan

15 U.S.C. § 80a-9 (1976) -._...............................

1S UB. $O0R41 (1976) .................................

Securities Act of 1933:

15 U.S.C. § 77h(d) and (e) (1976)...

RE | EAR en

Securities Exchange Act of 1934:

15 U.S.C. § 780(b) (4) and (6) (1976) .........

15 U.S.C. § 780(c) (4) (1976) 2.022.

15 U.S.C. § 780-3 (1976) 2002.

15 U.S.C. § 78s(h) (1976) ...............................

ee West PO CRUD onesie encncsescennscrem

ARTICLES, BOOKS AND TREATISES:

50 Am. Jur. 2d Libel and Slander § 74 (1970)........

Friendly, Some Kind of Hearing, 123 U. Pa. L.

ee ee ssdentausen

See ee es ee CO oc

Jaffe, Administrative Law: Burden of Proof

and Scope of Review, 79 Harv. L. Rev. 914

RRS Aor Bia RRS Nat ile eh Oe ek ee ea

L. Jaffe, Judicial Control of Administrative

F. James, Civil Procedure (1965) -............0000000222...

H. Kripke, The SEC and Corporate Disclosure:

Regulation in Search of a Purpose (1979)...........

or or gn

TABLE OF AUTHORITIES—Continued

Page

L. Loss, Securities Regulation (2d ed. 1961, Supp.

PN ical scion <snletnstortinckacnplieloemeupimsmenmnsaduaia casita ieee tad 5, 20

Mathews, Litigation and Settlement of SEC Ad-

ministrative Enforcement Proceedings, 29 Cath.

ie Rt are ne Semen ee 5, 19, 20

McBaine, Burden of Proof: Degrees of Belief, 32

Calif. L. Rev. 242 (1944) 2... 11

C. McCormick, Evidence § 340 (2d ed. 1972) .......... 22

Note, The Collateral Estoppel Effect of Adminis-

trative Agency Actions in Federal Civil Litiga-

tion, 46 Geo. Wash. L. Rev. 65 (1977) ................. 21

Pickholz and Brodsky, An Assessment of Collateral

Estoppel and SEC Enforcement Proceedings

After Parklane Hosiery Co. v. Shore, 28 Am. U.

Kis TS Te ID casaiitcet eis cevcehiechsteenicndcbinaansinigibs 21

Restatement (Second) of Torts § 569 (1977) ......... 21

Schwartz & Wade, Legal Control of Government

NI oi acres a ek hatin dencennieabecgemasnionanaspenaeaaiie 18

Timbers & Garfinkel, Examination of the Commis-

sion’s Adjudicatory Process: Some Suggestions,

45 Va. L. Rev. 817 (1959) ........00.0 15

Underwood, The Thumb on the Scales of Justice:

Burdens of Persuasion in Criminal Cases, 86

pg 5 ne ice ee 28

9 J. Wigmore, Evidence § 2498 (3d ed. 1940) _........ 22

MISCELLANEOUS:

p et A RS 8 Se mere n ern es 5

S. Rep. No. 75, 94th Cong., Ist Sess. (1975) -......... 16, 18

le IN: BE IID vcd ccensctpscninarneinatntglitindconiadagpiimeaa 22

INTEREST OF THE SIA AS AMICUS CURIAE

The Securities Industry Association (“SIA”) is a na-

tional trade association representing approximately 500

brokers and dealers responsible for over 90 percent of

the securities brokerage and investment banking business

of the nation. Its membership is located throughout the

United States and represents a broad cross section of the

securities industry, including members of every national

securities exchange as well as securities firms not mem-

bers of the exchanges.

SIA’s members perform a complete spectrum of pro-

fessional securities activities, including retail and insti-

tutional brokerage, over-the-counter market-making, un-

derwriting and other investment banking activities,

various exchange floor functions, money management and

investment advisory services with respect to corporate,

municipal, government, and foreign securities. The SIA

is generally recognized as a principal spokesman for the

securities industry before legislative, regulatory, and ju-

dicial bodies.

The issue of the quantity of evidence required to sus-

tain a Securities and Exchange Commission (“SEC” or

“Commission’”) disciplinary order against one of the

broad range of professionals in the securities industry is

of utmost importance to the SIA and its members. The

SIA cooperates with the SEC, the stock exchanges, and

other self-regulatory organizations in sponsoring numer-

ous programs to educate its members and others with

respect to compliance with the applicable securities laws.

Nevertheless, given the complexities of the securities

laws, disputes over the propriety of conduct by securities

1 All parties have consented to the filing of this brief for

amicus curiae in support of Petitioner. See letter from the

Solicitor General to Counsel for SIA, dated May 23, 1980, and

letter from Counsel for Steadman to Counsel for SIA, dated

June 5, 1980, copies of which have been filed with the Clerk

of this Court.

professionals will arise. In the adjudication of such dis-

putes, based as they frequently are on broad, vague stat-

utory anti-fraud provisions, there is a higher than nor-

mal risk of an erroneous result. The standard of proof

in SEC disciplinary proceedings determines the extent

to which industry professionals must bear that risk. The

SIA believes that the SEC’s application of the clear and

convincing evidence requirement in its disciplinary pro-

ceedings since the decision in Collins Securities Corp. Vv.

SEC, 562 F.2d 820 (D.C. Cir. 1977), has added substan-

tially to the fairness of such proceedings and the result-

ing sanctions. Consequently, the SIA urges this Court to

reverse the Court of Appeals’ conflicting decision in this

case because that decision, if allowed to stand, will in-

crease the risk of unfair disciplinary proceedings with

unwarranted sanctions and thus undermine public confi-

dence in the justice of such proceedings.

STATEMENT

Petitioner Charles W. Steadman is president, chair-

man of the board, and sole beneficial owner of all the

voting stock of Steadman Security Corporation (“SSC’’),

a registered investment adviser. SSC, either directly or

through wholly owned subsidiaries, advises and manages

several mutual funds known collectively as the Steadman

Funds. In June 1971, the SEC instituted an administra-

tive disciplinary proceeding against Steadman, SSC, and

the subsidiaries, alleging willful violations of several pro-

visions of the federal securities laws.

Over petitioner’s objection that a more rigorous stand-

ard of proof was required,” the SEC found, by a mere

preponderance of the evidence, that petitioner and SSC

had willfully violated or aided and abetted violations of

the anti-fraud provisions of Section 17(a) of the Se-

2 Steadman Security Corp., [1977-78 Transfer Binder] Fed.

Sec. L. Rep. (CCH) {81,243 at 88,339-19 n.88 (June 29,

1977).

curities Act of 1933, Section 10(b) of the Securities

Exchange Act of 1934, and Rule 10b-5 thereunder, and

Sections 206(1) and (2) of the Investment Advisers Act

of 1940. On the basis of these findings, the SEC (1)

permanently barred Steadman from associating with any

investment adviser, (2) prohibited him from affiliating

with any registered investment company, and (3) sus-

pended him for one year from associating with any broker

or dealer.*

Upon review, the United States Court of Appeals for

the Fifth Circuit held that a mere preponderance of the

evidence was sufficient to sustain the SEC’s findings of

willful fraud violations.* However, noting that the SEC

had imposed the most severe sanctions at its disposal,

the Fifth Circuit remanded with directions that the Com-

mission “articulate a sufficient justification” for ordering

petitioner’s expulsion from the industry.

SUMMARY OF ARGUMENT

The SEC asks this Court to reinstate the pre-Collins

standard to permit the SEC to bar permanently broker-

dealers, investment advisers, underwriters and other se-

curities industry personnel from their chosen profes-

sions, although the SEC is unable to find clear and con-

vincing evidence that the professional respondent will-

fully violated anti-fraud provisions of the federal se-

curities laws.

As this Court has repeatedly recognized, any adjudi-

cation of fact can be erroneous, and the function of the

standard of proof is to allocate the risk of an erroneous

result between the government and the target of govern-

ment disciplinary action. The preponderance of the evi-

dence—or more likely than not—standard, applied by the

SEC and affirmed below, improperly places upon industry

* Td. at 88,339-23.

* Steadman v. SEC, 603 F.2d 1126 (5th Cir. 1979).

professionals substantial and unwarranted risks of er-

roneous adjudication of willful fraud and the unfair

imposition of harsh sanctions.

A clear and convincing evidence standard is appropriate

because SEC disciplinary proceedings are penal or quasi-

criminal in nature. The possible sanctions, including li-

cense revocation, suspension and permanent bar from the

securities industry, constitute harsh penalties that are

analogous to disbarment of a lawyer. In addition, these

disciplinary proceedings almost always involve ambiguous

or inferential evidence and the “willful fraud” stigma

that have traditionally led courts, including this one, to

require clear and convincing proof.

The court below, applying settled principles of judicial

administration, properly required the SEC to justify with

particularity the sanctions imposed. Justifying the se-

verity of the particular sanction imposed does not, how-

ever, eliminate the need for clear and convincing proof

of a willful fraud violation. Application of an erroneous

standard of proof in making the underlying finding of a

willful violation of the anti-fraud provisions will under-

mine the fairness of the proceeding regardless of the

sanction. Exclusive reliance on judicial review of the

sanction would also enable the SEC to extract settlements

from persons who would not otherwise be charged. Be-

cause judicial review of the choice of sanction is tradi-

tionally narrow, it is not a substitute for the correct

standard of proof of a willful violation.

ARGUMENT

The SEC conducts administrative disciplinary proceed-

ings pursuant to several statutes and its own rules of

practice.” It has broad powers to impose severe sanc-

5 See, e.g., §§ 8(d) and (e) of the Securities Act of 1933, 15

U.S.C. § 77(d) and (e) (1976); §§ 15(b) (4) and (6), 15(c)

(4), 15A and 19(h) of the Securities Exchange Act of 1934, 15

U.S.C. § 780(b) (4) and (6), § 780(c) (4) (1976), 15 U.S.C.

tions. The SEC can permanently bar a person from

being registered as, or associated with, a broker, dealer,

investment adviser, or investment company upon a finding

that the person has willfully violated, or willfully aided

and abetted violations of, the federal securities laws, or

willfully made false or misleading statements in reports

filed with the SEC. Although lacking express statutory

authority, the SEC also claims and frequently exercises

the power to bar from practice before it lawyers,® ac-

countants,’ and other professionals whom it finds to have

willfully violated, or willfully aided and abetted others

in violating, the federal securities laws.

Neither statute nor SEC rule specifies the standard of

proof necessary in such proceedings, that issue being

left for resolution through case law development.* Before

§ 780-8, s(h) (1976); §203(e) of the Investment Advisers

Act of 1940, 15 U.S.C. § 80b-3 (1976); and §§ 8, 9, and 41

of the Investment Company Act of 1940, 15 U.S.C. §§ 80a-8,

80a-9, 80a-41 (1976); 17 C.F.R. § 201.2(e) (1979); see also

3 L. Loss, Securities Regulation 1891-1944 (2d ed. 1961) ;

6 L. Loss, Securities Regulation 4020-4078 (2d ed. Supp.

1969) ; Mathews, Litigation and Settlement of SEC Adminis-

trative Enforcement Proceedings, 29 Cath. U.L. Rev. 215,

220-26 (1980).

6 See, e.g., Kivitz v. SEC, 475 F.2d 956 (D.C. Cir. 1973),

rev’g Murray A. Kivitz, 44 S.E.C. 600 (1971); Schwebel v.

Orrick, 153 F. Supp. 701 (D.D.C. 1957), aff’d, 251 F.2d 919

(D.C. Cir.), cert. denied, 356 U.S. 927 (1958); Morris Mac

Schwebel, 40 S.E.C. 347 (1960); Keating, Muething & Kle-

kamp, [1979 Transfer Binder] Fed. Sec. L. Rep. (CCH)

| 82,124 (July 2, 1979) (particularly dissenting opinion of

SEC Commissioner Karmel); William R. Carter, [1979 Trans-

fer Binder] Fed. Sec. L. Rep. (CCH) {82,175 (March 7,

1979) (initial decision), appeal pending before SEC.

7 See, e.g., Touche Ross & Co. v. SEC, 609 F.2d 570 (2d

Cir. 1979).

8 See, e.g., Woodby v. INS, 385 U.S. 276, 284 (1966) (The

appropriate standard of proof “is the kind of question which

has traditionally been left to the judiciary to resolve... .’’).

the decision in Collins v. SEC, 562 F.2d 820 (D.C. Cir.

1977) [hereinafter cited as Collins], the SEC applied

the mere preponderance or “more likely than not’ stan-

dard in its disciplinary proceedings. It did so even when

the respondent was charged with willful violations of the

anti-fraud provisions of the federal securities laws and

faced the possible sanction of permanent exclusion from

his chosen profession.®

In affirming the SEC’s use of the “more likely than

not” standard, the Fifth Circuit expressly declined to

follow the Collins decision, in which Judge Wilkey, joined

by Judges Leventhal and Wright, held that “a realistic

correlation between the burden of persuasion and the

available remedies” required application of the “clear and

convincing” standard in SEC disciplinary proceedings in-

volving allegations of willful fraud and the potential for

serious sanctions.’° The Fifth Circuit failed to acknowl-

® See Harold T. White, 3 S.E.C. 466, 539-40 (1938), where

the Commission adopted the mere preponderance standard

even though it held its administrative disciplinary proceedings

were “closely analagous to proceedings for the collection of a

statutory penalty.” See also Steadman Security Corp., [1977

Transfer Binder] Fed. Sec. L. Rep. (CCH) {J 81,243 at 88,339-

19 n.88 (June 29, 1977); Norman Pollisky, 43 S.E.C. 458, 459-

60 (1967) ; James De Mammos, 43 S.E.C. 333, 337 (1967),

aff'd mem. (2d Cir., Oct. 18, 1967) ; Harris Clare & Co., 43

S.E.C. 198 (1966); Underhill Securities Corp., 42 S.E.C. 689

(1965); Richard N. Cea, 44 S.E.C. 8, 25 (1969); Associated

Sec. Corp. Vv. SEC, 283 F.2d 773 (10th Cir. 1960); Pierce v.

SEC, 239 F.2d 160 (9th Cir. 1956); Wright v. SEC, 112 F.2d

89 (2d Cir. 1940); Abbett, Summer & Co., 44 S.E.C. 104

(1969), aff’d sub nom. Abbett, Summer & Co. v. SEC, [1970-

71 Transfer Binder] Fed. Sec. L. Rep. (CCH) {| 92,813 (D.C.

Cir. 1970) (per curiam), cert. denied, 401 U.S. 974 (1971);

Aircraft Dynamics Int’l Corp., 41 S.E.C. 566 (1963) ; MacRob-

bins & Co., 49 S.E.C. 497, remanded on other grounds sub

nom. Berko v. SEC, 297 F.2d 116 (2d Cir. 1961).

10 562 F.2d at 826.

edge that in Whitney v. SEC, 604 F.2d 676 (D.C. Cir.

1979), the District of Columbia Circuit had reaffirmed

and extended Collins, holding that ‘any sanction imposed

under section 15(b) [of the Securities Exchange Act of

1934] which depends on a finding of fraud must be sus-

tained by clear and convincing evidence.” '! In addition,

the Fifth Circuit apparently gave no weight to the SEC’s

application of the clear and convincing standard in a

number of post-Collins administrative disciplinary pro-

ceedings involving brokers,’* investment advisers,'* and

lawyers.'* Nor did the Fifth Circuit note that other ad-

ministrative agencies, relying on the reasoning in Collins,

have applied the clear and convincing standard in disci-

plinary proceedings.” After the Steadman decision, the

11604 F.2d at 681 (footnote omitted). The Whitney court

severely rebuked the SEC for taking “an overly parsimonious

view of our rationale in Collins.” Id.

12 E.g., Allen & Co., [1979 Transfer Binder] Fed. Sec. L.

Rep. (CCH) { 82,174 at 82,163 (Aug. 2, 1979) (initial de-

cision); Thomas A. Sartain, SEC 1934 Act Release No. 16,561

(Feb. 8, 1980); J.A.B. Sec. Co., SEC 1934 Act Release No.

15,948 (June 25, 1979).

13 F.g., Hinkle Northwest, Inc., SEC 1934 Act Release

No. 15,338 (Nov. 16, 1978) ; International Research & Man-

agement Corp., SEC Investment Advisers Act Release No. 617

(March 6, 1978). In each of these proceedings, the SEC

declined to determine whether Collins governed but neverthe-

less found clear and convincing evidence of violations.

14 William R. Carter, [1979 Transfer Binder] Fed. Sec. L.

Rep. (CCH) {82,175 at 82,165 & n.3 (March 7, 1979)

(initial decision) , appeal pending before SEC.

15 See, e.g., Harold Collins, [1977-80 Transfer Binder]

Comm. Fut. L. Rep. (CCH) § 20,910 (1979) (CFTC adminis-

trative proceeding) ; Compania Salvadorena de Cafe, S.A.,

CFTC Docket No. 79-34, 518 Sec. Reg. & L. Rep. (BNA) A-16

(August 29, 1979) (CFTC administrative proceedng). See

also Delikosta v. Califano, 478 F. Supp. 640, 643-44 n.4 (S.D.

District of Columbia Circuit also applied the clear and

convincing standard with respect to findings of willful

fraud in a broadcast license revocation proceeding be-

fore the Federal Communications Commission. Sea I[s-

land Broadcasting Corp. v. FCC, No. 76-1735 (D.C.

Cir., Jan. 14, 1980).’° The decision below thus departs

from an unmistakable trend toward application of the

clear and convincing standard in willful fraud cases in-

volving potentially severe sanctions.

Respondents in SEC disciplinary proceedings are en-

titled to procedural fairness.’ In the realm of fact find-

N.Y. 1979) (HEW administrative proceedings to reopen an

award of social security benefits because of alleged fraud

should be governed by clear and convincing standard).

16 Tn several securities disciplinary proceedings subsequent

to Collins, parties have raised the issue of the applicable

standard of proof on appeal, but the courts have declined to

resolve the issue. E.g., Shultz v. SEC, 614 F.2d 561, 569 n.17

(7th Cir. 1980) (“The issue of what standard we would use

in a case involving fraud is not before us.’’) ; Sartain v. SEC,

601 F.2d 1366, 1371-72 (9th Cir. 1979) .(court declined to

resolve issue because it was not timely raised). See also In-

vestors Research Corp. v. SEC, [1$79-80 Transfer Binder]

_ Fed. Sec. L. Rep. (CCH) {| 97,366 at 97,445 n.41 (D.C. Cir.,

April 29, 1980), language modified on another point, [Cur-

rent] Fed. Sec. L. Rep. (CCH) {97,526 (D.C. Cir., June

11, 1980) (court declined to require application of clear and

convincing standard in SEC proceeding involving neither

fraud nor severe sanctions) ; Chatham vy. SEC, 604 F.2d 1368

(D.C. Cir. 1978) (per curiam) (court declined to resolve issue

because SEC’s ruling was reasonable under either standard of

proof); Nassar & Co. v. SEC, 566 F.2d 790, 794 n.2 (D.C.

Cir. 1977) (Leventhal, J., concurring) (SEC, while main-

taining that mere preponderance standard should govern, did

find clear and convincing evidence).

17 See SEC v. Sloan, 4386 U.S. 103 (1978); cf. Silver v.

New York Stock Exchange, 373 U.S. 341 (1963); Intercon-

tinental Indus., Inc. V. American Stock Exchange, 452 F.2d

935 (5th Cir. 1971), cert. denied, 409 U.S. 842 (1972).

ing, procedural fairness encompasses both allocating the

burden of proof to the proper party ** and selecting the

appropriate standard of proof to balance the risk of er-

roneous decisions with other societal interests in each

particular type of adjudication.’®

A standard of proof “represents an attempt to instruct

the factfinder concerning the degree of confidence our

society thinks he should have in the correctness of factual

conclusions for a particular type of adjudication.” As

the Court noted last term, a particular standard of proof

“serves to allocate the risk of error between the litigants

and to indicate the relative importance attached to the

ultimate decision.” **

18 See Mathews v. Eldridge, 424 U.S. 319 (1976) ; Speiser

v. Randall, 357 U.S. 513 (1958).

19 The precise standard of proof appropriate to a particular

type of adjudication “is embodied in the Due Process Clause

and in the realm of factfinding. ...” Addington v. Texas, 441

U.S. 418, 423 (1979). Since SEC administrative disciplinary

sanctions are imposed pursuant to federal statute—the federal

securities laws—determination of the applicable standard of

proof in this case need not rest on constitutional grounds but

simply upon the judicial responsibility properly to administer

litigation. Woodby v. INS, 385 U.S. 276, 284 (1966) ; see also

United States v. Fatico, 458 F. Supp. 388, 408 (E.D.N.Y.

1978), aff'd, 603 F.2d 1053 (2d Cir. 1979), cert. denied, 100

S. Ct. 1018 (1980).

20 In re Winship, 397 U.S. 358, 370 (1970) (Harlan, J.,

concurring).

21 Addington Vv. Texas, 441 U.S. 418, 423 (1979). This

Court has recognized four separate standards of proof:

(1) beyond a reasonable doubt; (2) clear, unequivocal and

convincing; (3) clear and convincing; and (4) mere pre-

ponderance. Beyond a reasonable doubt, the most stringent

standard, applies in criminal prosecutions. Mullaney v. Wil-

bur, 421 U.S. 684 (1975) ; In re Winship, 397 U.S. 358 (1970) ;

Holt v. United States, 218 U.S. 245, 254 (1910). Clear, un-

The preponderance of the evidence test advocated by

the SEC allocates to the respondent in an SEC discipli-

nary proceeding a substantial risk—only marginally

better than the flip of a coin *—that the government will

equivocal and convincing, an intermediate but stringent stan-

dard, applies in extraordinary civil cases “where the various

interests of society are pitted against restrictions on the

liberty of the individual... .” In re Ballay, 482 F.2d 648, 662

(D.C. Cir. 1973). E.g., Woodby v. INS, 385 U.S. 276 (1976)

(deportation) ; Chaunt v. United States, 364 U.S. 350 (1960)

(denaturalization) ; Baumgartner v. United States, 322 U.S.

665 (1944) (denaturalization); Schneiderman v. United

States, 320 U.S. 118, 125, 159 (1943) (denaturalization) ;

Nishikawa v. Dulles, 356 U.S. 129 (1958) (expatriation) ;

Gonzales v. Landon, 350 U.S. 920 (1955) (per curiam) (ex-

patriation). Clear and convincing, another intermediate but

less stringent standard, has been applied in civil cases that

involve significant charges that imply moral turpitude and

substantial sanctions that “can engender adverse social conse-

quences to... [and] have a very significant impact on the

individual.” Addington v. Texas, 441 U.S. 418, 425-26 (1979)

(civil commitment). See, e.g., Gertz v. Robert Welch, Inc.,

418 U.S. 323, 331-382 (1974) (libel) ; Rosenbloom v. Metro-

media, Inc., 403 U.S. 29, 50-52 (1971) (libel); Tippett v.

Maryland, 436 F.2d 1153, 1165-66 (4th Cir. 1971), cert. dis-

missed sub nom. Murel v. Baltimore City Criminal Court, 407

U.S. 355 (1972); cf. United States v. Fatico, 458 F. Supp.

388, 404 (E.D.N.Y. 1978), aff'd, 603 F.2d 1053 (2d Cir. 1979),

cert. denied, 100 S. Ct. 1018 (1980). Mere preponderance, the

least stringent standard, applies to “the typical civil case in-

volving a monetary dispute between private parties,” Adding-

ton Vv. Texas, 441 U.S. at 423, where the courts “view it as no

more serious in general for there to be an erroneous verdict

in the defendant’s favor than for there to be an erroneous

verdict in the plaintiff’s favor.” In re Winship, 397 U.S. 358,

371-72 (1970) (Harlan, J., concurring).

22 The “preponderance of the evidence” standard of proof

“simply requires the trier of fact ‘to believe that the existence

of a fact is more probable than its nonexistence... .’” In re

make an erroneous finding of willful fraud and conse-

quently impose a penalty that can be as severe as total,

permanent deprivation of profession, business and liveli-

hood. Such a distribution of the risk of erroneous adju-

dication is wrong. It fails to recognize the weight the

law has traditionally accorded to the interests of those

facing severe sanctions and to the interests of those

accused of willful fraud.** It also fails to accord any

weight to the public interest in ensuring that salutary

economic activity is not inhibited by either an actual

erroneous adjudication of willful fraud or the perception

that such an erroneous adjudication is likely. In con-

trast, the clear and convincing test recognizes these in-

terests while reconciling them with the legitimate public

interest in effective enforcement of the federal securities

laws against those who are convincingly shown to have

committed willful fraud violations.

Winship, 397 U.S. 358, 371 (1970) (Harlan, J., concurring)

(citing F. James, Civil Procedure 250-51 (1965)). See also

McBaine, Burden of Proof: Degrees of Belief, 32 Calif. L.

Rev. 242, 261 (1944) ; United States v. Fatico, 458 F. Supp.

388, 403 (E.D.N.Y. 1978) (in which Judge Weinstein quanti-

fies the various standards of proof “along a continuum from

low probability [50+ percent probable] to very high prob-

ability [95-- percent probable]’’), aff’d, 603 F.2d 1053 (2d

Cir. 1979), cert. denied, 100 S. Ct. 1018 (1980); United States

v. Schipani, 289 F. Supp. 43, 56-57 (E.D.N.Y. 1968), aff’d, 414

F.2d 1262 (2d Cir. 1969), cert. denied, 397 U.S. 922 (1970).

23 There is ample precedent for requiring clear and convinc-

ing evidence to support either a finding of willful fraud, see,

e.g., Lalone Vv. United States, 164 U.S. 255, 257 (1896); Whit-

ney V. SEC, 604 F.2d 676 (D.C. Cir. 1979), or imposition of

a drastic sanction, see, e.g., Woodby v. INS, 385 U.S. 276

(1976). The fact that this case, like Collins, involves both

allegations of willful fraud and the most severe sanctions,

provides an overwhelming basis for requiring clear and con-

vincing evidence.

I. THE INTERESTS OF RESPONDENTS IN SEC

“QUASI-CRIMINAL” DISCIPLINARY PROCEED-

INGS IN WHICH THEY FACE SEVERE SANC-

TIONS REQUIRE THE USE OF THE “CLEAR AND

CONVINCING” STANDARD OF PROOF.

Historically, where an administrative or disciplinary

body has sought to impose severe sanctions, this Court

has as a minimum required proof of the violation by clear

and convincing evidence. In Schneiderman v. United

States, 320 U.S. 118 (1948), the Court held that “the

clearest sort of justification” was required to support

the drastic sanction of revocation of citizenship.* In

Gonzales v. Landon, 350 U.S. 920 (1955) (per curiam),

this Court applied the same standard in an expatriation

action.” In Woodby v. INS, 385 U.S. 267, 282-86 (1966),

the Court held that the Immigration and Naturalization

Service had to have “clear, unequivocal and convincing

evidence” to order deportation. Noting the “drastic de-

privations” resulting from deportation, this Court re-

jected the government’s contention that the non-criminal

24 320 U.S. at 122. In Schneiderman, the Court drew an

analogy between public land grants and the grant of citizen-

ship to the naturalized citizen by quoting with approval lan-

guage from Johannessen Vv. United States, 225 U.S. 227

(1912):

[A] certificate of citizenship is “an instrument grant-

ing political privileges and open like other public grants

to be revoked if and when it shall be found to have been

unlawfully or fraudulently procured.” ... To set aside

such a grant the evidence must be “clear, unequivocal

and convincing”—‘“it cannot be done upon a bare pre-

ponderance of evidence which leaves the issue in doubt.”

820 U.S. at 125. The case at bar similarly could be charac-

terized as an attempt to revoke a “public grant’’—i.e., the

grant of a license to do business in the securities industry.

28 See also Nishikawa Vv. Dulles, 356 U.S. 129 (1958) (ex-

patriation).

nature of the proceeding permitted a preponderance

standard of proof “no higher . . . than applies in a negli-

gence case.” ** The Court added that the clear, unequivo-

cal and convincing standard “is no stranger to the civil

law” and “has traditionally been imposed in cases involv-

ing allegations of civil fraud.” *

As recently as last term, the Court in Addington v.

Texas, 441 U.S. 418, 481 (1979), held that in civil com-

mitment proceedings the states must apply at least a

clear and convincing standard—a “middle level of burden

of proof that strikes a fair balance between the rights of

the individual and the legitimate concerns of the state.”

This Court has also repeatedly recognized that ad-

ministrative deprivation of a person’s employment is a

drastic sanction or punishment that triggers a panoply

of procedural and constitutional protections. The Court

has held that a person may not be deprived of his em-

ployment as a state political party officer,?* a public con-

tractor,”® a police officer,®® or a city sanitation worker *

without a wide range of protections, including procedural

due process, the Fifth Amendment right against self-

incrimination, and other safeguards.

Although loss of particular employment is a severe

sanction, it is not nearly so drastic as total preclusion

from a chosen profession.*? In cases involving exclusion

26 385 U.S. at 285.

27 385 U.S. at 285 n.18.

28 Lefkowitz v. Cunningham, 481 U.S. 801 (1977).

29 Lefkowitz v. Turley, 414 U.S. 70 (1978).

80 Gardner V. Broderick, 392 U.S. 273 (1968); Garrity v.

New Jersey, 385 U.S. 493 (1967).

31 Uniformed Sanitation Men Ass’n Vv. Commissioner of

Sanitation, 392 U.S. 280 (1968).

82 See Friendly, Some Kind of Hearing, 123 U. Pa. L. Rev.

1267, 1297 (1975). Judge Friendly noted that the revocation

of a license to practice a profession ranks “high on the pro-

from a profession such as government service * or the

practice of law,* this Court has imposed even higher

standards, approaching those applicable in criminal

felony trials. In implementing the protections afforded

against permanent loss of profession, several federal

courts have required “clear and convincing evidence”

rather than the “more likely than not” standard advo-

cated by the SEC. For example, where attorneys are

subject to disciplinary proceedings, courts have recog-

nized that disciplinary sanctions, even those designed for

the protection of the public, severely punish the attorney,

often destroying both professional reputation and liveli-

hood.* Therefore, proof of the misconduct must be clearly

and convincingly shown.*®

cedural scale,” because “the government is threatening to

deprive a person of a way of life to which he has devoted

years of preparation and on which he and his family have

come to rely,” and “the types of issues often resemble those

tried in actions for fraud or negligence, or even in criminal

proceedings.” Jd. (footnotes omitted).

83 United States v. Lovett, 328 U.S. 303 (1946) (Permanent

proscription from government service is a “punishment” that

can be inflicted lawfully only upon compliance with the Sixth

Amendment).

34 In re Ruffalo, 390 U.S. 544 (1968); Spevack v. Klein,

885 U.S. 511, 514-16 (1967).

85 Cf. Kivitz v. SEC, 475 F.2d 956, 962 (D.C. Cir. 1973).

36 In re Fisher, 179 F.2d 361, 369 (7th Cir.), cert. denied,

340 U.S. 825 (1950) (“[T]he charges must be sustained by

clear and convincing proof”) (quoting In re Donaghy, 402

Ill. 120, 123, 83 N.E. 2d 560, 562 (1948)); In re Adriaans, 28

U.S. App. D.C. 515, 522 (1907). See In re Ryder, 263 F.

Supp. 360, 361 (E.D. Va.), aff'd, 381 F.2d 713 (4th Cir.

1967) (“In proceedings of this kind the charges must be sus-

tained by clear and convincing proof, the misconduct must be

fraudulent, intentional and the result of improper motives.’’).

See also Charlton v. FTC, 543 F.2d 903, 906 (D.C. Cir.

1976). In Charlton, the court stated that, contrary to the

It is widely acknowledged that SEC disciplinary pro-

ceedings are “penal” or “quasi-criminal” in nature.** The

SEC itself has described them as “closely analogous to

proceedings for the collection of a statutory penalty.” **

Judge Friendly has emphasized that SEC disciplinary

proceedings have the “quality of visiting serious conse-

quences on past conduct” in characterizing their “penal”

aspects.*” Former SEC General Counsel, now Second Cir-

cuit Judge, Timbers labeled SEC disciplinary proceedings

“quasi-punitive.” * A leading commentator has singled

out the frequent use of an agency’s most severe sanctions

as evidence that agency disciplinary proceedings have a

“significant penal component.” *! Congress has character-

FTC’s concept, disciplinary proceedings are adversary pro-

ceedings of a quasi-criminal nature and disbarment is a pun-

ishment or penalty imposed on the lawyer. Although the court

spoke of a preponderance standard, it also stated that the case

“should be clear and free from doubt.” As the court in Collins

recognized, the Charlton court clearly “was referring to the

type of clear and convincing evidence long reguired for disci-

pline of attorneys.” 562 F.2d at 825.

37 Professor Jaffe has noted that the license revocation and

suspension powers of administrative agencies are sanctions

“far heavier than the ordinary fine” and serve “the functions

of a criminal penalty.” L. Jaffe, Judicial Control of Adminis-

trative Action 114 (1965).

38 Harold T. White, 3 S.E.C. 466, 539-40 (1938).

39 Arthur Lipper Corp. v. SEC, 547 F.2d 171, 180-81 n.6

(2d Cir. 1976), cert. denied, 484 U.S. 1009 (1978).

40 Timbers & Garfinkel, Examination of the Commission’s

Adjudicatory Process: Some Suggestions, 45 Va. L. Rev. 817,

824 (1959).

41. Jaffe, Judicial Control of Administrative Action 267-

68 (1965) (“Revocation, indeed, seems often to be used as a

sanction not so much to control the respondent as to warn

ized the SEC’s sanction of suspending or withdrawing

registration as a “draconian remedy.” *? The statutory

requirement that the SEC find “willful” violations before

exercising its disciplinary powers parallels the criminal

scienter standard and serves to underline the “penal”

quality of the proceeding.**

There is no dispute that the sanction imposed by the

SEC against Steadman in this case is a penalty. The

court below explicitly so found.** The sanction would end

Steadman’s career and force him to sell his principal

asset, his stock in SSC, at a substantial loss. It would

permanently bar him from association with any regis-

tered investment company and suspend him from associa-

tion with any broker-dealer for one year. As the court

below recognized, “[E]xclusion from the industry is

clearly a penalty” that is “indistinguishable in its effect

on the respondent from disbarment from the practice of

law.” *

others, and thus it has a significant ‘penal’ component, even

though the courts may choose to mask its character by calling

it a ‘civil’ remedy.”’).

42S. Rep. No. 75, 94th Cong., 1st Sess. 34 (1975). See also

Hammon Capital Management Corp., [1979-80 Transfer

Binder] Fed. Sec. L. Rep. (CCH) {| 82,449 at 82,891 (Jan. 25,

1980) (initial decision) (revocation of investment adviser’s

registration “far too draconic” for nonfraudulent violations).

48 Cf. Arthur Lipper Corp. v. SEC, 547 F.2d 171, 180-81

nn.6, 7 (2d Cir. 1976), cert. denied, 434 U.S. 1009 (1978).

44 603 F.2d at 1139.

45 Jd. See Collins, supra, 562 F.2d at 825 (“‘Disbarment or

suspension is the equivalent to the penalty imposed on Collins

by the SEC here.’’).

Under the SEC’s rationale, as the SEC expressly stated in

its decision in this case, Steadman Security Corp., [1977-78

Transfer Binder] Fed. Sec. L. Rep. (CCH) {§ 81,243 at 88,319-

19 n.88 (June 29, 1977), it would also be free to disbar an

The SEC has attempted to justify its preponderance

standard by labeling these sanctions “remedial” rather

than punitive.*® The SEC’s characterization misses a

crucial point.*7 While the SEC may emphasize the reme-

dial component of its disciplinary proceedings, its sanc-

tions—that may deprive the respondent of the profession

to which he has devoted a lifetime or impose greater

financial sacrifices than the maximum fine for a criminal

conviction under the federal securities laws **—are dis-

attorney from practicing before it on the basis of a finding

that the attorney had more likely than not committed a willful

violation of the federal securities laws. The SEC would thus

be in the anomalous position of needing less convincing evi-

dence to deprive an cttorney of his chosen professional spe-

cialty than would a state or federal judge sitting in a disbar-

ment case.

46 See, e.g., Beck v. SEC, 430 F.2d 673, 674 (6th Cir. 1970) ;

Berko v. SEC, 316 F.2d 187, 141 (2d Cir. 1963); Blaise

D’ Antoni & Assoc., Inc. v. SEC, 289 F.2d 276, 277 (5th Cir.),

cert. denied, 368 U.S. 899 (1961) ; Pierce v. SEC, 239 F.2d 160,

163 (9th Cir. 1956).

47 As the Court noted in Addington, what the sanction is

called “is less important than that we recognize that it can

occur and that it can have a very significant impact on the

individual.” 441 U.S. at 426.

The SEC’s interpretation in its administrative case law of

the proper standard is not determinative. As this Court re-

cently emphasized, the existence of a prior administrative

practice does not relieve this Court of its responsibility to

determine whether that practice is consistent with the SEC’s

statutory mandate. SEC v. Sloan, 486 U.S. 108, 117-19

(1978) (rejecting SEC’s consistent interpretation, over a 34-

year period, of Securities Exchange Act of 1934 provision).

48 The loss of income resulting from permanent exclusion

from the investment advisory business or even a one-year

suspension from the brokerage business frequently exceeds

the maximum $10,000 fine that can be imposed for the most

tinctly punitive. As the court in Collins recognized, “One

would hardly say that removal of a criminal from society

should be classed as ‘remedial’ because it protects ordi-

nary citizens from the probable repetition of the crime.” *°

SEC disciplinary proceedings serve the purposes in-

tended by Congress only to the extent that appropriate

sanctions are properly and fairly applied. It is not ‘“reme-

dial” to bar from the securities business someone who is

erroneously adjudicated guilty of willful fraud. Such a

result wrongly deprives the public of a source of invest-

ment services, curtails useful economic activity, and

undermines industry confidence in regulatory bodies. The

clear and convincing standard will thus serve the true

purpose underlying the Congressional delegation of disci-

plinary authority, giving both the SEC and the securities

community greater assurance that justice is done.

Greater assurance of justice is particularly important

because of the nature of SEC proceedings. Unlike the

federal courts in civil and criminal cases, the SEC is in-

vestigator, prosecutor, judge, and jury.*' It does not ac-

cord respondents the degree of prehearing discovery avail-

serious felony conviction under the federal securities statutes.

See, e.g., § 24 of the Securities Act of 1933, 15 U.S.C. § 77x

(1976) ; §32(a) of the Securities Exchange Act of 1934, 15

U.S.C. § 78ff (1976).

49 562 F.2d at 825.

50 One of the principal goals of the Securities Exchange Act

of 1934, as amended in 1975, is to promote competition in the

securities industry. See S. Rep. No. 75, 94th Cong., Ist Sess.

8 (1975).

51 See Schwartz & Wade, Legal Control of Government 270

(1972) (“One of the limitations of the administrative expert

is his tendency to single-mindedness and excessive zeal. The

judges can stand apart from the tensions of the immediate

case and mitigate the enthusiasm of the expert by the com-

munity’s sense of justice.”’).

able to litigants under the Federal Rules of Civil Pro-

cedure. It allows into evidence a potpourri of “proofs”

that would ordinarily be inadmissible in a civil or crimi-

nal trial pursuant to the Federal Rules of Evidence.** The

SEC also has a consistent record of aggressive expansion

of the scope of the federal securities laws through en-

forcement proceedings against individual respondents.™

52 For further discussion, see Mathews, Litigation and Set-

tlement of SEC Administrative Enforcement Proceedings, 29

Cath. U.L. Rev. 215, 250-53 (1980). Cf. Villani v. New York

Stock Exchange, 348 F. Supp. 1185 (S.D.N.Y. 1972),

modified, 367 F. Supp. 1124 (S.D.N.Y.), aff'd on other

grounds sub nom. Sloan v. New York Stock Exchange, 489

F.2d 1 (2d Cir. 1973).

53 See, e.g., Mathews, Litigation and Settlement of SEC Ad-

ministrative Enforcement Proceedings, 29 Cath. U.L. Rev.

215, 258 (1980). Evidence need not even be “competent” to be

admissible in SEC disciplinary proceedings. Clinton Engines

Corp., 41 S.E.C. 408, 411-12 (1963) (footnotes omitted). For

examples of reversals by appellate courts of SEC disciplinary

sanctions based upon unreliable evidence, see, e.g., Kivitz v.

SEC, 475 F.2d 956 (D.C. Cir. 1973), rev’g Murray Vv. Kivitz,

44 S.E.C. 600 (1971); Klopp v. SEC, 427 F.2d 455 (6th Cir.

1970), rev’g Paine, Webber, Jackson & Curtis (Klopp), 438

S.E.C. 1042 (1969); Whitney v. SEC, 604 F.2d 676 (D.C. Cir.

1979).

54 The SEC both as a party and as amicus has, for example,

consistently urged this Court to adopt expansive interpreta-

tions of the federal securities laws. See, e.g., Aaron v. SEC,

446 U.S. ——, 48 U.S.L.W. 4609 (U.S. June 2, 1980) (No. 79-

66) ; SEC v. Sloan, 486 U.S. 103 (1978) ; Chiarella v. United

States, 445 U.S. ——, 100 S. Ct. 1109 (1980); Transamerica

Mortgage Advisers, Inc. v. Lewis, 444 U.S. 11 (1979) ; Touche

Ross & Co. Vv. Redington, 442 U.S. 560 (1979) ; International

Brotherhood of Teamsters v. Daniel, 489 U.S. 551 (1979);

Piper v. Chris-Craft. Industries, Inc., 480 U.S. 1 (1977);

Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) ; Foremost-

McKesson, Inc. Vv. Provident Sec. Co., 423 U.S. 2382 (1976) ;

United Housing Foundation, Inc. v. Forman, 421 U.S. 887

It is precisely this type of vigorous enforcement in in-

stances where “administrative procedures are less solici-

tous of the protection of the individual than are civil or

criminal procedures” * that calls for the increased pro-

cedural protection of a greater standard of proof for

administrative agencies “in situations where individuals

stand to suffer serious liabilities.” °°

II. THE INTERESTS OF RESPONDENTS IN SEC PRO-

CEEDINGS IN WHICH THEY ARE CHARGED

WITH WILLFUL FRAUD REQUIRE THE USE OF

THE “CLEAR AND CONVINCING” STANDARD OF

PROOF.

In the overwhelming majority of SEC administrative

disciplinary proceedings, the SEC alleges willful fraud

under the various anti-fraud provisions of the federal

securities statutes.*7 In such proceedings, the SEC must

make a specific finding that a statutory violation is “will-

ful’ in order to impose a sanction.**

(1975); Blue Chip Stamps v. Manor Drug Stores, 421 U.S.

723 (1975).

55 Jaffe, Administrative Law: Burden of Proof and Scope

of Review, 79 Harv. L. Rev. 914, 919-20 (1966).

56 Td.

57 “Tn the past decade (1970-1979), the Commission has

instituted a total of 864 administrative proceedings in which

the order commencing the proceeding alleged violations of one

or more of the anti-fraud provisions involved in this case.”

SEC Brief in Support of Petition for Certiorari at 6 n.8

(April 1980), in the instant case.

58 See Mathews, Litigation and Settlement of SEC Admin-

istrative Enforcement Proceedings, 29 Cath. U.L. Rev. 215,

238-39 (1980); 2 L. Loss, Securities Regulation 1307-12 (2d

ed. 1961); 5 L. Loss, Securities Regulation 3366-77 (2d ed.

Supp. 1969).

Willful fraud is a serious charge even when made in a

civil or administrative context. An allegation of fraud is

considered per se defamatory in most jurisdictions.” An

adjudication of willful fraud stigmatizes the respondent,”

destroys personal reputation, and frequently causes severe

professional and business injury.“ In the securities in-

dustry, SEC proceedings charging willful fraud fre-

quently trigger civil lawsuits in which the SEC’s findings

may have collateral estoppel effect. This Court has

acknowledged the severe consequences of fraud charges,

particularly against professionals, in recent securities

cases.*

5950 Am. Jur. 2d Libel and Slander § 74 (1970) ; Restate-

ment (Second) of Torts § 569, Comment g (1977). See, e.g.,

Reliance Ins. Co. v. Barron’s, 442 F. Supp. 1341, 13845 (S.D.

N.Y. 1977).

60 Whitney Vv. SEC, 604 F.2d 676, 681 (D.C. Cir. 1979)

(Sanctions depending on a finding of fraud “result in stig-

matizing the defendant irrespective of the formal sentence

meted out.”’).

61 Sea Island Broadcasting Corp. v. FCC, No. 76-1735, slip.

op. at 8-9 (D.C. Cir., Jan. 14, 1980).

62 See United States v. Utah Constr. & Mining Co., 384

U.S. 394 (1966) ; Shore v. Parklane Hosiery Co., 565 F.2d 815,

819 n.1 (2d Cir. 1977), aff’d, 489 U.S. 322 (1979) (“[W]hen

an administrative agency acts in a judicial capacity, collateral

estoppel effect may be given to its findings of fact against

the respondent rather than require relitigation in subsequent

legal proceedings.’”); Pickholz and Brodsky, An Assessment

of Collateral Estoppel and SEC Enforcement Proceedings

After Parklane Hosiery Co. Vv. Shore, 28 Am. U.L. Rev. 37,

56-58 (1978) ; Note, The Collateral Estoppel Effect of Admin-

istrative Agency Actions in Federal Civil Litigation, 46 Geo.

Wash. L. Rev. 65 (1977).

6 Ernst & Ernst v. Hochfelder, 425 U.S. 185, 214-16 n.33

(1976) and Blue Chip Stamps v. Manor Drug Stores, 421 U.S.

723, 747-48 (1975), both quoting Ultramares Corp. v. Touche,

255 N.Y. 170, 174 N.E. 441 (1981).

Because of the gravity of a willful fraud charge the

courts have traditionally fashioned special safeguards in

fraud cases. Under Rule 9(b) of the Federal Rules of

Civil Procedure the circumstances constituting fraud

must be “stated with particularity.” A finding of fraud

must usually be based on a finding of scienter.* Most

important, many courts,” including this one, have in-

sisted that fraud be proved by clear and convincing evi-

dence or “an even higher” standard.” As recently as last

* Aaron, supra, at 4613-15; Hochfelder, supra, at 212-14.

6 See, e.g., Borowicz Vv. Chicago Mastic Co., 367 F.2d 751,

760 (7th Cir. 1966) (“Fraud is not to be presumed, but roust

be affirmatively established by clear and convincing proof of

each and every essential element.”) ; Troeder v. Lorsch, 150

F. 710, 714 (1st Cir. 1906) (“[W]hen a person is charged

with all the elements which constitute a heinous crime, al-

though it be only on a civil issue, it shocks the judicial mind

to refuse to give him the benefit of the usual presumption of

innocence unless the adverse proofs are so far satisfactory as

to be convincing.”). The court noted in Collins: ‘There are

literally hundreds of cases decided by the United States Court

of Appeals in which the standard applied in fraud situations

has been ‘clear and convincing evidence.’” 562 F.2d at 824 &

n.27.

See C. McCormick, Evidence § 340 at 797 (2d ed. 1972);

9 J. Wigmore, Evidence § 2498 at 329 (3d ed. 1940). Dean

Wigmore states that “some such phrase, as ‘clear and con‘inc-

ing proof,’ is commonly applied to measure the necessary

persuasion for a charge of fraud,” and collects the federal

and state case law at 329 n.13.

66 See Lalone v. United States, 164 U.S. 255, 257 (1896).

8? Woodby v. INS, 385 U.S. 276, 285 n.18 (1966) (The

clear and convincing “standard, or an even higher one, has

traditionally been imposed in cases involving allegations of

civil fraud’’) ; see Collins, supra, 562 F.2d at 824-26; Whitney

v. SEC, supra. 604 F.2d at 681 n.19 (“We intend the word

‘fraud’ not merely in its common law sense, but comprehend-

ing all violations of § 10(b) and rule 10b-5.”’).

term, the Court noted approvingly that many jurisdictions

reduced “the risk to the defendant of having his reputa-

tion tarnished erroneously by increasing the plaintiff’s

burden of proof” to clear and convincing evidence in

fraud cases.®

The use of the more exacting “clear and convincing”

standard also reflects the belief of the courts that, since

proof in cases involving fraud is often circumstantial

and dependent on inference, the risk of an error by the

trier of fact is particularly great. Basic fairness there-

fore requires use of the “clear and convincing” standard

of proof to offset the enhanced risk of an erroneous re-

sult.” That securities fraud cases often turn on circum-

stantial proof is apparent not only from precedent ® but

also from the fact that such cases frequently involve find-

ings with respect to the intentions of businessmen or

88 Addington Vv. Texas, 441 U.S. 418, 424 (1979).

69 See Lalone v. United States, 164 U.S. 255, 257 (1896) (“A

mere preponderance of evidence which at the same time is

vague or ambiguous is not sufficient to warrant a finding of

fraud, and will not sustain a judgment based on such find-

ing.”) ; Collins, supra, 562 F.2d at 823; Whitney, supra, 604

F.2d at 681 (“[D]lespite the presence of some ‘direct’ testi-

mony in this case, the state of the evidence is hardly unequi-

vocal and we are reluctant to forgo the added assurance of

correctness afforded by a heightened standard of proof.’’).

See also 12 Ga. L. Rev. 153, 154 n.9 (1977):

The “clear and convincing evidence” standard first ap-

peared in English equity cases involving the use of parol

evidence. The courts were concerned about the quality

of the evidence; hence, a more stringent standard of

proof was adopted. Townshend (The Marquis) v. Stran-

groom, 31 Eng. Rep. 1076 (Ch. 1801); Henkle v. Royal

Exch. Assurance Co., 27 Eng. Rep. 1055 (Ch. 1749).

70 See, ¢.g., Collins, supra; Kivitz v. SEC, 475 F.2d 956

(D.C. Cir. 1973) ; Klopp v. SEC, 427 F.2d 455 (6th Cir. 1970).

businesswomen forced to make economic choices under

pressure with imperfect information.

The risk of error in SEC disciplinary proceedings in

which willful fraud is alleged is heightened by the am-

biguity and imprecision of important provisions of the

federal securities laws."! Several times in the last few

years this Court has rejected SEC interpretations of the

anti-fraud and related provisions of the securities laws.”

Several of these decisions suggest that the meaning of

fraud may be particularly unclear in the securities con-

text.”* In such circumstances, the “clear and convincing”

standard of proof affords an essential protection against

an erroneous finding of willful fraud and the attendant

stigma.

71 See Collins, supra, 562 F.2d at 822-23. See 12 Ga. L. Rev.

153, 157 n.24 (1977): “The [Collins] court noted that the

practice of relying on inferential evidence is unobjectionable

and is a result of the ambiguities and imprecisions of the

securities laws.”

72 See cases cited at note 54, supra.

73 The fiduciary nature of the standards of conduct imposed

on investment advisers under the Investment Advisers Act,

SEC v. Capital Gains Research Bureau, 375 U.S. 180 (1963),

is not a reason for a lesser standard of proof under that stat-

ute. First, federal fiduciary responsibility law is, if anything,

even more ambiguous than securities fraud law. Second, the

clear and convincing standard has been required in an adjudi-

cation of willful fraud charges against a broadcasting licensee

who is a statutory trustee with a special fiduciary duty to the

public. Sea Island Broadcasting Corp. v. FCC, No. 76-1735

(D.C. Cir., Jan. 14, 1980). In any event, the Investment Ad-

visers Act violation was but one of the violations upon which

the SEC based its sanctions against Steadman. Among others,

the SEC found willful violations of the anti-fraud provisions

of §17(a) of the Securities Act of 1933 and §10(b) of the

Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

Ill. ALTHOUGH THE COURT OF APPEALS COR-

RECTLY REQUIRED THE SEC TO JUSTIFY THE

PARTICULAR SANCTIONS IT IMPOSES, THIS

REQUIREMENT IS NOT A SUBSTITUTE FOR

CLEAR AND CONVINCING EVIDENCE OF A

WILLFUL VIOLATION.

In ordering the SEC to satisfy the “burden of justifica-

tion” by articulating the reasons for choosing the precise

sanction ultimately imposed on petitioner and in suggest-

ing the range of factors the SEC might appropriately

employ, the Fifth Circuit neither announced a new doc-

trine nor established additional procedural safeguards

for respondents in SEC disciplinary proceedings. Rather

the court merely engaged in traditional judicial review of

final agency action by insisting on the first prerequisite

of judicial review, an explanation of how the agency

reached its decision.“ Under the authority of the Ad-

ministrative Procedure Act, 5 U.S.C. §§551(10), 551

(13), 702, 706 (1976), and the due process clause, nu-

merous courts have reviewed and on occasion modified

disciplinary sanctions imposed by the SEC. The Court

of Appeals neither purported to expand the law nor in

fact did so.

1 See Citizens to Preserve Overton Park v. Volpe, 401 U.S.

402 (1971); Nassar & Co. v. SEC, 566 F.2d 790, 794 (D.C.

Cir. 1977) (in remanding case, court emphasized need for

specific factual findings supporting SEC’s revocation order) ;

Beck v. SEC, 413 F.2d 882, 834 (6th Cir. 1969), after remand,

430 F.2d 673, 675 (6th Cir. 1970) (court remanded case to

SEC with instructions to disclose reasons for imposition of

suspension order; after remand, court set aside four-month

supervision order as a “gross abuse of the Commission’s re-

medial authority”).

7 F.g., Arthur Lipper Corp. v. SEC, 547 F.2d 171, 184-85

(2d Cir. 1976), cert. denied, 484 U.S. 1009 (1978) (modify-

ing severe broker-dealer revocation and bar order found to

constitute an abuse of discretion) ; Beck v. SEC, 430 F.2d 673,

675 (6th Cir. 1970). See note 53, supra.

The Fifth Circuit decision should not be read to imply

that the SEC’s duty to explain its exercise of discretion

in selecting particular sanctions is a substitute for “clear

and convincing” proof that a willful fraud violation had

occurred. Although the court did state that a high stan-

dard of proof to establish a willful violation is not “the

only means to protect a respondent,” ** it nowhere sug-

gested that it viewed different procedural protections as

interchangeable or that its views about the proper stan-

dard of proof did not stand on their own merits. Indeed,

the Court of Appeals did not even suggest that the SEC

should consider whether its willful fraud finding was

supported by clear and convincing evidence or only a

mere preponderante of the evidence in choosing a sanc-

tion.

Nor should the long-standing and unexceptionable re-

quirement that the SEC engage in a reasoned exercise of

discretion in selecting sanctions substitute for clear and

convincing evidence of a violation. First, the selection of

a penalty proceeds from the premise that a willful viola-

tion has occurred. If that premise is erroneous—or if a

respondent in an SEC disciplinary proceeding has to bear

an unfair risk that it is erroneous—the unfairness of the

entire disciplinary proceeding cannot be cured by the in-

troduction of safeguards during the penalty phase of the

proceedings.

A mere finding that a respondent has engaged in will-

ful fraud has serious adverse consequences.” These con-

sequences do not disappear with a subsequent administra-

tive determination not to impose the most severe avail-

able sanction. Regardless of the choice of sanction, any

unfairness in the underlying adjudication of willful

fraud is ineradicable and will have direct, demonstrable,

and deleterious effects upon the party unfairly tainted.

76 603 F.2d at 1189.

7 See text at notes 59-63, supra.

Branding the respondent as a willful fraud violator “

may trigger private, and sometimes vexatious,” civil liti-

gation in which the willful fraud finding may have a

collateral estoppel effect.

Second, reliance solely on appropriate justification of

the sanction will encourage the SEC to initiate pro-

ceedings on the basis of marginal evidence since the

SEC will be able to justify a public censure even where

the evidence establishes only that it is barely more likely

than not that a willful violation occurred. Given the

risks and expenses of litigation, adoption of the Fifth

Circuit’s approach is likely to enable the SEC to extract

settlements from respondents who might otherwise not

even be the targets of disciplinary proceedings.”

Third, the notion that a critically important pro-

cedural safeguard should depend upon the severity of the

sanction actually imposed rather than the potential sanc-

tion at the outset of the proceeding is inconsistent with

principles enunciated by this Court in other situations.

For example, this Court has looked to the maximum

authorized penalty in distinguishing between serious

crimes and petty offenses for purposes of the Sixth

Amendment right to jury trial.

78 See, e.g., Whitney, supra, 604 F.2d at 684 (The record

did not support the SEC’s characterization of “petitioner as

an ingenious schemer, deliberately spreading misimpressions

and confusion.”’).

79 See Blue Chip Stamps v. Manor Drug Stores, 421 U.S.

723, 739-44 (1975).

80 See, e.g., H. Kripke, The SEC and Corporate Disclosure:

Regulation in Search of a Purpose 47-51 (1979); Parklane

Hosiery Co. v. Shore, 439 U.S. 322, 355-56 (1979) (Rehn-

quist, J., dissenting).

81 See Codispotti v. Pennsylvania, 418 U.S. 506, 511. (1974) ;

Baldwin v. New York, 399 U.S. 66, 68 (1970); Frank v.

United States, 395 U.S. 147, 149 (1969) (“[T]he severity of

Finally, the Fifth Circuit was quite careful to point

out the modest degree of protection that is afforded by

judicial review of the SEC’s choice of sanction.” In light

of such narrow review, the requirement that the SEC

justify its choice of sanction is no substitute for the

protection afforded by insisting that the trier of fact find

clear and convincing evidence of willful fraud.

CONCLUSION

*espondents in SEC administrative disciplinary pro-

ceedings have important personal and professional “in-

terests at stake . . . more substantial than mere loss of

money.” Addington v. Texas, 441 U.S. 418, 424 (1979).

As this Court pointed out in Addington, “[T]he ultimate

truth as to how the standards of proof affect decision-

making may well be unknowable. . .. Nonetheless, even

if the particular standard-of-proof catchwords do not

always make a great difference in a particular case,

adopting a ‘standard of proof is more than an empty

the penalty authorized, not the penalty actually imposed, is the

relevant criterion.”); Duncan v. Louisiana, 391 U.S. 145, 159

(1968) (“[T]he penalty authorized for a particular crime is

of major relevance in determining whether it is serious or

not and may in itself, if severe enough, subject the trial to

the mandates of the Sixth Amendment.’”’).

82603 F.2d at 1139-40. See Butz v. Glover Livestock Com-

mission Co., 411 U.S. 182, 185 (1973) (citing American Power

Co. v. SEC, 329 U.S. 90, 112 (1946) ).

83 441 U.S. at 424-25 (citing Tippett v. Maryland, 436 F.2d

1153, 1166 (4th Cir. 1971) (Sobeloff, J., concurring in part

and dissenting in part), cert. dismissed sub nom. Murel Vv.

Baltimore City Criminal Court, 407 U.S. 355 (1972)). See

also In re Winship, 897 U.S. 358, 869-70 (1970) (Harlan, J.,

concurring). Cf. Underwood, The Thumb on the Scales of

Justice: Burdens of Persuasion in Criminal Cases, 86 Yale

L. J. 1299, 13811 (1977).

Amicus SIA respectfully suggests that clear and con-

vincing evidence of willful fraud is essential in SEC

disciplinary proceedings to balance the risks of erroneous

decisions that are detrimental to society at large, as well

as to industry professionals who make up the pool of

prospective respondents in SEC administrative discipli-

nary proceedings. The mere preponderance standard does

not satisfy society’s demands of procedural fairness to

individuals whose persona! and professional reputations

and livelihoods are at stake.

For the reasons set forth above, the decision of the

Court of Appeals should be reversed insofar as it held

that the SEC may find a willful violation of the anti-

fraud provisions of the federal securities laws based on a

mere preponderence of the evidence, and affirmed insofar

as it required the SEC to justify with particularity the

sanction it chooses to impose.

Respectfully submitted,

Of Counsel: ARTHUR F’. MATHEWS

ROBERT B. McCAw

WILLIAM J . FITZPATRICK D AVID M. BECKER

General Counsel JANE TUCKER DANA

LIsA DESOTO WILMER & PICKERING

Assistant General Counsel 1666 K Street, N.W.

SECURITIES INDUSTRY “anaes 20006

ASSOCIATION

20 Broad Street Counsel for Securities

New York, New York 10005 Industry Association

July 15, 1980

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