# Amicus Brief — Steadman v. Securities & Exchange Commission

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Brief
- **Published:** January 1, 1981
- **Citation:** 450 U.S. 91

## Text

~ uprema Court, U. &
KF1lLED

JUL 25 1960

No. 79-1266

RS — eee

— -_—----—_—_—___—_

| _RICHAEL RODAK, JR, CLEI

’
t
>

— —4
'

IN THE
Suprene Court of the United States

OCTOBER TERM, 1980

>

CHARLES W. STEADMAN,

Petitioner,
i

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

R

(iii)

PREVIOUS PAGE WAS BLANK

iv

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

v
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

14

19

19, 23

,» 22, 23
13

13

vi

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

ix
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
I
F. James, Civil Procedure (1965) -............0000000222...
H. Kripke, The SEC and Corporate Disclosure:
Regulation in Search of a Purpose (1979)...........

or

or or gn

x

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.

2

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).

3

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).

4

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.

5

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... .’’).

6

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.

7

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.

8

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).

9

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-

10

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

11

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.

12

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).

13

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-

14

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

15

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

16

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

17

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

18

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.”’).

19

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

20

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).

21

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).

22

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.”’).

23

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).

24

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.

25

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.

26

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.

27

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

28

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
semantic exercise.’ ” ©
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).

29

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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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385006_2203%3A8. Public record. Not legal advice.