Source: http://www.law.cornell.edu/supremecourt/text/450/91
Timestamp: 2014-03-08 00:32:11
Document Index: 114761255

Matched Legal Cases: ['§ 7', '§ 9', '§ 203', '§ 80', '§ 5', '§ 7', '§ 7', '§ 7', '§ 10', '§ 7', '§ 7', '§ 7', '§ 10', '§ 7', '§ 9', '§ 7', '§ 7', '§ 4', '§ 7', '§ 7', '§ 9', '§ 203', '§ 201', '§ 201', '§ 201', '§ 201', '§ 201', '§ 201', '§ 201', '§ 201', '§ 201', '§ 201', '§ 201', '§ 10', '§ 240', '§ 206', '§ 240', '§ 30', '§ 77', '§ 80', '§ 80', '§ 80', '§ 80', '§ 80', '§ 80', '§ 554', '§ 80', '§ 80', '§ 706', '§ 2498']

Charles W. STEADMAN, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION. | LII / Legal Information Institute
Supreme Court aboutsearch liibulletin subscribe previews Charles W. STEADMAN, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION.
450 U.S. 91 (101 S.Ct. 999, 67 L.Ed.2d 69)
Argued: Dec. 3, 1980.
Decided: Feb. 25, 1981.
[HTML] dissent, POWELL, STEWART
[HTML] See 451 U.S. 933, 101 S.Ct. 2008.
Syllabus After an on-the-record hearing before an Administrative Law Judge and review by the Securities and Exchange Commission (SEC) in which the preponderance-of-the-evidence standard of proof was employed, the SEC held that petitioner had violated various antifraud provisions of the federal securities laws, and sanctions were imposed. Petitioner sought review in the Court of Appeals on the alleged ground, inter alia, that the SEC's use of the preponderance-of-the-evidence, rather than the clear-and-convincing, standard of proof in determining whether he had violated the securities laws, was improper. The Court of Appeals rejected the argument.
Held: 1. In adjudicatory proceedings before the SEC, § 7(c) of the Administrative Procedure Act applies. It provides in pertinent part that a sanction may not be imposed by an administrative agency except on consideration of the whole record or parts thereof cited by a party and supported by and "in accordance with the reliable, probative, and substantial evidence." Pp. 95-97.
* In June 1971, the Commission initiated a disciplinary proceeding against petitioner and certain of his wholly owned companies. The proceeding against petitioner was brought pursuant to § 9(b) of the Investment Company Act of 1940
and § 203(f) of the Investment Advisers Act of 1940.
theCommission held that between December 1965 and June 1972, petitioner had violated antifraud,
Where Congress has not prescribed the degree of proof which must be adduced by the proponent of a rule or order to carry its burden of persuasion in an administrative proceeding, this Court has felt at liberty to prescribe the standard, for "it is the kind of question which has traditionally been left to the judiciary to resolve." Woodby v. INS, 385 U.S. 276, 284, 87 S.Ct. 483, 487, 17 L.Ed.2d 362 (1966). However, where Congress has spoken, we have deferred to "the traditional powers of Congress to prescribe rules of evidence and standards of proof in the federal courts"
absent countervailing constitutional constraints. Vance v. Terrazas, 444 U.S. 252, 265, 100 S.Ct. 540, 548, 62 L.Ed.2d 540 (1980). For Commission disciplinary proceedings initiated pursuant to 15 U.S.C. 80a-9(b) and § 80b-3(f), we conclude that Congress has spoken, and has said that the preponderance-of-the-evidence standard should be applied.
Because they do not indicate which standard of proof governs Commission adjudications, however, we turn to § 5 of the Administrative Procedure Act (APA), 5 U.S.C. 554, which "applies . . . in every case of adjudication required by statute to be determined on the record after opportunity for an agency hearing," except in instances not relevant here.
Section 5(b), 5 U.S.C. 554(c)(2), makes the provisions of § 7, 5 U.S.C. 556, applicable to adjudicatory proceedings.
The answer to the question presented in this case turns therefore on the proper construction of § 7.
The search for congressional intent begins with the language of the statute. Andrus v. Allard, 444 U.S. 51, 56, 100 S.Ct. 318, 322, 62 L.Ed.2d 210 (1979); Reiter v. Sonotone Corp., 442 U.S. 330, 337, 99 S.Ct. 2326, 2330, 60 L.Ed.2d 931 (1979); 62 Cases of Jam v. United States, 340 U.S. 593, 596, 71 S.Ct. 515, 518, 95 L.Ed. 566 (1951). Section 7(c), 5 U.S.C. 556(d), states in pertinent part:
The language of the statute itself implies the enactment of a standard of proof. By allowing sanctions to be imposed only when they are "in accordance with . . . substantial evidence," Congress implied that a sanction must rest on a minimum quantity of evidence. The word "substantial" denotes quantity.
The phrase "in accordance with . . . substantial evidence" thus requires that a decision be based on a certain quantity of evidence. Petitioner's contention that the phrase "reliable, probative, and substantial evidence" sets merely a standard of quality of evidence is, therefore, unpersuasive.
The phrase "in accordance with" lends further support to a construction of § 7(c) as establishing a standard of proof. Unlike § 10(e), the APA's explicit "Scope of review" provision that declares that agency action shall be held unlawfulif "unsupported by substantial evidence,"
§ 7(c) provides that an agency may issue an order only if that order is "supported by and in accordance with . . . substantial evidence" (emphasis added). The additional words "in accordance with"
suggest that the adjudicating agency must weigh the evidence and decide, based on the weight of the evidence, whether a disciplinary order should be issued. The language of § 7(c), therefore, requires that the agency decision must be "in accordance with" the weight of the evidence, not simply supported by enough evidence " 'to justify, if the trial were to a jury, a refusal to direct a verdict when the conclusion sought to be drawn from it is one of fact for the jury.' " Consolo v. FMC, 383 U.S. 607, 620, 86 S.Ct. 1018, 1026, 16 L.Ed.2d 131 (1966), quoting NLRB v. Columbian Enameling & Stamping Co., 306 U.S. 292, 300, 59 S.Ct. 501, 505, 83 L.Ed. 660 (1939). Obviously, weighing evidence has relevance only if the evidence on each side is to be measured against a standard of proof which allocates the risk of error. See Addington v. Texas, 441 U.S. 418, 423, 99 S.Ct. 1804, 1808, 60 L.Ed.2d 323 (1979). Section 10(e), by contrast, does not permit the reviewing court to weigh the evidence, but only to determine that there is in the record " 'such relevant evidence as a reasonable mind might accept as adequate to support a conclusion,' " Consolo v. FMC, supra, at 620, 86 S.Ct., at 1026 quoting Consolidated Edison Co. v. NLRB, 305 U.S. 197, 229, 59 S.Ct. 206, 216, 83 L.Ed. 126 (1938). It is not surprising, therefore, in view of the entirely different purposes of § 7(c) and § 10(e), that Congress intended the words "substantial evidence" to have different meanings in context. Thus, petitioner's argument that § 7(c) merely establishes the scope of judicial review of agency orders is unavailing.
"Where a party having the burden of proceeding has come forward with a prima facie and substantial case, he will prevail unless his evidence is discredited or rebutted. In any case the agency must decide 'in accordance with the evidence.' Where there is evidence pro and con, the agency must weigh it and decide in accordance with the preponderance. In short, these provisions require a conscientious and rational judgment on the whole record in accordance with the proofs adduced." H.R.Rep.No. 1980, 79th Cong., 2d Sess., 37 (1946) (emphasis added).
Nor is there any suggestion in the legislative history that a standard of proof higher than a preponderance of the evidence was ever contemplated, much less intended. Congress was primarily concerned with the elimination of agency decisionmaking premised on evidence which was of poor qualityirrelevant, immaterial, unreliable, and nonprobativeand of insufficient quantityless than a preponderance. See id., at 36-37 and 45; S.Doc.No. 248, 79th Cong., 2d Sess., 320-322 and 376-378 (1946); n. 21, supra.
Our view of congressional intent is buttressed by the Commission's longstanding practice of imposing sanctions according to the preponderance of the evidence. As early as 1938, the Commission rejected the argument that in a proceeding to determine whether to suspend, expel, or otherwise sanction a brokerage firm and its principals for, inter alia, manipulation of security prices in violation of § 9 of the Securities Exchange Act of 1934, 15 U.S.C. 78i, a standard of proof greater than the preponderance-of-the-evidence standard was required. In re White, 3 S.E.C. 466, 539-540 (1938). Use of the preponderance standard continued after passage of the APA, and persists today. E. g., In re Cea, 44 S.E.C. 8, 25 (1969); In re Pollisky, 43 S.E.C. 458, 459-460 (1967). The Commission's consistent practice, which is in harmony with § 7(c) and its legislative history, is persuasive authority that Congress intended that Commission disciplinary proceedings, subject to § 7 of the APA, be governed by a preponderance-of-the-evidence standard. See Andrus v. Sierra Club, 442 U.S. 347, 358, 99 S.Ct. 2335, 2341, 60 L.Ed.2d 943 (1979); United States v. National Association of Securities Dealers, Inc., 422 U.S. 694, 719, 95 S.Ct. 2427, 2442, 45 L.Ed.2d 486 (1975); Skidmore v. Swift & Co., 323 U.S. 134, 140, 65 S.Ct. 161, 164, 89 L.Ed. 124 (1944).
In Vermont Yankee Nuclear Power Corp. v. Natural Resources Defense Council, Inc., 435 U.S. 519, 524, 98 S.Ct. 1197, 1202, 55 L.Ed.2d 460 (1978) we stated that § 4 of the APA, 5 U.S.C. 553, established the "maximum procedural requirements which Congress was willing to have the courts impose upon agencies in conducting rulemaking procedures." In § 7(c), Congress has similarly expressed its intent that adjudicatory proceedings subject to the APA satisfy the statute where determinations are made according to the preponderance of the evidence. Congress was free to make that choice, Vance v. Terrazas, 444 U.S., at 265-266, 100 S.Ct., at 547-548, and, in the absence of countervailing constitutional considerations, the courts are not free to disturb it.
The Court today sustains the action of the SEC, holdingthat § 7(c) of the Administrative Procedure Act (APA), 5 U.S.C. 556(d), commands the use of this standard in disciplinary proceedings brought under the securities laws. The Court recognizes, however, ante, at 95-96, that the general provisions of the APA are applicable only when Congress has not intended that a different standard be used in the administration of a specific statute. The critical inquiry thus is the identification of the standard of proof desired by Congress.
The SEC acted in this case under § 9(b) of the Investment Company Act of 1940, 15 U.S.C. 80a-9(b), and § 203(f) of the Investment Advisers Act of 1940, 15 U.S.C. 80b-3(f). Sanctions imposed under these sections are the functional equivalent of penalties for fraud. At common law, it was plain that allegations of fraud had to be proved by clear and convincing evidence. E. g., Addington v. Texas, 441 U.S. 418, 424, 99 S.Ct. 1804, 1808, 60 L.Ed.2d 323 (1979); Woodby v. INS, 385 U.S. 276, 285, n. 18, 87 S.Ct. 483, 488, n. 18, 17 L.Ed.2d 362 (1966); Weininger v. Metropolitan Fire Insurance Co., 359 Ill. 584, 598, 195 N.E. 420, 426 (1935); Bank of Pocahontas v. Ferimer, 161 Va. 37, 40-41, 170 S.E. 591, 592 (1933); Bowe v. Gage, 127 Wis. 245, 251, 106 N.W. 1074, 1076 (1906). Congress enacted the Investment Company and Investment Advisers Acts against this common-law background. There is no evidence that Congress, when it adopted these Acts, intended to authorize the SEC to abandon the then-applicable standard of proof in fraud adjudications. See Whitney v. SEC, 196 U.S.App.D.C. 12, 604 F.2d 676 (1979); Collins Securities Corp. v. SEC, 183 U.S.App.D.C. 301, 562 F.2d 820 (1977).
The APA, upon which the Court relies, did not become law for some seven years after the enactment of the two statutes under which the SEC imposed these penalties. Again, the Court points to no specific evidence that Congress intended the APA to supplant the burden-of-proof rule generally applicable when the securities laws were enacted. Thus, the APAthe general statute applicable only where a specific statute is notshould have no bearing on the proof burden in this case.
I imply no opinion on the question whether the evidence supports the SEC's allegations against petitioner. It is clear, however, that the SEC's finding of fraud and its imposition of harsh penalties have resulted in serious stigma and deprivation. Cf. Addington v. Texas, supra.
In the absence of any specific demonstration of Congress' purpose, we should not assume that Congress intended the SEC to apply a lower standard of proof than the prevailing common-law standard for similar allegations. With all respect, it seems to me that the Court's decision today lacks the sensitivity that traditionally has marked our review of the Government's imposition upon citizens of severe penalties and permanent stigma.
Section 9(b) of the Investment Company Act of 1940, 15 U.S.C. 80a-9(b), empowers the Commission, in specified circumstances, "after notice and opportunity for hearing . . . [to] prohibit, conditionally or unconditionally, either permanently or for such period of time as it in its discretion shall deem appropriate in the public interest, any person from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter . . . ."
Section 203(f) of the Investment Advisers Act of 1940, 15 U.S.C. 80b-3(f), empowers the Commission, in specified circumstances, after notice and opportunity for hearing "on the record" to "censure or place limitations on the activities of any person associated or seeking to become associated with an investment adviser, or suspend for a period not exceeding twelve months or bar any such person from being associated with an investment adviser . . . ."
Disciplinary proceedings before the Securities and Exchange Commission are governed by the Commission's Rules of Practice, 17 CFR § 201.1 et seq. (1980), which enlarge, in certain respects, protections afforded by the Administrative Procedure Act (APA), 5 U.S.C. 551 et seq. Cf. Vermont Yankee Nuclear Power Corp. v. Natural Resources Defense Council, Inc., 435 U.S. 519, 524, 98 S.Ct. 1197, 1202, 55 L.Ed.2d 460 (1978) (as to 5 U.S.C. 553, "[a]gencies are free to grant additional procedural rights in the exercise of their discretion, but reviewing courts are generally not free to impose them if the agencies have not chosen to grant them"). A respondent in a disciplinary proceeding is entitled to receive timely notice of the charges against him and the questions of fact and law to be determined. 17 CFR § 201.6(a) (1980). He may retain counsel to represent him in connection with the proceeding, § 201.2(b), file an answer to the charges against him and move for a more definite statement of those charges, §§ 201.7(a) and (d), and have a trial-type hearing presided over by an impartial administrative law judge, other duly-appointed officer, or a Commission member, §§ 201.11(b)-(c). The respondent may present oral or documentary evidence, cross-examine adverse witnesses, and object to the admission or exclusion of evidence. § 201.14(a). A respondent may compel production of evidence by subpoena, § 201.14(b), and may obtain witness statements in the possession of the Commission's staff for cross-examination purposes, § 201.11.1. At the conclusion of the hearing, the respondent has the right to submit briefs and proposed findings of fact and conclusions of law. § 201.16(d). The initial decision of the administrative law judge must include findings of fact and conclusions of law, with supporting reasons, on all material issues of fact, law, or discretion presented on the record. § 201.16(a). A respondent may seek review by the Commission, which may affirm, reverse, or modify the initial decision based on its independent review of the record. §§ 201.17(g)(2), 201.21.
Section 17(a) of the Securities Act of 1933, 15 U.S.C. 77q(a); § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 CFR § 240.10b-5 (1980); §§ 206(1)-(2) of the Investment Advisers Act of 1940, 15 U.S.C. 80b-6(1)-(2).
Section 17(a) of the Securities Exchange Act of 1934, 15 U.S.C. 78q(a), and Rule 17a-5 thereunder, 17 CFR § 240.17a-5 (1980); §§ 30(a) and 34(b) of the Investment Company Act of 1940, 15 U.S.C. 80a-29(a) and 80a-33(b).
Sections 15(a)(1), 17(a), and 17(e) of the Investment Company Act of 1940, 15 U.S.C. 80a-15(a)(1), 80a-17(a), and 80a-17(e).
Section 20(a) of the Investment Company Act of 1940, 15 U.S.C. 80a-20(a).
Title 15 U.S.C. 77i, 78y, 80a-42, and 80b-13 provide for judicial review of Commission orders in the courts of appeals.
Commission findings of fact are conclusive for a reviewing court "if supported by substantial evidence." 15 U.S.C. 78y, 80a-42, and 80b-13; cf. § 77i (Commission findings conclusive "if supported by evidence").
This disciplinary proceeding, brought by the Commission pursuant to 15 U.S.C. 80a-9(b) and § 80b-3(f), is clearly a "case of adjudication" within 5 U.S.C. 554. See International Telephone & Telegraph Corp. v. Electrical Workers, 419 U.S. 428, 445, 95 S.Ct. 600, 610, 42 L.Ed.2d 558 (1975). Both § 80a-9(b) and § 80b-3(f) also explicitly require an "opportunity for [an agency] hearing." Moreover, the disciplinary proceeding must be conducted "on the record." The phrase "on the record" appears in § 80b-3(f), and while it does not appear in § 80a-9(b), see n. 1, supra, the absence of the specific phrase from § 80a-9(b) does not make the instant proceeding not subject to § 554. See United States v. Florida East Coast R. Co., 410 U.S. 224, 238, 93 S.Ct. 810, 817, 35 L.Ed.2d 223 (1973); United States v. Allegheny-Ludlum Steel Corp., 406 U.S. 742, 757, 92 S.Ct. 1941, 1950, 32 L.Ed.2d 453 (1972); Seacoast Anti-Pollution League v. Costle, 572 F.2d 872, 876 (CA1), cert. denied, 439 U.S. 824, 99 S.Ct. 94, 58 L.Ed.2d 117 (1978). Rather, the "on the record" requirement for § 80a-9(b) is satisfied by the substantive content of the adjudication. Title 15 U.S.C. 80a-42 provides for judicial review of Commission orders issued pursuant to § 80a-9(b). Substantial-evidence review by the Court of Appeals here required a hearing on the record.
Section 5(b), 5 U.S.C. 554(c)(2), provides that "[t]he agency shall give all interested parties opportunity for . . . hearing and decision on notice and in accordance with sections 556 and 557 of this title."
Section 10(e) of the APA, 5 U.S.C. 706, is entitled "Scope of review" and provides, in pertinent part, that "[t]he reviewing court shall . . . hold unlawful and set aside agency action, findings, and conclusions found to be . . . unsupported by substantial evidence in a case subject to sections 556 and 557 of this title or otherwise reviewed on the record of an agency hearing provided by statute." § 706(2)(E).
Representative Walter of Pennsylvania, author of the House Report and a principal drafter of the legislation, speaking during the floor debate on the day the bill was passed by the House, stated as to the meaning of the phrase "in accordance with . . . substantial evidence," that "the accepted standards of proof, as distinguished from the mere admissibility of evidence, are to govern in administrative proceedings as they do in courts of law and equity." S.Doc.No. 248, 79th Cong., 2d Sess. 365 (1946). This statement suggests that the usual preponderance standard was contemplated. See Sea Island Broadcasting Corp. v. FCC, 200 U.S.App.D.C. 187, 190, 627 F.2d 240, 243 (1980) ("The use of the 'preponderance of evidence' standard is the traditional standard in civil and administrative proceedings. It is the one contemplated by the APA, 5 U.S.C. 556(d)"), cert. denied, 449 U.S. 834, 101 S.Ct. 65, 66 L.Ed.2d 39 (1980); Collins Securities Corp. v. SEC, 183 U.S.App.D.C. 301, 304, 562 F.2d 820, 823 (1977) ("The traditional standard of proof in a civil or administrative proceeding is the preponderance standard . . ."); 9 J. Wigmore, Evidence § 2498 (3d ed. 1940); cf. Woodby v. INS, 385 U.S., at 288, 87 S.Ct., at 489 (Clark, J., dissenting).
Petitioner has practiced the profession of investment adviser for many years. He has been forever barred from resuming that profession. Many penalties imposed under our criminal laws such as monetary fines and probationare far less severe, and yet these can be imposed only under the "beyond a reasonable doubt" standard of the criminal law.