Opinion ID: 2105662
Heading Depth: 1
Heading Rank: 4

Heading: What is the Appropriate Standard of Proof for Iowa Code Chapter 502 Actions?

Text: The State contends the correct standard of proof under Iowa Code chapter 502 is a preponderance of the evidence. Although the district court concluded the correct standard is a preponderance of clear, satisfactory, and convincing evidence, the court found the State had failed to prove its case against McHose under either standard. We have never addressed which standard of proof is appropriate for securities fraud under chapter 502. Before we decide whether the State proved McHose aided and abetted securities fraud, we need to set forth which standard applies. On this question, the district court found State ex rel. Miller v. Rahmani, 472 N.W.2d 254 (Iowa 1991) convincing. In Rahmani, we decided that a preponderance of clear, satisfactory, and convincing evidence was called for in deciding claims under the Iowa Consumer Fraud Act. See Iowa Code § 714.16 (1985). In doing so we said: The general presumption in Iowa is that in civil cases the burden of proof is a preponderance of the evidence. However, an exception to this rule has long been recognized in the area of civil fraud. In fraud cases, the plaintiff must prove his case by a preponderance of clear, satisfactory, and convincing evidence. This burden is higher than the typical preponderance of the evidence standard and less than the beyond a reasonable doubt standard. The burden of proof in fraud cases is qualitatively, rather than quantitatively, distinguishable from a mere preponderance of the evidence. Rahmani, 472 N.W.2d at 257 (citations omitted). Our securities statute is modeled somewhat after the Securities Exchange Act of 1934. State v. Tyler, 512 N.W.2d 552, 556 (Iowa 1994). Therefore, cases interpreting the 1934 Securities Exchange Act are persuasive. Id. Section 10(b) of the 1934 Securities Exchange Act prohibits fraudulent misrepresentations and omissions in connection with the sale of securities. The Supreme Court has held that the standard of proof for civil actions under § 10(b) is a preponderance of the evidence. Herman & MacLean v. Huddleston, 459 U.S. 375, 390-91, 103 S.Ct. 683, 692, 74 L.Ed.2d 548, 561 (1983). In Herman & MacLean, the Supreme Court noted that [r]eferences to common law practices can be misleading ... since the historical considerations underlying the imposition of a higher standard of proof have questionable pertinence here. Moreover, the antifraud provisions of the securities laws are not coextensive with common law doctrines of fraud. Indeed, an important purpose of the federal securities statutes was to rectify perceived deficiencies in the available common law protections by establishing higher standards of conduct in the securities industry. We therefore find references to the common law in this instance unavailing. Id. at 388-89, 103 S.Ct. at 690-91, 74 L.Ed.2d at 559-60 (citations omitted). The Supreme Court recognized that a standard of proof allocates the risk of error between the litigants and indicates the importance attached to the ultimate decision. Id. at 389, 103 S.Ct. at 691, 74 L.Ed.2d at 560. In the case of securities fraud, the Court decided that plaintiffs and defendants should be on equal footing: A preponderance-of-the-evidence standard allows both parties to share the risk of error in roughly equal fashion. Any other standard expresses a preference for one side's interest. The balance of interests in this case warrants use of the preponderance standard. On the one hand, the defendants face the risk of opprobrium that may result from a finding of fraudulent conduct, but this risk is identical to that in an action under Section 17(a) [of the 1933 Securities Act], which is governed by the preponderance-of-the-evidence standard.... On the other hand, the interests of plaintiffs in such suits are significant. Defrauded investors are among the very individuals Congress sought to protect in the securities law. If they prove that it is more likely than not that they were defrauded, they should recover. Id. at 390, 103 S.Ct. at 691-92, 74 L.Ed.2d at 560-61 (citations omitted). The foregoing reasoning applies with equal force to our own securities law found in chapter 502. Iowa Code section 502.611 expressly directs us to co-ordinate the interpretation and administration of [chapter 502] with the related federal regulation. Section 502.611 also allows us to construe and implement chapter 502 to effectuate its general purpose to protect investors. By adopting the preponderance-of-the-evidence standard, we are complying with these statutory directives. We therefore adopt the preponderance-of-the-evidence standard in all chapter 502 civil actions.