562 F.2d 820 (D.C. Cir. 1977), 75-2200, Collins Securities Corp. v. S.E.C.
|Citation:||562 F.2d 820|
|Party Name:||COLLINS SECURITIES CORPORATION and Timothy Collins, Petitioners, v. SECURITIES AND EXCHANGE COMMISSION, Respondent.|
|Case Date:||August 12, 1977|
|Court:||United States Courts of Appeals, Court of Appeals for the District of Columbia Circuit|
As Amended on Denial of Rehearing Sept. 23, 1977.
James W. Beasley, Jr., Miami, Fla., for petitioners.
David Ferber, Sol. to the Commission, Washington, D.C., with whom David J. Romanski, Asst. Gen. Counsel, Securities and Exchange Commission and John M. Mahoney, Atty., Securities and Exchange Commission, Washington, D.C., were on the brief, for respondent.
Before WRIGHT, LEVENTHAL and WILKEY, Circuit Judges.
Opinion for the Court filed by WILKEY, Circuit Judge.
WILKEY, Circuit Judge:
The petitioners in this case are Collins Securities Corporation (CSC), a broker-dealer and investment adviser registered with the Securities and Exchange Commission (SEC or Commission), and its president, Timothy Collins. Petitioners seek to have set aside the 23 October 1975 decision of the Commission In The Matter of Collins Securities Corporation, 1 which concluded that petitioners had violated various antifraud provisions of the federal securities laws. 2 As the result of this conclusion, the SEC ordered 1) that the broker-dealer and investment adviser registrations of CSC be revoked; 2) that CSC be expelled from membership in the National Association of Securities Dealers, Inc.; and 3) that petitioner Collins be barred from association with any broker or dealer, provided that "after two years, he may apply to the Commission to become so associated in a position which is not directly or indirectly connected with the making of markets in securities." 3
In reaching its conclusion that petitioners had violated federal securities laws, the Commission based its decision on the "preponderance of the evidence" standard of proof. 4 Because of the type proof involved in an alleged fraud type case and of the extremely serious consequences to the petitioners of the sanctions imposed by the SEC in this case, we believe it was error for the Commission to employ this standard of proof. We therefore remand this case to
the Commission for a reconsideration of the evidence under a higher standard of proof as outlined in Part II of this opinion.
In addition, since the issuance of the opinion and order In The Matter of Collins Securities Corporation on 23 October 1975, the Supreme Court has spoken to several major issues which relate to the proceedings here under review. Therefore, on remand we direct that the Commission reconsider petitioners' case in light of these recent precedents, in particular the decision in Ernst & Ernst v. Hochfelder. 5
For the reasons stated in Part II, infra, in this opinion we undertake to sketch out only the most basic factual underpinnings of this case. In defining the nature of the controversy presented to it in this case, the Commission stated:
The major issue before us is whether (petitioners) manipulated the market for and fraudulently sold common stock of Big Horn National Life Insurance Company during the period from June 25 to July 25, 1968. 6
Central to this case is the desire on the part of the petitioners to assist the Big Horn National Life Insurance Company of Wyoming in raising needed capital funds. If petitioners could successfully assist Big Horn in this regard, petitioner Collins believed that CSC would be able to attract additional investment advisory clients, as well as share in the various ventures conducted by Big Horn.
In order to raise the additional capital, a plan was suggested by petitioner Collins whereby the holders of certain stock purchase warrants of Big Horn would be encouraged to exercise those warrants to acquire the underlying common stock. If all of the warrants were exercised, Big Horn would receive an inflow of approximately $670,000 in additional capital, less expenses attributed to the distribution of the warrant stock. 7 But, because the warrants were exercisable at $5.00 per share, petitioner Collins' plan would be successful only if the market price of Big Horn should be at or above that level.
The various actions taken by the petitioners to induce the exercise of the warrants, which we do not detail here, form the basis for the Commission's action in this case. In the Commission's view, the petitioners "manipulated the market for Big Horn, and sold warrant stock to customers without disclosing that its price had been artificially inflated." 8 Petitioners, on the other hand, characterize their actions as an attempt to make a legitimate and bona fide market in Big Horn stock "for investment, and not with the intent to manipulate or artificially inflate the market of Big Horn stock." 9 Thus, the key issue in this case revolves around the distinction between making a market and manipulating a market; it is necessary at this point to examine the nature of the evidence relied upon by the Commission in reaching the conclusion that petitioners' actions fall into the latter category.
The Commission concedes that it did not rely on direct evidence that petitioners willfully manipulated the market in Big Horn stock. Rather, the Commission relied on inferences from the evidence which was adduced to reach the conclusion that illegal manipulation had occurred. 10 We have no quarrel with this technique of proof; indeed, we agree with the Commission that in many instances the use of this inferential mode of reasoning is necessary to prove a violation of the securities laws. 11 The legitimate need to rely on inferential evidence does, however, illuminate the ambiguity and lack of precision in the definition of
many security law violations. We have no doubt that the SEC, as the expert federal agency in this field, possesses the necessary qualifications to draw the inferences and to construct a case in such a manner as to give concrete and faithful meanings to the imprecise statutory mandates.
Although we have confidence that the SEC can utilize inferential evidence in a proper and responsible manner, the fact remains that such evidence is at least somewhat weaker and less reliable than direct evidence of violations. In addition, the use of inferences, which is dependent on the exercise of discretion by an administrative agency and not a court, can, as in this case, lead to drastic sanctions which in effect amount to a deprivation of livelihood for the sanctioned parties.
The fact that such consequences can flow from an inferential mode of reasoning exercised by an administrative agency forms in large part our concern over the standard of proof to which these inferences are to be put. Thus, while we recognize the need to draw inferences to support allegations of security law violations, we discern a need to subject such evidence to a standard which will ensure that any remedial sanctions are imposed only in those circumstances where the evidence is of such a quality as to make the sanctions appear just and reasonable. It is this concern over the quality of proof in this proceeding to which we now turn.
II. STANDARD OF PROOF 12
As noted previously, the Commission relied on the "preponderance of the evidence" standard of proof in reaching its decision in this case. 13 The Securities and Exchange Act does not address itself specifically to the question of what standard of proof is required in an administrative proceeding before the Commission. 14 The only authority on point cited to us by the Commission consists of the Commission's own interpretation in its case law of the proper standard. 15 Under these circumstances, we believe, as the Supreme Court has stated in a similar context, that the issue of standard of proof "is the kind of question which has traditionally been left to the judiciary to resolve . . . ." 16
The traditional standard of proof in a civil or administrative proceeding is the preponderance standard urged by the SEC as being appropriate in this case. 17 This rule is not, however, without exceptions. In Woodby v. Immigration and Naturalization Service, 18 the Supreme Court held that the preponderance standard was not sufficient in a deportation case. The Court recognized that a deportation proceeding was not a purely criminal prosecution, "but it does not syllogistically follow that a person may be banished from this country upon no
higher degree of proof than applies in a negligence case." 19 The Court noted that Congress had not specifically addressed itself to the degree of proof required in deportation proceedings; that "it is the kind of question which has traditionally been left to the judiciary to resolve"; that its resolution is necessary to evenhanded administration of the statute; and that definition would be sought in light of the "drastic deprivations that may follow when a resident of this country is compelled by our Government to forsake all the bonds formed here and go to a foreign land where he often has no contemporary identification." 20 Applying the standard previously adopted for denaturalization proceedings, 21 and expatriation cases, 22 the court held that the deportation order must be based on "clear, unequivocal and convincing evidence." 23
We cannot say that the impact of the expulsion or suspension sanction involved in Collins here is as profound as that of deportation, akin to ancient banishment. Yet in Woodby the Court noted that its standard "is no stranger to the civil law," 24 and "has traditionally been imposed in cases involving allegations of civil fraud." 25 There is ample case law support for this assertion. 26 However, our research indicates that an even more common standard applied to cases involving civil fraud is that of...
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