Steadman v. Securities and Exchange Commission

• Decision Date: 25 February 1981
• Docket Number: No. 79-1266,79-1266
• Citation: 101 S.Ct. 999,450 U.S. 91,67 L.Ed.2d 69
• Parties: Charles W. STEADMAN, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION
• Court: U.S. Supreme Court

450 U.S. 91

101 S.Ct. 999

67 L.Ed.2d 69

Charles W. STEADMAN, Petitioner,

v SECURITIES AND EXCHANGE COMMISSION.

No. 79-1266.

Argued Dec. 3, 1980.

Decided Feb. 25, 1981.

Rehearing Denied April 20, 1981.

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.

2. The SEC properly used the preponderance-of-the-evidence standard of proof in determining whether the antifraud provisions of the federal securities laws had been violated. Pp. 97-104.

(a) Section 7(c)'s language 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. And the phrase "in accordance with" lends further support to a construction of § 7(c) as establishing a standard of proof, suggesting that the adjudicatory agency must weigh the evidence and decide, based on the weight of the evidence, whether a disciplinary order should be issued. Pp. 98-100.

(b) While § 7(c)'s language is somewhat opaque as to the precise standard of proof to be used, the legislative history clearly reveals that Congress intended to adopt a preponderance-of-the-evidence standard. Pp. 100-102.

(c) Such intent is buttressed by the SEC's longstanding practice of imposing sanctions according to the preponderance of the evidence. Pp. 103-104.

5 Cir., 603 F.2d 1126, affirmed.

Peter J. Nickles, Washington, D. C., for petitioner.

Ralph C. Ferrara, Washington, D. C., for respondent.

Justice BRENNAN delivered the opinion of the Court.

In administrative proceedings, the Securities and Exchange Commission applies a preponderance-of-the-evidence standard of proof in determining whether the antifraud provisions of the federal securities laws have been violated. The question presented is whether such violations must be proved by clear and convincing evidence rather than by a preponderance of the evidence.

I

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 ¹ and § 203(f) of the Investment Advisers Act of 1940.² The Commission alleged that petitioner had violated numerous provisions of the federal securities laws in his management of several mutual funds registered under the Investment Company Act.

After a lengthy evidentiary hearing before an Administrative Law Judge and review by the Commission in which the preponderance-of-the-evidence standard was employed,³ the- Commission held that between December 1965 and June 1972, petitioner had violated antifraud,⁴ reporting,⁵ conflict of interest,⁶ and proxy ⁷ provisions of the federal securities laws. Accordingly, it entered an order permanently barring petitioner from associating with any investment adviser or affiliating with any registered investment company, and suspending him for one year from associating with any broker or dealer in securities.⁸

Petitioner sought review of the Commission's order in the- United States Court of Appeals for the Fifth Circuit on a number of grounds, only one of which is relevant for our purposes. Petitioner challenged the Commission's use of the preponderance-of-the-evidence standard of proof in determining whether he had violated antifraud provisions of the securities laws. He contended that, because of the potentially severe sanctions that the Commission was empowered to impose and because of the circumstantial and inferential nature of the evidence that might be used to prove intent to defraud, the Commission was required to weigh the evidence against a clear-and-convincing standard of proof. The Court of Appeals rejected petitioner's argument, holding that in a disciplinary proceeding before the Commission violations of the antifraud provisions of the securities laws may be established by a preponderance of the evidence. 603 F.2d 1126, 1143 (1979). See n. 8, supra. Because this was contrary to the position taken by the United States Court of Appeals for the District of Columbia Circuit, 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), we granted certiorari to resolve the conflict. 446 U.S. 917, 100 S.Ct. 1849, 64 L.Ed.2d 271 (1980). We affirm.

II

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 "[i]t 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" ⁹ 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.¹⁰

The securities laws provide for judicial review of Commission disciplinary proceedings in the federal courts of appeals ¹¹ and specify the scope of such review.¹² 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.¹³ Section 5(b), 5 U.S.C. § 554(c)(2), makes the provisions of § 7, 5 U.S.C. § 556, applicable to adjudicatory proceedings.¹⁴ The answer to the question presented in this case turns therefore on the proper construction of § 7.¹⁵

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:

"Except as otherwise provided by statute, the proponent of a rule or order has the burden of proof. Any oral or documentary evidence may be received, but the agency as a matter of policy shall provide for the exclusion of irrelevant, immaterial, or unduly repetitious evidence. A sanction may not be imposed or rule or order issued except on consideration of the whole record or those parts thereof cited by a party and supported by and in accordance with the reliable, probative, and substantial evidence." (Emphasis added.)

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.¹⁶ 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.¹⁷

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 unlawful- if "unsupported by substantial evidence," ¹⁸ § 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" ¹⁹ 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 (1...