The Supreme Court yesterday handed government regulators a major victory, ruling that they may impose severe penalties for violations of federal law and regulations subject only to minimum standards of proof.
The decision, stemming from a Securities and Exchange Commission anti-fraud investigation, strengthens enforcement powers for the entire range of federal regulatory agencies.
The court rejected 7-2 the arguments of regulated industries that such a ruling would allow people to be put out of business on only the flimsiest of evidence that they broke the law.
The case was a dispute over how convincing the evidence must be for the SEC to prove fraud by an investment company president, Charles W. Steadman. Steadman also is the manager of several major Washington area mutual funds.
The legal system sets up three categories of proof, depending on the seriousness of the potential punishment. The largest amount of evidence is required in criminal cases. A lesser amount -- "clear and convincing evidence" -- is needed for less severe cases involving less stringent punishments. The smallest amount of proof -- a "preponderance of evidence" -- is most often required when the penalty for the case at hand would not involve loss of liberty.
The third level was the one sought by the government. Industry, and Steadman, who faces the loss of his license to trade securities, argued that the imposition of such a heavy penalty after presentation of such light evidence was unfair and asked the justices to require the intermediate-level (clear and convincing) proof.
Yesterday the court said that the question of fairness was irrelevant to the case. It said that Congress, which was not explicit, meant the agencies to use the lowest standard to carry out their missions and that the courts may not tamper with the congressional judgment.
In June 1971 the SEC moved against Steadman, whose investment advisory organization at its peak managed about $250 million of investor assets, according to the government.
The agency charged him with violating antifraud, reporting, conflict of interest and proxy provisions of securities law by concealing from shareholders the fact that he drew personal loans from banks in which he deposited investors money.
The SEC permanently barred Steadman from associating with investment companies and suspended him for a year from associating with brokers or dealers in securities. Neither the finding or the punishment, which for unrelated reasons is still under dispute, applied to the Steadman companies themselves.
The judgment was made by an administrative law judge using the lowest standard of proof: the preponderance of evidence standard. The standard basically required only a showing that Steadman probably did what the SEC said he did. The judge need not be absolutely convinced of guilt in such an administrative proceeding.
Steadman appealed to the Fifth U.S. Court of Appeals in New Orleans and won a partial victory when the SEC was ordered to reconsider the harshness of the punishment imposed: kicking him out of the business. But he lost his claim for a higher standard of proof.
The Fifth Circuit's ruling conflicted with a U.S. Court of Appeals ruling in Washington, however, and yesterday the justices resolved the dispute.
Justice William Brennan wrote for the majority that the Administrative Procedures Act, which governs the workings of federal agencies, used the phrase "substantial evidence" when discussing the imposition of punishments. Though the language is not precise, he said, the debates surrounding passage of the act contain no suggestion that a standard of proof "higher than a preponderance of evidence was ever contemplated, much less intended."
Justice Lewis Powell, joined by Potter Stewart, dissented. They argued that Congress was not clear enough about the standards in the law and that the intermediate standard sought by industry traditionally is required when allegations of fraud are brought.