“Ours is a world filled with more and more civil laws bearing more and more extravagant punishments.”—Sessions v. Dimaya, 138 S. Ct. 1204, 1229 (2018) (Gorsuch, J. dissenting)
Can we admit the obvious? Today’s Securities and Exchange Commission (SEC) law enforcement cases are criminal in nature, and courts should start treating them as such. Despite the misnomer Congress applied in the relevant securities-law provisions, and no matter how many times the SEC and courts insist these cases are “civil” in nature, SEC charges threaten financial sanctions that far exceed those imposed for most federal misdemeanor and petty crimes, and for many federal felonies as well. True, SEC cases don’t raise the specter of incarceration—no small distinction, to be sure—but more than a quarter of criminally convicted defendants are also spared incarceration, especially those whose offenses do not involve violence, weapons, or illegal drugs. See, e.g., Mark Motivans, Federal Justice Statistics, 2021, BJS Bull., Dec. 2022, at 12, https://bit.ly/41ND1vm. Moreover, this distinction is irrelevant where the defendant is a corporation or other non-natural person that cannot be incarcerated.
Whatever claim to mill-run civil litigant status the SEC could once make has long since expired. For its first 50 years, the SEC lacked any statutory power to obtain punitive financial sanctions, but over the ensuing 40 years, Congress has empowered the agency to seek increasingly draconian sanctions that inflict severe reputational harm and routinely deprive defendants of both their liberty and their property. For the last 15 years in particular, most of the SEC’s enforcement directors have been former criminal prosecutors (a qualification virtually unheard of before 2005), and one agency chairman was tapped precisely because of her reputation as a no-nonsense former prosecutor who, we were warned, “[y]ou don’t want to mess with.” Barack Obama, Remarks on the Nomination of Mary Jo White to Be Chair of the Security and Exchange Commission and the Renomination of Consumer Financial Protection Bureau Director Richard A. Cordray (Jan. 24, 2013), https://bit.ly/40xhJAY. Multimillion-dollar SEC financial penalties are now commonplace, allowing the agency to boast a breathtaking $6.4 billion in aggregate financial sanctions during just its most recent fiscal year. SEC Press Rel. No. 22-206, SEC Announces Enforcement Results for FY22 (Nov. 15, 2022), https://bit.ly/41Ra9T6.
Dispensing with the fiction that SEC enforcement cases are just routine civil lawsuits—i.e., on par with private contractual disputes or slip-and-fall accident cases—would bring much-needed clarity and due process enhancement to SEC enforcement. This article briefly discusses four essential changes that would make for a worthy start.
Heightened Burden of Proof
For more than half a century, courts have allowed the SEC to prove its enforcement charges by a mere preponderance of the evidence, aptly described as the “rock bottom” lightest burden of proof known to law and the one typically applied in civil lawsuits between private citizens. See Charlton v. FTC, 543 F.2d 903, 907 (D.C. Cir. 1976); accord Russell G. Ryan, The SEC’s Low Burden of Proof, Wall St. J., July 14, 2013 (offering the metaphor of a one-possession football game where proof beyond reasonable doubt requires scoring a touchdown; clear and convincing evidence requires kicking a field goal; and preponderance of evidence requires merely crossing the 50-yard line). When this ultralight burden of proof is coupled with Chevron and other judicial deference doctrines that favor agencies like the SEC, and with what courts sometimes refer to as the “presumption” that governmental prosecutors “have properly discharged their official duties,” United States v. Armstrong, 517 U.S. 456, 464 (1996) (quoting United States v. Chem. Found., Inc., 272 U.S. 1, 14–15) (1926)), it is easy to understand why many (if not most) SEC defendants fear that the burden of proof, as a practical matter, is on them rather than the SEC.
Most seminal precedent on the SEC’s burden of proof dates back to a long bygone era when the SEC was limited to seeking relatively toothless remedial sanctions against wrongdoers. Congress didn’t empower the SEC to seek financial penalties until the mid-1980s, and even then only in insider trading cases. It was not until the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (the Remedies Act) that Congress authorized financial penalties in a broad array of SEC cases. Pub. L. No. 101-429, 104 Stat. 931. But by that time, the SEC’s undemanding burden of proof was largely considered well-settled, rarely to be challenged again.
Thus, before the SEC had any statutory authority to seek monetary penalties in enforcement cases, two federal circuits held that the agency could obtain statutory injunctions in federal court by proving its cases by a mere preponderance. SEC v. First Fin. Grp. of Texas, 645 F.2d 429, 434 (5th Cir. 1981); SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1169 (D.C. Cir. 1978). Shortly thereafter, in Steadman v. SEC, 450 U.S. 91 (1981), a divided Supreme Court upheld the SEC’s practice of adjudicating its administrative enforcement proceedings under the preponderance standard. A seven-justice majority found the preponderance standard the fairest inference to be drawn from the “somewhat opaque” language of Section 7 of the Administrative Procedures Act, which permits the imposition of administrative sanctions only if they are “supported by and in accordance with the reliable, probative, and substantial evidence.” 5 U.S.C. § 556(d). Importantly, because no party raised the issue in Steadman, the Court did not address whether the preponderance standard was constitutionally permissible. 450 U.S. at 97 n.15. Moreover, the SEC administrative proceeding challenged in Steadman had resulted only in industry bars and suspensions because the agency at the time still lacked statutory power to impose any punitive financial penalties.
Even then, however, Justice Powell dissented, joined by Justice Stewart. In their view, the preponderance standard was too light to ensure a fair administrative enforcement process. Among other things, they noted that courts had historically applied the more demanding “clear-and-convincing evidence” standard to civil claims alleging fraud. See id. at 104–06 (Powell, J., dissenting) (citing Whitney v. SEC, 604 F.2d 676 (1979); Collins Sec. Corp. v. SEC, 562 F.2d 820 (1977)). Securities practitioners and commentators (including this author) have made similar arguments both before and after Steadman. See, e.g., Arthur F. Mathews, Litigation and Settlement of SEC Administrative Enforcement Proceedings, 29 Cath. U. L. Rev. 215, 232–38 (1980); Gordon K. Eng, The Burden of Proof in SEC Disciplinary Proceedings: Preponderance and Beyond, 49 Fordham L. Rev. 642 (1981); Russell G. Ryan, The SEC’s Low Burden of Proof, Wall St. J., July 14, 2013.
Even assuming Steadman and the earlier circuit court cases were correctly decided at the time, they are now easily distinguished and should no longer be considered controlling authority. Today’s severely punitive SEC enforcement sanctions go well beyond the prophylactic injunctions and industry bars the SEC could obtain when those cases were decided. A succession of intervening securities law amendments—from the Remedies Act in 1990 to the Sarbanes-Oxley Act in 2002 to the Dodd-Frank Act in 2010—have fundamentally transformed SEC enforcement into the veritable criminal prosecution enterprise that now polices Wall Street and corporate America, collecting billions of dollars annually in aggregate penalties and other financial sanctions. Multimillion-dollar “civil” fines are now commonplace, and unpaid disgorgement awards can land defendants in prison for contempt.
Given this new reality, there is no legitimate reason to continue allowing the SEC to prosecute its cases under a mere preponderance-of-evidence burden of proof. At a bare minimum, the agency should be required to prove its cases—especially those involving fraud charges—by clear and convincing evidence. A far more satisfying reform would put the SEC on par with fellow criminal prosecutors in having to prove cases beyond reasonable doubt.
Greater Respect for Fifth Amendment Right Against Self-Incrimination
While contending with their prosecutors’ minimal burden of proof, SEC defendants are also effectively deprived of any meaningful Fifth Amendment protection against self-incrimination. This anomaly also dates back to the SEC’s early days when it lacked power to impose harsh punitive sanctions, finding its roots in the non-SEC case of Baxter v. Palmigiano, 425 U.S. 308 (1976). There, the Supreme Court held that while litigants are free to assert their Fifth Amendment rights during civil litigation, that assertion comes at a very high price: The trier of fact can draw an “adverse inference” based on the assertion—an inference that could in some cases flip the overall preponderance of evidence from innocence to guilt. As one commentator has noted, this adverse inference, when considered alongside the SEC’s minimal burden of proof, effectively shifts the burden of proof to the defendant in SEC enforcement proceedings. T. Hanusik, Adverse to Adverse Inferences? Rethinking the Scope of the Fifth Amendment Protections in SEC Proceedings, BNA Sec. Reg. & L. Rep. 574 (Mar. 30, 2009).
The SEC wasted no time seizing upon Baxter to draw adverse inferences in its putatively civil investigations and enforcement cases, and courts generally went along, even in situations where a defendant ultimately provided testimony after initially declining to do so on Fifth Amendment grounds. See, e.g., SEC v. Cherif, 933 F.2d 403, 417 (7th Cir. 1991), cert. denied, 502 U.S. 1071 (1992); SEC v. DiBella, No. 3:04-cv-1342 (EBB), 2007 WL 1395105 (D. Conn. May 8, 2007); SEC v. Kornman, 391 F. Supp. 2d 477, 494–95 (N.D. Tex. 2005); SEC v. Musella, 578 F. Supp. 425, 429 (S.D.N.Y. 1984). In some cases, the SEC went even further, convincing courts to preclude defendants from introducing any evidence on issues as to which they had asserted their Fifth Amendment rights. See, e.g., SEC v. Cymaticolor Corp., 106 F.R.D. 545, 550 (S.D.N.Y. 1985); but see SEC v. Graystone Nash, Inc., 25 F.3d 187, 192 (3d Cir. 1994) (reversing district court’s preclusion order as unnecessary and overly broad).
Whatever logic once may have existed for attaching these severe costs to the exercise of a constitutional right in SEC enforcement cases is no longer tenable. Thoughtful commentators have long decried the SEC’s routine reliance on adverse inferences when investigative subjects assert their Fifth Amendment rights, particularly in the context of parallel civil and criminal investigations into suspected violations of laws that can result in both civil and criminal punishment. See, e.g., Hanusik, supra; S. Glanzer, H. Schiffman & M. Packman, The Use of the Fifth Amendment in SEC Investigations, 41 Wash. & Lee L. Rev. 895 (1984). As one commentator put it, “when a government agency is involved in a case—particularly when that agency has investigatory subpoena power and is using its civil law enforcement authority to enforce the exact same statutes that constitute criminal charges—defendants confront a catch-22 between invoking a constitutional right that could result in an adverse inference and waiving a constitutional right and assisting a criminal case against themselves.” Hanusik, supra.
These concerns have become increasingly acute as SEC enforcement continues to drift ever further toward criminal prosecution in terms of both the investigative tactics employed and the draconian penal sanctions imposed. It is long past time for the SEC and courts to start fully honoring Fifth Amendment assertions in SEC enforcement cases just as in criminal cases—that is, by forbidding any references to those assertions and drawing no adverse inferences.
Enhanced Double Jeopardy Protection
In yet another distinction from traditional criminal cases, SEC enforcement cases have generally been exempted from the reach of the double jeopardy clause of the Fifth Amendment. Once again, the historical rationale has been that this constitutional protection forbids only duplicative criminal cases, not a putatively civil case that duplicates a related criminal case (or vice versa). See, e.g., United States v. Melvin, 918 F.3d 1296, 1299–301 (11th Cir. 2017) (per curiam); SEC v. Palmisano, 135 F.3d 860, 864–66 (2d Cir. 1998).
For similar reasons, although the double jeopardy clause precludes criminal prosecutors from appealing acquittals, see generally United States v. Martin Linen Supply Co., 430 U.S. 564, 571 (1977) (citing United States v. Ball, 163 U.S. 662, 671 (1896)), the SEC faces no similar appellate restrictions when it loses a case at trial, see, e.g., SEC v. Merchant Capital, LLC, 483 F.3d 747 (2d Cir. 2007) (reversing in part, vacating in part, and remanding district court bench-trial decision against SEC). Indeed, earlier this year the SEC convinced the U.S. Court of Appeals for the Fourth Circuit to reverse and remand a district court decision that had dismissed SEC insider trading charges for lack of evidence after SEC prosecutors had presented their case to a jury. SEC v. Christopher Clark, 60 F.4th 807, 813-15, reh’g denied, 2023 U.S. App. LEXIS 10108 (4th Cir. 2023). The Double Jeopardy clause would have foreclosed such an appeal after a mid-trial order directing an acquittal in a criminal case. See Martin Linen Supply Co., 430 U.S. at 570–76.
It is long past time for courts to carefully revisit these increasingly artificial distinctions that effectively exempt the SEC from the double jeopardy clause. Under the controlling test established by Hudson v. United States, courts should look past the “civil” penalty label used by Congress and inquire further into whether the statutory scheme is “so punitive either in purpose or effect” as to “transfor[m] what was clearly intended as a civil remedy into a criminal penalty.” 522 U.S. 93, 99 (1997) (cleaned up; citations omitted).
In Hudson, three defendants were criminally prosecuted for various banking law violations after paying civil penalties ranging from $12,500 to $16,500 to settle “substantially similar” administrative charges lodged by the Office of the Comptroller of the Currency. Id. at 95, 97. In rejecting the defendants’ double jeopardy claim in the criminal case, the Supreme Court identified seven “guideposts” for courts to use in determining whether a nominally civil sanction is sufficiently punitive to trigger double jeopardy protection: “(1) whether the sanction involves an affirmative disability or restraint; (2) whether it has historically been regarded as a punishment; (3) whether it comes into play only on a finding of scienter; (4) whether its operation will promote the traditional aims of punishment-retribution and deterrence; (5) whether the behavior to which it applies is already a crime; (6) whether an alternative purpose to which it may rationally be connected is assignable for it; and (7) whether it appears excessive in relation to the alternative purpose assigned.” Id. at 99–100 (cleaned up; quoting Kennedy v. Mendoza-Martinez, 372 U.S. 144, 168–69 (1963)).
Given the relatively modest administrative penalty amounts at issue in Hudson, it is not terribly surprising that the Court declined to equate them to criminal fines. But fair application of the Hudson “guideposts” leaves little doubt that most of today’s harshly punitive SEC sanctions are easily distinguished and should trigger double jeopardy protection. In nearly every SEC case, the agency seeks or imposes affirmative disabilities and restraints in the form of injunctions, cease-and-desist orders, or industry bars or suspensions. The astronomical financial penalties the SEC routinely demands are clearly (and entirely) punitive, with little alternative purpose, see, e.g., Gabelli v. SEC, 568 U.S. 442, 451–52 (2013) (SEC penalties “go beyond compensation, are intended to punish, and label defendants wrongdoers”), as are many SEC disgorgement awards, see Kokesh v. SEC, 581 U.S. 455, 463–65 (2017) (disgorgement constitutes a penalty for purposes of statute of limitations). The most draconian penalties are typically so high, moreover, because there is a predicate finding of scienter. See, e.g., 15 U.S.C. § 78u(d)(3)(B) (three-tier penalty structure with substantially higher penalties for violation that involve fraud). And, of course, willful violation of any securities law provision or SEC rule is already a crime. 15 U.S.C. § 78ff.
Acknowledgment that many (if not most) SEC penalties are criminal under the Hudson analysis would bring significant due process relief to SEC defendants. If an alleged violation were willful, it could be prosecuted in a criminal proceeding with the full panoply of due process protections that are well established in that context, but the SEC would be precluded from pursuing its own putatively civil proceeding that would afford the defendant only the civil version of “due process light.” Conversely, non-willful defendants charged by the SEC could rest assured that there would be no subsequent criminal prosecution, and thus would have far more leeway to defend themselves by testifying at trial in the SEC case. Equally important, if the SEC prosecuted a case and lost at trial, the defendant’s jeopardy would end there—with no possibility for an SEC appeal.
Incorporation of Sixth Amendment Jury Trial Rights
It is widely acknowledged, even by the SEC, that when the agency prosecutes an enforcement case in federal court and seeks penalties as a remedy, the Seventh Amendment guarantees the defendant a jury trial—at least on the question of liability. See, e.g., SEC v. Life Partners Holdings, Inc., 854 F.3d 765, 782 (5th Cir. 2017); SEC v. Lipson, 278 F.3d 656, 662 (7th Cir. 2002). Thus far, however, no court appears to have addressed whether the SEC’s penalty demand should also trigger a Sixth Amendment jury trial right, which applies “[i]n all criminal cases.”
Attachment of Sixth Amendment rights would provide substantial additional protection to SEC defendants. For example, courts have generally held—following the early 20th century case of Fidelity & Deposit Co. v. United States, 187 U.S. 315 (1902)—that summary judgment in civil cases does not violate the losing party’s Seventh Amendment jury trial rights. See, e.g., Parklane Hosiery Co. v. Shore, 439 U.S. 322, 336 (1979) (citing Fidelity). But if SEC cases were properly categorized as criminal cases, it is likely that courts would be precluded by the Sixth Amendment from granting summary judgment in favor of the SEC, just as summary judgment is unavailable to prosecutors in traditional criminal cases.
The same would presumably hold true for directed verdicts and judgments notwithstanding the verdict, which are also unavailable to prosecutors in criminal cases. Indeed, if the Sixth Amendment were applied to SEC penalty cases, the many SEC targets of modest means would no longer need to defend themselves pro se because they would also have the same right to counsel that criminal defendants already enjoy.
Incorporating these Sixth Amendment protections into SEC penalty cases would go a long way towards leveling what is now a lopsided playing field in favor of the SEC. All it would take is for courts to acknowledge that SEC penalty cases are indeed criminal cases, notwithstanding their statutory label.
During oral argument in Gabelli v. SEC, in which the Supreme Court unanimously rejected the SEC’s argument that its statute of limitations should not begin to run until it discovers a securities fraud violation, Justice Scalia captured the reality of modern SEC enforcement by suggesting to SEC counsel that “[y]ou just call it a civil penalty and—and you don’t have to prove it beyond a reasonable doubt.” Oral Argument Tr. at 48. The Court’s unanimous decision, written by Chief Justice Roberts, echoed this concern by describing the SEC as “a different kind of plaintiff” seeking “a different kind of relief.” 568 U.S. at 451.
But Justice Gorsuch made the broader point most poignantly in his concurring opinion in a subsequent immigration case having no direct relevance to SEC enforcement:
Ours is a world filled with more and more civil laws bearing more and more extravagant punishments. Today’s “civil” penalties include confiscatory rather than compensatory fines, forfeiture provisions that allow homes to be taken, [and] remedies that strip persons of their professional licenses and livelihoods. … Some of these penalties are routinely imposed and are routinely graver than those associated with misdemeanor crimes—and often harsher than the punishment for felonies.
Sessions v. Dimaya, 138 S. Ct. 1204, 1229 (2018) (Gorsuch, J. dissenting).
Over the past 40 years, the SEC has fundamentally transformed itself from a modest New Deal regulator with limited enforcement powers into a harsh prosecutorial “cop on the beat” that routinely punishes companies and executives with staggering fines and other punitive sanctions. Unfortunately, this inexorable shift of SEC enforcement toward the model of criminal prosecution has largely neglected to bring with it commensurate due process protections for those accused. It is long past time for courts and litigants to insist that along with the SEC’s enormous prosecutorial power must come far more robust procedural safeguards—including, for starters, a heightened burden of proof, greater respect for the right against self-incrimination, increased protection against the specter of double jeopardy, and incorporation of Sixth Amendment jury trial rights.