WHX Corporation v. Securities and Exchange Commission

Brief Fact Summary. The Securities and Exchange Commission (SEC) (Plaintiff) imposed a cease-and-desist order upon the WHX Corporation (WHX) (Defendant), preventing WHX from committing or starting any future violations of theAll Holders Rule, SEC Rule 14d-10(a)(l), with WHX arguing that the order wasunpredictable and arbitrary.

Synopsis of Rule of Law. Where the SEC does not comply with its own standards by providing lack of evidence, that either there is at least some danger of future violation or that the violation the order is based on is serious, the imposition on a corporation of a cease-and-desist order issued by the SEC is arbitrary and unpredictable.

Facts. WHX desired to make a hostile tender offer for Dynamics Corporation of America (DCA), but due to the annual shareholder meeting having passed already, WHX suggested to incorporate a condition extending the offer to shareholders who, as of the current date, were holders or to those who attained a valid proxy.  The company’s attorney sought advice from the SEC about if this condition would cause trouble with the All Holders Rule, SEC Rule 14d-10(a)(l ), but was informed that no-action letters on this rule were not issued by the SEC.  No bidder shall make a tender offer unless the “tender offer is open to all security holders of the class of securities subject to the tender offerâ€, as stated by the All Holders Rule. The purpose of the rule was mostly to eradicate offers that discriminate against identifiable shareholders. The attorney felt good-faith arguments existed regarding why the condition in this specific situation failed to violate the rule, considering how the rule is structured, the condition would not influence the security holders not included in the offer to sell to those included. Upon WHX continuing with the tender offer, it was advised by the SEC staff that the offer was in violation of the All Holders Rule then WHX explained to the Commissioners why they thought no remedial response was warranted by the condition. The pleas of WHX were futile and the SEC approved an enforcement action to stop the tender offer. WHX instantly withdrew the condition in response and following that, its takeover bid failed. Regardless, after a year and some had passed, the SEC began cease-and-desist proceedings against WHX. An Administrative Law Judge (ALJ) found no violation, however the SEC reversed and imposed on the cease-and-desist order. Review granted by the court of appeals.

Issue. Where the SEC does not comply with its own standards by providing lack of evidence, that either there is at least some danger of future violation or that the violation the order is based on is serious, is the imposition on a corporation of a cease-and-desist order issued by the SEC  arbitrary and unpredictable?

Held. (Williams, J.) Yes. Where the SEC does not comply with its own standards by providing lack of evidence, that either there is at least some danger of future violation or that the violation the order is based on is serious, the imposition on a corporation of a cease-and-desist order issued by the SEC is arbitrary and unpredictable. In this case, the SEC failed to observe its own standards, while noting that there “must be a showing of ‘some risk’ of future violation,” it does not need to be a severe risk. However, the SEC failed to clarify how traditional factors could be reasonably applied, inclusive of: the severity of the violation, WHX’s state of mind, how earnest WHX is in assuring against future violations, the reoccurring or insulated nature of the violation, the chance to commit future violations, and WHX’s acknowledgment of the illegal nature of its behavior, to back the imposition of the cease-and-desist order.  For starters, the SEC evaluation of the danger of future violations was only based on the fact that WHX had committed a violation and was still in the market.  These circumstances are not seen as important, seeing as these circumstances can be found in virtually ever case where the SEC is looking for a cease-and-desist order. Then, the reasoning supplied by the SEC that WHX disregarded staff warnings and because the All Holders Rule is unambiguous and clear for their claim of the violation being “serious†does not pass even a weak standard of review. The claim that the plain language of the All Holders Rule clearly and unambiguously applies to WHX’s record holder standing lacks basis. There is nothing on the face of the regulation that signifies its ability to be applied to a condition like that and the SEC was provided many reasonable, good faith arguments by WHX as to why the rule was not able to be applied. Also, WHX’s determinationin the face of warnings from the SEC staff, whose advice lacks authority, does not signify that its violationis “serious†or “willful†seeing as, under the SEC’s own regulations, parties in danger of enforcement actions are allowed to offer arguments as to why the Commissioners should discard the suggestions of the staff regarding enforcement, otherwise known as “Wells submissions.â€Â  Without additional justification, punishing WHX for making a good faith Wells submission would be arbitrary and unpredictable. WHX is guilty of one isolated violation at most and once the SEC made its stance clear, WHX withdrew the offending condition instantly; the SEC has provided no reason that WHX should be doubted regarding assurances against future rule violations. The order is vacated.

Discussion. The SEC may issue a temporary cease-and-desist order without notifying the respondent and without a hearing, in addition to issuing a permanent cease-and-desist order. A temporary order like that will remain effectual until the respondent takes an appeal that is resolved in their favor or when the proceeding for the permanent order is resolute.