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.
We accord great deference to the SEC's decisions as to choice of sanction, inquiring only whether a sanction was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.
View Full Point of LawIssue. 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 SECÂ 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.