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SEC LOSES CASE AND IS ORDERED TO PAY:
WILL MIRACLES NEVER END?

The following article describes the recently released Securities and Exchange Commission (SEC) decision In the Matter of Rita Villa, Initial Decision Release #132, Admin. Proc. #3-8527-EAJ(September 23, 1998, Robert G. Mahony, ALJ)

What the SEC Alleged She Did

On October 20, 1994, the SEC issued an Order Instituting Proceedings (OIP) against Rita Villa (Villa). Basically, the SEC's Division of Enforcement (Division) alleged that Villa, a certified public accountant who was both controller and chief accounting officer of the company at issue, knew or should have known of a reserve credit problem. Villa was charged with violations of Sections 13(a) and 13(b)(2)(A) of the Securities and Exchange Act of 1934 (Exchange Act) and Rules 13a-1 and 12b- 20 thereunder.

What the SEC Found She Did

At the close of the Division's case, Villa moved for a directed verdict. The ALJ found, inter alia, that the Division had not presented sufficient evidence to support a finding that Villa knew of or understood the reserve credit problem. The ALJ concluded that the Division failed to prove a prima facie case and granted Villa's motion. The Division appealed and after an independent review of the record the SEC affirmed the ALJ's dismissal of the proceeding.

Villa Wants Her Pound Of Flesh 

Pursuant to the Equal Access to Justice Act (EAJA), 5 U.S.C. §504(a)-(f), and Subpart B of Commission's Rules of Practice, 17 C.F.R. §201.31 et seq., Villa sought to recover attorney's fees and costs incurred as the prevailing party in the above referenced proceeding. Villa filed an Application for an Award of Attorney's Fees and Costs based on 1,063.51 billable hours by Villa's lead attorney, who requested a fee of $187,876.00, based upon an hourly rate of approximately $175.00 per hour. An additional fee of $7,403.65 for unspecified hours was sought by Villa's local counsel. The total fee request was $195,279.65. Villa also sought reimbursement of costs in the amount of $6,511.96 for an expert witness fee and other expenses of $22,660.22, for a total of $29,172.18. 

The Division did not contest the number of billable hours or any of the expenses, but did contest the hourly rate because SEC regulations limit recovery to $75.00 per hour. Counsel for the Division, however, conceded that a cost of living adjustment might be appropriate if the fee is otherwise approved.

In 1980 Congress adopted the EAJA to deal with the perceived problem that certain individuals may be deterred from seeking review of or defending against unreasonable government action because of the expense involved in securing the vindication of their rights.

SEC Argues That Past Is Not Prologue

Villa sought the attorney's fees and reimbursement of costs she incurred prior to the OIP (during the Division's investigation) and those fees and costs incurred after the OIP. Although events that postdate the OIP, are "adversary adjudications" under the EAJA, the Division argued that the investigation phase does not fit within the definition of an "adversary adjudication," and therefore costs incurred prior to the OIP are not recoverable.

EAJA applies only to adversary adjudications, which are generally those in which the United States is represented by counsel.

Investigation + Administrative Hearing =Adversary Adjudication

In this case the Division's investigation led directly to an OIP against Villa, which was followed by a hearing before an ALJ. The Division's investigation and the administrative hearing were essential components for the final disposition of this case, and, consequently, together they represented the agency's process for the formulation of an order. Consequently, those factors were deemed sufficient to define the circumstances as an adversary adjudication and costs and expenses incurred prior to the OIP were found recoverable.  

Prevailing Party

Applicants must show they were a prevailing party.

The prevailing-party standard is interpreted liberally and litigants are considered prevailing parties under the EAJA if they succeed on any significant issue in the litigation that achieves some benefits on the merits. The Division did not dispute that Villa was the prevailing party.

Substantially Justified or Special Circumstances

The government can still avoid paying by showing that its position was substantially justified or that special circumstances exist that make an award unjust.

The United States Supreme Court has interpreted substantially justified to mean that the government's position was justified to a degree that could satisfy a reasonable person. However, a loss at trial does not automatically mean the government was not substantially justified, because even an incorrect position can be substantially justified if a reasonable person could think it correct, that is, if it has a reasonable basis in law and fact.

Credible Evidence Establishing a Prima Facie Case

The existence of credible evidence constituting a prima facie case of unlawful conduct is enough to defeat an EAJA application.

In the instant proceeding, an ALJ initially found that the Division's evidence was legally insufficient to establish a prima facie case. A subsequent independent review of the proceeding by the SEC found the Division's evidence similarly lacking. Therefore, the proceeding did not have a reasonable basis in both law and fact and was not substantially justified, and the prevailing party is entitled to payment of attorney's fees and costs

You Want How Much?

Respondent's counsel requested legal fees at a rate of approximately $175.00 per hour. The recent amendment to EAJA, which increased the hourly rate from $75.00 to $125.00 per hour, only applies where the underlying action commenced on or after March 29, 1996, which did not occur in Villa's case. The then-applicable maximum statutory rate for a fee award under the EAJA was $75.00 per hour, unless the agency determines by regulation that an increase in the cost of living or a special factor, such as the limited availability of qualified attorneys or agents for the proceedings involved, justifies a higher fee. The SEC's own regulations provide for the same cap on attorney fees.

Villa's counsel contended that the $75.00 cap should not apply to actions initiated by the government, and that his expertise and experience as a securities litigator permits an enhanced fee. At oral argument the Division reasserted its objection to an hourly rate in excess of $75.00, but did not oppose the alternative position urged by Respondent's counsel that the $75.00 hourly rate should be subject to a cost of living escalator. The inclusion in the EAJA of a cost of living escalator indicates that Congress was aware of and desired to insulate EAJA fee awards against inflation. In order to account for inflationary pressures since the adoption of the EAJA and in light of the Division's acquiescence, a cost of living escalator was applied to the EAJA fees in the instant proceeding.

Notwithstanding the cost of living escalator,  Villa's request for an enhanced attorney fee beyond the statutory rate of $75.00 per hour was rejected. The application for fees, when calculated to include a cost of living adjustment for the relevant period, reflects 226 hours in 1994 at $131.47 per hour ($29,712.22), 684.26 hours in 1995 at $134.88 per hour ($92,229.99), .25 hours in 1996 at $138.26 ($34.57) and .25 hours in 1997 at $142.40 ($35.60). Using this calculation, a total fee of $122,075.37 plus costs of $29,172.18 is approved.

ORDERED: The SEC shall pay Rita Villa the sum of $122,075.22 as an attorney's fee, plus an additional $29,172.18 for reimbursement of costs


For Further Reference:

Jonathan Garrett Ornstein, 51 S.E.C. 135, 137 (1992).[ credibility determinations of the initial decision-maker when such determinations are based on hearing the witnesses’ testimony and observing their demeanor]

Anthony Tricarico, 51 S.E.C 457, 460 (1993) [where the record contains substantial evidence providing a basis for disregarding a credibility determination the SEC will do so ]

Compare Mark James Hankoff, 50 S.E.C. 1009, 1012 (1992)[in evaluating reliability of hearsay evidence, possible bias of declarant, contradictory direct testimony, and corroborative evidence, among other matters, must be considered].





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