Guest Post by Nicolas Morgan of DLA Piper Rudnick Gray Cary:

If the SEC thought it would gain home court advantage by asking Congress to allow monetary penalties to be awarded in administrative proceedings under Sarbanes-Oxley, the DC Circuit has set the record straight.  On November 15, 2005, in The Rockies Fund v. SEC, the DC Circuit scolded the SEC for arbitrarily and capriciously awarding "the harshest available penalties" against the Funds' directors without any showing that their conduct "created a significant risk of substantial loss to others." 

The SEC accused the Fund of mischaracterizing and overvaluing certain holdings on its SEC filings, but the SEC failed to demonstrate in the administrative proceeding that such conduct put any investors at risk of loss.  Sarbanes-Oxley permitted the SEC to seek civil penalties in an administrative proceeding presided over by an SEC administrative law judge rather than in a federal court action.  However, the DC Circuit confirmed that the SEC must make the same evidentiary showing to obtain civil penalties no matter which forum the SEC brings its enforcement action in.