INITIAL DECISION RELEASE NO. 132 ADMINISTRATIVE PROCEEDING FILE NO. 3-8527-EAJ UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Washington, D.C. _______________________________ : In the Matter of : INITIAL DECISION : September 23, 1998 RITA VILLA : : : APPEARANCES: Richard Humes, James A. Brigagliano, and John J. Nicholas for the Division of Enforcement, Securities and Exchange Commission Eric Landau and Steven Aranoff for the Applicant BEFORE: Robert G. Mahony, Administrative Law Judge Background On October 20, 1994, the Securities and Exchange Commission (Commission) issued an Order Instituting Proceedings (OIP) against Rita Villa (Villa). The Division of Enforcement (Division) alleged that Villa caused First Capital Holdings Corp. (FCH) to violate 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 by filing a materially deficient Form 10-K for the year ending December 31, 1990. (OIP at 7.)[1] At the time of the events in question, FCH had two principal subsidiaries, First Capital Life Insurance Company (FCL), which was domiciled in California, and First Bankers Life Insurance Company. Villa, a certified public accountant, was both controller and chief accounting officer of FCH. She was responsible for the financial reporting by FCH and maintained the books of the holding company. (Hearing Tr. May 4, 1995, 4-5.) According to the Division, the 1990 Form 10-K materially misstated the financial condition of FCL, and failed to disclose material information regarding: the amount of reserve credits claimed by FCL pursuant to reinsurance treaties; the nature of the relevant reinsurance treaties (e.g., that they improperly passed virtually no risk to the reinsurer); the negative effect that disallowance of reserve credits would have upon the ability of FCH to stay in business; and FCL's undercapitalization problem.[2] (OIP at 2.) The Division alleged that Villa was a cause of FCH's reporting and recordkeeping violations. (OIP at 7-8.) Specifically, the Division alleged that Villa knew or should have known of the reserve credit problem based on, among other things, her position as controller and chief accounting officer of FCH and because of her responsibility for ensuring the accuracy of FCH's periodic reports. (OIP at 8.) From May 2 to May 4, 1995, the Division presented its case to an administrative law judge. At the close of the Division's case, Villa moved for a directed verdict. The judge 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. (Hearing Tr. May 4, 1995, at 90-91.) The judge concluded that the Division failed to prove a prima facie case and granted Villa's motion.[3] (Hearing Tr. May 4, 1995, at 91.) The Division appealed and after an independent review of the record the Commission affirmed the judge's dismissal of the proceeding. Rita Villa, 66 SEC Docket at 778. 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 seeks 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 on February 10, 1998. The Division filed its Opposition to Respondent's Application for an Award of Attorney's Fees and Costs on May 4, 1998. Villa filed a Reply Brief and Supplemental Declaration in support of her application on July 8, 1998. Oral argument was held on August 13, 1998. The fee petition is based on 1063.51 billable hours by Villa's lead attorney, Eric Landau, who requests a fee of $187,876.00. The hourly rate for the requested fee computes to approximately $175.00 per hour. An additional fee of $7403.65 for unspecified hours is sought by Villa's local counsel, Kirkpatrick & Lockhart. The total fee request is $195,279.65. Reimbursement of costs include $6511.96 for an expert witness fee and other expenses of $22,660.22, for a total of $29,172.18. At oral argument, counsel for the Division stated that it was not contesting the number of billable hours or any of the expenses, but was contesting the hourly rate sought by Mr. Landau because Commission regulations limit recovery to $75.00 per hour.[4] See 17 C.F.R.  201.36(b). Counsel for the Division, however, conceded that a cost of living adjustment may be appropriate if the fee is otherwise approved. (Oral Argument Tr. at 14-15). Equal Access to Justice Act 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." H.R. Rep. No. 96-1418, 96th Cong., 2d Sess. 5-6, reprinted in 1980 U.S.C.C.A.N. 4984, 4984. The EAJA permits prevailing parties to obtain awards of attorney fees and other expenses against the United States in certain administrative proceedings and judicial actions.[5] Applicants under the EAJA must meet several threshold requirements. First, the EAJA applies only to "adversary adjudications." 5 U.S.C.  504(a)(1). The EAJA defines an "adversary adjudication" as an "adjudication under section 554 of this title in which the United States is represented by counsel or otherwise . . . ." 5 U.S.C.  504(b)(1)(C). Section 554 covers adjudications required by statute to be determined on the record after opportunity for an agency hearing. 5 U.S.C.  554(a)(1). In turn, these adjudications are defined as the "agency process for the formulation of an order," 5 U.S.C.  551(7), and an "order" is defined as the "whole or part of a final disposition . . . ." 5 U.S.C.  551(6). Villa seeks attorney's fees and reimbursement of costs incurred prior to the OIP, i.e., during the Division's investigation, as well as after the OIP. Clearly, events that postdate October 20, 1994, the date of the OIP, are "adversary adjudications" under the EAJA. The Division, however, contends that the investigation phase of the Division's efforts does not fit within the definition of an "adversary adjudication," and therefore costs incurred prior to October 20, 1994 are not recoverable. In support, the Division cites Family Television, Inc. v. SEC, 608 F. Supp. 882, 883 (D.C. Cir. 1985). In Family Television, the Division conducted an investigation that was terminated without a recommendation of any enforcement action. Id. at 882. The D.C. Circuit held that an enforcement investigation which did not result in a hearing before an administrative law judge did not constitute an "adversary adjudication." Id.; see also ITT v. Electrical Workers, 419 U.S. 428, 443 (1975) (quoting Attorney General's Manual on Administrative Procedures Act 40 (1947)) ("`investigatory proceedings, no matter how formal, which do not lead to the issuance of an order containing the element of final disposition as required by the definition, do not constitute adjudication'"). The instant proceeding can be distinguished from Family Television. Namely, in this case the Division's investigation led directly to an OIP against Villa, which was followed by a hearing before an administrative law judge. I conclude that the Division's investigation and the administrative hearing were essential components for the "final disposition" of this case. Consequently, together they represent "the agency process for the formulation of an order," and come within the definition of "adversary adjudications." Therefore, I reject the Division's argument that attorney's fees and other costs and expenses incurred prior to October 20, 1994 are not recoverable. If an applicant can demonstrate that they were party to an adversary adjudication, the applicant must then show they were a "prevailing party." The Division does not dispute that Villa is the prevailing party in an action brought by the Division under section 13(a) and 13(b)(2)(A) of the Securities and Exchange Act, and Rules 13a-1 and 12b-20 thereunder. See Jefrey v. INS, 710 F. Supp. 486, 487-88 (S.D.N.Y. 1989) (noting that the prevailing party standard is interpreted liberally and a litigant is a prevailing party under the EAJA if he [or she] succeeds on any significant issue in the litigation that achieves some benefits on the merits); see also Correa v. Heckler, 587 F. Supp. 1216 (S.D.N.Y. 1984). Once an applicant demonstrates that he or she is a prevailing party, the government can still avoid paying an applicant's fees by showing that its position was substantially justified or that special circumstances exist that make an award unjust. Pierce v. Underwood, 487 U.S. 552, 565 (1988). The Supreme Court has interpreted substantially justified to mean that the government's position was "`justified in substance or in the main' -- that is, justified to a degree that could satisfy a reasonable person." Pierce, 487 U.S. at 565. The Pierce decision, however, recognized that a loss at trial does not determine the availability of fees: "a position can be justified even though it is not correct, and we believe it can be substantially (i.e., for the most part) justified if a reasonable person could think it correct, that is if it has a reasonable basis in law and fact." Id. at 566. In short, the substantial justification standard is "essentially one of reasonableness." FEC v. Political Contributions Data, 995 F.2d 383, 386 (2d Cir. 1993) (citations omitted). The existence of credible evidence constituting a prima facie case of unlawful conduct is enough to defeat an EAJA application. Natchez Coca-Cola Bottling Co. v. NLRB, 750 F.2d 1350 (5th Cir. 1985). In the instant proceeding, the Division's evidence has been thoroughly evaluated by an administrative law judge and the Commission. There is no further need to consider the Division's evidence in this proceeding. I credit the decision of the administrative law judge which established that the Division's evidence was legally insufficient to establish a prima facie case. An independent review of the proceeding by the Commission found the Division's evidence similarly lacking. Therefore, I conclude that the proceeding did not have a reasonable basis in both law and fact and was not substantially justified within the meaning of 5 U.S.C.  504(a)(1). I further conclude that the prevailing party is entitled to payment of attorney's fees and costs in accordance with the EAJA and Regulation B of the Commission's Rules of Practice. Award Of Fees And Costs Respondent's counsel requests an approval of a rate of approximately $175.00 per hour. The maximum statutory rate for a fee award under the EAJA, however, is $75.00 per hour,[6] "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." 5 U.S.C.  504(b)(1)(A)(ii). The Commission's own regulations provide for the same cap on attorney fees. See 17 C.F.R.  201.36(b) ("[n]o award or fee of an attorney or agent under these rules may exceed $75 per hour"). Counsel contends 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 as set out in Respondent's Reply Brief.[7] 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. See, e.g., Meyer v. Sullivan, 958 F.2d 1029, 1034 (11th Cir. 1992). In order to account for inflationary pressures since the adoption of the EAJA and in light of the Division's acquiescence, I conclude that a cost of living escalator should be applied to the EAJA fees in the instant proceeding. Notwithstanding the cost of living escalator, I reject Villa's request for an enhanced attorney fee beyond the statutory rate of $75.00 per hour. 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. ORDER The Commission 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. This order shall become effective in accordance with and subject to the provisions of Rules 410 and 411 of the Commission's Rules of Practice, 17 C.F.R.  201.410, .411. Pursuant to these rules, the Division or the Applicant may seek review of this decision within twenty-one days after service of the decision. If no review is sought or if the Commission does not review the decision on its own initiative, the initial decision shall become a final decision of the Commission thirty days after it is issued. 17 C.F.R.  201.57. If a party timely files a petition for review, or the Commission acts to review as to a party, the initial decision shall not become final as to that party. ____________________________ Robert G. Mahony Administrative Law Judge **FOOTNOTES** [1]: I will cite to the October 20, 1994 Order Instituting Proceedings as "(OIP__ )." I will cite to the transcript for the May 2-4, 1995 administrative hearing as "(Hearing Tr.__ )," and the August 13, 1998 EAJA oral argument as "(Oral Argument Tr.__ )." [2]: For a more detailed description of the reinsurance treaties and reserve credits, see Rita Villa, 66 SEC Docket 770, 773 n.3 (Jan. 6, 1998). [3]: The administrative law judge entered a "Notice Regarding Initial Decision," which stated that, for the purposes of Rule 17 of the Commission's former Rules of Practice, the intial decision was contained in the transcript of the hearing dated May 4, 1995. [4]: Infra note 6. [5]: EAJA provides, in relevant part, that: (a) A prevailing applicant may receive an award for fees and expenses incurred in connection with a proceeding . . . unless the position of the Office or Division over which the applicant has prevailed was substantially justified. . . . . The burden of proof that an award should not be made to an eligible prevailing applicant is on counsel for an Office or Division of the Commission, which must show that its position was reasonable in fact and law. 17 C.F.R.  201.35. [6]: 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. The Division's action against Villa commenced prior to the effective date of the amendment; thus, she is not entitled to fees and costs at the rate of $125.00 per hour. [7]: During the August 13, 1998 oral arguments on the EAJA issue, the Division stated, "as to the cost of living, [the Division] would state that that may apply here. We're not necessarily contesting that. We think it may well apply . . . ." (Oral Argument Tr. 15.)