LexisNexis Corporate & Securities Law Community 2011 Top 50 Blogs

Bon mots

"You can observe a lot just by watching." Yogi Berra

"We do not distain to borrow wit or wisdom from any man who is capable of lending us either." Henry Fielding, Tom Jones

"In our complex society the accountant's certificate and the lawyer's opinion can be instruments for inflicting pecuniary loss more potent than the chisel or the crowbar." United States v. Benjamin, 328 F.2d 854, 862 (2d Cir. 1964)

Michael Sassano, Dogan Baruh, Robert Okin, R. Scott Abry, Exchange Act Rel. 56874, November 30, 2007

Interlocutory appeal, omnibus formal order, discretion of ALJ's to set pre-trial document discovery procedures

Pages - 6


The Division of Enforcement appealed an order by an ALJ that required it to turn over all evidence gathered with an omnibus formal order.  Note - omnibus formal orders are a device whereby the Commission authorizes numerous investigations, often by different offices, into matters that involve similar, but often unrelated conduct.  For example, it might authorize an  "omnibus" formal order to investigate frequent trading or mutual fund market timing at different mutual funds.  The investigation into conduct at fund x might not involve the same subjects as the investigation of trading at fund y. Further, the investigations might be conducted by different offices. Here, there were numerous investigations carried out under different file numbers, using the same formal order.

In this case, the Division used an omnibus formal order to investigate mutual fund trading, and opened a new investigative file number under the omnibus order to specifically investigate trading at Canadian Imperial Bank of Commerce.

Commission rules require that the Division shall make available to respondents documents obtained in connection with the investigation that leads to the proceedings.  Here, it provided documents related to its investigation of Canadian Imperial, but not all the documents gathered under the much broader omnibus investigative order that involved other investigations.  The ALJ, based on a motion by a respondent, ordered the Division to produce all documents gathered under the omnibus formal order that related to the mutual funds and other entities that were named in the order instituting proceedings.  The ALJ denied the Division's motion for interlocutory review.

In its motion for interlocutory review the Division noted that it had gathered tens of millions of documents pursuant to the omnibus order and that the task of selecting documents and preparing a privilege log would be a daunting task.  Respondent argued that even if the ALJ had ruled incorrectly on a "discovery" matter, interlocutory review was not warranted and further argued that it was irrelevant that the order placed a substantial burden on the Division for purposes of deciding whether interlocutory review was appropriate.

Commission rules permit discretionary interlocutory review of ALJ orders, even if the ALJ has not certified the matter for review.  However, it grants such review "only in extraordinary circumstances."

The Commission declined to review the ALJ's order.  It agreed with respondent that pre-trial discovery orders are "almost never appealable."  It further held that mere expense and inconvenience are not grounds for such an appeal.  The Commission did grant the Division sixty days to respond to the ALJ's order following this decision.  Further, at the Division's request, the Commission tolled the 300 day deadline for an initial decision to encompass the period of the Commission's consideration of the Division's motion and an additional 120 days. It also ruled that the documents did not need to be gathered in a single location for review by the respondents.


Apparently, the Commission has stayed the administrative proceeding since June 15, 2007, while it considered the Division of Enforcement's appeal.  Given the short shrift that the Commission gave to the Division's arguments, there is no good reason why this decision took five and one-half months.

The Division of Enforcement has in the past used omnibus formal orders as an "umbrella" for conducting broadly related investigations.  Often this was done to streamline the process of obtaining Commission authorization of an investigation.  While the ALJ was probably wrong in his or her interpretation of the relevant rule, the Commission's lack of concern for the difficulties and costs involved would seem to signal the end of the use of omnibus formal orders.  The Division simply cannot spend the resources preparing such vast volumes of documents for review or take the risk that it will be tied up in lengthy litigation concerning the quality of its document production.  The Commission is clearly signaling that it will give its ALJs great latitude in dealing with pre-trial discovery issues regardless of the exact wording of the relevant rules.