Commission Refuses To Allow Former Chief Accountant To Testify in Fanny Mae Litigation

Fanny Mae Securities Litigation, Exchange Act Rel. 60772, October 2, 2009

The Ohio Public Employees Retirement System as lead plaintiffs in a class action suit against Fanny Mae subpoenaed Donald Nicolaisen the former chief accountant of the Commission to testify at a deposition. Nicolaisen had testified before Congress that Fanny Mae accounting practices did not comply with generally accepted accounting principles.

Pursuant to Commission rules the Commission's general counsel issued a decision denying the request. This appeal followed.

There is a split in the circuits over the standard of review to be employed by a federal agency in these situations – whether the Administrative Procedure Act arbitrary and capricious standard or the FRCP should be applied. The Commission followed D.C. Circuit precedent and used the FRCP. Using that standard, the Commission decision analyzes: 1) whether the deposition would cause undue burden to the Commission; 2) whether the testimony would likely invade the SEC's privileges; and 3) whether the testimony would consist of expert opinion or fact testimony.

The Commission concluded that the testimony would be largely expert opinion and to the extent that it was factual, would largely be protected by the Commission's deliberative process privilege. The opinion expresses concern that allowing present or former staff to routinely testify would impose a significant burden on the Commission as the staff issues numerous comments on company periodic filings and provides accounting guidance on a regular basis.

The Commission also noted that its deliberative process privilege protects the internal discussions of its staff. See, pages 8-9 of the Commission's opinion.

David Disraeli and Lifeplan Associates, Inc., Exchange Act Rel. 56045, July 11, 2007

Order denying motion to take SEC staff depositions

Summary

The Commission denied respondent's motion requesting that the Commission order the depositions of two staff members.  The Commission's Rules of Practice are very restrictive and permit depositions only under specific limited circumstances.  Rule 233 permits depositions only when the witness will be unable to attend the hearing due to age, sickness, infirmity, imprisonment, or absence from the U.S.  Depositions are also permitted in the "interests of justice." 

Depositions in SEC proceedings are not intended as a discovery mechanism.  The hearing had already been concluded.  Under Rule 452, leave to adduce additional evidence after the hearing closes is permitted under very limited circumstances.  Here, respondents failed to explain their failure to subpoena the staff members in question to testify at the hearing itself.  Further, respondents claimed that their purpose in seeking the testimony of an enforcement attorney was to show that the staff's investigation was not objective.  The Commission dismissed this argument noting that the ALJ's initial decision was based on the evidence submitted during the hearing, not the underlying investigation.  Their request to depose a staff accountant was denied because she testified at the hearing and was available for cross examination. 

Comment 

Please note that the Commission seems to regularly post decisions to its web site a long time after those decisions are actually rendered.  They are posted in chronological order by date of decision, not date of posting.   This, and several other decisions have only recently been posted.  Thus, one must go back through the posted decisions on a regular basis to determine if old decisions have only recently been posted.  That is the reason you see July decisions with October posting dates.