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

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Summary

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.

Comment

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.

Trout Wasserman & Co., Inc., et. al., Exchange Act Rel. 55989 (June 29, 2007)

Interlocutory Appeal, Motion to Dismiss

Time Between appeal and decision - unknown

Time between last brief and decision - unknown

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Comment

This decision concerns an interlocutory appeal in a pending administrative proceeding. Respondents were charged with violations in connection with frequent trading and late trading of mutual funds.  An individual respondent filed a motion to dismiss alleging misconduct by the Division of Enforcement which was ordered to make its investigative files available to him. The Commission denied the motion, applying the standard for review it uses for interlocutory appeals of ALJ orders.  Respondent's motion was based on: 1) purported "improper" questioning of respondents and others by the division during it's pre-filing investigation; 2) claims that the Division promised to seek to withdraw cease and desist proceedings against respondent; and 3) an investigation of his former counsel by the Commission's Office of General counsel and trial subpoena in these proceedings to that counsel by the division.

The Commission found that the investigative testimony did not show any prejudice to respondent.  There were no statements adverse to respondent and he does not claim any witness changed his testimony because of the Division conduct.  Nor does respondent cite to any authority that supports dismissing an entire proceeding even if he had suffered prejudice.

As to the claim that the Division had promised to dismiss the cease and desist proceedings, those proceedings were in fact dismissed and Respondent has demonstrated no prejudice resulting from any delay in doing so.  The Division did not "cause" the OGC's investigation of counsel, it was prompted by testimony during the investigation.  The Commission rejected the argument that Respondent was thereby deprived of counsel of his choice.  It noted that there is no absolute to counsel of one's choosing when the integrity of Commission processes may be threatened.  Further, Respondent's current counsel has represented that he has interviewed former counsel and claims that his testimony will not be useful to the Division at trial, an argument inconsistent with claiming prejudice.  

Respondent also argued that the Division knew about the testimony concerning counsel,but failed to disclose it to Respondent, arguing this made his counsel appear untrustworthy, depriving him of effective assistance.  the commission noted that counsel in adversarial proceedings may view positions by opposing counsel with skepticism anyway.  Finally, the Division did not deprive respondent of a meaningful right to make a Wells submission by not disclosing the tampering allegations to Respondent.  Here there was no prejudice to Respondent because he has hired new untainted counsel.

Concerning the claims relating to his former counsel,  the Commission noted that persons had testified that counsel had attempted to tamper with their prospective investigative testimony. 

The Commission summarized by finding that Respondent had not alleged any prejudice or harm from the purported misconduct.

It is somewhat unhelpful that the Commission does not discuss whether or not the investigative testimony was in fact abusive or not.  Nor does the Commission explain why it does not.  At least one case has sanctioned extremely aggressive investigative testimony by the Division.  See, SEC v. Isbrandtsen, 245 F.Supp 518 (S.D.N.Y., 1965) ( SEC entitled to make persistent and thororough inquiry).

Key Points

• Here, despite the fact that there is no ALJ ruling under consideration, that standard of review will be applied to the interlocutory motion to dismiss.
•  Respondents do not have an absolute right to counsel of their choosing, especially when as here, allegations of witness tampering by former counsel are being investigated by the Commission staff.
• Interlocutory motions are  disfavored.  Review of interim orders by the ALJ will be reviewed only under "extraordinary circumstances."
  

Additional discussion

Isbrandtsen is worth a further look.  A witness refused to continue answering questions pursuant to a SEC investigative subpoena.  He had testified for several days.  The court ordered the testimony to continue.  

"... the protective power of the court may not be invoked by a witness who is uncomfortable or embarrassed by a persistent and thorough examiner who is following out leads and checking possible inconsistencies.  The line of demarcation between persistent questioning and oppressive inquisition cannot be defined in advance.  The individualizing facts and circumstances must be considered ad hoc.  . . . An SEC inquiry is not governed by judicial standards of proof.  Leading questions may be asked.  Hearsay may be elicited.  Investigators are, by the very nature of their task, (especially in non-public hearings) interested in obtaining clues and leads.  Even rumors may furnish helpful material, on the basis of which witnesses may be located  and competent evidence unearthed.  These are but a few of the practical considerations that, realistically considered, require the courts to adopt a liberal attitude in judging the propriety of the investigative techniques of the SEC . . . .  The SEC is charged by Congress with the administration of a number of statutes designed to regulate a complex and technical industry.  Deliberately concealed violations of the securities laws are most difficult to detect.  The SEC is often required to conduct extensive investigations and to inquire into intricate transactions."