ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA Misc. No. 7507
Before: SEITZ, Chief Judge, ADAMS, Circuit Judge, and LORD, District Judge*fn*
In this case we are asked to decide whether the district court erred in declining to enforce a subpoena issued by the Securities and Exchange Commission. The district court found that the agency's subpoena sought materials relevant to an investigation authorized by statute and conducted in good faith. Nevertheless, because it concluded that the agency's investigative process had been abused by certain third parties, the district court refused to compel compliance with the subpoena. We reverse.
Wheeling-Pittsburgh Steel Corporation (W-P), a Delaware corporation with headquarters in Pittsburgh, Pennsylvania, manufactures and sells steel and related products. W-P's stock is registered pursuant to Section 12(b) of the Securities Exchange Act of 1934,*fn1 and is listed on the New York Stock Exchange. W-P files its annual and other periodic reports with the Securities Exchange Commission (SEC or Commission) pursuant to Section 13(a) of the Act.*fn2
For two years prior to the events giving rise to the dispute in this case, W-P had attempted to secure loan guarantees from the Economic Development Administration (EDA) and the Farmers Home Administration of the Department of Agriculture (FmHA). These guarantees would assist W-P in securin g loans from private lenders, the loans to be used in constructing a mill to produce steel rails at Moneseen, Pennsylvania. Only three other companies produce steel rails -- United States Steel Corporation, Bethlehem Steel Corporation, and Colorado Fuel and Iron Company (CF&I). All three have opposed the efforts of W-P to obtain loan guarantees.
On December 28, 1978, and January 9, 1979, Dennis J. Carney, President and Chief Executive Officer of W-P, received identical "letters of intent" from the EDA and FmHA. The letters stated that the agencies "will recommend" loan guarantees of $100 million (EDA) and $40 million (FmHA). Both letters stated that the agency recommendations were contingent on the satisfactory completion by W-P of certin conditions.
W-P announced these developments in its "Report on the Annual Meeting of Stockholders," issued on April 27, 1979:
We obtained commitments for federal loan guarantees of $140,000,000 and for a $10,000,000 direct loan through the State of Pennsylvania. These commitments will enable us to finalize arrangements in June through a consortium of insurance companies....
We are also exploring future acquisitions being proposed to us by several foreign and domestic firms.
On August 28, 1979, the EDA executed a guarantee agreement and on the same day the FmHA executed a conditional commitment to guarantee.
After W-P's April 27 announcement regarding the EDA and FmHA guarantees, Arthur T. Downey, a Washington, D.C. attorney retained by CF&I to assist in opposing W-P's efforts to obtain loan guarantees, wrote to the agencies involved, suggesting that they compel W-P to withdraw the statements made in the report. Downey also furnished Timothy Keeney, an aide to Senator Lowell Weicker of Connecticut, with a copy of the report. At the June 4 meeting of the Subcommittee for State, Justice & Commerce Appropriations of the Senate Committee on Appropriations, Weicker, an opponent of the loan guarantee program, attacked the proposed EDA loan guarantee. As a result of this attack, Carney was called to appear before the June 11 subcommittee meeting to explain W-P's position. Senator Weicker interrogated Carney at this meeting regarding his use of the word "commitments" in the report to shareholders. The Senator felt that use of this word in connection with the status of the loan guarantees was a material misrepresentation of fact, since the EDA and FmHA had issued only "letters of intent." Carney's opinion was that the two expressions were synonymous and could be used interchangeably.
Three days after the meeting, a letter from Senator Weicker was hand delivered to Stanley Sporkin, Director of the Division of Enforcement of the SEC. In the letter, the Senator pointed out Carney's use of the word "commitments" in the shareholder report and questioned whether its use constituted a violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder.*fn3 Martin Aussenberg, an SEC staff attorney, was assigned to conduct an informal investigation. Aussenberg commenced his efforts by contacting Keeney for background information on the loan guarantee process. Keeney described for Aussenberg the guarantee program and the reasons for Senator Weicker's opposition to it, reiterated the Senator's view that the use of the word "commitments" may have been misleading, and referred Aussenberg to Downey as a potential source of additional information. Aussenberg telephoned Downey the same day. Although initially reluctant to ...