UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
filed: August 27, 1980.
SECURITIES & EXCHANGE COMMISSION, APPELLANT
WHEELING-PITTSBURGH STEEL CORP., DENNIS J. CARNEY, APPELLEES
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*
ADAMS, Circuit Judge.
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 volunteer information, Downey ultimately related several instances, including those mentioned in the Weicker letter, in which, in Downey's opinion, W-P had made material misrepresentations to the government agencies involved in the guarantee process.
During the early days of the SEC investigation, Senator Weicker's office demonstrated considerable interest in the Commission's activities. While conducting the informal inquiry, Aussenberg received a call from Keeney, who asked what actions the SEC had taken in response to the Weicker letter. Keeney was advised that the Commission staff could not release confidential information about or even confirm the existence of Commission investigations. In a second call made a few days later, Keeney advised Aussenberg that Senator Weicker was considering introducing an amendment to the pending supplemental appropriations bill for the EDA which would preclude it from providing federal long guarantees to corporations under investigation by the Commission. Aussenberg objected to Weicker's amendment, expressing fear that it would compromise the confidentiality of the Commission's investigation. Despite these objections, on June 25 Senator Weicker introduced the amendment,*fn4 along with nine others each of which would have blocked an EDA loan guarantee to W-P. Only the amendment that would have tied loan guarantees to SEC activity was called up for a vote, and it was defeated by a substantial margin.
The same day as the Senate debate on the EDA Supplemental Appropriations Bill, June 25, Aussenberg called counsel for W-P to request production of certain documents. This was the first notice to W-P of any investigation. On July 2, counsel for W-P produced the requested documents.
On July 31, the Commission issued its formal order directing a private investigation and designating officers to take testimony pursuant to Section 21(a) of the Act.*fn5 The order stated that members of the staff had reported information tending to show that W-P had disseminated material misrepresentations concerning (1) federal loan guarantees; (2) loans, line of credit, and other sources of financing; (3) possible acquisitions by or of W-P; and (4) trading in W-P stock.
In response to a subpoena, Carney appeared and testified before Aussenberg on August 2. Aussenberg's inquiries focused primarily on the loan guarantee process, particularly on Carney's use of the word "commitments" in the April 27 report. Carney answered all questions relating to the loan guarantees. Carney would not, however, identify the names of other companies involved in reported merger negotiations or provide documents relating to those negotiations.
On August 15, W-P filed suit against the Commission in the district court, seeking to enjoin the investigation. Two days later, the Commission filed a subpoena enforcement action to compel W-P's compliance with the request for information concerning alleged merger negotiations. The cases were consolidated for a hearing before the district court on August 22, at which W-P's injunctive action was dismissed since W-P could raise its legal objections to the subpoena as defenses to the Commission's enforcement action. The Court then conducted a series of hearings in the matter before rendering its judgment.
W-P asserted four defenses to the application for enforcement of the subpoena: (1) the information equested was irrelevant to any legitimate inquiry; (2) the subpoena demanded privileged and confidential information and disclosure that would cause W-P irreparable harm; (3) the subpoena was issued in bad faith and for the purpose of administrative harassment; and (4) the investigation constituted an abuse of the Commission by persons opposed to the grant of federal loan guarantees to W-P.
The district court, in an opinion dated December 17, rejected the first three of these claims. The court ruled that the requested material was relevant to two lawful purposes: ascertaining whether W-P had violated Rule 10b-5 and whether heavy trading in W-P stock could be attributed to the possession by "insiders" of information relating to possible combinations between W-P and other entities. The court also rejected W-P's claim of confidentiality, ruling that such a claim is premature until the subpoenaed information has been made available to the agency and opportunity exists to rule on specific requests for confidential treatment. More significant for our decision today was the district court's explicit repudiation of W-P's bad faith defense: "Although it is claimed that the agency's motivations were also improper, there is no substantial evidence of record to support the contention." The court observed that the burden when allegations of bad faith and harassment are made is a "heavy one," concluding that "[the] burden has not been met in this case."
The court accepted W-P's fourth defense, however. Pointing to the various contacts Aussenberg had with the staff of Senator Weicker, a political opponent of the loan guarantees to W-P, and with counsel for CF&I, who opposed the guarantees as a competitor of W-P, the court found that "the totality of circumstances here presented creates the appearance of a partnership between the Commission and these persons. Wittingly or not, the agency has permitted and at times encouraged, the abuse of its investigating function." In light of this abuse, the court declined to enforce the Commission's subpoena.
The Commission argues on appeal that the district court erred in holding that what it perceived as an abuse of the Commission's process by Senator Weicker constituted grounds for denying subpoena enforcement. It contends that the controlling legal standard for enforcement of an agency's subpoena requires only that the agency's investigation be legitimate under the Securities Exchange Act, that the documents requested be relevant to the investigation, and that the investigation be conducted in good faith. Defendants, on the other hand, maintain that even when these three conditions are satisfied, a district court has broad discretion to refuse to enforce an administrative subpoena. This discretion, it is claimed, is properly exercised when, as here, agency action is colored by political interference.
Section 21(a) of the Securities Exchange Act*fn6 authorizes the Commission to "make such investigations as it deems necessary to determine whether any person has violated or is about to violate any provision" of the securities laws or any regulation thereunder. For that purpose, "any member of the Commission or any officer designated by it is empowered to... subpoena witnesses, compel their attendance, take evidence, and require the production of any books, papers, correspondence, memoranda, or other records which the Commission deems relevant or material to the inquiry."*fn7 In the event its requests are not complied with, the Commission may solicit the hand of the court to exact compliance.*fn8 As the Court of Appeals for the District of Columbia Circuit has commented, "These powers, to be sure, are potent, but hardly dispensable in the protection of the investing public and the fairness and honesty of the Nation's financial markets."*fn9
Through these provisions Congress has endowed the Commission with broad powers to protect the public interest through prompt and effective enforcement of the federal securities laws. The Commission is not required by statute to limit its investigations to those against whom "probable" or even "reasonable" cause has been established.*fn10 Rather, it "can investigate merely on [the] suspicion that the law is being violated, or even just because it wants assurance that it is not."*fn11
The Commission's subpoena powers are conferred "[for] the purpose of any such investigation"*fn12 authorized by the Act, and have long been held to be far reaching. In Oklahoma Press Publishing Co. v. Walling,*fn13 a case involving the administration of the Fair Labor Standards Act, the Supreme Court stated "what has since become the rule for interpreting regulatory statutes".*fn14 The Court said of the requirement of "probable cause" as applied to subpoena enforcement actions:
The requirement of "probable cause supported by oath or affirmation," literally applicable in the case of a warrant, is satisfied in that of an order for production by the court's determination that the investigation is authorized by Congress, is for a purpose Congress can order, and the documents sought are relevant to the inquiry.*fn15
The Supreme Court has subsequently reaffirmed the doctrine enunciated in Oklahoma Press.*fn16 In United States v. Morton Salt Co.,*fn17 for instance, the Court indicated that even if the agency is motivated by "nothing more than official curiosity," its subpoena is enforceable because agencies have a legitimate interest in seeing that the law and the public interest are maintained.
The subpoena powers of the Commission are not unlimited, however, and federal courts do not function as mere "rubber stamps" in reviewing agency enforcement requests.*fn18 While "the party objecting to enforcement has the burden of making a showing of irregularity,"*fn19 the Supreme Court indicated in United States v. Powell*fn20 that a court should refuse enforcement when the agency is not pursuing an investigation in good faith:
It is the court's process which is invoked to enforce the administrative summons and a court may not permit its process to be abused. Such an abuse would take place if the summons had been issued for an improper purpose, such as to harass the taxpayer or to put pressure on him to settle a collateral dispute, or for any other purpose reflecting on the good faith of the particular investigation.
The Supreme Court addressed the issue of enforcement of administrative summonses more directly in United States v. LaSalle National Bank.*fn21 The LaSalle National Bank had refused to obey a summons to produce documents issued by the Internal Revenue Service under I.R.C. § 7602*fn22 on grounds that the information was requested solely in connection with a criminal investigation of one Gattuso. In holding that there had not been a demonstration of sufficient justification to preclude enforcement, the Court identified several requirements for the enforcement of an IRS summons.*fn23 First, in order to avoid encroaching on the role of the grand jury as the principal tool of criminal accusation, the summons must be issued before the Service recommends to the Department of Justice that a criminal prosecution be undertaken. Second, and more significant for our case, the agency "must at all times use the summons authority in good-faith pursuit of the congressionally authorized purposes" of the Act. The Court made clear, moreover, that it is the good fith of the agency as an institution, rather than the personal intent of any particular agency employee, that determines whether a summons should be enforced
Defendants read Powell and LaSalle National Bank as recognizing a broad discretion in the district courts to refuse enforcement of administrative summonses. Pointing to the Supreme Court's statements in LaSalle National Bank that the requirements for enforcement announced therein "are not intended to be exclusive," and that "[future] cases may well reveal the need to prevent other forms of agency abuse of congressional authority and judicial process,"*fn24 defendants conclude that the Court has vested in the trial courts discretion to decline to enforce agency subpoenas even when the agency is conducting its investigation in good faith. In particular, defendants contend that the Supreme Court has authorized the district courts to consider the motives of an agency's informants to determine whether enforcement of the subpoena would constitute an abuse of the judicial process.
We do not interpret Powell and LaSalle National Bank as mandating so wide ranging an inquiry, however. The Supreme Court stated explicitly in LaSalle National Bank that, at least as long as the agency investigation is statutorily authorized and the information sought relevant, whether an agency acts in good faith determines whether its summons must be obeyed: "The dispositive question in each case, then, is whether the [agency] is pursuing the authorized purposes in good faith."*fn25 While the Court left open the possibility of future development of the law on enforcement, we think that in doing so it recognized the need for future refinements of the concept of good faith. Thus the Court indicated that the statements in Powell that a summons is issued for an improper purpose when intended to harass or to induce settlement of a collateral dispute "were not intended as an exclusive statement about the meaning of good faith. They were examples of agency action not in good-faith pursuit of the congressionally authorized purposes of § 7602."*fn26 We do not understand the Court to have sanctioned district court refusals to enforce administrative subpoenas issued in good faith pursuit of a statutorily authorized purpose.
This Court had occasion to examine the issues surrounding enforcement of administrative summonses earlier this year in United States v. Cortese.*fn27 The district court in Cortese had declined to enforce an IRS summons on grounds that the Service's investigation was not conducted in good faith. In so finding, the district court had focused on the effect that an informant's motive had on the Service's purpose in issuing the summons, concluding that a biased informant had used the Service, with its knowledge, for the purpose of retribution against the subjects of the agency's investigation. We reversed, holding that the motivations of third parties should have no bearing on the question of agency good faith:
We agree with appellant that the motive of an informant is not a relevant consideration in determining good faith. Despite its conclusion, the district court recognized that informants "have historically been known to hold grudges against those who are the subject matter of the information." Informants traditionally act in their own interest. It is a rare informant who is not interested in "pursuing his own purposes."... The motive of the informant does not taint the motive of the IRS.*fn28
This Court, then, has held that the good or bad faith of the investigative agency determines whether its subpoena will be enforced, and that the motives of third parties are irrelevant to the enforcement issue. W-P attempts to distinguish Cortese , claiming that Cortese held only that evidence of ill-will on the part of private informants is legally insufficient to support a finding of institutional bad faith on the part of an administrative agency; the decision did not consider whether the motives or actions of informants might bear on other defenses to enforcement. While it is technically correct that Cortese involved the definition of institutional bad faith, we think the principles announced there guide the resolution of the case before us. The Court's observation that enforcement agencies are largely dependent upon information obtained from informants and other external sources who frequently act out of self-interest or revenge rings true whether a challenge to a subpoena is framed in terms of agency bad faith, as in Cortese , or in the language of abuse of process, as here. The proper role of the court in an enforcement action is to ensure that whatever vindictive motive may have prompted the agency's source was not adopted by the agency itself. Having assured itself that the agency's investigation is conducted in good faith, the court has adequately protected the integrity of the investigative process, and need neither condemn nor condone the personal intent of agency informants.
Defendants would have us modify these principles, only recently endorsed in Cortese . In particular, they ask us to hold that "political interference" with agency action compels judicial invalidation of such action, notwithstanding the good faith of the agency itself.*fn29 Defendants point to various decisions of other courts which, they contend, demonstrate a judicial willingness to look beyond the institutional good faith of an enforcement agency. We are not persuaded, however, that the cases cited are inconsistent with the view that a court asked to enforce an administrative summons should regard the issue of the good faith of the agency as dispositive.
Most pertinent of the cases relied on by defendants is United States v. Fensterwald .*fn30 Fensterwald had been selected by the Internal Revenue Service for a "special audit." An attorney, Fensterwald had represented James McCord, one of the original Watergate defendants, and, earlier in his legal career, James Earl Ray. He had also served as counsel to a Senate committee that had investigated allegations of wrongdoing within the Internal Revenue Service itself. Claiming that his professional activities could have led to an "extraordinary interest" on the part of persons in the Executive Branch "possessed of sufficient power to stir an interest in [him] by the Internal Revenue Service," Fensterwald sought to quash an IRS summons and to institute discovery by filing interrogatories directed to the IRS. The Court of Appeals for the District of Columbia Circuit reversed the decision of the district court denying discovery, holding that Fensterwald was entitled to explore the process by which his name was selected for audit. While defendants suggest that the teaching of Fensterwald is that an enforcement agency's action should be struck down whenever it was "influenced" by political considerations, we think the language of the case demonstrates that the court's concern was with the bona fides of the agency itself: "[Our] conclusion [is] that clearly taxpayer Fensterwald has taken himself out of the category of an ordinary taxpayer challenging the good faith of the Internal Revenue Service in conducting a special audit."*fn31 This interpretation was shared by the district court on remand in Fensterwald , which enforced the summons, finding that "the overwhelming evidence adduced in this proceeding is that the audit complained of was the result of the normal processes of the I.R.S. which occurred in isolation from any real or imagined bad faith on the part of the I.R.S."*fn32
Similarly, United States v. Church of Scientology ,*fn33 relied on by the district judge, does not endorse an "abuse of process" defense to agency summonses independent of the bad faith defense of Powell and LaSalle National Bank . The Ninth Circuit identified the inquiry in Church of Scientology as whether certain documents or the litigating strategy of the Internal Revenue Service "reveal a pattern of bad faith IRS harassment." It concluded that neither "sufficiently [evinces] bad faith to require us or the district court to deny enforcement of the summons."*fn34 We find nothing in Church of Scientology to suggest that the Ninth Circuit would refuse enforcement absent a showing of nefarious motive on the part of the Service itself.*fn35
We recognize the potential dangers presented when members of Congress or the Executive Branch suggest that an enforcement agency undertake an investigation. Surely an investigation undertaken solely to placate a powerful figure of a coordinate branch of government cannot be sanctioned by the courts. But not every investigative referral by a congressman or other official should be considered suspect or condemned per se . The Supreme Court recognized in Gravel v. United States*fn36 that members of Congress "are constantly in touch with the Executive Branch of the Government -- they may cajole, and exhort with respect to the administration of a federal statute."*fn37 And one commentator recently has remarked regarding congressional oversight of administrative enforcement that "most of these actions seem well within the constitutional authority of congressional committees and individual congressmen."*fn38
The abuse against which the Federal courts stand guard is the adoption by the enforcement agency of a political, vindictive, or other objectionable motivation of an influential official who refers an investigation to the agency. Where, however, the agency undertakes an investigation in good faith pursuit of the enforcement purposes authorized by Congress, a court should not decline to enforce a summons issued by that agency simply because it does not approve of the political objectives that prompted a public official to call to the attention of the agency instances of possible wrong doing. It is not the identity or political motivations of informants that should determine whether the agency's subpoenas are to be enforced, but whether the agency has made an independent, good faith decision to commence action.
In short, we find that the law as enunciated by the federal courts converges on the proposition that a district court should not decline to enforce an agency summons that seeks information relevant to an investigation conducted in good faith pursuit of a congressionally authorized purpose. Applying this principle to the case before us, we conclude that the Commission's subpoena should be enforced.
The district court found that the information and materials sought by the Commission were relevant to two distinct and lawful purposes: (1) to the determination whether Carney's statement in the April 27 report concerning "commitments" constituted material misrepresentation under Rule 10b-5; and (2) to the ascertainment whether traders in W-P stock prior to Carney's announcement may have possessed information relating to potential combinations between W-P and other entities. The court rejected defendants' argument that the Commission could obtain the information it seeks from other sources, namely, through interrogation of traders who purchased or sold W-P stock; the Court said of such an approach that it would be "impractical and unreasonable." We think the district court's findings with respect to lawful purpose and relevance are amply supported by the record. In any event, they are not challenged by the parties to this appeal and will not be disturbed by this Court.
The district court also made specific findings regarding the good faith of the agency, the only remaining element of the legal standard for enforcement we apply. The court found that "there is no substantial evidence of record to support the contention" that the agency's motivations were improper. Citing LaSalle National Bank for the proposition that the burden when allegations of bad faith and harassment are made is a "heavy one,"*fn39 the court concluded that "[that] burden has not been met in this case."
This finding, like the trial court's finding with respect to relevance and purpose, is not challenged on this appeal. We think it appropriate to observe, however, how different this case is from those in which agency action has been overturned by the courts because influenced by political interference. Here, there was no vague directive from a powerful Senator that the Commission harass W-P,*fn40 nor was the Commission threatened with loss of funds or other hardship if it did not undertake an investigation.*fn41 Instead, the Commission was approached with specific information relating to the actions of W-P's chief executive officer and asked whether such action might constitute a violation of the securities laws. On these facts, the district judge was not willing to find that the Commission failed to make a good faith decision, based on this information, to commence an investigation; the court stated explicitly that "we do not suggest that the agency adopted the motives of the third-parties." We decline to hold that the district court was in error in so concluding.
The only error we find was the willingness of the district court, writing without the guidance of our recent decision in Cortese , to invalidate agency action on the basis of an "abuse of process" theory independent of the bad faith defense of Powell and LaSalle National Bank . For the reasons set forth above, we believe that an agency summons for material relevant to an investigation conducted in good faith and pursuant to a statutory purpose must be enforced. In light of the specific findings of the district court, unchallenged on this appeal, that the Commission's summons was so issued, we conclude that the judgment of the district court must be reversed, and the case remanded for enforcement of the Commission's subpoena.