APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA (D.C. Misc. No. 7507)
Before Seitz, Chief Judge, Adams, Circuit Judge, and Lord, District Judge.*fn* Argued July 8, 1980 Reargued Nov. 17, 1980 Before Seitz, Chief Judge, and Aldisert, Adams, Gibbons, Rosenn, Hunter, Weis, Garth, Higginbotham and Sloviter, Circuit Judges.
This appeal requires us to decide if the district court erred in refusing to enforce a subpoena duces tecum issued by the Securities and Exchange Commission pursuant to § 21(b) of the Securities Exchange Act, 15 U.S.C. § 78u(b), to Wheeling-Pittsburgh Steel Corporation (W-P) and its president, Dennis J. Carney. The district court determined that W-P failed to meet its burden of proving that the SEC acted in bad faith, 482 F. Supp. 555, 563-564 but concluded that the SEC "has permitted, and at times encouraged, the abuse of its investigating function," id. at 565. Accordingly, the court denied enforcement of the subpoena, and the SEC has appealed. Because we believe that the district court must educe additional testimony and clarify its determinations, we will vacate the order, and remand these proceedings for further consideration.
The subpoena was issued to compel Mr. Carney to identify companies involved in reported merger negotiations with Wheeling-Pittsburgh and to provide documents relating to those negotiations. Wheeling-Pittsburgh's basic contention is that the SEC proceedings are tainted because of improper interference by United States Senator Lowell Weicker of Connecticut on behalf of the Colorado Fuel and Iron Company (CF&I), an acknowledged competitor of Wheeling-Pittsburgh, for no legitimate legislative purpose. The district court was persuaded that sufficient improprieties had occurred to deny enforcement of the subpoenas.
Because the district court determined that W-P had not proved bad faith on the part of the SEC, the precise issue before us is whether the court's determination that the SEC allowed its investigatory process to be abused is sufficient under the teachings of United States v. Powell, 379 U.S. 48, 85, 13 L. Ed. 2d 112, 85 S. Ct. 248 (1964), to deny enforcement of the SEC's subpoena. Corollary issues of equal importance are whether we should determine the length of time the refusal to enforce should remain in effect and, if so, an identification of conditions affecting that time period.
Wheeling-Pittsburgh Steel Corporation, a Delaware corporation with offices at Pittsburgh, Pennsylvania, manufactures and sells steel and related products. Its stock is registered pursuant to § 12(b) of the Securities Exchange Act, 15 U.S.C. § 78l (b), and is listed on the New York Stock Exchange. W-P files annual and other periodic reports with the SEC pursuant to § 13(a) of the Act, 15 U.S.C. § 78m(a); see 17 C.F.R. § 240.13a-1. Mr. Carney is President and Chief Executive Officer of Wheeling-Pittsburgh.
Beginning in 1977, and for some time thereafter, W-P attempted to obtain loan guarantees from the Economic Development Administration of the United States Department of Commerce (EDA) and the Farmers Home Administration of the United States Department of Agriculture (FMHA). The loans, to be obtained from private lenders, were to be used to install government mandated pollution control equipment at several plants and to construct a rail rolling mill at Monessen, Pennsylvania. The court found that the loan guarantees were critical to the company because the rail rolling mill could not be constructed without pollution control devices required by the Environmental Protection Agency. In addition, the company could not finance the production facility construction without the loan guarantees.
United States Steel Corporation, Bethlehem Steel Corporation, and CF&I also manufacture steel rails and all have opposed loan guarantees to W-P. The district court found that CF&I, a company owned by Crane Company, played a major role in opposing the guarantees, individually and in conjunction with Senator Weicker.
W-P signed loan guarantee agreements with the EDA on August 28, 1979, under which the EDA pledged to guarantee loans totaling $100 million. Of this $100 million, $63.5 million are earmarked to finance partial construction of the mill at Monessen, Pennsylvania, and $36.5 million are to finance the purchase and installation of pollution control equipment at plants in Monessen and Allenport, Pennsylvania. On the same day, FmHA issued conditional commitments (revised and reissued in September, 1979, and further revised in September, 1980) to guarantee six separate loans to W-P totaling $50 million for the purchase and installation of pollution control equipment at plants in Ohio and West Virginia. These guarantees have induced a consortium of private lenders to agree to extend loans to W-P for the purposes contemplated by the guarantees. As of the date of oral argument, W-P had actually received over $50 million in guaranteed loan funds.*fn1 The balance of almost $100 million represents loans that W-P expects to draw at intervals through the end of 1982. W-P's application for these loan guarantees and the violent opposition thereto by Senator Weicker and CF&I precipitated this law suit.
On December 28, 1978, and January 9, 1979, before the loan guarantee agreements were actually executed, Carney received identical "Letters of Intent" from EDA and FmHA. The letters stated that the agencies "will recommend" respectively to the Assistant Secretary for Economic Development and the Assistant Secretary for Rural Development loan guarantees of $100 million (EDA) and $40 million (FmHA). The "Letters of Intent" were contingent on a number of provisions. The district court determined that "(a) careful examination of these provisions reveals, however, that the conditions involved ministerial matters which offered no major obstacles to receipt of the guarantees." 482 F. Supp., at 558.
On April 27, 1979, in a "Report on the Annual Meeting of Stockholders," Carney discussed the status of the loan guarantees: "We obtained commitments for federal loan guarantees of $140-million, and for a $10-million direct loan through the State of Pennsylvania. These commitments will enable us to finalize financial arrangements in June through a consortium of insurance companies." Report on the Annual Meeting of Stockholders and Report on Results for the Three Months Ended March 31, 1979 (April 27, 1979), at 10. In the same report, Carney remarked: "We are also exploring future acquisitions being proposed to us by several domestic and foreign firms." Id. at 12. Following the report to shareholders, Carney spoke to news reporters. He related that the turnaround in W-P's financial position had attracted domestic and foreign concerns who were interested in entering business combinations, but "so far none of them looks good." He termed the discussions "preliminary" and declined to elaborate. Wall St.J., April 30, 1979, at 20, col. 6.
In September, 1978, before W-P had received the first "Letter of Intent," CF&I's counsel, Paul R. Hundt, hired Arthur T. Downey, an attorney in Washington, D.C., to assist CF&I in opposing W-P's efforts to obtain the guarantees. That opposition led Downey to meet in February, 1979, with two members of Senator Lowell Weicker's staff. App. at 419-20. Senator Weicker was the ranking minority member of the Subcommittee for State, Justice & Commerce Appropriations of the Senate Committee on Appropriations. That subcommittee was in charge of a supplemental appropriation to the EDA essential to the W-P loan guarantees. The record indicates that between February and October, 1979, Downey met with Timothy Keeney, Weicker's administrative assistant, as many as ten to twenty times. App. at 425.
Downey continued his assault on the W-P loan application by writing to the EDA and the FmHA, suggesting that these agencies compel W-P to withdraw the statements made in the quarterly report concerning "commitments" received from those agencies. He then furnished Keeney with copies of the quarterly report and of his letters to EDA and FmHA. Later, Keeney and Downey met in Downey's office to discuss the W-P quarterly report in preparation for a hearing before Weicker's subcommittee on June 4, 1979.
Weicker publicly attacked the proposed EDA loan guarantee to W-P at the June 4 hearing and thereafter. App. at 215-16. Carney appeared at the June 11, 1979, subcommittee hearing to explain W-P's position. On the evening before the hearing, Downey and various CF&I executives met with Keeney in a hotel in Washington, D.C. App. at 576-79. Carney appeared on June 11, read a prepared statement, and was questioned by various members of the subcommittee. Weicker and Carney engaged in a colloquy over the distinction between a "letter of intent" and a "commitment." Although Carney contended that the terms were substantially synonymous, Weicker expressed the view that use of the term "commitments" in Carney's report to W-P shareholders violated § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Commission Rule 10b-5, 17 C.F.R. § 240.10b-5 (1980).
Subsequently, the subcommittee approved the appropriation for the W-P loan guarantee over the opposition of Senator Weicker, who declared that he would take the matter to the floor of the Senate. He later did so, but at the same time opened a new front in his opposition to the W-P loans, soliciting the cooperation of the SEC in his campaign against W-P. Three days after the Senate subcommittee hearing, Weicker had a letter delivered by hand to Stanley Sporkin, head of SEC's Division of Enforcement, requesting an investigation of whether Carney's use of the term "commitments" instead of "letters of intent" in his report to W-P stockholders constituted a violation of the Securities Exchange Act of 1934. App. at 37-38.
Sporkin routed the letter to Richard E. Brodsky of the Division of Enforcement, who then assigned the case to staff attorney Martin Aussenberg. Aussenberg contacted Keeney on June 19. Keeney explained the loan guarantee process to Aussenberg, advised him of W-P's pending application, noted Carney's use of the word "commitments" in the quarterly report, and gave Aussenberg a transcript of the Senate hearings. Keeney also suggested that Aussenberg contact Downey, whom he described as CF&I's attorney. When Aussenberg called Downey later that same day, Downey suggested other potential securities law violations. Downey testified that CF&I was "frustrated" and "exasperated" by its inability to block the loan guarantees and that he provided much of the information as a means of "venting my exasperation." Deposition of Arthur T. Downey (Oct. 9, 1979) at 193, 195, reprinted in App. at 592, 594; see 482 F. Supp., at 559.
While conducting the informal inquiry, Aussenberg received a call from Keeney, who asked what actions the SEC had taken in response to Senator Weicker's letter. Aussenberg refused to disclose any information or even confirm the existence of SEC investigations. In a second call, Keeney notified Aussenberg that Senator Weicker intended to introduce an amendment to the supplemental appropriations bill for the EDA and that the amendment would preclude the EDA from providing federal loan guarantees to corporations under investigation by the SEC. The SEC objected to Weicker's amendment through Aussenberg, and expressed fear that the amendment would compromise the confidentiality of its investigation. On June 25, Senator Weicker introduced the amendment,*fn2 along with nine others, each of which would have blocked an EDA loan guarantee to W-P. During the Senate debate on Weicker's amendment, he engaged in a heated exchange with Senator John Heinz of Pennsylvania, during which Senator Heinz questioned the motives of Senator Weicker.*fn3 When the amendment that would have tied loan guarantees to SEC activity was called for a vote, it was defeated by a substantial margin.
The SEC entered an order pursuant to 17 C.F.R. § 202.5(a) on July 31, 1979, directing a private formal investigation into W-P's activities and Carney's statements. The order empowered the Commission officers to issue subpoenas, take testimony, and compel the production of documents. The SEC issued a subpoena duces tecum to Carney on August 2, 1979, who appeared for questioning by Aussenberg. Aussenberg's inquiries focused primarily on the loan guarantee process, particularly Carney's use of the word "commitments" in the report of April 27. Carney answered all questions relating to the loan guarantees. During a final phase of the deposition, however, Aussenberg instructed Carney to disclose the names of every company that had approached him, or he had approached, since January, 1979, concerning possible acquisition by or of W-P. Carney refused to divulge names or turn over any documents pertaining to those discussions.
On August 15, 1979, W-P filed a motion for a protective order to enjoin further attempts to obtain information from Carney. On August 17, the SEC filed the present subpoena enforcement action. W-P then voluntarily dismissed its motion for a protective order but in its answer requested an injunction against the investigation. It later withdrew that request. The case was heard before the district court on August 22. The court conducted four additional hearings primarily focusing on two allegations by W-P: that the SEC allowed Senator Weicker and CF&I to abuse its normal discretionary investigative process, and that the SEC acted in bad faith in investigating W-P. The district court treated these allegations separately. It primarily emphasized the abuse of the investigative process and concentrated on the motivation of third parties who may have influenced the SEC investigation.
Although recognizing that the merit of the SEC's charges was not before it, the court expressed skepticism about the reasonableness of the charges, characterizing them as "patently frivolous." 482 F. Supp., at 566. It determined that the SEC's investigative process had been abused by third parties, and that "(wittingly) or not, the agency has permitted, and at times encouraged, the abuse of its investigating function." Id. at 565. The court held that it would not "compound the gross lack of judgment by sanctioning such abuse." Id. ...