Securities and Exchange Commission v. Stewart

• Decision Date: 16 March 1973
• Docket Number: Docket 73-1250,73-1251.,760,No. 759,759
• Citation: 476 F.2d 755
• Parties: SECURITIES AND EXCHANGE COMMISSION, Petitioner, v. Charles E. STEWART, Jr., United States District Judge, Respondent.
• Court: U.S. Court of Appeals — Second Circuit

476 F.2d 755 (1973)

SECURITIES AND EXCHANGE COMMISSION, Petitioner, v. Charles E. STEWART, Jr., United States District Judge, Respondent.

Nos. 759, 760, Docket 73-1250, 73-1251.

United States Court of Appeals, Second Circuit.

Argued March 5, 1973.

Decided March 16, 1973.

David Ferber, Solicitor, SEC, Washington, D. C. (Richard E. Nathan, Asst. Gen. Counsel, Richard L. Jaeger, Spec. Counsel, and William H. Kuehnle, Atty., SEC, Washington, D. C., on the brief), for petitioner.

Arthur L. Liman, New York City (Paul, Weiss, Rifkind, Wharton & Garrison, Jack C. Auspitz, New York City, Leonard H. Becker, Washington, D. C., Warren M. Green, New York City, on the brief), for respondent Vesco.

John S. Martin, Jr., New York City (Martin & Obermaier, New York City, on the brief) for respondent Straub.

Martin Mensch, New York City (Dornbush Mensch, Mandelstam & Schwartz, New York City, Frederic J. Gruder, Yonkers, N. Y., on the brief), for respondents Clay and Beatty.

Neal M. Goldman, New York City (Squadron, Gartenberg, Ellenoff & Plesent, Theodore Ellenoff, New York City on the brief), for respondent Graze.

James P. O'Neill, New York City, (Palmer & Serles, New York City, Raichle, Banning, Weiss & Halpern, Frank G. Raichle, Buffalo, N. Y., on the brief), for defendant Meissner.

Before FEINBERG, MULLIGAN and TIMBERS, Circuit Judges.

FEINBERG, Circuit Judge:

The Securities and Exchange Commission petitions this court for a writ of mandamus directing Charles E. Stewart, Jr., judge of the United States District Court for the Southern District of New York, to vacate an order preventing the Commission from obtaining pre-trial discovery of Robert L. Vesco, Gilbert R. J. Straub, Frank G. Beatty, Richard E. Clay, Stanley Graze and Laurence B. Richardson, Jr., unless the Government grants them immunity pursuant to 18 U.S.C. §§ 6002, 6003.^* The order was entered in the course of a proceeding that commenced on November 27, 1972 when the Commission brought a civil complaint against 42 defendants, including the persons named above, charging them with having engaged, and continuing to engage, in acts and practices which constitute a "scheme to defraud" in violation of section 10(b) of the Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint alleges a scheme to transfer investments held by International Controls Corp. in IOS Ltd. and its related companies to shell companies controlled by defendant Vesco and his group. The complaint seeks broad equitable relief, including the appointment of a receiver, return of securities, an injunction and an accounting. The order complained of was entered at the request of the six defendants,¹ over the objection of the Commission, on the ground that since criminal charges were in the offing their fifth amendment rights might otherwise be violated.

At the outset, it must be remembered that the first question before us is not whether Judge Stewart's pre-trial discovery order was a correct exercise of his discretion but whether this situation is an appropriate instance for use of the extraordinary writ of mandamus. While such an issue may seem technical, it is not, for it raises grave questions of the continued strength of the salutary final judgment rule in the federal courts and the propriety of appellate interference with the trial process at an early stage of the proceedings in an obviously massive litigation. From the papers before us, from the representations at oral argument, and from subsequent events of public record of which we are now cognizant, certain facts are now clear. Not surprisingly, the Commission stated in open court that it has no intention of granting use immunity under 18 U.S.C. §§ 6002, 6003 to any of the five defendants now resisting the mandamus petition. See note 1 supra. The Commission expressed its belief in the trial court, and reiterated it to us, that it has sufficient evidence of fraudulent activities to present a prima facie case on a motion for a preliminary injunction. While that motion, for reasons which were sufficient for the respective parties, was originally bypassed, it appears that the Commission has now determined to seek preliminary relief, and that proceedings on the preliminary injunction are scheduled to commence before Judge Stewart on March 19, 1973. In addition, counsel for the principal defendant (Vesco) stated to us in open court that his client will not testify unless he is granted immunity and that as to him, the Commission may get the benefit of any inferences to which it therefore might be entitled, should Judge Stewart decide to draw them. Vesco is now apparently out of the country.

Thus, in considering the propriety of mandamus here, the following factors must be noted. While we fully appreciate the grave danger of ongoing violations, to which the Commission and our dissenting brother refer, the Commission is now seeking preliminary relief to correct these and anticipates success without deposition testimony. Should it be unsuccessful, then from any denial of preliminary injunctive relief, the Commission will have an appeal of right under 28 U.S.C. § 1292(a) (1), at which time it could and would undoubtedly challenge the propriety of the order now before us on petition for mandamus. Moreover, that order does not threaten to compel the Commission to grant immunity and jeopardize any future criminal proceedings involving these defendants, since the Commission refuses to do so. Thus, whatever damage might result if the condition imposed by Judge Stewart were applied in other cases, its only effect in this case is to prevent the depositions of these defendants. Even as to that, it is important to define the precise harm allegedly resulting from Judge Stewart's order. The Commission argues that failure to depose these defendants prior to trial will deprive it of the benefit of negative inferences from defendants' failure to testify on fifth amendment grounds; if Judge Stewart's order were withdrawn, at least Vesco and possibly others would be required to invoke their fifth amendment privilege at any deposition, from which unfavorable inferences might be drawn. But if these defendants fail to testify in their own behalf either at the evidentiary hearing on preliminary relief or at trial, nothing in Judge Stewart's order prevents the judge from drawing any proper inference from that. Under these circumstances, the possible immediate harm to the Government and the precise underlying legal dispute are both narrow indeed. The question is whether Judge Stewart, at the preliminary hearing or at trial, might² be barred from drawing the additional adverse inference flowing from invocation by these defendants of a fifth amendment privilege.³

On this record, we do not think that a compelling case has been made for the issuance of the extraordinary writ of mandamus to decide such a narrow issue. At the hearing on preliminary relief or at trial, the Commission may suffer no immediate harm at all because its case would be sufficiently strong to justify granting the relief requested. If the Commission fails, it has an immediate right to appeal, as already indicated, which in a proper case can be expedited. Of course, that an error committed in the trial court will ultimately be reviewable does not absolutely foreclose a petition for mandamus, but access to immediate appellate correction of error, if any, surely counsels against mandamus. See Roche v. Evaporated Milk Association, 319 U.S. 21, 26, 63 S.Ct. 938, 87 L.Ed. 1185 (1943). It is argued that should the Commission prevail in the civil proceedings, the correctness of the order would not be litigated on appeal and would survive as an unfortunate precedent. Neither proposition necessarily follows. If the Commission prevails, one or all of the losing parties would likely prosecute an appeal; we do not believe that this court would ignore the issue of the propriety of Judge Stewart's order in an appeal already properly before it, if the Commission as appellee stressed its significance. Moreover, two judges of this panel have today gone on record as disapproving, on the merits, the action taken by Judge Stewart.⁴ But the fact that the order may have been improper does not change our position as to the propriety of granting the writ. Extraordinary writs do not serve the function of merely correcting error, Will v. United States, 389 U.S. 90, 103-104, 88 S.Ct. 269, 19 L.Ed.2d 305 (1967), however tempting that course may be when the order appealed from appears, as it does to our dissenting brother, to be gross error. See United States v. DiStefano, 464 F.2d 845, 850 (2d Cir. 1972).

The arguments raised in dissent do not justify ignoring the clear policy of denying mandamus except in the rarest situations. In United States v. Kordel, 397 U.S. 1, 9, 90 S.Ct. 763, 25 L.Ed.2d 1 (1970), the Supreme Court alluded to the possibility of a protective order postponing civil discovery until termination of a criminal action, when failure to do so appreciably threatened the fifth amendment rights of a civil litigant. In view of that, it is hard to see how Judge Stewart lacked the power to do something less. See also Gordon v. Federal Deposit Insurance Corp., 1238 U.S.App. D.C. 308, 427 F.2d 578, 580 (1970). Nor do we believe that the order raises issues suitable for resolution through "supervisory" mandamus. See generally Note, Supervisory and Advisory Mandamus Under the All Writs Act, 86 Harv. L.Rev. 595 (1973). The competing rights of the Government and of individuals, who are faced with parallel civil and criminal proceedings or the threat of them, hardly raise questions of first impression. See United States v. Kordel, supra; Gordon v. Federal Deposit Insurance Corp., supra; United States v. Simon, 373 F.2d 649 (2d Cir.), cert. granted sub nom. Simon v. Wharton, 386 U.S. 1030, 87 S.Ct. 1485, 18 L.Ed.2d 591, vacated as moot, 389 U.S. 425, 88 S.Ct. 577, 19 L.Ed.2d 653 (1967). Nor is the problem one...