S.E.C. v. Blackfoot Bituminous, Inc., s. 79-1130
| Decision Date | 09 June 1980 |
| Docket Number | 79-1131,Nos. 79-1130,s. 79-1130 |
| Citation | 622 F.2d 512 |
| Parties | Fed. Sec. L. Rep. P 97,532 SECURITIES AND EXCHANGE COMMISSION, Applicant-Appellee, v. BLACKFOOT BITUMINOUS, INC. and Colfax National Bank, Respondents, Stanley Drizin, William A. Kilpatrick, John Jewell, Myron Bjerkaas, Frances Graham, Declan J. O'Donnell and Richard Peterman, Respondents-Appellants. SECURITIES AND EXCHANGE COMMISSION, Applicant-Appellee, v. P & J COAL COMPANY, INC. and John H. Pettingill, Respondents-Appellants. BLACKFOOT BITUMINOUS, INC., and P & J Coal Company, Inc., Plaintiffs-Appellants, v. UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Tenth Circuit |
Robert C. Ripple of O'Donnell, Beville & Ripple, Denver, Colo., for respondents-appellants.
Michael K. Wolensky, Asst. Gen. Counsel, Securities and Exchange Commission, Washington, D. C. (Jacob H. Stillman, Associate Gen. Counsel and Jonathan Eisenberg, Atty., Securities and Exchange Commission, Washington, D. C., on the brief). for applicant-appellee.
Before McWILLIAMS, BREITENSTEIN and LOGAN, Circuit Judges.
These are appeals from district court orders enforcing two Securities and Exchange Commission (SEC) subpoenas and dismissing an action for declaratory relief. Appellants contend the subpoenas are invalid and enforcement should have been denied for various reasons. Those we believe warranting discussion are the contentions that (1) the SEC is required by 17 C.F.R. § 202.5(a) to establish on the record a "likelihood of violation," which it failed to do; (2) the SEC failed to make the showing required by United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964), and (3) the subpoenas were overbroad and burdensome. Also, we treat briefly appellants' argument that it was error for the court to deny them pre-enforcement discovery of certain documents from the SEC.
The SEC issued an order instituting a nonpublic formal investigation into the activities of Blackfoot Bituminous, Inc., P & J Coal Company, Stanley Drizin and John H. Pettingill relating to their offer and sale to the public of investments in coal lease tax shelter programs. Immediately thereafter the SEC issued subpoenas duces tecum to all respondents except Blackfoot Bituminous, Inc. The subpoenas required production of certain corporate records of Blackfoot Bituminous and any other entity engaged in the production of coal lease programs. After refusal by all respondents to comply with the subpoenas, the SEC applied for judicial enforcement under 15 U.S.C. §§ 77v(b) and 78u(c). Shortly thereafter the corporate respondents commenced an action against the SEC in which they sought a declaratory judgment that the subpoenas were legally invalid. Although the district court denied a motion to consolidate, it heard and decided the enforcement and declaratory judgment actions at the same time.
The SEC alleged in its enforcement applications that the requested documents were "relevant and material" to its investigation. In support, it provided the district court with the order commencing the investigation. This order set out the factual basis for the Commission's action. Respondents answered with a general denial that the subpoenas were enforceable, raising the issues pressed in this appeal and discussed below and other defenses not germane to the issue of enforceability.
To obtain judicial enforcement of an administrative subpoena, an agency must show that the inquiry is not too indefinite, is reasonably relevant to an investigation which the agency has authority to conduct, and all administrative prerequisites have been met. United States v. Morton Salt Co., 338 U.S. 632, 70 S.Ct. 357, 94 L.Ed. 401 (1950). In the context of a subpoena issued by the SEC, a determination that "a subpoena (is) within the scope of the authority granted . . . is enough to authorize subpoenas for the production of records which might reveal the existence and extent" of any violation of the securities law. Securities and Exch. Comm'n v. First Security Bank, 447 F.2d 166, 168-69 (10th Cir. 1971), cert. denied, 404 U.S. 1038, 92 S.Ct. 710, 30 L.Ed.2d 729 (1972).
On the basis of the SEC order directing a formal investigation the trial court found the subpoenas met the requirements set forth above and ordered the production of the subpoenaed documents by all respondents except Blackfoot Bituminous, Inc., which it found had never been served. We agree with the district court's holding that the necessary showings for judicial enforcement were met in this case. The SEC has authority to "make such investigations as it deems necessary to determine whether any party has violated, is violating, or is about to violate" the securities laws it is entrusted to uphold. 15 U.S.C. § 78u(a). See also 15 U.S.C. § 77t(a). Pursuant to this broad grant of authority, the Commission is empowered to "require the production of any . . . records which (it) deems relevant or material to the inquiry." 15 U.S.C. § 78u(b). See also 15 U.S.C. § 77s(b). A Commission order of investigation is the only administrative requirement for the commencement of formal investigative proceedings. 17 C.F.R. § 203.1 et seq. (1979).
Appellants' major argument is that the SEC failed to establish a case for judicial enforcement because 17 C.F.R. § 202.5(a) requires the agency to establish on the record a "likelihood of violation" of the securities laws before administrative process can be judicially enforced. 1 The trial court refused to look behind the Commission's order, holding that 17 C.F.R. § 202.5(a) is not a rule but merely a description of the Commission's internal operating procedure.
Respondents contend that the reference to a preliminary finding of a "likelihood" of a violation places upon the SEC the burden of proving a factual basis for its decision to institute a formal investigation as a prerequisite to enforcement of its subpoenas. We do not agree.
First, that reference appears to be descriptive only. Although it appears in the Code of Federal Regulations, it is in one of several sections denominated "brief description(s) of procedures generally followed by the Commission which have not been formalized in rules." 17 C.F.R. § 202.1(c) (1979) (emphasis added). Second, assuming without deciding that the description of the procedure should be treated as a rule, we do not equate likelihood of violation referred to in this provision with probable cause. At this initial stage, before any adverse action has been taken against respondents, or indeed before any specific documents have been identified as relevant, it is unnecessary and contrary to judicial precedent to require more than the safeguards mandated by Morton Salt and United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964). Powell rejected a taxpayer's claim that the Internal Revenue Service must indicate the grounds for its belief that a fraud had been committed before enforcement of a summons could be ordered. The...
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