SECURITIES & EXCH. COM'N v. Republic Nat. Life Ins. Co.

• Decision Date: 18 October 1974
• Docket Number: No. 74 Civ. 1097 (MP).,74 Civ. 1097 (MP).
• Citation: 383 F. Supp. 436
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. REPUBLIC NATIONAL LIFE INSURANCE CO. et al., Defendants.
• Court: U.S. District Court — Southern District of New York

383 F. Supp. 436

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. REPUBLIC NATIONAL LIFE INSURANCE CO. et al., Defendants.

No. 74 Civ. 1097 (MP).

United States District Court, S. D. New York.

October 18, 1974.

Gary N. Sundick, John S. Stoppelman, David J. Romanski, and Frederick L. White, Washington, D.C., of counsel, for Securities and Exchange Commission.

Cahill, Gordon & Reindel, New York City by William E. Hegarty, Mathias E. Mone, and Michael P. Tierney, New York City, of counsel, for defendant Peat, Marwick, Mitchell & Co.

MEMORANDUM

POLLACK, Distict Judge.

This is a Rule 12 motion by the SEC to dismiss the counterclaim of Peat, Marwick, Mitchell & Company ("PMM") on the ground that the court lacks jurisdiction over the subject matter of the claim.

The counterclaim concerns the alleged obligation of the SEC to release to independent public accountants upon their inquiry information obtained by the SEC which would be material to the accountants' examinations of financial statements required by statute to be filed with the SEC.

With respect to PMM, the SEC complaint concerns the 1970 through 1972 financials filed by Republic which were allegedly materially false and misleading. The SEC alleges inter alia that by letter dated October 30, 1970, the Commission on Valuation of Securities of the National Association of Insurance Commissioners had advised Republic that its staff recommended that the Realty debentures he valued at NO **, a lower rating than the previous NO *, for statutory purposes at December 31, 1970. (Am. Compl., ¶ 32) PMM asserts that this information, which the SEC apparently considers material, was withheld from PMM by the SEC despite PMM's request for any material information concerning Republic made at a time when PMM was examining Republic's 1973 financials. PMM had previously withdrawn its reports on Republic's prior financials, as well as notified Republic that significant potential losses existed in its investment portfolio which would require adjustments in both the 1973 and prior financial statements. PMM continued to work on Republic's 1973 financials at the request of the SEC, and PMM submitted its report on April 12, 1974.

PMM's counterclaim thus seeks an order permanently enjoining the SEC from withholding from independent public accountants information concerning their clients which may be material to an accountant's examination of statutory financial statements and the accountant's report which accompanies them.

Neither the SEC nor PMM discuss whether the counterclaim is compulsory or permissive under Rule 13. The SEC complaint deals only with the 1970 through 1972 statements, while the PMM counterclaim concerns the 1973 financials. Thus it could be said that the counterclaim is not compulsory since it does not arise out of the same "transaction or occurrence". If the counterclaim is permissive, then the court has a certain amount of discretion to decline to hear the counterclaim if it would unduly complicate the litigation. 6 C. Wright and A. Miller, Federal Practice and Procedure, § 1420, at 115 (1971). Separate trials would be a possible means of avoiding complications if the claim were joined. Id. The SEC does argue that it is vital that defendants not be permitted to delay or disrupt an enforcement proceeding by maintaining a counterlaim.¹

Both the SEC and PMM have cited numerous cases on whether and when a court has jurisdiction to review an agency's exercise of discretion. The cases cited present "judicial review" of agency action in a wide variety of contexts, such as immediate review when review would ultimately be available by statute, e.g., Wolf Corp. v. SEC, 115 U.S.App. D.C. 75, 317 F.2d 139, 141 (1963) (motion to enjoin stop order proceeding), review of an agency's motivation in invoking the process of the court to enforce a subpoena, SEC v. Brigadoon Scotch Dist. Co., 480 F.2d 1047, 1056 (2d Cir. 1973), cert. denied, 415 U.S. 915, 94 S.Ct. 1410, 39 L.Ed.2d 469 (1974), or as in the present case, review of an agency action which does not constitute an "order" subject to statutory review. E.g., Silver King Mines, Inc. v. Cohen, 261 F.Supp. 666 (D.Utah 1966) (issuance of allegedly harmful press releases).

In a case such as this, the question of jurisdiction necessarily shades into consideration of the claim on the merits. If the agency or officer is acting within the limits of the discretion conferred by Congress, then there is no jurisdiction. See, e.g., International Waste Controls, Inc. v. SEC, 362 F. Supp. 117 (S.D.N.Y.1973), aff'd per curiam, 485 F.2d 1238 (2d Cir. 1973). Similarly, if the agency or officer has exceeded its authority, then courts have jurisdiction to review. See, e.g., Joint Anti-Facist Refugee Committee v. McGrath, 341 U.S. 123, 139-140 & n.13, 71 S.Ct. 624, 95 L.Ed. 817 (1951) (Attorney General exceeded authority conferred by executive order: injunctive relief granted); Silver King Mines, Inc. v. Cohen, 261 F.Supp. 666, 674 (D.Utah 1966) (publicity beyond any discretion or power granted to the commission: injunctive relief granted). Simply stated, a court may restrain an agency when it exceeds the limits of its authority, but may not influence an agency's exercise of discretion within the proper sphere of its authority.

In this context, whether a complaint is dismissed for lack of subject matter jurisdiction or for failure to state a claim "is of no great consequence". See M. G. Davis & Co. v. Cohen, 256 F.Supp. 128, 135 (S.D.N.Y.1966), aff'd, 369 F.2d 360 (2d Cir. 1966) (suit to restrain SEC from conducting an administrative hearing dismissed).

Thus the dispute between the SEC and PMM comes down to whether or not the SEC's decision not to release the information to PMM was within its statutory authority, rather than to the applicable law as to jurisdiction to review.

The heart of the SEC's position is thus that it was acting within the scope of the discretion committed to it by Congress and that its action is therefore not subject to judicial review.

Section 21(a) of the Exchange Act, 15 U.S.C. § 78u(a) provides that: "The Commission may, in its discretion, make such investigation as it deems necessary to determine whether any person has violated . . . any provision of this chapter . . . and the Commission is authorized in its discretion, to publish information concerning any such violations . . ."²

17 CFR § 240.0-4 provides that information or documents obtained pursuant to a § 21(a) investigation shall be deemed confidential and may not be released unless such release is authorized by the Commission as not being contrary to the public interest. See generally LaMorte v. Mansfield, 438 F.2d 448 (2d Cir. 1971) (release by Commission of transcript of his own testimony to a witness).

Professor Loss has recognized some of the problems involved in the exercise of this discretion.

Even if one assumes the strict legality of making information available to certain persons without publication generally, there is of course, a serious policy question. The Commission is torn when, for example, a registration statement is about to become effective and the issuer itself is apparently unaware of facts adduced in a private investigation, perhaps of the underwriter or accountant or other persons having some connection with the offering. There have been instances in which the Commission has opened parts of its private investigatory files in the interest of avoiding a deficient or misleading registration statement. 6 L. Loss, Securities Regulation, 4079-80 (2d supp.1969).

Loss also notes that the Commission has employed its discretionary power to publish information concerning violations sparingly. 3 Loss, at 1947 (2d ed. 1961). The SEC has not indicated any reason in particular for declining to release information in this case.³

PMM consistently argues that the SEC has acted in violation of the letter and spirit of the federal securities laws without really getting down to, as the SEC points out, a precise statement of the basis of illegality. See Delaware Valley Conservation Association v. Resor, 269 F.Supp. 181, 184-85 (M.D.Pa. 1967), aff'd 392 F.2d 331 (3d Cir.), cert. denied 393 U.S. 915, 89 S.Ct. 239, 21 L. Ed.2d 200 (1968) (affirmative allegations of relevant statutory provisions required).

In order to establish illegality by the SEC, PMM seems to rely initially on both official and unofficial pronouncements by the SEC of its willingness to cooperate fully with public accountants in light of the heavy public duties imposed upon accountants by the securities laws, as well as the admonitions by the SEC that it cannot...