Gewerter v. Sec. & Exch. Comm'n
| Decision Date | 29 July 2016 |
| Docket Number | No. CV-16-02556-PHX-DLR,CV-16-02556-PHX-DLR |
| Parties | Harold P. Gewerter, Movant, v. Securities and Exchange Commission, Respondent. |
| Court | U.S. District Court — District of Arizona |
Before the Court is Harold Gewerter's Motion to Quash Subpoena. (Doc. 1.) The motion is fully briefed, and the Court heard oral argument on July 29, 2016. For the following reasons, Gewerter's motion is denied.
The Securities and Exchange Commission (SEC) has opened an investigation into four entities (Order Entities) believed to be engaging in securities fraud. (Doc. 4 at 3-4.) Because of suspicious similarities in the Order Entities' Form S-1 Registration Statements, the SEC suspects that the Order Entities are failing to disclose or making materially false statements about their management and control persons. (Id. at 4.) For example, the Registration Statements include identical resumes for purportedly different control persons, and some information that is supposed to be entity-specific appears to have been copied verbatim between the Order Entities' statements. (Id. at 4-5.)
Gewerter, a Nevada attorney, filed the Registration Statements for the four Order Entities, and is listed as counsel on all of the Registration Statements. (Id. at 5-6.) Additionally, Gewerter filed a Registration Statement on behalf of a fifth entity, Stuart King Capital Corp. (Stuart King), which contains similarly suspicious entries. (Id. at 5.) The SEC has learned that some investment funds raised by Stuart King were deposited into one of Gewerter's IOLTA Accounts. (Id. at 6.) The SEC Division of Corporate Finance instructed Gewerter that Stuart King is required to return these investment funds. (Id.) To the SEC's knowledge, however, Stuart King has not done so. (Id.) Further, Gewerter appears to have deposited at least $22,000 into and transferred at least $17,000 from the IOLTA Account in connection with the Order Entities. (Id. at 7.) These transactions include payments to and from a third party that the SEC believes is an undisclosed control person of one or more of the Order Entities. (Id.)
On April 25, 2016, the SEC issued a subpoena to Wells Fargo Bank for records associated with Gewerter's IOLTA Account. (Id.; Doc. 1 at 18-22.) The SEC seeks to identify the source of the funds for payments made on behalf of the Order Entities, to trace the movements of any Stuart King investment funds, and to uncover other investment funds or other suspicious deposits associated with the Order Entities. (Doc. 4 at 7.)
The SEC mailed a copy of the subpoena to Gewerter, along with instructions on how to challenge it. (Id. at 7-8.) These documents were delivered to Gewerter on April 26, 2016. (Id. at 8.) Gewerter contacted the SEC on May 5, 2016, and again on May 9, 2016. (Id.) He proposed that Wells Fargo be required to produce only checks relating to the Order Entities and suggested that he would provide the SEC with a list of other related transactions. (Id.) The SEC declined Gewerter's proposal. (Id.) Consequently, on May 11, 2016, Gewerter filed the instant motion to quash. (Id.)
The Right to Financial Privacy Act of 1978 (RFPA) provides "the sole judicial remedy available to a customer to oppose disclosure of financial records" pursuant to an administrative subpoena. 12 U.S.C. § 3410(e). RFPA requires a customer objecting tothe production of bank records to file a motion to quash within fourteen days after the investigating agency mails the subpoena to the customer or within ten days after the customer is served with the subpoena. 12 U.S.C. § 3410(a). The court must deny the motion if "there is a demonstrable reason to believe that the law enforcement inquiry is legitimate and a reasonable belief that the records sought are relevant to that inquiry[.]" 12 U.S.C. § 3410(c).
Gewerter's motion to quash is untimely. The SEC issued the subpoena on April 25, 2016 and sent Gewerter a copy that same day. Gewerter received the subpoena, along with instructions for challenging it, on April 26, 2016. He did not file his motion to quash, however, until May 11, 2016—fifteen days after he received the subpoena and sixteen days after it was mailed. Courts construe RFRA's time limits as jurisdictional and strictly enforce them. Turner v. United States, 881 F. Supp. 449, 450-51 (D. Haw. 1995). Because Gewerter did not file his motion to quash within fourteen days after the SEC mailed it to him or ten days after he received it, the Court lacks subject matter jurisdiction over Gewerter's motion.
Even if Gewerter's motion were timely, however, the Court would deny it because there is a demonstrable reason to believe that the SEC is conducting a legitimate law enforcement inquiry and a reasonable belief that the records sought are relevant to it.
"An investigation is legitimate if it is one the agency is authorized to make and is not being conducted solely for an improper purpose such as political harassment or intimidation or otherwise in bad faith." Pennington v. Donovan, 574 F. Supp. 708, 709 (S.D. Tex. 1983). The SEC is statutorily empowered to investigate suspected violations of federal securities laws. 15 U.S.C. §§ 77t(a), 78u(a); Sec. & Exch. Comm'n v. Arthur Young & Co., 584 F.2d 1018, 1023 (D.C. Cir. 1978) (). Gewerterdoes not argue or offer evidence that the SEC is conducting its investigation solely for an improper purpose. Accordingly, the Court finds the challenged subpoena is issued in connection with a legitimate SEC inquiry.
Subpoenaed information is relevant if the requested material "touches a matter under investigation." Sandsend Fin. Consultants, Ltd. v. Fed. Home Loan Bank Bd., 878 F.2d 875, 882 (5th Cir. 1989) (internal quotations and citations omitted). "RFPA requires only that financial information be relevant to a 'legitimate law enforcement inquiry,' and not relevant in a narrow, evidentiary sense[.]" United States v. Wilson, 571 F. Supp. 1417, 1420 (S.D.N.Y. 1983). The SEC contends that Gewerter's IOLTA Account records will allow it "to confirm whether [the account] contains, or has contained, offering proceeds or other monies raised or deposited under the names of Stuart King, the Order Entities, or other entities that may not yet be known to the staff but that may have engaged in similar offers[.]" (Doc. 4 at 14.) Additionally, the SEC "seek[s] the records to identify any IOLTA Account funds transferred to, from, for the benefit of, or on behalf of any Order Entities so that it can obtain a more complete picture of the conduct and transactions being investigated." (Id.) Finally, the SEC argues that the IOLTA Account records will allow it to "trace what happened to money connected to Stuart King, the Order Entities, or any entity that made similar offerings that was transferred to, from, or through the IOLTA Account for purpose of disgorgement should the SEC file an enforcement lawsuit here." (Id.) The Court finds that the financial records sought by the SEC's subpoena are relevant to its legitimate securities fraud investigation.
Despite receiving instructions on how to challenge the SEC's subpoena under RFPA, Gewerter ignores the relevant standards. Instead, he argues that the subpoena does not comport with Fed. R. Civ. P. 45. (Doc. 1 at 4-6.) He contends that the subpoena is overbroad and seeks irrelevant information because it demands all IOLTA Account records and not those related only to the Order Entities and Stuart King. (Id.) But Gewerter does not explain why Rule 45 supplies the relevant standards. As previously explained, RFPA provides "the sole judicial remedy available to a customer to opposedisclosure of financial records," pursuant to an administrative subpoena. 12 U.S.C. § 3410(e). Moreover, by its terms, Rule 45 governs subpoenas issued by a court. See Fed. R. Civ. P. 45(a)(2) (). Rule 45 does not offer relief to those challenging subpoenas issued by federal administrative agencies. See LeBeau v. C.I.R., No. 07CV237-IEG(POR), 2007 WL 1585175, at *1 n.2 (S.D. Cal. Apr. 2, 2007).
Gewerter also argues that "the identity of clients and the information regarding certain financial transactions is protected by the attorney-client privilege." (Doc. 1 at 9.) "Generally, the identity of an attorney's client and the nature of the fee arrangement between an attorney and his client are not privileged." In re Grand Jury Subpoenas, 803 F.2d 493, 496 (9th Cir. 1986). Citing Baird v. Koerner, 279 F.2d 623 (9th Cir. 1960), Gewerter argues that the identities of his clients and certain financial transactions fall within a narrow exception to this general rule because the information "exposes such parties to potential civil liability." (Doc. 1 at 9.) In Baird, clients asked an attorney for tax advice. 279 F.2d at 626. On advice of counsel, the clients anonymously paid back taxes through the attorney. Id. The Internal Revenue Service issued a summons requiring the attorney to appear and identify the taxpayers for whom the back taxes were paid. Id. at 627. The attorney refused to disclose his clients' identities on the basis of the attorney-client privilege and was found guilty of civil contempt. Id. On appeal, the Ninth Circuit acknowledged the general rule that a client's identity is not protected by the attorney-client privilege, but held that a narrow exception exists when the identification "conveys information which ordinarily would be conceded to be part of the usual privileged communication between attorney and client." Id. at 632. The Court found that the privilege applied because each client's identity showed "an acknowledgment of guilt on the part of such client...
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