Jerry T. O'Brien, Inc. v. S.E.C.

• Decision Date: 25 April 1983
• Docket Number: Nos. 82-3108,82-3109 and 82-3185,s. 82-3108
• Parties: Fed. Sec. L. Rep. P 99,182 JERRY T. O'BRIEN, INC., doing business as Pennaluna & Co., et al., Plaintiffs- Appellants, v. SECURITIES AND EXCHANGE COMMISSION, et al., Defendants-Appellees, and Harry F. MAGNUSON and H.F. Magnuson & Company, Cross-Plaintiffs-Appellants, v. SECURITIES AND EXCHANGE COMMISSION, et al., Cross-Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1065

704 F.2d 1065

Fed. Sec. L. Rep. P 99,182

JERRY T. O'BRIEN, INC., doing business as Pennaluna & Co., et al., Plaintiffs- Appellants, v. SECURITIES AND EXCHANGE COMMISSION, et al., Defendants-Appellees, and Harry F. MAGNUSON and H.F. Magnuson & Company, Cross-Plaintiffs-Appellants, v. SECURITIES AND EXCHANGE COMMISSION, et al.,

Cross-Defendants-Appellees.

Nos. 82-3108, 82-3109 and 82-3185.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Feb. 8, 1983.

Decided April 25, 1983.

Linda D. Fienberg, S.E.C., Washington, D.C., for defendants-appellees.

William D. Symmes, Witherspoon, Kelley, Davenport & Toole, Spokane, Wash., for cross-plaintiffs-appellants.

C. Dean Little, Lesourd, Patten, Fleming, Hartung & Emory, Seattle, Wash., for plaintiffs-appellants.

Appeal from the United States District Court for the Eastern District of Washington.

Before SKOPIL, PREGERSON, and FERGUSON, Circuit Judges.

PREGERSON, Circuit Judge:

I

The Securities and Exchange Commission (SEC) moved the district court to dismiss appellants' claims for injunctive relief. The court granted the motion after concluding that agency-initiated subpoena enforcement proceedings afforded appellants an adequate legal remedy. This appeal followed. Appellate jurisdiction is based on 28 U.S.C. Sec. 1292(a)(1).

Since this appeal presents only questions of law, our review is de novo. State of Oregon, Division of State Lands v. Riverfront Protection Association, 672 F.2d 792, 794 (9th Cir.1982).

The relevant factual background may be summarized briefly. In September 1980, the SEC issued a Formal Order of Investigation (FOI) "In the Matter of H.F. Magnuson & Co." ¹ The FOI stated that "Magnuson, Pennaluna & Co., Inc., Benjamin A. Harrison, corporations headquartered at H.F. Magnuson & Co., and others" (emphasis added) were suspected of engaging in securities violations. Neither Jerry T. O'Brien nor Jerry T. O'Brien, Inc., doing business as Pennaluna & Co., was named in the FOI. Subsequently, however, the SEC informed O'Brien's attorney that Jerry T. O'Brien, Inc., was "under consideration as being one of the 'others' engaged" in the suspected violations.

The FOI authorized SEC personnel to investigate the parties targeted by the FOI for a variety of securities laws violations including insider trading; failing to file certain required statements with the SEC; filing false or misleading annual reports, proxy statements, or ownership statements; and engaging in stock sales in violation of the antifraud provisions of the Securities Act of 1933. ² The FOI also empowered certain SEC personnel to subpoena witnesses, documents, and other information. The SEC served subpoenas on Jerry T. O'Brien, Inc., and on several individuals and entities not targeted by the investigation. ³

Appellants sought to enjoin the investigation because they thought it was conducted improperly. In granting the SEC's motion, the district court concluded that appellants were not entitled to injunctive relief because they had an adequate remedy at law--the issues they raised could be litigated in subpoena enforcement proceedings initiated by the SEC under 15 U.S.C. Sec. 78u(c).

II

Appellants' challenges to the SEC's investigation fall into two categories: those that involve SEC actions aimed directly at appellants, and those that involve SEC subpoenas served on non-parties to the investigation.

A. SEC actions directed at appellants

The district court correctly concluded that appellants had an adequate legal remedy in which to resist the SEC subpoenas served on them. This remedy was adequate because an SEC subpoena is not self-executing. A recipient of an SEC subpoena may refrain from complying with it, without penalty, until directed otherwise by a court order. See Donaldson v. United States, 400 U.S. 517, 523-25, 91 S.Ct. 534, 538-39, 27 L.Ed.2d 580 (1971). ⁴ A court will not enforce an SEC subpoena directed at the target of an investigation unless the agency, at an evidentiary hearing, demonstrates that it has complied with the requirements of United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964). These are that (1) the agency has a legitimate purpose for the investigation; (2) the inquiry is relevant to that purpose; (3) the agency does not possess the information sought; and (4) the agency has adhered to administrative steps required by law. Id. at 57-58, 85 S.Ct. at 254-55; ⁵ Lynn v. Biderman, 536 F.2d 820, 824 (9th Cir.), cert. denied sub nom. Biderman v. Hills, 429 U.S. 920, 97 S.Ct. 316, 50 L.Ed.2d 287 (1976). Thus, appellants have an adequate legal remedy with regard to subpoenas served on them. ⁶

B. The target's right to challenge SEC subpoenas served on non-parties

Ordinarily, "parties summoned [by an administrative subpoena] and those affected by a disclosure may appear or intervene before the District Court and challenge the summons." Reisman v. Caplan, 375 U.S. 440, 445, 84 S.Ct. 508, 511, 11 L.Ed.2d 459 (1963). The SEC noted correctly in oral argument that the Supreme Court has since limited this precept. Such intervention "is permissive only and is not mandatory. The language recognizes that the District Court ... may allow the [target of the investigation] to intervene." Donaldson v. United States, 400 U.S. at 529-30, 91 S.Ct. at 541-42 (emphasis added). Thus, when "an administrative summons is issued to a third party," the person being investigated "may attempt to restrain voluntary compliance by the third party, assuming [the target] is aware of the issuance of the summons prior to compliance ...." United States v. Genser, 582 F.2d 292, 300 (3d Cir.1978) (emphasis added).

Appellants contend that third-party subpoena enforcement proceedings do not afford targets an adequate legal remedy unless the agency notifies them of the identities of the subpoenaed third parties. Appellants stress that the lack of such notice denies targets of an investigation the opportunity even to seek permissive intervention in enforcement proceedings. They point out further that some of the unidentified parties probably lack the ability, resources, or motive to challenge the subpoenas, especially since the investigation implicates persons other than themselves. Moreover, SEC subpoenas do not inform recipients of their right to resist; rather, the subpoenas suggest that failure to comply will result in penalties. ⁷ Appellants argue that, unless they are given notice of and an opportunity to seek intervention in any proceeding to enforce third-party subpoenas, the agency could circumvent the protections afforded by United States v. Powell.

The SEC argues that appellants lack standing to challenge subpoenas issued to third parties, and the district court so held. ⁸ Barring questions of privilege or other special circumstances, it is true that appellants have no right to protect or withhold documents held by a third party. Donaldson, 400 U.S. at 523, 91 S.Ct. at 538. See United States v. Miller, 425 U.S. 435, 96 S.Ct. 1619, 48 L.Ed.2d 71 (1976). But appellants, as targets of the investigation, do have a right to be investigated consistently with the Powell standards. Cf. Powell, 379 U.S. at 57-58, 85 S.Ct. at 254-55. As a practical matter, this is a right that only appellants would assert.

Cases involving the question of standing to object to agency process have arisen primarily in the context of IRS summonses. The Second Circuit has held that taxpayers lack standing to object to enforcement of an IRS summons directed to a third party because the taxpayers neither own nor possess the items sought by the IRS. Foster v. United States, 265 F.2d 183, 188 (2d Cir.), cert. denied, 360 U.S. 912, 79 S.Ct. 1297, 3 L.Ed.2d 1261 (1959). The Supreme Court has stated as a "general rule that the issuance of a subpoena to a third party to obtain the records of that party does not [itself] violate the rights of a defendant." Miller, 425 U.S. at 444, 96 S.Ct. at 1624. The Ninth Circuit had earlier stated that "customers have no standing to object to [grand jury or other] subpoenas requiring their banks to produce records of the customers' accounts." Harris v. United States, 413 F.2d 316, 318 (9th Cir.1969).

For at least two reasons this lack of standing rule has no application in the present matter. ⁹ The cases holding that targets lack standing to object to process issued to third parties do so based on the premise that targets have no right to maintain the confidentiality of information held by third parties. E.g., Miller, 425 U.S. at 444, 96 S.Ct. at 1624; Harris, 413 F.2d at 318. This premise is irrelevant to the present case. While appellants lack any right to maintain confidentiality of information held by third parties, they do have the right to be investigated consistently with the Powell standards. To assure that the target has the opportunity to assert this right, notice of third-party subpoenas is necessary.

Third-party recipients of agency process appear to lack standing to require an agency to conduct its investigation of a target consistently with Powell. See Sierra Club v. Morton, 405 U.S. 727, 733, 734-35, 92 S.Ct. 1361, 1365, 1365-66, 31 L.Ed.2d 636 (1972). Thus, denying the target notice of agency process issued to third parties necessarily denies the target the ability to assert its right to be investigated consistently with Powell. The target's right could be asserted by seeking permissive intervention in enforcement proceedings brought by the agency against the third party or by other appropriate district court proceedings. As a practical matter, unless the target of an SEC investigation receives notice of subpoenas served on third parties, no one will question compliance with the Powell standards as to those subpoenas.

Notice to targets of third-party subpoenas need not unduly burden the agency or the courts. Compliance with Powell can be determined on the basis of affidavits. See Lynn v. Biderman, 536 F.2d 820, 823 (9th...