OKC Corp. v. Williams
| Citation | 461 F. Supp. 540 |
| Decision Date | 22 November 1978 |
| Docket Number | Civ. A. No. CA-3-78-1021-G. |
| Parties | OKC CORP. v. Harold WILLIAMS, John R. Evans, Philip A. Loomis, Jr., Irving M. Pollack and Robert S. Karmel, Individually and as Commissioners of the Securities and Exchange Commission, Richard M. Hewitt, Cecil S. Mathis, Wayne M. Whitaker, Benjamin F. Simms, Jr., Kathleen N. Stewart, Theodore A. Levine, Edward D. Herlihy, Steven K. McGinnis and David A. Watson, Individually and as officers and employees of the Securities and Exchange Commission and the Securities and Exchange Commission, an Agency of the United States of America. |
| Court | U.S. District Court — Northern District of Texas |
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George B. Davis of Brice & Barron, Dallas, Tex., John J. Witmeyer, III, and Richard B. Marrin of Ford, Marrin, Esposito, Witmeyer & Bergman, New York City, Arthur Mitchell, Gen. Counsel, Robert A. Miller, G. Scott Damuth, OKC Corp., Dallas, Tex., for plaintiff.
Michael J. Stewart, Regional Administrator, Walter E. Keller, Jr., of counsel, SEC, Fort Worth, Tex., James H. Schropp, Asst. Gen. Counsel, SEC, Washington, D. C., for Cecil Mathis, David A. Watson and Steven K. McGinnis.
This is a clash between a New York Stock Exchange listed company and its principal regulator, the Securities Exchange Commission. In a self-policing effort, OKC employed outside legal counsel to gather information and give advice regarding a situation viewed as a potential problem by its board of directors. Counsel prepared a report, the contents of which were to be held in confidence, but have fallen into the hands of the SEC. Thus the effort at self-regulation has failed and the potential problem has shifted in its focus. The core of this fight is the use by the SEC of this report.
In early 1978, the SEC obtained the report which the Dallas law firm of Locke, Purnell, Boren, Laney & Neely prepared for OKC. How this report came to the Commission is unclear. (McGinnis affidavit, August 15, 1978, p. 5; Mathis affidavit, September 5, 1978, p. 5; OKC memorandum, September 29, 1978, pp. 4-5; Mitchell affidavit, August 29, 1978, p. 4). When the SEC became aware of its existence, or of the internal OKC investigation is also contested. (SEC memorandum, September 25, 1975, pp. 2-9; OKC memorandum, September 29, 1978, pp. 5-7, 13.) In any event, on March 27, 1978, the Commission entered an order appointing certain of the individual defendants as officers of the Commission for the purpose of conducting a private investigation to determine whether OKC, Cloyce K. Box, chief executive officer and chairman of the board of OKC, and others have violated antifraud and filing provisions of the Securities Exchange Act of 1934. After the SEC inquiry was underway, OKC lodged with the Commission a motion to halt the investigation. OKC director John Kelsey, the First City National Bank of El Paso and OKC also filed motions to quash subpoenas duces tecum. On August 15 and 16, 1978, the Commission commenced in the United States District Courts for the Western and Northern Districts of Texas and the Northern District of Oklahoma actions to compel compliance with the subpoenas.
The Commission learned during the summer of 1978 that Ghaith Pharaon was contemplating a tender offer to purchase OKC common stock. Specifically how and when it learned is disputed. (SEC memorandum, September 25, 1978, p. 11; McGinnis affidavit, September 21, 1978, p. 4; OKC memorandum, September 29, 1978, pp. 11-12; Mitchell affidavit, August 29, 1978, pp. 5-7.) Officers of the Division of Enforcement scheduled a meeting with Pharaon's representatives in Washington, D. C. For reasons yet unresolved, the Commission staff advised Pharaon's representatives of the SEC investigation. Whether other matters were discussed with Pharaon is disputed. (Miller affidavit, September 28, 1978, p. 3, Exhibit B; Herlihy affidavit, pp. 6-7, and attached exhibit.)
In late June, 1978, OKC requested from the SEC's Freedom of Information Act officer all documents relating to the Commission's OKC investigation. The Commission extended through July 21, 1978, its time to respond and on July 20, 1978, refused the request. OKC filed no additional administrative requests.
On August 15, 1978, OKC filed with this court a lengthy complaint in which it charged that defendants are:
1. Conducting an investigation which allegedly is "without the jurisdiction of the Commission and flouts the will of Congress";
2. Conducting the investigation based upon a report allegedly covered by the attorney-client privilege and unlawfully obtained from OKC in violation of OKC's fourth and fifth amendment rights;
3. Conducting the investigation pursuant to the Commission's rules relating to investigations, 17 C.F.R. 203, which, it is alleged, violate OKC's fifth amendment due process rights;
4. Allegedly intimidating witnesses and otherwise conducting the investigation in bad faith; and
5. Causing plaintiff, its officers, directors, agents, employees, shareholders, and customers irreparable injury.
In addition, OKC alleges:
1. That the SEC has violated the Privacy Act of 1974, 5 U.S.C. 552a(b) (), by providing to and receiving from various government agencies and other persons information relating to OKC;
2. That the defendants violated the Privacy Act, §§ 14(e) and 24(b) of the Securities Exchange Act of 1934, and OKC's fifth amendment rights by disclosing the existence and nature of the Commission's investigation to Pharaon's representatives and by requesting Pharaon not to proceed with the tender offer; and
3. That the defendants have conspired to violate the Freedom of Information Act, 5 U.S.C. 552 (), as well as the Commission's rules relating thereto, by denying, without adequate grounds, OKC's FOIA request for all records relating to the investigation of OKC, all in violation of OKC's fifth amendment due process rights.
Based upon these allegations, OKC requested this court:
A. Temporarily and permanently to enjoin the Commission's investigation of OKC and enjoin SEC from commencing or recommending any proceeding based upon the investigation, information derived from the investigation, or information upon which the investigation is based;
B. In the event that it denies A. above, order that the investigation be conducted under trial-like procedures, that the defendants stop conducting the SEC's investigation in furtherance of any investigation being conducted by the federal Department of Energy or any other agency, that the defendants cease intimidating witnesses in the investigation, and that certain witness testimony be suppressed C. Declare the Commission's order of investigation "unauthorized, invalid, and void" and declare the SEC's Rules Relating to Investigations unconstitutional;
D. Order the SEC to grant OKC's FOIA requests;
E. Order the defendants to surrender to OKC all reports, files, and other records of OKC, which, without the consent of OKC, are in the possession of the defendants, and enjoin the defendants from disclosing or using such reports, records, or files in or as the basis of any investigation or other proceeding;
F. Enjoin the defendants from disclosing to or receiving from any agency or person records of or records pertaining to OKC in violation of the Privacy Act, § 24(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78x(b), or 18 U.S.C. § 1905; and
G. Award the plaintiff $15,000,000 in damages.
Following an August 25, 1978, status conference with the parties, this court issued an order on August 29, 1978, which restrained the SEC's use of the Locke, Purnell report and ordered expedited discovery regarding "the circumstances applicable to the SEC's receipt, acceptance, and use of such report as the basis for its proceedings with respect to OKC Corp." The SEC conceded that it could not proceed if its use of the report was enjoined and all parties consented to the order to preserve the status quo.
The order enjoining use of the report pending completion of expedited discovery was premised on the concession of counsel that there was no dispute as to the privileged status of the report. It was then envisioned that this discovery could be completed in less than thirty days. On August 31, 1978, the parties scheduled depositions of two defendants for September 11, 1978. On September 5, 1978, however, the SEC's Washington office disavowed the concession and withdrew from the agreement negotiated by its Fort Worth, Texas, office and filed with the court an application for protective order, or, in the alternative, a motion for postponement for discovery.
On September 5, 1978, the court ordered the report sealed.
On September 6, 1978, the court held a status conference in which in an effort to expedite discovery it probed the scope of factual disputes by inquiring into possible stipulations of facts. The court inquired if the SEC contested OKC's claims that:
1. The Locke, Purnell report was subject to the attorney-client privilege in the hands of OKC;
2. OKC had not waived the attorney-client privilege; and
3. The motive of the persons who provided the report to the defendant is irrelevant to a determination of the claim that the SEC's use of the report must be barred.
The SEC asked for time to consider the proposed stipulations and agreed not to pursue its investigation in the meantime. The SEC advised that it did contest those claims and on September 21, 1978, asked the court to continue the status quo pending resolution of a planned motion challenging the court's subject matter jurisdiction. The SEC then filed with this court on September 25, 1978, a 47-page memorandum, accompanied by lengthy affidavits and exhibits. On September 29, 1978, OKC submitted an equally voluminous response.
The SEC's motion deals...
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