S.E.C. v. Arthur Young & Co.

• Decision Date: 14 September 1978
• Docket Number: No. 76-1716,76-1716
• Citation: 584 F.2d 1018,190 U.S.App.D.C. 37
• Parties: , Fed. Sec. L. Rep. P 96,502 SECURITIES AND EXCHANGE COMMISSION v. ARTHUR YOUNG & COMPANY, Appellant.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1018

584 F.2d 1018

190 U.S.App.D.C. 37, Fed. Sec. L. Rep. P 96,502

SECURITIES AND EXCHANGE COMMISSION v. ARTHUR YOUNG & COMPANY, Appellant.

No. 76-1716.

United States Court of Appeals District of Columbia Circuit.

Argued May 16, 1977.

Decided July 24, 1978.

As Amended Sept. 14, 1978.

Stephen M. Sacks, Washington, D. C., with whom Milton V. Freeman, Washington, D. C., was on the brief, for appellant.

Glynn L. Mays, Atty., SEC, Washington, D. C., with whom David Ferber, Sol., and David J. Romanski, Asst. Gen. Counsel, SEC, Washington, D. C., were on the brief, for appellee. Peter M. Sullivan, Atty., SEC, Washington, D. C., also entered an appearance for appellee.

Before BAZELON, LEVENTHAL and ROBINSON, Circuit Judges.

Opinion for the Court filed by Circuit Judge SPOTTSWOOD W. ROBINSON, III.

SPOTTSWOOD W. ROBINSON, III, Circuit Judge:

Arthur Young & Company, a partnership of certified public accountants, appeals from an order of the District Court directing it to comply with a subpoena duces tecum issued by the Securities and Exchange Commission. Review is sought in this court on grounds that the investigative order of the Commission authorizing the subpoena is legally deficient, ¹ that relevance of the subpoenaed documents to the investigation does not sufficiently appear, ² and that obedience to the subpoena will be unduly burdensome. ³ We find that these arguments do not withstand scrutiny as justification for denying enforcement of the subpoena. We conclude, however, that enforcement should be conditioned upon reimbursement of appellant's costs of compliance to the extent that otherwise the expenses would become unreasonable. ⁴ We modify the District Court's enforcement order accordingly, and affirm it as so modified.

I

The pertinent facts are undisputed. The challenged subpoena emanates from a Commission investigation of SCA Services, Inc. (SCA), a publicly-held corporation engaged primarily in waste disposal services ⁵ and registering securities with the Commission. ⁶ Appellant has been SCA's principal independent auditor since 1973. On September 25, 1975, the Commission's staff requested, and at its own cost appellant supplied, five groups of materials ⁷ bearing on transactions between SCA and Christopher Recklitis, its then president and chief operating officer. ⁸ On October 21, 1975, on the basis of information presented by the staff, the Commission ordered a private investigation ⁹ into possible violations by SCA and others of the antifraud provisions of the federal securities laws. ¹⁰ The order instructed the staff to ascertain whether there were material factual untruths or omissions in statements filed by SCA with the Commission and disseminated by it to the public; ¹¹ more specifically, whether

(t)he aforementioned registration statements (of SCA) . . . include untrue statements of material facts or omit to state material facts . . . concerning among other things:

1. Interest of management and others in certain transactions.

2. Financial statements.

3. Description of business and property.

4. Acquisition or disposition of assets. ¹²

To carry out its investigative responsibilities, the staff was empowered to subpoena "any books, papers, correspondence, memoranda, or other records deemed relevant or material to the inquiry. . . ." ¹³

From its beginning as an inquiry into suspected self-dealing and looting by SCA's management, the investigation blossomed into one encompassing the full range of SCA's financial affairs, including the caliber of audits conducted by appellant. So it was that on April 23, 1976, the Commission's staff, purportedly pursuant to the investigative order, issued the undeniably broad subpoena that precipitated this litigation. ¹⁴ The subpoena demands 14 different categories of documents relating to SCA over a six-year period; ¹⁵ and within these 14 categories it calls for documents pertaining to 29 individuals and entities, ¹⁶ to "(a)ll officers, directors and employees (present and past)" of SCA, ¹⁷ and to "any special engagements, projects or management consulting services" performed by appellant for SCA. ¹⁸

Appellant refused to honor the subpoena. ¹⁹ The Commission then sought enforcement in the District Court and appellant promptly moved to quash. The court, concluding that the investigation pursued a lawfully authorized purpose and that the subpoenaed materials were relevant thereto, ordered enforcement, ²⁰ but subject to two conditions designed to ameliorate the burden of compliance. One was that the documents be examined at the offices of appellant wherein they were ordinarily kept; ²¹ the other was that the Commission absorb the expense of copying all documents that appellant might agree to release temporarily for that purpose. ²² The court made plain, however, that "(f)or those documents that (appellant) determines it cannot allow to leave its possession, (appellant) shall provide copies to the Commission." ²³ Dissatisfied with this disposition, appellant brought the controversy here. ²⁴

II

The Securities and Exchange Commission is statutorily authorized to "make such investigations as it deems necessary to determine whether any person has violated, is violating, or is about to violate" provisions of the federal securities laws ²⁵ or "the rules or regulations thereunder . . ." ²⁶ For that purpose, "any member of the Commission or any officer designated by it is empowered to . . . require the production of any books, papers, correspondence, memoranda, or other records which the Commission deems relevant or material to the inquiry." ²⁷ Beyond that, in the event of disobedience, the Commission can solicit the hand of the court to exact compliance. ²⁸ These weapons, to be sure, are potent, but hardly dispensable in the protection of the investing public and the fairness and honesty of the Nation's financial markets.

In the case at bar, however, we are first confronted with the claim that the order launching the investigation in suit is fatally lacking in specificity. It is said that the Commission has the responsibility for setting both the scope of its investigations and the limits within which its investigative staff may resort to compulsory process; in appellant's words, that "it is the Commission which must determine what basic subjects will be investigated and the areas in which private parties can be compelled to produce documents in connection with such investigations." ²⁹ By what is termed "a vague order of this breadth," ³⁰ appellant argues that "the Commission has left wholly to its staff the determination of what subjects pertaining to SCA will actually be investigated and when compulsion may be used to secure documents in connection with the investigation of these subjects." ³¹ We do not agree.

Congress has endowed the Commission, not unlike other agencies, ³² with broad power to conduct investigations ³³ "such . . . as it deems necessary to" ferret out violations of the federal securities laws and implementing regulations, whether consummated or incipient ³⁴ and in that connection to call for production of relevant materials by those who seem to have them. ³⁵ There are, of course, limits; to begin with, "a governmental investigation into corporate matters may be of such a sweeping nature and so unrelated to the matter properly under inquiry as to exceed the investigatory power." ³⁶ Moreover, while the statutory powers of federal regulatory agencies to investigate have traditionally been extensive, ³⁷ "the Fourth Amendment requires that the subpoena be sufficiently limited in scope, relevant in purpose, and specific in directive so that compliance will not be unreasonably burdensome." ³⁸ The federal courts stand guard, of course, against abuses of their subpoena-enforcement processes ³⁹ but constitutional mandates aside, ⁴⁰ " '(t)he gist of the protection is in the requirement, expressed in terms, that the disclosure sought shall not be unreasonable.' " ⁴¹ Resultantly, it has long been clear that "it is sufficient if the inquiry is within the authority of the agency, the demand is not too indefinite and the information sought is reasonably relevant." ⁴²

Surely we cannot characterize the challenged investigation as unreasonable. Its stated purpose is to inquire into possible infringements of the securities laws or implementing regulations by "SCA, its officers, directors and employees" ⁴³ or by "any other persons." ⁴⁴ The predicate for the investigation was a preliminary indication ⁴⁵ of falsifications or misleading omissions in registration statements, proxy materials and periodic reports filed with the Commission and disseminated to the public. ⁴⁶ The suspected violations relate to such matters as the interest of SCA's management and others in certain transactions, SCA's financial statements and its descriptions of businesses, properties, acquisitions and dispositions of assets. ⁴⁷ Despite their apparent breadth which appellant attacks these are all areas of legitimate concern to the Commission in the discharge of its statutory responsibilities, and categories of data generally required to be submitted to the Commission and disclosed to the investing public. ⁴⁸

We must also discard any notion that the Commission's investigative order is too indefinite as to the documents that its staff might apparently subpoena. Indeed, any such conclusion is foredoomed by our holding that the scope of the investigation itself is adequately bounded. ⁴⁹ The Commission's subpoena power is coextensive with its investigative power; by statute it may "require the production of any (document) which the Commission deems relevant or material to the inquiry," ⁵⁰ and we cannot say that the Commission's interest in the documents demanded of appellant is untoward. The investigation focuses on the financial statements and activities of SCA, a publicly-held corporation, and during the period under scrutiny appellant has been the principal independent accountant...