S.E.C. v. Dresser Industries, Inc.

• Decision Date: 17 November 1980
• Docket Number: 78-1705,Nos. 78-1702,s. 78-1702
• Citation: 202 U.S.App.D.C. 345,628 F.2d 1368
• Parties: , Fed. Sec. L. Rep. P 97,172, Fed. Sec. L. Rep. P 97,573 SECURITIES AND EXCHANGE COMMISSION, v. DRESSER INDUSTRIES, INC., Appellant, United States, Intervenor. SECURITIES AND EXCHANGE COMMISSION, v. DRESSER INDUSTRIES, INC., Edward R. Luter, Appellant, United States, Intervenor.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1368

628 F.2d 1368

202 U.S.App.D.C. 345, Fed. Sec. L. Rep. P 97,172,

Fed. Sec. L. Rep. P 97,573

SECURITIES AND EXCHANGE COMMISSION, v. DRESSER INDUSTRIES, INC., Appellant, United States, Intervenor.

SECURITIES AND EXCHANGE COMMISSION, v. DRESSER INDUSTRIES, INC., Edward R. Luter, Appellant, United States, Intervenor.

Nos. 78-1702, 78-1705.

United States Court of Appeals, District of Columbia Circuit.

Argued en banc April 15, 1980.

Decided July 16, 1980.

Certiorari Denied Nov. 17, 1980.

See 101 S.Ct. 529.

Appeals from the United States District Court for the District of Columbia (D.C. Miscellaneous No. 78-0141).

David R. MacDonald, Chicago, Ill., with whom Francis D. Morrissey, Chicago, Ill., and Edward E. Dyson, Washington, D. C., were on brief, for appellant Dresser Industries, Inc.

Raymond G. Larroca, Herbert J. Miller, Jr., and Thomas B. Carr, Washington, D. C., were on supplemental memorandum for appellant Edward R. Luter.

Paul Gonson, Principal Associate Gen. Counsel, Securities and Exchange Commission, Washington, D. C., with whom Ralph C. Ferrara, Gen. Counsel, Michael K. Wolensky, Associate Gen. Counsel, and James H. Schropp and John P. Sweeney, Asst. Gen. Counsel, Securities and Exchange Commission, Washington, D. C., were on brief, for appellee.

Irvin B. Nathan, Deputy Asst. Atty. Gen., Washington, D. C., with whom Phillip B. Heymann, Asst. Atty. Gen., Washington, D. C., and Stephen G. Milliken, Atty., Dept. of Justice, Providence, R. I., were on brief, for intervenor.

Before WRIGHT, Chief Judge, and McGOWAN, TAMM, ROBINSON, MacKINNON, ROBB, WILKEY, WALD, MIKVA, and EDWARDS, Circuit Judges.

Opinion for the court filed by Chief Judge WRIGHT.

J. SKELLY WRIGHT, Chief Judge:

Dresser Industries, Inc. (Dresser) appeals from a decision of the District Court ¹ requiring obedience to a subpoena duces tecum issued by the Securities and Exchange Commission (SEC) on April 21, 1978, and denying Dresser's motion to quash the subpoena. ² The subpoena was issued in connection with an SEC investigation into Dresser's use of corporate funds to make what are euphemistically called "questionable foreign payments," and into the adequacy of Dresser's disclosures of such payments under the securities laws.

The principal issue facing this en banc court is whether Dresser is entitled to special protection against this SEC subpoena because of a parallel investigation into the same questionable foreign payments now being conducted by a federal grand jury under the guidance of the United States Department of Justice (Justice). Dresser argues principally that the SEC subpoena abuses the civil discovery process of the SEC for the purpose of criminal discovery and infringes the role of the grand jury in independently investigating allegations of criminal wrongdoing. On November 19, 1979 a panel of this court issued a decision affirming the District Court but, with Judge Robb dissenting, attaching a condition prohibiting the SEC from providing Justice with the information received from Dresser under this subpoena. Because of the importance of this issue to enforcement of the regulatory laws of the United States, this court voted to vacate the panel opinions and rehear the case en banc.

I. BACKGROUND

A. Origin of the Investigations

Illegal and questionable corporate payments surfaced as a major public problem in late 1973, when several major scandals implicated prominent American corporations in improper use of corporate funds to influence government officials in the United States and foreign countries. The exposure of these activities disrupted public faith in the integrity of our political system and eroded international trust in the legitimacy of American corporate operations abroad. ³ SEC investigation revealed that many corporate officials were falsifying financial records to shield questionable foreign and domestic payments from exposure to the public and even, in many cases, to corporate directors and accountants. Since the completeness and accuracy of corporate financial reporting is the cornerstone of federal regulation of the securities markets, such falsification became a matter of grave concern to the SEC. ⁴

Beginning in the spring of 1974 the SEC brought a series of injunctive actions against certain American corporations. It obtained consent decrees prohibiting future violations of the securities laws and establishing internal corporate procedures for investigation, disclosure, and prevention of illegal corporate payments. However, the problem of questionable foreign payments proved so widespread that the SEC devised a "Voluntary Disclosure Program" to encourage corporations to conduct investigations of their past conduct and make appropriate disclosures without direct SEC coercion. ⁵ Participation in the Voluntary Disclosure Program would not insulate a corporation from an SEC enforcement action, but the Commission would be less likely to exercise its discretion to initiate enforcement actions against participants. ⁶ The most important elements of the Voluntary Disclosure Program were (1) an independent committee of the corporation would conduct a thorough investigation into questionable foreign and domestic payments made by the corporation; (2) the committee would disclose the results of this investigation to the board of directors in full; (3) the corporation would disclose the substance of the report to the public and the SEC on Form 8-K; and (4) the corporation would issue a policy statement prohibiting future questionable and illegal payments and maintenance of false or incomplete records in connection with them. ⁷ Except in "egregious cases" the SEC would not require that public disclosures include specific names, dates, and places. Rather, the disclosures might be "generic" in form. ⁸ Thus companies participating in the Voluntary Disclosure Program would ordinarily be spared the consequences to their employees, property, and business that might result from public disclosure of specific instances of foreign bribery or kickbacks. However, companies participating in the Voluntary Disclosure Program had to agree to grant SEC requests for access to the final report and to the unexpurgated underlying documentations. ⁹

B. The Dresser Investigations

On January 27, 1976 an attorney and other representatives of Dresser met with members of the SEC staff to discuss a proposed filing. At the meeting Dresser agreed to conduct an internal inquiry into questionable foreign payments, in accordance with the terms of the Voluntary Disclosure Program. ¹⁰ The next day Dresser submitted a Form 8-K describing, in generic terms, one questionable foreign payment. Joint Appendix (JA) 100-102. On November 11, 1976 Dresser filed a second Form 8-K reporting the results of the internal investigation. JA 103-108. On February 10, 1977 the company supplemented this report with a third Form 8-K concerning a questionable payment not reported in the earlier reports. JA 109-113. The reports concerned Dresser's foreign activities after November 1, 1973. All disclosures were in generic, not specific, terms.

As part of its general monitoring program the SEC staff requested access to the documents underlying Dresser's report. On July 15, 1977 Dresser refused to grant such access. The company argued that allowing the staff to make notes or copies might subject its documents to public disclosure through the Freedom of Information Act. ¹¹ Dresser stated that such disclosure could endanger certain of its employees working abroad. ¹² During the ensuing discussions with the staff Dresser attempted to impose conditions of confidentiality upon any SEC examination of its documents, but the staff did not agree. ¹³ Instead, it issued a recommendation to the Commission for a formal order of investigation in the Dresser case. This recommendation was predicated on the staff's conclusions that Dresser:

1. may have used corporate funds for non-corporate purposes;

2. may have made false and misleading statements concerning the existence of and circumstances surrounding material obligations of Dresser to certain foreign governments and to other entities; and

3. may have made false entries and caused false entries to be made upon the books and records of Dresser, and its affiliates and subsidiaries with respect to, among other things, payments to foreign government officials.

JA 7-8 (order directing private investigation and designating officers to take testimony). Moreover, the staff reported that Dresser's proxy soliciting materials, reports, and statements may have been misleading with respect to the potential risks involved in its conduct of business through questionable foreign payments, and may have included false statements in connection with such payments. JA 8. Dresser vigorously opposed issuance of an order of investigation. ¹⁴

Meanwhile, the Department of Justice had established a task force on transnational payments to investigate possible criminal violations arising from illegal foreign payments. Two SEC attorneys participated in the task force. In the summer of 1977 the Justice task force requested access to SEC files on the approximately 400 companies, including Dresser, that had participated in the Voluntary Disclosure Program. ¹⁵ Pursuant to Commission authorization the SEC staff transmitted all such files to the Justice task force in August 1977. ¹⁶ After its preliminary investigation of the Form 8-K's submitted by Dresser under the Voluntary Disclosure Program, Justice presented Dresser's case to a grand jury in the District of Columbia on January 25, 1978.

Before any summons or subpoena had issued in either the SEC or the grand jury investigation, Dresser filed suit in the Southern District of Texas against the SEC and Justice to enjoin any further investigation of it by either agency. ¹⁷ While Dresser's suit was pending in the Southern District of Texas, the District of Columbia grand jury subpoenaed Dresser's...