S.E.C. v. ESM Government Securities, Inc., 79-2868

• Decision Date: 18 May 1981
• Docket Number: No. 79-2868,79-2868
• Citation: 645 F.2d 310
• Parties: Fed. Sec. L. Rep. P 97,995 In the Matter of an Application to Enforce Administrative Subpoena Duces Tecum of the SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. ESM GOVERNMENT SECURITIES, INC., Defendant-Appellant. . Unit B
• Court: U.S. Court of Appeals — Fifth Circuit

Page 310

645 F.2d 310

Fed. Sec. L. Rep. P 97,995

In the Matter of an Application to Enforce Administrative Subpoena Duces Tecum of the SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. ESM GOVERNMENT SECURITIES, INC., Defendant-Appellant.

No. 79-2868.

United States Court of Appeals, Fifth Circuit.

Unit B

May 18, 1981.

Arky, Freed, Stearns, Watson & Greer, Bruce W. Greer, Gerald B. Cope, Jr., Miami, Fla., for defendant-appellant.

David A. Sirignano, Rosalind C. Cohen, Jacob H. Stillman, Frederick B. Wade, Securities & Exchange Comm., Washington, D. C., for plaintiff-appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before TUTTLE, VANCE and POLITZ, Circuit Judges.

VANCE, Circuit Judge:

The Securities and Exchange Commission (SEC) applied to the district court below to enforce an administrative subpoena duces tecum against ESM Government Securities, Inc. (ESM). ESM responded that the application should be denied because of alleged fraud and deceit by the SEC. ¹ The court ordered that the subpoena be enforced, and ESM appeals.

I.

The court below made no findings of fact. After hearing the opening statements of the attorneys, it held that even were all of ESM's allegations correct, there would still be no grounds to deny enforcement of the subpoena. For purposes of review, therefore, we shall accept the allegations made by ESM in its statements below as correct. We note, however, that several of the allegations are denied by the SEC.

ESM is a wholly owned subsidiary of ESM Group, Inc. It is a broker-dealer engaged exclusively in the sale of government securities. It shares a suite of offices with another wholly owned subsidiary of ESM Group, Inc., ESM Securities, Inc., a broker-dealer in other types of securities. For present purposes the important distinction between the two is the different nature of SEC supervision. Government securities are exempt from many provisions of the securities laws. See 15 U.S.C. §§ 77c(a)(2), 78c(a)(12). Thus while ESM Securities, Inc. is open to routine inspection by the SEC, ESM is not.

In March or April of 1977 an investigator for the SEC, Floyd Young, came to the ESM offices. He explained that he was in the building investigating another government securities firm. He added that, in addition to doing a routine audit of ESM Securities, Inc., he would like ESM to provide him with a basic education in the government securities market. Since the SEC does not routinely supervise broker-dealers in government securities, ESM found Young's request plausible. They therefore provided him with a tour of their operations, explaining all their procedures. At the end of the day, Young left, saying that he would be back for further study.

In June the SEC ordered an investigation of ESM. At Young's suggestion no subpoena was issued. Indeed, ESM was not notified that any investigation had been ordered. Instead, in November Young returned to the ESM offices with a new staff attorney. He asked that ESM repeat for them the tour it had provided earlier and that he be permitted to continue his education in government securities. ESM agreed to this. ESM ran the SEC investigators through the tour, and then ESM provided them with documents they wished to review. The SEC attorneys returned two more days for further "education." At the end of the third day, ESM finally grew suspicious when the SEC investigators asked for copies of commission schedules. At that point the SEC investigators disclosed the formal order of investigation. ESM immediately asked them to leave, which they did. On the basis of the information they had gathered during their stay at ESM, the SEC investigators issued a subpoena. When ESM refused to comply with the subpoena, the SEC applied to the district court for enforcement. See 15 U.S.C. §§ 77v(b), 78u(c).

II.

The question before us is whether this set of facts would be grounds for denying enforcement of an administrative subpoena. The SEC claims that this case is controlled by United States v. Calandra, 414 U.S. 338, 94 S.Ct. 613, 38 L.Ed.2d 561 (1974). Calandra dealt with grand jury testimony. Based on a warrant, federal agents searched Calandra's place of business and seized certain books and records. A grand jury was then convened, which subpoenaed Calandra to question him regarding the seized materials. The district court found that the warrant had been issued without probable cause and that the search had exceeded the scope of the warrant. It therefore ordered that Calandra need not answer the grand jury questions based on the suppressed evidence. The Supreme Court reversed, holding that the fourth amendment exclusionary rule does not apply to grand jury testimony.

The SEC argues that the same principle should apply to administrative subpoenas. It is true that administrative subpoenas are in some respects analogous to grand jury investigations. See United States v. Davis, 636 F.2d 1028, 1037 (5th Cir. 1981). However, the Supreme Court has carefully refrained from suggesting that administrative investigations are identical in all respects to legislative or judicial investigations. See Hannah v. Larche, 363 U.S. 420, 449, 80 S.Ct. 1502, 1518, 4 L.Ed.2d 1307 (1960). Indeed, were this a grand jury subpoena, the case would not be before us, since denial of a motion to quash a grand jury subpoena cannot be appealed. Compare United States v. Ryan, 402 U.S. 530, 532, 91 S.Ct. 1580, 1581, 29 L.Ed.2d 85 (1971) (no appeal from grand jury subpoena) with Reisman v. Caplin, 375 U.S. 440, 449, 84 S.Ct. 508, 513, 11 L.Ed.2d 459 (1964) (administrative subpoena can be appealed). The holding of Calandra is thus not dispositive of the present case and we must consider whether its reasoning applies to the facts before us. ²

We are not persuaded that Calandra is applicable here. The Court gave two reasons for its holding regarding grand juries. First, it emphasized the historic role of the grand jury in Anglo-American jurisprudence. In particular it noted that the grand jury is not merely an instrument of investigation, but also "essential to basic liberties." 414 U.S. at 343, 94 S.Ct. at 617.

The grand jury's historic functions ... include ... the protection of citizens against unfounded criminal prosecutions.

Id. at 343, 94 S.Ct. at 617.

Second, the Court doubted that extending the exclusionary rule to grand juries would deter police misconduct.

The incentive to disregard the requirement of the Fourth Amendment solely to obtain an indictment from a grand jury is substantially negated by the inadmissibility of the illegally seized evidence in a subsequent criminal prosecution of the search victim.

Id. at 351, 94 S.Ct. at 621.

Neither of these two arguments fully applies to an SEC subpoena. Although the SEC has a dual function, it is not an historic guardian of individual liberties. Instead, its two functions are investigation of possible illegal activities, and adjudication of alleged violations. Hannah v. Larche, 363 U.S. at 446-47, 80 S.Ct. at 1516-1517. The SEC is not, like the grand jury, a protector of individuals against government prosecution. Nor is the deterrent effect of an exclusionary rule so clearly minimal when applied to the SEC. In the first place it is the SEC itself which commits the violations to which the rule would be applied. There is no division of functions comparable to that between police and the grand jury. In the second place the SEC does not rely on criminal prosecutions as its exclusive tool of enforcement. Persuasion, disclosure and rule-making are all weapons in its armory which are unaffected by exclusion of evidence in judicial proceedings. Hence, the sanction relied upon by the Court in Calandra is considerably less effective in this context.

We do not deduce from this line of reasoning that the exclusionary rule necessarily should or should not apply to SEC subpoenas. All we conclude at this point is that the question is not foreclosed by Calandra. We must, therefore, examine the law which has developed regarding administrative investigations and subpoenas.

III.

We begin our inquiry with Reisman v. Caplin, 375 U.S. 440, 84 S.Ct. 508, 11 L.Ed.2d 459 (1964). In Reisman the recipient of an IRS summons sought injunctive relief from a district court. The Supreme Court held that such relief was inappropriate, since the IRS could only enforce the summons by an action in court. At that time, the Court said, "the witness may challenge the summons on any appropriate ground." Id. at 449, 84 S.Ct. at 513. The Court elaborated in United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964). There the Court held that the IRS did not need to show probable cause to obtain enforcement of its summons. After discussing the showing required of the IRS, the Court stated that such a showing could nevertheless be attacked upon a showing of abuse of process. ³ The Court declared: "It is the court's process which is invoked to enforce the administrative summons and a court may not permit its process to be abused." Id. at 58, 85 S.Ct. at 255.

The Supreme Court has never provided a complete list of the "appropriate ground(s)" referred to in Reisman. The Court has made clear that the fifth amendment privilege against self-incrimination is an appropriate ground. See Couch v. United States, 409 U.S. 322, 93 S.Ct. 611, 34 L.Ed.2d 548 (1973); Boyd v. United States, 116 U.S. 616, 6 S.Ct. 524, 29 L.Ed. 746 (1886). So is the attorney-client privilege. Reisman, 375 U.S. at 449, 84 S.Ct. at 513. Other courts, including this one, have added to the list. See, e. g., United States v. Holmes, 614 F.2d 985, 989 (5th Cir. 1980) (free exercise of religion); United States v. Citizens State Bank, 612 F.2d 1091, 1093-94 (8th Cir. 1980) (freedom of association). A fourth amendment claim has also been held to be an appropriate ground. See United States v. Bank of Commerce, 405 F.2d 931, 934-35 (3d Cir. 1969). Cf. ...