S.E.C. v. Howatt

• Decision Date: 31 October 1975
• Docket Number: No. 75-1150,75-1150
• Citation: 525 F.2d 226
• Parties: Fed. Sec. L. Rep. P 95,346 SECURITIES AND EXCHANGE COMMISSION, Applicant-Appellee, v. Robert HOWATT et al., Respondents-Appellants.
• Court: U.S. Court of Appeals — First Circuit

Page 226

525 F.2d 226

Fed. Sec. L. Rep. P 95,346

SECURITIES AND EXCHANGE COMMISSION, Applicant-Appellee, v. Robert HOWATT et al., Respondents-Appellants.

No. 75-1150.

United States Court of Appeals First Circuit.

Argued Sept. 9, 1975.

Decided Oct. 31, 1975.

Jeffrey M. Smith, Boston, Mass., with whom Paul T. Smith and Harvey R. Peters, Boston, Mass., were on brief, for respondents-appellants.

Michael J. Stewart, Asst. Gen. Counsel, with whom Lawrence E. Nerheim, Gen. Counsel, David Ferber, Sol., and Martin S. Berglas, Atty., Washington, D. C., were on brief for applicant-appellee.

Before COFFIN, Chief Judge, CAMPBELL, Circuit Judge, and THOMSEN, Senior District Judge. ^*

LEVIN H. CAMPBELL, Circuit Judge.

This is an appeal from an order entered after a hearing in the district court enforcing subpoenas duces tecum that were issued by the Securities and Exchange Commission in the course of an investigation into alleged securities law violations. ¹

In its verified complaint and attached exhibits, and orally at the district court hearing, the SEC represented as follows: On May 8, 1973, it had issued an order authorizing a private investigation into reports that Aurre & Company, Inc., a Delaware company registered with the Commission as a broker-dealer, and others were offering and selling securities to the public under circumstances amounting to violations of law. ² Among the securities supposedly being sold were ones of appellant Armstead Corporation and appellant H and L Management Company. The order directed an investigation to determine whether "the aforesaid persons" (a group that included Armstead and H and L Company) and "any other persons" had engaged or were about to engage in any of the reported or similar acts or practices.

Separate subpoenas to Armstead, to H and L, and to each of their two principals, appellants Landry and Howatt, ³ were thereupon issued, and, after some legal fencing that is immaterial, reissued. The subpoenas addressed to the two firms called for financial statements, names and addresses of investors, prospectuses, and related information. Armstead was also directed to bring in its stock records, and H and L to bring "records reflecting the issuance of debentures, notes or any other security." Landry and Howatt individually were to bring any records of sales of securities of Armstead, H and L, and several other named concerns, together with any literature used in connection with their sale.

At the hearing below, the Commission's counsel said, in response to the court's questions, that its investigation was initiated upon a written complaint from a broker whose clients had purchased some of the securities in question, and that the Commission staff had later interviewed the investors directly. Stating that it "does not sit in substitution of the SEC," the district court declined to take testimony from appellants concerning their contentions that they did not use the mails, that there was no printed material and no public offering, and that there was never any conduct placing them within the jurisdiction of the SEC. The court said "I will hear all of the grounds of your objections to the issuance of subpoena, don't misunderstand me. But I am not going to sit in substitute and exercise the powers that are reserved to the SEC."

After the hearing, the court ordered Landry and Howatt, in their capacities as officers of Armstead and partners of H and L, to produce all the documents described in the subpoenas addressed to the two firms. They were also directed, as individuals, to furnish the documents described in the subpoenas addressed to them individually.

We find no merit in appellants' contentions that the district court denied them rights under the fourth and fifth amendments and under Fed.R.Civ.P. 81(a) (3). The Commission is not required by statute or the Constitution to limit its investigations to those against whom "probable" or even "reasonable" cause to suspect a violation has been established. ⁴ The Commission has, as the Supreme Court said of the Federal Trade Commission in United States v. Morton Salt, 338 U.S. 632, 642, 70 S.Ct. 357, 94 L.Ed. 401 (1950), a power of "original inquiry." See Oklahoma Press Pub. Co. v. Walling, 327 U.S. 186, 216, 66 S.Ct. 494, 90 L.Ed. 614 (1946). It may "in its discretion, make such investigations as it deems necessary to determine whether any person has violated or is about to violate (the securities laws),"15 U.S.C. § 78u(a). The Commission's subpoena powers are conferred "(f)or the purpose of any such investigation," § 78u(b). There are, to be sure, limitations: the Commission's inquiry must be for a proper purpose; the information sought must be relevant to that purpose; and statutory procedures must be observed. See United States v. Powell, 379 U.S. 48, 58, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964). In addition to satisfying itself as to such matters, a court asked to enforce a subpoena has a broad power of inquiry to ensure that its process is not abused should, for example, the Government appear to be acting in bad faith. Id. But, as the district court correctly recognized here, it is not the court's role to intrude into the investigative agency's function. Congress committed securities investigations to the SEC, not the courts.

Here the court made sufficient inquiry to satisfy itself that the investigation and subpoenas were legally authorized and properly motivated, and for a purpose related to the Commission's powers. It did not, it is true, hold an evidentiary hearing, but under the circumstances one was not needed. Appellants offered no meaningful evidence that the Government might be exceeding or abusing its investigatory powers.

The issues which appellants told the court they wanted to air at an evidentiary hearing involved whether or not they and their transactions were within the SEC's regulatory jurisdiction. The record is murky on that point. But, while SEC coverage is unclear, its absence is likewise unclear. It appears that H and L issued promissory notes or debentures, which generally are within the definition of a security, see 15 U.S.C. § 77b(1). Fraud in connection with the issue of securities of a company whose operations are intrastate may in certain circumstances be actionable by the Commission. 15 U.S.C. §§ 77q(a) & (c); 78j(b). In any event, appellants may not litigate questions having to do with the application and coverage of the federal securities laws before responding to subpoenas designed to produce the very information that may be needed to shed light upon those questions. We agree with the Second Circuit in Securities & Exch. Comm'n v. Brigadoon Scotch Dist. Co., 480 F.2d 1047, 1052-53 (1973), that whether or not certain activities are subject to SEC regulation is not to be decided in a subpoena enforcement action. Rather the Commission "must be free without undue interference or delay to conduct an investigation which will adequately develop a factual basis for a determination as to whether particular activities come within the Commission's regulatory authority." Id. at 1053. We can add nothing to the Brigadoon court's discussion of the law in this area.

Appellants seek to block the production of H and L's partnership records on the ground that since there is no affirmative evidence of H and L's independent institutional character, Howatt and Landry the general partners are shielded by their personal privilege against self incrimination from producing the records. See Bellis v. United States, 417 U.S. 85, 94 S.Ct. 2179, 40 L.Ed.2d 678 (1974). However, this argument, like several others raised on appeal, was not presented below either before the Commission or the court. It may not now be pursued as a ground for overturning the district court's order enforcing the subpoenas. Dobb v. Baker, 505 F.2d 1041, 1044 (1st Cir. 1974); Roto-Lith, Ltd. v. F. P. Bartlett & Co., 297 F.2d 497, 500 (1st Cir. 1962); Bird v. United States, 241 F.2d 516, 520 (1st Cir. 1957). In the absence of any challenge, the Commission was under...