Sec. & Exch. Comm'n v. Goldstone
| Decision Date | 23 August 2014 |
| Docket Number | No. CIV 12-0257 JB/LFG,CIV 12-0257 JB/LFG |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. LARRY A. GOLDSTONE, CLARENCE G. SIMMONS, III, and JANE E. STARRETT, Defendants. |
| Court | U.S. District Court — District of New Mexico |
THIS MATTER comes before the Court on: (i) the Defendants' Motion to Compel Production of PCAOB Deposition Transcripts and Plaintiff's Notes and Memoranda of Interviews with Non-Party Witnesses, filed November 28, 2012 (Doc. 90)("Motion toCompel");2 (ii) Non-Party KPMG LLP's Motion to Quash, in Part, or Modify Subpoena to Produce Documents, and for Protective Order, filed December 4, 2012 (Doc. 91)("KPMG Motion to Quash"); and (iii) the Plaintiff Securities and Exchange Commission's Motion for a Protective Order to Quash Defendants' Notice of 30(b)(6) Deposition and Second and Third Requests for the Production of Documents, filed January 15, 2013 (Doc. 121)("Motion for Protective Order"). The Court held a hearing on January 30, 2013. The primary issues are: (i) whether Defendants Larry A. Goldstone, Clarence G. Simmons, III, and Jane E. Starrett may obtain through discovery the notes and memoranda that Plaintiff Securities and Exchange Commission ("SEC") obtained during unsworn interviews and attorney proffers with non-party KPMG, LLP's employees; (ii) whether the Court should compel the SEC to produce the testimony transcripts and sworn statements of KPMG employees that the Public Company Accounting Oversight Board ("PCAOB") took in 2009; (iii) whether 15 U.S.C. § 7215(b)(5)(A) ("the PCAOB Privilege"),3 part of the Sarbanes-Oxley Act of 2002, Pub. L. 107-204, 116 Stat. 745 (2002), protects KPMG from disclosing documents and information between KPMG and the PCAOB; (iv) whether the Defendants may depose an SEC representative under rule 30(b)(6) of the Federal Rules of Civil Procedure; and (v) whether the Court should release the SEC from any obligation to respond to the Defendants' Second and Third Requests for the Production of Documents from the SEC. First, the Court will not permit the Defendants to obtain the SEC's notes and memoranda from interviews and witness proffers with KPMG, because the notes and memoranda are the SEC's work product and the Defendants have not demonstrated substantialneed for the notes. The Court will not compel the SEC to produce the PCAOB transcripts, because the PCAOB Privilege protects documents that the PCAOB prepared, and the SEC has not waived the PCAOB Privilege in this case. The PCAOB Privilege protects KPMG from having to disclose "documents and information prepared or received by or specifically for the Board," but not KPMG's communications with the SEC regarding the PCAOB investigation or internal KPMG communications regarding the PCAOB investigation. The Defendants may not depose a rule 30(b)(6) SEC designee regarding the SEC's communications with the PCAOB and with KPMG, because the PCAOB Privilege protects the SEC's communications with the PCAOB and the work-product doctrine protects the SEC's communications with KPMG. The PCAOB Privilege and work-product doctrine also protect the documents that the Defendants are requesting in the Second and Third Requests for Production. The Court will (i) deny the Motion to Compel; (ii) grant in part and deny in part the KPMG Motion to Quash; and (iii) grant the Motion for Protective Order.
The Defendants are former officers of Thornburg Mortgage Inc.: Larry A. Goldstone was the chief executive officer, Clarence G. Simmons, III, was the chief financial officer, and Jane E. Starrett was the chief accounting officer. See Complaint ¶ 1, at 1, filed March 13, 2012 (Doc. 1). The Plaintiff Securities and Exchange Commission ("SEC") alleges that the Defendants were involved in fraudulent misrepresentations and omissions made in connection with the 2007 Form 10-K.4 Complaint ¶¶ 1-3, at 1-2. The SEC asserts that the Defendants misled and withheldimportant financial information from Thornburg Mortgage's outside auditor, KPMG LLP, such as the impending collapse of a large European hedge fund that held mortgage-backed securities ("MBS") similar to the Thornburg Mortgage's adjustable rate mortgage ("ARM") securities.5 Complaint ¶¶ 76-79, at 22.
Thornburg Mortgage was a publicly traded single-family mortgage lender and real estate investment trust, founded in 1993, headquartered in Santa Fe, New Mexico, and once was the second-largest independent mortgage company in the United States of America after Countrywide Financial Corporation. See Complaint ¶ 2, at 1; id. ¶ 20, at 7. During the time relevant to the allegations in the Complaint, Thornburg Mortgage's shares were traded on the New York Stock Exchange. See Complaint ¶ 20, at 7. Thornburg Mortgage's lending operations focused on "jumbo" and "super-jumbo" 6 ARM securities; Thornburg Mortgage alsopurchased ARM securities that third parties originated. Complaint ¶ 21, at 7. Thornburg Mortgage paid out most of its earnings in dividends, and obtained financing for its mortgage and investment business through reverse repurchase agreements7 backed by ARM securities. See Complaint ¶ 3, at 2. Thornburg Mortgage's reverse repurchase agreements "typically consisted of a simultaneous sale of pledged securities to a lender at an agreed price in return for Thornburg Mortgage's agreement to repurchase the same securities at a future date (the maturity date) at a higher price." Complaint ¶ 22, at 7-8. The reverse repurchase agreements required Thornburg Mortgage to maintain a certain degree of liquidity and subjected Thornburg Mortgage to margin calls if the value of the ARM securities serving as collateral on the agreements fell below a specified level. See Complaint ¶ 22, at 8. A margin call would generally require ThornburgMortgage to pay cash to reduce its loan amount or to pledge additional collateral to the lender, either on the same day that Thornburg Mortgage received the margin call or on the following day, unless the parties agreed otherwise. See Citigroup Global Markets, Inc. as Intermediating Agent for Citigroup Global Markets Limited and [Counterparty] Thornburg Mortgage, Inc., International Securities Lenders Association ISLA Global Master Securities Lending Agreement § 5.8, at 11, filed May 21, 2012 (Doc. 37-6)(brackets in original); Master Repurchase Agreement Between Greenwich Capital Markets, Inc., and Thornburg Mortgage, Inc. § 4(c) at 5, filed July 20, 2012 (Doc. 60-2); id. at § 11(a), at 7-8; Master Repurchase Agreement Between Credit Suisse First Boston Corporation and Thornburg Mortgage Asset Corporation § 4(c), at 4, filed July 20, 2012 (Doc. 60-3); id. at § 11(a), at 7; Complaint ¶ 23, at 8. Thornburg Mortgage's failure to timely meet a margin call would be an event of default and allowed a lender to declare Thornburg Mortgage in default, which would trigger cross-defaults on Thornburg Mortgage's other reverse repurchase agreements, and all lenders with whom Thornburg Mortgage had defaulted would then be allowed to seize and to sell the ARM securities collateralizing Thornburg Mortgage's loans. See Complaint ¶ 24, at 8. Receiving margin calls was part of Thornburg Mortgage's normal course of business, as the value of its ARM securities often fluctuated. See Complaint ¶ 25, at 8.
Citigroup Global Markets, Inc.'s margin call on February 21, 2008, was the largest of the three that Thornburg Mortgage could not immediately meet -- $196 million. See Complaint ¶ 33, at 10. In response to Thornburg Mortgage's inability to meet the Citigroup Global margin call on February 21, 2008, Citigroup Global sent a letter to Goldstone and Simmons, stating that Thornburg Mortgage had breached the parties' reverse repurchase agreement and reserving Citigroup Global's right to declare Thornburg Mortgage in default, see Complaint ¶ 3, at 2; id.¶ 34, at 10-11 (). Citigroup Global made clear that, although Citigroup Global was not exercising its rights under the reverse repurchase agreement, it was not waiving its right to declare Thornburg Mortgage in default or to amend the underlying reverse repurchase agreement. See Complaint ¶ 34, at 11. In an electronic mail transmission from Goldstone to Simmons, Starrett, and others, dated February 21, 2008, Goldstone stated that he had negotiated a "payment plan with Citigroup Global in order to satisfy the call by the end of [the following] week[.]" Complaint ¶ 61, at 18 (alterations in original)(quoting Electronic Mail Transmission from Clay Simmons to Nyira Gitana, Subject: FW: TMA Update at 2, sent February 21, 2008, at 9:30 a.m., filed May 21, 2012 (Doc. 37-10)). Thornburg Mortgage paid the Citigroup Global margin call over seven days and made the final payment of seventy-five million dollars on February 27, 2008. See Complaint ¶ 35, at 11.
In the last week of February, 2008, Thornburg Mortgage had to sell the interest-only portions of its ARM loans ("I/O Strip Transactions") to generate sufficient cash to meet the margin calls it received in the second half of the month. Complaint ¶ 36, at 11. The I/O Strip Transactions further depleted Thornburg Mortgage's liquidity to meet margin calls. See Complaint ¶ 36, at 11. In an electronic mail transmission from Goldstone to Simmons and Starrett on February 22, 2008, Goldstone informed them of some of Thornburg Mortgage's plans to raise liquidity to meet margin calls: "'Citi sold two of [Thornburg Mortgage's] IO securities as well for a gain of approximately $25 million and net proceeds to Citi of $10 million.'"Complaint ¶ 67, at 19-20 (...
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