SEC v. Wheeling-Pittsburgh Steel Corp., Misc. No. 7507.
| Decision Date | 17 December 1979 |
| Docket Number | Misc. No. 7507. |
| Citation | 482 F. Supp. 555 |
| Parties | The SECURITIES AND EXCHANGE COMMISSION, Applicant, v. WHEELING-PITTSBURGH STEEL CORPORATION, a corporation, and Dennis J. Carney, its Chairman, President and Chief Executive Officer, Respondents. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
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Paul A. Manion, Pittsburgh, Pa., for respondents.
The Securities and Exchange Commission filed a civil enforcement action seeking to compel Wheeling-Pittsburgh Steel Corporation and Dennis J. Carney to produce evidence concerning the identity of any company or individual with whom merger or acquisition discussions were held. We decline to place the imprimatur of this court upon the activities of the Commission and, therefore, relief will be denied.
On August 17, 1979, the Securities and Exchange Commission (Commission) filed an application with this court for an enforcement order pursuant to section 21(c) of the Securities Exchange Act of 1934, 15 U.S.C. § 78u(c) (1976).1 The Commission seeks to enforce that portion of a subpoena duces tecum dated August 2, 1979, and directed to Wheeling-Pittsburgh Steel Corporation (W-P) and its president, Dennis J. Carney (Carney), which requires respondents to disclose information that the Commission deems relevant to its investigation.
On August 27, 1979, respondents filed an answer and counterclaim advancing four distinct defenses. They are as follows: (1) The information sought is irrelevant to any legitimate inquiry by the Commission; (2) the subpoena demands confidential information and disclosure would cause irreparable harm to the company; (3) the subpoena was issued in bad faith and for the purpose of harassment; and (4) the investigation constitutes a misuse and abuse of an administrative agency by persons who oppose the grant of federal loan guarantees to W-P. As a result, respondents urge this court to enjoin the entire investigation.
The court, tracking the procedures outlined in United States v. McCarthy, 514 F.2d 368, 372-73 (3d Cir. 1975), and its progeny, United States v. Genser, 582 F.2d 292, 302 (3d Cir. 1978), conducted hearings on September 7, 13 and 14. The testimony of the witnesses2 and the exhibits raised serious issues concerning the propriety of the Commission's investigation. In particular, the court was concerned with respect to the apparent abuse of the investigative process by persons opposed to the grant of federal loan guarantees to W-P, as well as the role, if any, of the agency in furthering the conduct. Accordingly, at the close of the hearing on September 14, 1979, the court granted respondents' request for discovery.3
The discovery order was narrowly drawn to insure that the burden on the administrative agency would be minimized as much as possible.4 A final hearing was conducted on October 22, 1979, after completion of the authorized discovery. We now articulate the following findings of fact and conclusions of law in accordance with United States v. McCarthy and Fed.R.Civ.P. 52(a).
Wheeling-Pittsburgh Steel is a Delaware corporation with offices at Pittsburgh, Pennsylvania. It is engaged in the business of manufacturing and selling steel and related products. W-P's stock is registered pursuant to section 12(b) of the Securities Exchange Act, 15 U.S.C. § 78L(b) (1976), and is listed on the New York Stock Exchange. Annual and other periodic reports are filed with the Commission pursuant to section 13(a) of the Act. 15 U.S.C. § 78m(a) (1976). Dennis J. Carney has held the position of President and Chief Executive Officer for two years.
During the preceding two years, W-P attempted to obtain loan guarantees from the Economic Development Administration (EDA) and the Farmers Home Administration (FmHA). The loans would be financed by private lenders and used to install pollution control equipment and a rail mill at Monessen, Pennsylvania. Receipt of the loan guarantees is critical to the company because the rail mill cannot be constructed without pollution control devices required by the Environmental Protection Agency which in turn cannot be financed without the loans. Three other companies — United States Steel Corporation, Bethlehem Steel Corporation and CF&I — manufacture steel rails. All have opposed the granting of loan guarantees to W-P. As we will explore in detail, CF&I, a company owned by Crane Company, has been particularly active in its opposition.
On December 28, 1978, and January 9, 1979, Carney received identical "Letters of Intent" from EDA and FmHA.5 The letters stated that the agencies "will recommend" loan guarantees of $100 million (EDA) and $40 million (FmHA). The "Letters of Intent" were contingent on a number of provisions. A careful examination of these provisions reveals, however, that the conditions involved ministerial matters which offered no major obstacles to receipt of the guarantees.
On April 27, 1979, in a "Report on the Annual Meeting of Stockholders," Carney discussed the status of the loan guarantees. The language that precipitated this entire investigation is as follows:
We obtained commitments for federal loan guarantees of $140-million, and for a $10-million direct loan through the State of Pennsylvania. These commitments will enable us to finalize financial arrangements in June through a consortium of insurance companies.6
Later, in the same report, Carney remarked:
We are also exploring future acquisitions being proposed to us by several domestic and foreign firms.7
Following the report to shareholders, Carney spoke to news reporters. He related that the turnaround in W-P's financial position had attracted domestic and foreign concerns who were interested in entering business combinations, but "so far none of them looks good."8 According to Carney, the discussions were preliminary and did not reach the point of discussing terms.
On June 11, 1979, Carney appeared before the Subcommittee of the Committee on Appropriations of the United States Senate. He was interrogated at length by Senator Lowell Weicker of Connecticut, an opponent of the loan guarantees, concerning use of the word "commitments" in the report to shareholders.9 The exchange between Senator Weicker and Carney reveals that the Senator believed that use of the word "commitments," in describing the status of the loan guarantees, was a material misrepresentation of fact, since the letters from EDA and FmHA were only "Letters of Intent." In Carney's opinion, the terms were synonymous and use of the word "commitments" was at most a semantical distinction.
The Senator obviously felt otherwise. On June 14, a letter from Senator Weicker was hand delivered to Stanley Sporkin, Director of the Division of Enforcement of the Commission.10 The letter directed Sporkin's attention to Carney's use of the word "commitments" in the April 27 report, and suggested that the statement constituted a violation of Rule 10b-5. No other alleged violations were indicated.
The letter was routed from Sporkin to Richard E. Brodsky of the Division of Enforcement, who in turn assigned the case to Martin Aussenberg, a staff attorney. On June 19, Aussenberg contacted Timothy Keeney, a legislative assistant of Senator Weicker. Keeney described the loan guarantee process, advised Aussenberg of W-P's pending application, pointed out Carney's use of the word "commitments" in the April 27 report and supplied Aussenberg with a transcript of the Senate hearings.11 Keeney also referred Aussenberg to one "Art Downey," describing him as an attorney for CF&I, a corporate competitor of W-P that was vigorously opposing the loan guarantees.
Aussenberg called Downey the same day. During the conversation, Downey suggested other areas, apart from use of the word "commitments," of suspected violation of the securities laws. Downey has testified that he told Aussenberg that CF&I was "frustrated" and "exasperated" concerning its inability to block the loan guarantees and was providing much of the information as a means of "venting my exasperation."12
Some information concerning the role of Arthur T. Downey is instructive. Downey is an attorney practicing in Washington, D. C. He was retained by Paul R. Hundt, general counsel for Crane Co. and CF&I, to direct CF&I's efforts to block the grant of guarantees to W-P. As early as February of 1979, Downey had contacts with members of Senator Weicker's staff, Timothy Keeney and Peter Goldfarb. Since that time, he has spoken to Keeney approximately 10 to 20 times on the subject of the loan guarantees to W-P, but prepared no notes of any conversation. As a result, his deposition is replete with instances of professed inability to recall critical but recent events.13
The deposition does reveal, however, that Downey and Keeney joined forces to block the loan guarantees to W-P and, when their efforts appeared doomed in a political forum, they began using the investigative authority of the Securities and Exchange Commission to achieve a political result. More importantly the Downey deposition, when considered with additional evidence of record, discloses that the Commission was aware that it was being used, and did nothing to prevent the abuse of its process.
All doubts concerning manipulation were resolved shortly after Aussenberg's initial contacts with Kenney and Downey. On June 21, 1979, Senator Weicker introduced ten amendments relating to W-P to the Supplemental Appropriations Bill for the EDA.14 Amendment No. 273 provided:
None of the funds provided in this Act shall be available for a new loan or guarantee under the Economic Development Revolving Fund to any corporation which is the subject of an investigation by the Securities and Exchange Commission.15
Prior to the introduction of this amendment, Keeney telephoned Aussenberg on two occasions. In the first call, Keeney...
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