U.S. v. Brendsel
| Decision Date | 02 February 2004 |
| Docket Number | No. MISC.NO.03-MC-57.,MISC.NO.03-MC-57. |
| Citation | 301 F.Supp.2d 518 |
| Parties | UNITED STATES of America and Office of Federal Housing Enterprise Oversight, Petitioners, v. Leland BRENDSEL, Respondent. |
| Court | U.S. District Court — Eastern District of Virginia |
Dennis E. Szybala, AUSA, United States Attorney's Office, Alexandria, VA, for Petitioners.
Edward J. Bennett, Williams & Connolly, LLP, Washington, DC, for Respondent.
Petitioners United States of America and the Office of Federal Housing Enterprise Oversight ("OFHEO"), the federal regulator of the Federal Home Loan Mortgage Corporation ("Freddie Mac"), seek to enforce an administrative subpoena for deposition testimony and document production against respondent Leland Brendsel, Freddie Mac's former Chief Executive Officer. The OFHEO issued the subpoena on October 10, 2003 in the course of a special examination of Freddie Mac relating to a restatement of its financial reports. On December 17, 2003, the OFHEO initiated an administrative enforcement proceeding against Brendsel, seeking to have his resignation from Freddie Mac reclassified as a termination for cause, which would limit severance and other payments due to Brendsel. Brendsel opposes enforcement of the present subpoena, arguing that the issuance under the authority of the special examination is pretextual because the OFHEO's true interest is in gathering information for the enforcement proceeding. For the reasons discussed below, we find that issuance of the subpoena was not pretextual or in any other respect in violation of the applicable statutes or regulations, and the petition will be granted.
On January 22, 2003, Freddie Mac announced that it would restate its earnings for 2002, 2001, and possibly 2000, due to a reevaluation of its accounting practices. On June 7, 2003, the Director of the OFHEO ("the Director") ordered a special examination of Freddie Mac relating to those accounting practices and the events leading to the departure of three senior executives, including respondent Brendsel.
The following facts, which are uncontroverted by the respondent, are included in the Declaration of David W. Roderer, a deputy general counsel to OFHEO who is responsible for the special examination. To conduct the special examination, the OFHEO requested documents and testimony from Freddie Mac and its officers, directors, and employees. Much of the information requested was provided voluntarily. In July 2003, the OFHEO advised counsel for Brendsel that it was seeking his testimony, and the parties negotiated proposed dates to take testimony in August. On July 29, 2003, the OFHEO issued a subpoena for Brendsel's testimony on August 14, 2003. Upon request of Brendsel's counsel, the OFHEO agreed to postpone Brendsel's testimony to August 29, 2003. A new subpoena was issued for that date, however, on August 25, 2003, Brendsel's counsel again requested a postponement. The same day, the OFHEO agreed not to enforce the subpoena for August 29, 2003, but reserved the right to subpoena Brendsel for another date. In September and October 2003, the OFHEO and Brendsel's counsel engaged in further negotiations over Brendsel's testimony. On October 10, 2003, the OFHEO issued a subpoena for Brendsel's testimony and document production on October 27, 2003. Brendsel did not appear on October 27, 2003.
On December 3, 2003, petitioners filed the instant action to enforce the administrative subpoena. On December 10, 2003, the OFHEO issued a "Report of the Special Examination of Freddie Mac." On December 17, 2003, the OFHEO filed against Brendsel a Notice of Charges, initiating an administrative enforcement proceeding to impose civil money penalties, require repayment of bonuses paid in 2000 and 2001, and forfeit any severance payments to which he would not be entitled if he were terminated for cause.
The OFHEO is the federal regulator of the Federal National Mortgage Association ("Fannie Mae") and Freddie Mac, known as the enterprises. 12 U.S.C. § 4501 et seq. The OFHEO is authorized to conduct examinations "whenever the Director determines that an examination is necessary to determine the condition of an enterprise for the purpose of ensuring its financial safety and soundness." 12 U.S.C. § 4517(b). The Director is authorized to issue subpoenas in the course of such examinations. 12 U.S.C. §§ 4517(f), 4641. The OFHEO is also authorized to take enforcement action and seek civil money penalties against an executive officer who violates statutes regulating the enterprises. 12 U.S.C. §§ 4631, 4636. The statutory authority to take enforcement action, however, does not grant the Director subpoena authority. Rather, discovery in enforcement proceedings is governed by regulations promulgated at 12 C.F.R. § 1780 et seq., which do not authorize discovery subpoenas for testimony. The subpoena for which the OFHEO seeks enforcement in this case was issued by the Director pursuant to his authority to conduct special examinations.
To enforce an administrative subpoena, a court must be satisfied that the administrative agency has shown that: (1) it is authorized to make such investigation; (2) it has complied with statutory requirements of due process; and (3) the materials requested are relevant to the authorized investigation. E.E.O.C. v. Lockheed Martin Corp., Aero & Naval Systems, 116 F.3d 110 (4th Cir.1997). Brendsel argues that the subpoena fails to satisfy any of those three requirements. Specifically, Brendsel argues that the subpoena exceeds the OFHEO's authority because it was issued for a special examination that has already been completed, and therefore does not relate to a safety and soundness examination of Freddie Mac. Respondent also argues that the OFHEO violated due process in issuing the subpoena by failing to respond to an administrative request to revoke the subpoena, as well as by violating regulatory confidentiality provisions and retaining outside counsel without authority to do so.
Brendsel's primary argument is that the present subpoena cannot be issued under the OFHEO's special examination authority because the OFHEO has already exercised all statutory authority it possesses to conduct a special examination into the restatement of earnings. Respondent points to two documents supporting his position: 1) the report to Congress of December 10, 2003 presenting "conclusions and recommendations of the special examination," and 2) a stipulation and consent order between the OFHEO and Freddie Mac that purportedly estops the Director from taking action against Freddie Mac and persons affiliated with it. Relying primarily on these two documents, Brendsel argues that the OFHEO has exhausted its statutory authority to conduct a special examination, and therefore that the OFHEO lacks authority to seek enforcement of the instant subpoena. Specifically, respondent argues that by advising Congress that Freddie Mac is safe and sound, the OFHEO no longer has any need to continue exercising its special examination authority.
The OFHEO responds that despite the December 10, 2003 report to Congress, it has the authority to continue an ongoing special examination into the safety and soundness of Freddie Mac "whenever the Director determines that an examination is necessary to determine the condition of an enterprise for the purpose of ensuring its financial safety and soundness." 12 U.S.C. § 4517(b). The OFHEO explains that a finding of present safety and soundness does not preclude review to ensure future safety and soundness. A financial institution's practices may be unsafe and unsound, even if the institution is currently safe and sound. See Lindquist & Vennum v. FDIC, 103 F.3d 1409, 1417 (8th Cir.1997). According to the uncontroverted Roderer declaration, Freddie Mac's restatement created a safety and soundness concern because financial markets rely upon accurate and timely disclosure. Uncertainty about the accuracy of Freddie Mac's financial statements could increase the enterprise's cost of funds, imperiling its safe and sound operation in the future. The special examination is designed to identify and correct the problems that led to the restatement, so that any future restatements that could imperil Freddie Mac's safety and soundness can be avoided. The OFHEO argues that addressing these concerns is exactly what Congress intended in providing the Director with authority to order such examinations.
We agree with the OFHEO that its December report and conclusion that Freddie Mac is presently safe and sound does not deprive the OFHEO of its authority to continue its special examination to determine the future safety and soundness of Freddie Mac. Therefore, the Director is acting within his authority by seeking enforcement of the subpoena, despite the December report to Congress.
Brendsel also argues that the report to Congress shows that any special examination authority has been exhausted, because the report presents the conclusions and recommendations of the special examination. The OFHEO argues that the issuance of the report reflects a desire to keep the public informed of the progress of the investigation to date, but does not signal the end of the examination. According to Roderer, the conclusions presented represent the conclusions to date, but the OFHEO has reserved its right to make additional conclusions and recommendations. The OFHEO continues to examine the role of other parties, such as third party broker-dealers, and Brendsel has information relevant to this inquiry.1 Therefore, the special examination remains open until the OFHEO obtains Brendsel's testimony and incorporates it into the examination.
Respondent further claims that the stipulation and consent order between the OFHEO and...
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