Watts v. S.E.C.

• Decision Date: 30 March 2007
• Docket Number: No. 06-1307.,06-1307.
• Citation: 482 F.3d 501
• Parties: Philip WATTS, Petitioner v. SECURITIES AND EXCHANGE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — District of Columbia Circuit

482 F.3d 501

Philip WATTS, Petitioner v. SECURITIES AND EXCHANGE COMMISSION, Respondent.

No. 06-1307.

United States Court of Appeals, District of Columbia Circuit.

Argued December 7, 2006.

Decided March 30, 2007.

On Petition for Review of an Order of the Securities and Exchange Commission.

Andrew J. Morris argued the cause and filed the briefs for petitioner.

Melinda Hardy, Assistant General Counsel, Securities & Exchange Commission, argued the cause for respondent. With her on the briefs were Mark B. Stern and Tara Leigh Grove, Attorneys, U.S. Department of Justice, Brian G. Cartwright, General Counsel, and Kathleen Cody, Senior Counsel.

Before: BROWN and KAVANAUGH, Circuit Judges, and WILLIAMS, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge KAVANAUGH.

KAVANAUGH, Circuit Judge.

Several Shell shareholders sued Sir Philip Watts, a former Shell executive, and alleged that he committed securities fraud. During discovery, which is still ongoing, Watts served third-party testimonial subpoenas under Federal Rule of Civil Procedure 45 on three Securities and Exchange Commission employees. Watts thinks their testimony might help his defense. The SEC did not permit the three employees to testify, contending that their testimony would cover privileged matters and be unduly burdensome. Watts has sought review of the SEC's refusal—not in the district court, but directly in this Court. He has invoked the statute providing for direct court of appeals review of SEC "orders." See 15 U.S.C. § 78y(a); see also id. § 77i(a).

We lack subject-matter jurisdiction to reach the merits; instead, Watts's challenge must be decided by the district court in the first instance. As the consistent practice of courts and agencies reflects, an agency's determination not to comply with a third-party subpoena in an ongoing civil suit is simply an agency's ordinary litigation decision, not an "order" that a court of appeals has separate jurisdiction to directly review. Disputes over third-party subpoenas to agencies in civil litigation therefore must commence in the district court under Rule 45. We transfer this case to the United States District Court for the District of Columbia. See 28 U.S.C. § 1631.

I

1. In March 2004, Sir Philip Watts resigned as the Chairman of the Committee of Managing Directors at the corporate predecessor of Royal Dutch Shell plc. Shell disclosed in a series of announcements during 2004 that it had incorrectly categorized as "proved oil and gas reserves" certain quantities of the reserves it had previously reported in its financial statements. Shell re-categorized those quantities, reducing the dollar value of Shell's proved reserves for several fiscal years.

In August 2004, the SEC settled a cease-and-desist proceeding with Shell. See In re Royal Dutch Petroleum Co Exchange Act Release No. 50,233 (Aug. 24, 2004). The agency issued related findings (which Shell neither admitted nor denied) that Shell's "overstatement of proved reserves, and its delay in correcting the overstatement," stemmed in part from Shell's failure to comply with the standards of Rule 4-10 of SEC Regulation S-X. See 17 C.F.R. § 210.4-10; Release No. 50,233, at 3. Under Rule 4-10, companies that issue federally registered securities must disclose the value of their oil and gas reserves, and they may report as proved reserves only those oil and gas quantities that "geological and engineering data demonstrate with reasonable certainty to be recoverable in future years." 17 C.F.R. § 210.4-10(a)(2).

In describing the requirements of Rule 4-10 that Shell allegedly failed to satisfy, the SEC's cease-and-desist order repeatedly referred to informal agency guidance concerning the rule. See Release No. 50,233, at 4-5, 7-8, 12-15. The SEC staff had published that guidance on its website in 2000 and 2001. Employees of the SEC's Division of Corporate Finance had discussed that guidance with numerous oil and gas companies, including Shell. The SEC employees involved in those discussions included Roger Schwall, an assistant director at the Division, and two of his subordinates, Ronald Winfrey and James Murphy.

Following the SEC's cease-and-desist proceeding, Shell shareholders sued several persons, including Watts. In that lawsuit —which is still ongoing in the United States District Court for the District of New Jersey—the shareholders alleged that the defendants had engaged in securities fraud by not earlier disclosing the overstatement in proved reserves. The shareholders' complaint referenced the SEC's informal guidance about Rule 4-10 and the SEC's cease-and-desist order.

2. In February 2006, Watts served four testimonial subpoenas under the authority of the United States District Court for the District of Columbia. See Fed.R.Civ.P. 45. He directed one subpoena to the SEC. (A government agency can designate a knowledgeable person to give a deposition on the agency's behalf. See Fed.R.Civ.P. 30(b)(6).) Watts also directed subpoenas to Schwall, Winfrey, and Murphy—the individual SEC employees involved in administering Rule 4-10.

The testimonial subpoenas sought depositions on two general topics: (i) the development, interpretation, and application of the terms "proved oil and gas reserves," "reasonable certainty," and "reasonable doubt," as used in Rule 4-10 and the staff-written guidance; and (ii) communications between the SEC and oil and gas companies concerning Rule 4-10 and the related guidance. Watts emphasized that the depositions would support his defense in the shareholder litigation. He argued that the informal guidance and SEC staff contacts with Shell and other companies improperly tightened the substantive standard of Rule 4-10, and that Shell's reserves re-categorization stemmed from that regulatory crackdown, not from any fraud.

In an April 2006 letter to Watts, the SEC's General Counsel stated that the SEC objected to the depositions and would not comply with the subpoenas. The General Counsel asserted that the deliberative process privilege shielded the information Watts sought, and that a deposition of the SEC's Rule 30(b)(6) designee would be unduly burdensome. Citing agency regulations, see 17 C.F.R. § 200.735-3(b)(7), the General Counsel also stated that the SEC would not authorize the three individual employees to give depositions because of the deliberative process privilege.

Watts sought to contest the General Counsel's determinations along two routes in May 2006. First, regarding the subpoena directed to the SEC, he filed a motion to compel in the District Court for the District of Columbia. The District Court has stayed that proceeding.

Second, regarding the subpoenas directed to the three SEC employees, Watts initially sought Commission review of the General Counsel's action. The SEC denied Watts's petition, amplifying the General Counsel's deliberative process argument and adding that "allowing staff to appear for testimony would place an undue burden on the Commission." In re Royal Dutch/Shell Transp. Sec. Litig., Exchange Act Release No. 54,259, at 3 (Aug. 1, 2006). Watts then filed a petition in this Court for judicial review of the SEC's action with respect to the subpoenas to the three SEC employees. Watts pointed to Section 25 of the Securities Exchange Act of 1934 as the source of our subject-matter jurisdiction. See 15 U.S.C. § 78y(a)(1).

II

1. Limits on subject-matter jurisdiction "keep the federal courts within the bounds the Constitution and Congress have prescribed," and those limits "must be policed by the courts on their own initiative." Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574, 583, 119 S.Ct. 1563, 143 L.Ed.2d 760 (1999). In this case, we therefore must address an issue not presented to us by the parties: whether Watts's petition for review of the SEC's privilege and undue burden assertions belongs in this Court at this time.

Congress is free to "choose the court in which judicial review of agency decisions may occur." Five Flags Pipe Line Co. v. Dep't of Transp., 854 F.2d 1438, 1439 (D.C.Cir.1988) (internal quotation marks and alteration omitted). Because district courts have general federal question jurisdiction under 28 U.S.C. § 1331, the "normal default rule" is that "persons seeking review of agency action go first to district court rather than to a court of appeals." Int'l Bhd. of Teamsters v. Pena, 17 F.3d 1478, 1481 (D.C.Cir.1994). Initial review occurs at the appellate level only when a direct-review statute specifically gives the court of appeals subject-matter jurisdiction to directly review agency action. Id.; accord Midwest Indep. Transmission Sys. Operator, Inc. v. FERC, 388 F.3d 903, 908 (D.C.Cir.2004).

The SEC is subject to such a direct-review statute for judicial review of SEC "orders." Section 25 of the Securities Exchange Act of 1934 provides: "A person aggrieved by a final order of the Commission entered pursuant to this chapter may obtain review of the order in the United States Court of Appeals for the circuit in which he resides or has his principal place of business, or for the District of Columbia Circuit . . . ." 15 U.S.C. § 78y(a)(1) (emphasis added). Section 9 of the Securities Act of 1933 similarly provides: "Any person aggrieved by an order of the Commission may obtain a review of such order in the court of appeals of the United States, within any circuit wherein such person resides or has his principal place of business," or in this Court. 15 U.S.C. § 77i(a) (emphasis added).

This case hinges on interpretation of the term "order" used in Section 9 of the Securities Act and Section 25 of the Exchange Act. Neither the Securities Act nor the Exchange Act defines the term. We therefore look to the Administrative Procedure Act, as we have done before when an agency's direct-review statute did not define "order." See APCC Servs., Inc. v. Sprint Communications Co., 418 F.3d 1238, 1249 (D.C.Cir.2005) (looking to APA when interpreting "order"...