648 F.

2d 118

Fed. Sec. L. Rep. P 97,833

SECURITIES AND EXCHANGE COMMISSION, Appellant,
v.
WHEELING-PITTSBURGH STEEL CORPORATION, a
corporation, and
Dennis J. Carney, Chairman, President and Chief
Executive Officer.
No. 80-1375.

United States Court of Appeals,

Third Circuit.
Argued July 8, 1980.
Reargued En Banc Nov. 17, 1980.
Decided Jan. 21, 1981.
Rehearing Denied Feb. 19, 1981.

Ralph C. Ferrara, Gen. Counsel (argued), Michael K. Wolensky,

Associate Gen. Counsel, David A. Knight, Atty., Washington, D.C., for
appellant; Paul Gonson, Sol., S.E.C., Washington, D. C., of counsel.
Paul A. Manion (argued), Charles C. Cohen, Fredrick N. Egler, Jr., Reed,
Smith, Shaw & McClay, Pittsburgh, for appellees.
Argued July 8, 1980
Before SEITZ, Chief Judge, ADAMS, Circuit Judge, and LORD, District
Judge.*
Reargued Nov. 17, 1980
Before SEITZ, Chief Judge, and ALDISERT, ADAMS, GIBBONS,
ROSENN, HUNTER, WEIS, GARTH, HIGGINBOTHAM and
SLOVITER, Circuit Judges.
OPINION OF THE COURT
ALDISERT, Circuit Judge.

This appeal requires us to decide if the district court erred in refusing to enforce
a subpoena duces tecum issued by the Securities and Exchange Commission
pursuant to 21(b) of the Securities Exchange Act, 15 U.S.C. 78u(b), to
Wheeling-Pittsburgh Steel Corporation (W-P) and its president, Dennis J.
Carney. The district court determined that W-P failed to meet its burden of
proving that the SEC acted in bad faith, 482 F.Supp. 555, 563-564 but
concluded that the SEC "has permitted, and at times encouraged, the abuse of
its investigating function," id. at 565. Accordingly, the court denied
enforcement of the subpoena, and the SEC has appealed. Because we believe
that the district court must educe additional testimony and clarify its
determinations, we will vacate the order, and remand these proceedings for
further consideration.

The subpoena was issued to compel Mr. Carney to identify companies involved
in reported merger negotiations with Wheeling-Pittsburgh and to provide
documents relating to those negotiations. Wheeling-Pittsburgh's basic
contention is that the SEC proceedings are tainted because of improper
interference by United States Senator Lowell Weicker of Connecticut on behalf
of the Colorado Fuel and Iron Company (CF&I), an acknowledged competitor
of Wheeling-Pittsburgh, for no legitimate legislative purpose. The district court
was persuaded that sufficient improprieties had occurred to deny enforcement
of the subpoenas.

Because the district court determined that W-P had not proved bad faith on the
part of the SEC, the precise issue before us is whether the court's determination
that the SEC allowed its investigatory process to be abused is sufficient under
the teachings of United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d
112 (1964), to deny enforcement of the SEC's subpoena. Corollary issues of
equal importance are whether we should determine the length of time the
refusal to enforce should remain in effect and, if so, an identification of
conditions affecting that time period.

I.
4

Wheeling-Pittsburgh Steel Corporation, a Delaware corporation with offices at

Pittsburgh, Pennsylvania, manufactures and sells steel and related products. Its
stock is registered pursuant to 12(b) of the Securities Exchange Act, 15
U.S.C. 78l (b), and is listed on the New York Stock Exchange. W-P files
annual and other periodic reports with the SEC pursuant to 13(a) of the Act,
15 U.S.C. 78m(a); see 17 C.F.R. 240.13a-1. Mr. Carney is President and

Chief Executive Officer of Wheeling-Pittsburgh.

A.
5

Beginning in 1977, and for some time thereafter, W-P attempted to obtain loan
guarantees from the Economic Development Administration of the United
States Department of Commerce (EDA) and the Farmers Home Administration
of the United States Department of Agriculture (FmHA). The loans, to be
obtained from private lenders, were to be used to install government mandated
pollution control equipment at several plants and to construct a rail rolling mill
at Monessen, Pennsylvania. The court found that the loan guarantees were
critical to the company because the rail rolling mill could not be constructed
without pollution control devices required by the Environmental Protection
Agency. In addition, the company could not finance the production facility
construction without the loan guarantees.

United States Steel Corporation, Bethlehem Steel Corporation, and CF&I also
manufacture steel rails and all have opposed loan guarantees to W-P. The
district court found that CF&I, a company owned by Crane Company, played a
major role in opposing the guarantees, individually and in conjunction with
Senator Weicker.

W-P signed loan guarantee agreements with the EDA on August 28, 1979,
under which the EDA pledged to guarantee loans totaling $100 million. Of this
$100 million, $63.5 million are earmarked to finance partial construction of the
mill at Monessen, Pennsylvania, and $36.5 million are to finance the purchase
and installation of pollution control equipment at plants in Monessen and
Allenport, Pennsylvania. On the same day, FmHA issued conditional
commitments (revised and reissued in September, 1979, and further revised in
September, 1980) to guarantee six separate loans to W-P totaling $50 million
for the purchase and installation of pollution control equipment at plants in
Ohio and West Virginia. These guarantees have induced a consortium of private
lenders to agree to extend loans to W-P for the purposes contemplated by the
guarantees. As of the date of oral argument, W-P had actually received over
$50 million in guaranteed loan funds.1 The balance of almost $100 million
represents loans that W-P expects to draw at intervals through the end of 1982.
W-P's application for these loan guarantees and the violent opposition thereto
by Senator Weicker and CF&I precipitated this law suit.

B.
8

On December 28, 1978, and January 9, 1979, before the loan guarantee

agreements were actually executed, Carney received identical "Letters of

Intent" from EDA and FmHA. The letters stated that the agencies "will
recommend" respectively to the Assistant Secretary for Economic Development
and the Assistant Secretary for Rural Development loan guarantees of $100
million (EDA) and $40 million (FmHA). The "Letters of Intent" were
contingent on a number of provisions. The district court determined that "(a)
careful examination of these provisions reveals, however, that the conditions
involved ministerial matters which offered no major obstacles to receipt of the
guarantees." 482 F.Supp., at 558.
9

On April 27, 1979, in a "Report on the Annual Meeting of Stockholders,"

Carney discussed the status of the loan guarantees: "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." Report on the Annual Meeting of Stockholders and Report on
Results for the Three Months Ended March 31, 1979 (April 27, 1979), at 10. In
the same report, Carney remarked: "We are also exploring future acquisitions
being proposed to us by several domestic and foreign firms." Id. at 12.
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." He termed the discussions "preliminary"
and declined to elaborate. Wall St.J., April 30, 1979, at 20, col. 6.

10

In September, 1978, before W-P had received the first "Letter of Intent,"
CF&I's counsel, Paul R. Hundt, hired Arthur T. Downey, an attorney in
Washington, D. C., to assist CF&I in opposing W-P's efforts to obtain the
guarantees. That opposition led Downey to meet in February, 1979, with two
members of Senator Lowell Weicker's staff. App. at 419-20. Senator Weicker
was the ranking minority member of the Subcommittee for State, Justice &
Commerce Appropriations of the Senate Committee on Appropriations. That
subcommittee was in charge of a supplemental appropriation to the EDA
essential to the W-P loan guarantees. The record indicates that between
February and October, 1979, Downey met with Timothy Keeney, Weicker's
administrative assistant, as many as ten to twenty times. App. at 425.

11

Downey continued his assault on the W-P loan application by writing to the
EDA and the FmHA, suggesting that these agencies compel W-P to withdraw
the statements made in the quarterly report concerning "commitments" received
from those agencies. He then furnished Keeney with copies of the quarterly
report and of his letters to EDA and FmHA. Later, Keeney and Downey met in

Downey's office to discuss the W-P quarterly report in preparation for a hearing
before Weicker's subcommittee on June 4, 1979.
12

Weicker publicly attacked the proposed EDA loan guarantee to W-P at the June
4 hearing and thereafter. App. at 215-16. Carney appeared at the June 11, 1979,
subcommittee hearing to explain W-P's position. On the evening before the
hearing, Downey and various CF&I executives met with Keeney in a hotel in
Washington, D.C. App. at 576-79. Carney appeared on June 11, read a prepared
statement, and was questioned by various members of the subcommittee.
Weicker and Carney engaged in a colloquy over the distinction between a
"letter of intent" and a "commitment." Although Carney contended that the
terms were substantially synonymous, Weicker expressed the view that use of
the term "commitments" in Carney's report to W-P shareholders violated
10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and
Commission Rule 10b-5, 17 C.F.R. 240.10b-5 (1980).

13

Subsequently, the subcommittee approved the appropriation for the W-P loan
guarantee over the opposition of Senator Weicker, who declared that he would
take the matter to the floor of the Senate. He later did so, but at the same time
opened a new front in his opposition to the W-P loans, soliciting the
cooperation of the SEC in his campaign against W-P. Three days after the
Senate subcommittee hearing, Weicker had a letter delivered by hand to Stanley
Sporkin, head of SEC's Division of Enforcement, requesting an investigation of
whether Carney's use of the term "commitments" instead of "letters of intent" in
his report to W-P stockholders constituted a violation of the Securities
Exchange Act of 1934. App. at 37-38.

14

Sporkin routed the letter to Richard E. Brodsky of the Division of Enforcement,

who then assigned the case to staff attorney Martin Aussenberg. Aussenberg
contacted Keeney on June 19. Keeney explained the loan guarantee process to
Aussenberg, advised him of W-P's pending application, noted Carney's use of
the word "commitments" in the quarterly report, and gave Aussenberg a
transcript of the Senate hearings. Keeney also suggested that Aussenberg
contact Downey, whom he described as CF&I's attorney. When Aussenberg
called Downey later that same day, Downey suggested other potential securities
law violations. Downey testified that CF&I was "frustrated" and "exasperated"
by its inability to block the loan guarantees and that he provided much of the
information as a means of "venting my exasperation." Deposition of Arthur T.
Downey (Oct. 9, 1979) at 193, 195, reprinted in App. at 592, 594; see 482
F.Supp., at 559.

15

While conducting the informal inquiry, Aussenberg received a call from

Keeney, who asked what actions the SEC had taken in response to Senator
Weicker's letter. Aussenberg refused to disclose any information or even
confirm the existence of SEC investigations. In a second call, Keeney notified
Aussenberg that Senator Weicker intended to introduce an amendment to the
supplemental appropriations bill for the EDA and that the amendment would
preclude the EDA from providing federal loan guarantees to corporations under
investigation by the SEC. The SEC objected to Weicker's amendment through
Aussenberg, and expressed fear that the amendment would compromise the
confidentiality of its investigation. On June 25, Senator Weicker introduced the
amendment,2 along with nine others, each of which would have blocked an
EDA loan guarantee to W-P. During the Senate debate on Weicker's
amendment, he engaged in a heated exchange with Senator John Heinz of
Pennsylvania, during which Senator Heinz questioned the motives of Senator
Weicker.3 When the amendment that would have tied loan guarantees to SEC
activity was called for a vote, it was defeated by a substantial margin.
16

The SEC entered an order pursuant to 17 C.F.R. 202.5(a) on July 31, 1979,
directing a private formal investigation into W-P's activities and Carney's
statements. The order empowered the Commission officers to issue subpoenas,
take testimony, and compel the production of documents. The SEC issued a
subpoena duces tecum to Carney on August 2, 1979, who appeared for
questioning by Aussenberg. Aussenberg's inquiries focused primarily on the
loan guarantee process, particularly Carney's use of the word "commitments" in
the report of April 27. Carney answered all questions relating to the loan
guarantees. During a final phase of the deposition, however, Aussenberg
instructed Carney to disclose the names of every company that had approached
him, or he had approached, since January, 1979, concerning possible
acquisition by or of W-P. Carney refused to divulge names or turn over any
documents pertaining to those discussions.

17

On August 15, 1979, W-P filed a motion for a protective order to enjoin further
attempts to obtain information from Carney. On August 17, the SEC filed the
present subpoena enforcement action. W-P then voluntarily dismissed its
motion for a protective order but in its answer requested an injunction against
the investigation. It later withdrew that request. The case was heard before the
district court on August 22. The court conducted four additional hearings
primarily focusing on two allegations by W-P: that the SEC allowed Senator
Weicker and CF&I to abuse its normal discretionary investigative process, and
that the SEC acted in bad faith in investigating W-P. The district court treated
these allegations separately. It primarily emphasized the abuse of the
investigative process and concentrated on the motivation of third parties who
may have influenced the SEC investigation.

18

Although recognizing that the merit of the SEC's charges was not before it, the
court expressed skepticism about the reasonableness of the charges,
characterizing them as "patently frivolous." 482 F.Supp., at 566. It determined
that the SEC's investigative process had been abused by third parties, and that "
(w)ittingly or not, the agency has permitted, and at times encouraged, the abuse
of its investigating function." Id. at 565. The court held that it would not
"compound the gross lack of judgment by sanctioning such abuse." Id. Yet it
concluded that W-P did not meet its burden of proving that the SEC was acting
in "bad faith." Id. at 563-564 (footnote omitted).

19

The special dichotomy employed by the district court is central to the resolution
of this appeal. If the abuse of process contention is considered to be subsumed
in the good faith argument, then we believe there is an inconsistency in the
district court's determination. Resolution of this inconsistency requires a
remand for the purpose of clarification. If the contentions are separate and
distinct, the proceedings still must be remanded for development of an adequate
record on the abuse of process issue. The district court seems to have
concentrated on the abuse by third parties of the agency's process, and did not
explain, to our satisfaction, the relationship between the abuse of the agency's
process and the abuse of the court's process. This can be rectified by further
discovery and testimony. We note that following the October 27, 1979, hearing
W-P advised the district court that it would not press its right for discovery if
the court denied the SEC's application for enforcement. The following
considerations will guide the district court's proceedings on remand.

II.
20

In asking this court to reverse the district court's refusal to enforce the
subpoenas, the Commission argues that the district court exceeded the narrow
authority accorded it in administrative subpoena enforcement actions. The
implicit premise of the Commission's argument is that the judiciary's role is
strictly confined by Supreme Court precedent and that, under these authorities,
a court has little flexibility in confronting new situations.4 Although we agree
that courts generally must defer to the agencies and that the scope of judicial
inquiry is not expansive, we disagree with the Commission's premise that the
Supreme Court has foreclosed incremental development of the law by the
courts when we are faced with allegations of egregious abuses.

A.
21

We begin by noting that although congressional subpoenas are self-executing,

McGrain v. Daugherty, 273 U.S. 135, 47 S.Ct. 319, 71 L.Ed. 580 (1927),

Congress has entrusted the enforcement of the administrative process for the
production of witnesses and papers to the courts. United States v. Friedman,
532 F.2d 928, 936-37 (3d Cir. 1976).5 Since ICC v. Brimson, 154 U.S. 447, 14
S.Ct. 1125, 38 L.Ed. 1047 (1894),6 it has been clear that in passing on the
application for enforcement of a subpoena the court acts judicially in a case or
controversy. See In re Grand Jury Proceedings, 486 F.2d 85, 90 (3d Cir. 1973)
(Schofield I ). Appellate courts have consistently recognized that whether to
enforce an administrative subpoena is a judicial decision, based on the totality
of particular circumstances proved on a given record. This court, speaking
through Judge Gibbons, has emphasized that "federal courts have never lent
their enforcement machinery to an executive branch investigative body in the
manner of a rubber stamp." Id.
22

In several decisions in the last two decades,7 culminating most recently in

United States v. LaSalle National Bank, 437 U.S. 298, 98 S.Ct. 2357, 57
L.Ed.2d 221 (1978), the Supreme Court has enunciated standards for district
court enforcement of an Internal Revenue Service summons when the recipient
of the summons alleges that the Service is using its civil investigative authority
to gather evidence for a criminal prosecution. The Court in these decisions has
recognized the importance of judicial deference to administrative agencies in
conducting investigations, and has admonished all federal courts that frequent
judicial interference is inappropriate. See LaSalle National Bank, 437 U.S. at
316-17, 98 S.Ct. at 2367-2368. Up to the present time, the decisions of the
Court have addressed only the use of civil summons authority in furtherance of
a criminal investigation, and the Court therefore has had the opportunity to
recognize only that abuse as a basis for invalidating an IRS summons.

23

But because the Supreme Court has never confronted allegations like the ones
before us does not mean that the federal judiciary is powerless to structure
relief when necessary. In United States v. Friedman, 532 F.2d at 937, we noted
in the context of still another IRS civil summons proceeding that the IRS civil
summons statute, I.R.C. 7604,

24
follows
the classic model, without in any way purporting to limit the power of the
judiciary to choose an appropriate rule of decision in an enforcement proceeding. In
other subpoena enforcement proceedings the courts have looked to non-statutory
sources for appropriate guidance
25

We conclude that from the very fact that enforcement of a 7602 summons is
by 7604(b) entrusted to the judiciary, this court has the power to fashion
appropriate rules as to the fairness of the enforcement order.

26

(footnote omitted); cf. Schofield I, 486 F.2d at 92 (supervisory role of judiciary

over grand jury subpoenas). As the Supreme Court noted in Powell, 379 U.S. at
58, 85 S.Ct. at 255, "(i)t is the court's process which is invoked to enforce the
administrative summons and a court may not permit its process to be abused."
(footnote omitted).

27

Our analysis is further supported by the persistent theme running through the
Court's decisions in this area that an administrative summons can be challenged
"on any appropriate ground." Reisman v. Caplin, 375 U.S. 440, 449, 84 S.Ct.
508, 513-514, 11 L.Ed.2d 459 (1964). The Court has subsequently quoted this
language in United States v. Powell, 379 U.S. at 58, 85 S.Ct. at 255, Donaldson
v. United States, 400 U.S. 517, 526, 91 S.Ct. 534, 27 L.Ed.2d 580 (1971), and
LaSalle National Bank, 437 U.S. at 306, 98 S.Ct. at 2362. In LaSalle, the Court
went even further to emphasize that "(t)he Powell elements were not intended
as an exclusive statement about the meaning of good faith." 437 U.S. at 317
n.19, 98 S.Ct. at 2368 n.19. At another point, the Court reiterated that "(t)hese
requirements are not intended to be exclusive. Future cases may well reveal the
need to prevent other forms of agency abuse of congressional authority and
judicial process." Id. at 318 n.20, 98 S.Ct. at 2368, n.20.8 We deem this
calculated reiteration of the equitable powers of federal courts to deny
enforcement in appropriate cases to be very significant.

28

Because the courts must not interfere unduly in the administrative process, see
note 12 infra, our primary concern is with the integrity of the judicial process;
our examination of the administrative process at this stage is important only to
the extent that it bears on the agency's request that the court's process be used to
enforce its subpoena. We have some doubt whether the parties correctly
perceived the distinction between abuse by an agency of the court's process and
abuse by third parties of the administrative process. The court's determination
that W-P had failed to demonstrate the SEC's bad faith, though a rejection of the
most common basis for attacking an agency subpoena, does not foreclose
further inquiry. But if the court directed the further inquiry to the motivations
of third parties and their illicit use of the agency's authority to investigate, that
inquiry was misdirected. In our view, the inquiries in an adversary enforcement
proceeding are limited: a determination that the court's process would or would
not be abused by enforcement of the subpoena, and the conclusion that
enforcement will be denied or granted. In the case before us, the presence of
SEC bad faith is only one of several possible reasons for the ultimate
conclusion; a determination that the court's process would be abused if the
subpoena were to be enforced is the ultimate conclusion. Similarly, the finding
that the SEC knew that its process was being abused, that it knowingly did
nothing to prevent this abuse, see 482 F.Supp., at 560, 565, and, in addition,

that it vigorously pursued the frivolous charges is, like a determination of bad
faith, a separate reason for an ultimate conclusion that the court's process was
being abused.9 The distinction between the abuse of the SEC's process and
abuse of the court's process must always be recognized.
29

Good jurisprudence advises against statement of universal precepts in single

cases, see Walz v. Tax Commission, 397 U.S. 664, 668, 90 S.Ct. 1409, 1411,
25 L.Ed.2d 697 (1970), especially when the allegations are as unusual as the
ones in this case. But because the allegations in this case are so unusual, they
would, if proved, transcend the reason for judicial deference to the SEC. And,
given our disposition of this case, we perceive no threat to the efficient
functioning of the SEC's investigative process by giving Wheeling-Pittsburgh
an opportunity to conduct discovery prior to its attempt to prove its nonfrivolous allegations. We conclude, therefore, that neither the reasons nor the
language of the Supreme Court administrative summons decisions forecloses us
from allowing an inquiry into W-P's allegations of abuse.

B.
30

Our ultimate inquiry, therefore, is whether enforcement of the administrative

subpoena would constitute an abuse of the court's process. One determination
that would support such a conclusion that the agency is abusing the court's
process is a finding that the agency is acting in "bad faith." In analogous
situations, the Supreme Court has defined "bad faith" as a "prosecution brought
without a reasonable expectation of obtaining a valid conviction." Kugler v.
Helfant, 421 U.S. 117, 126 n.6, 95 S.Ct. 1524, 1531-1532, n.6, 44 L.Ed.2d 15
(1975); see also Perez v. Ledesma, 401 U.S. 82, 85, 91 S.Ct. 674, 677, 27
L.Ed.2d 701 (1971) ("without hope of obtaining a valid conviction"); Cameron
v. Johnson, 390 U.S. 611, 619-20, 88 S.Ct. 1335, 1339-1340, 20 L.Ed.2d 182
(1968). In this case, W-P has alleged that a politically powerful third party
influenced the SEC to bring an action that it ordinarily would not pursue. To
determine if W-P has met its burden of alleging abuse of the court's process, we
must first examine the relationship of this allegation to the bad faith standard.
The examination must not end there, however, because "bad faith" action by
the agency represents but one ground for denying the enforcement request.

31

We do not doubt the usefulness to administrative agencies of information

gained from third parties. Nor do we doubt that frequently the motivations of
informants are less than altruistic. See United States v. Cortese, 614 F.2d 914,
921 (3d Cir. 1980). But we cannot simply avert our eyes from the realities of
the political world: members of Congress are requested to, and do in fact,
intrude, in varying degrees, in administrative proceedings. One commentator

has said recently of the Internal Revenue Service:

32
(A)lthough
the IRS ultimately must be accountable to Congress, whose members are
in turn accountable to the people, the IRS also has a constitutional duty to execute
the tax law faithfully by determining and administering it properly. The IRS must
give congressional comments only as much deference as they deserve on the merits,
for the agency has no duty to placate particular congressmen or committees. Given
the fine line between lawmaking and law enforcement, it is always difficult to say
when one shades into the other, but clearly there is an inevitable tension between
congressional oversight powers and the executive exercise of delegated powers to
interpret, articulate, and execute the tax laws.
33

Parnell, Congressional Interference in Agency Enforcement: The IRS

Experience, 89 Yale L.J. 1360, 1368 (1980) (footnotes omitted).10 The duty of
the SEC, therefore, is not to ignore information given to it by congressmen,11
but to "give congressional comments only as much deference as they deserve
on the merits." Id. An administrative agency that undertakes an extensive
investigation at the insistence of a powerful United States Senator "with no
reasonable expectation" of proving a violation and then seeks federal court
enforcement of its subpoena could be found to be using the judiciary for illicit
purposes. We need not lend the processes of the federal courts to aid such
behavior.

34

The allegations by Wheeling-Pittsburgh and the preliminary submissions before

the district court are substantial enough not to be dismissed as a matter of law.
Under the SEC's own regulations, it may conduct two types of investigations.
A preliminary investigation, in which no process is issued or testimony
compelled, is proper whenever "it appears that there may be (a) violation " 17
C.F.R. 202.5(a) (1980). A formal investigation, in which process may be
used, may be ordered by the Commission if "it appears from information
obtained that there is a likelihood that a violation has been or is about to be
committed and that the issuance of process may be necessary " Id. In this case,
the Commission issued a formal investigation order on July 26, 1979, and
therefore must have found a "likelihood" of a violation. See In re WheelingPittsburgh Steel Corp., File no. HO-1175 (SEC July 31, 1979). This implicit
finding by the Commission cannot be squared with the district court's
conclusion that the claims of wrongdoing by W-P are "patently frivolous." 482
F.Supp., at 566.

35

Although we will not countenance judicial interference with agency decisions

to conduct investigations, decisions that are committed entirely to agency
discretion,12 if the district court reaffirms its determination of frivolity after a

more thorough review of the evidence, this judicial conclusion would serve as
an impressive indication of agency bad faith or harassment, or adoption by the
SEC of the animus of a third party who inspired the agency's action originally.
See Cortese, 614 F.2d at 921. Alternatively, the district court's determination
that the SEC knowingly allowed its process to be abused would also be
consistent with a finding that the Commission allowed a formal investigation to
proceed without first ascertaining the "likelihood" of a violation. See district
court op., at 565-566.13 At all times, of course, the burden is on the respondent
of showing an abuse of the court's process, Powell, 379 U.S. at 58, 85 S.Ct. at
255, and, at least in the context of the Internal Revenue Service's criminal and
civil fraud liability, the Court has indicated that the burden of proving bad faith
"is a heavy one." LaSalle National Bank, 437 U.S. at 316, 98 S.Ct. at 2367.
Nevertheless, these considerations bear on the ultimate question of whether the
SEC is pursuing a claim it knows it cannot win, or is in some other manner
abusing the court's process.
36

We are unable to determine from the district court's memorandum whether it

properly focused on the motivation of the Commission rather than on the
motivations of third parties. Although the court rejected W-P's argument that
the SEC had acted in bad faith, 482 F.Supp., at 563-564 and that the SEC had
adopted the illicit motivations of the third parties, id. at 565 it did find that the
SEC had "permitted, and at times encouraged, the abuse of its investigative
process," id. The court further determined that the charges of securities law
violations were "patently frivolous." Id. at 566. This court has previously made
clear that the proper focus in a challenge to an administrative subpoena is
motivation of the agency itself, not that of third parties. See Cortese, 614 F.2d
at 921. Today we make clear that the ultimate determination is whether judicial
enforcement, as requested by the agency, will result in an abuse of the judicial
process. From the record before us we are unable to ascertain whether the
district court's determinations accord with these precepts. In addition, we have
difficulty reconciling the court's refusal to find that the Commission was
improperly motivated with its determination that the Commission permitted
third parties to abuse its process by its decision to pursue frivolous charges. In
these circumstances, we conclude that the proceedings should be remanded for
clarification of these issues.

C.
37

The basic structure for addressing these allegations is already in use in the
district courts of this circuit. Under United States v. McCarthy, 514 F.2d 368,
372-73 (3d Cir. 1975), the district court must undertake a three step procedure
before granting or denying enforcement of the subpoena. The agency seeking

enforcement must first file a complaint alleging compliance with the Powell
standards and an affidavit of the agent who issued the subpoena verifying those
allegations. The person subpoenaed is then served, and finally a hearing is held
during which the government must prove its compliance with the Powell
standards. If the government makes this preliminary showing, the burden then
shifts to the respondent to prove that enforcement of the subpoena would be
improper under the test enunciated in Powell, 379 U.S. at 58, 85 S.Ct. at 255. In
Powell the Supreme Court explained that "an abuse would take place if the
summons had been issued for an improper purpose, such as to harass the
taxpayer or to put pressure on him to settle a collateral dispute, or for any other
purpose reflecting on the good faith of the particular investigation." Id. After
these proceedings, the district court must make findings of fact and conclusions
of law in conformity with Fed.R.Civ.P. 52(a), but if the record as then
constituted is inadequate to dispose of the action, the trial judge may, in his
discretion and on request, direct further proceedings including discovery. The
trial judge must evaluate the assertions of the recipient of the subpoena and any
evidence introduced by both parties before allowing substantial discovery. See
United States v. Church of Scientology, 520 F.2d 818, 824-25 (9th Cir. 1975)
(citing McCarthy ); United States v. Salter, 432 F.2d 697, 700 (1st Cir. 1970).
This procedure requires the respondent to bear the initial burden of convincing
the trial judge that the claimed abuse of process is not frivolous.
38

In this case, the procedure outlined in McCarthy was followed. When faced
with the allegations of senatorial interference with the SEC, the trial judge
concluded that W-P had met its burden of challenging the subpoena. Although
we conclude that the record is not yet sufficient to reach this ultimate
determination, we agree with the district court that non-frivolous allegations of
senatorial interference do constitute sufficient grounds for further proceedings,
including discovery. Three other courts of appeals have allowed closely
supervised discovery when confronted with substantial allegations that agencies
were abusing the judicial process. United States v. Fensterwald, 553 F.2d 231,
232-33 (D.C.Cir.1977) (per curiam); United States v. Church of Scientology,
520 F.2d at 822, 824-25; United States v. Salter, 432 F.2d at 700. Although
respondent still confronts the burden of proving abuse, it has submitted
sufficient "meaningful evidence," SEC v. Howatt, 525 F.2d at 229, that we
cannot at this point foreclose further inquiry.

39

The district court's opinion did not delineate with specificity the distinction
between a reason for the conclusion and the conclusion itself. We believe that a
remand is necessary to clarify the basis for its refusal to enforce the subpoena
in this unusual case. If the district court adheres to its conclusion that the court's
processes were being abused, but, at the same time, that no case of SEC bad

faith was proved, the district court should explain more clearly the other reason
or reasons for its determination.
40

Moreover, upon remand, the district court will have the advantage of our
teaching in United States v. Cortese, a decision handed down subsequent to the
district court's opinion here. We do not believe that Cortese necessarily
precludes a determination that the court's process was abused here. Although,
as in LaSalle, the sole issue in Cortese was whether an investigation by a
government agency was being conducted in good faith, we there emphasized
that the animus of the third party was not determinative of the agency's good
faith. But we acknowledged that "(a) different result may obtain if it were
found that either the (agency) or the investigating agent was motivated by the
same animus that motivated the (third party)." 614 F.2d at 921. In any event,
Cortese did not intend to set forth the only defenses available to a respondent in
an administrative subpoena case. To suggest that it did is to conclude,
improperly, that this court has the power to limit the specific Supreme Court
directions that a respondent to a subpoena may "challenge the summons on any
appropriate ground." Reisman, 375 U.S. at 449, 84 S.Ct. at 513-514; see
Powell, 378 U.S. at 58, 85 S.Ct. at 255.

41

On remand, the respondents should be entitled to discovery procedures. The

respondents withdrew their discovery requests upon being advised that a
determination of abuse was to be forthcoming from the court. The district court
will be able to exercise its discretion in supervising this discovery to effect the
best balance of allowing W-P access to relevant evidence but protecting the
SEC from unnecessary burdens. See Fed.R.Civ.P. 26(c).

III.
42

Should the district court reaffirm its decision to deny enforcement of the
subpoena, the appellees cannot expect to be immunized from SEC
investigations in perpetuo. We need not decide the effect of such a decision on
the SEC's ability to pursue these allegations at some future time. We note,
however, that the theory on which the district court disposes of the issue would
bear heavily on the SEC's ability to pursue its investigation with the aid of the
federal courts. If, for example, the district court determines that the SEC is
pursuing the investigation in bad faith, for the sole purpose of blocking the loan
guarantees, the taint of the investigation would seem to be substantially
eliminated as to the guarantees when they are consummated. Any other residual
effects of the taint will, of course, require independent evaluation. If the court
determines that the SEC is pursuing allegations at the behest of a powerful third
party without independently evaluating those allegations, a fresh evaluation by

the Commission would not be out of order, and if it finds a likelihood of a

violation, it can reinstitute the judicial action to enforce the subpoena. Finally,
if the court determines that the Commission is knowingly pursuing frivolous
allegations in bad faith, it might be foreclosed from using the court's process to
serve those ends against W-P in this case. In any event, there no doubt will be
reopening of discovery and review by the district court of additional evidence.
IV.
43

We acknowledge that, arguably, it may be possible for us at this time to affirm

the district court judgment on the theory that the court was not restricted to
deciding the case on the basis of the institutional good faith of SEC
investigators, and that sufficient narrative or historical facts were found, not
clearly erroneous, supporting the theory that "the totality of circumstances here
presented creates the appearance of a partnership between the Commission and
persons (knowingly abusing the SEC procedures)." District court op., at 565.
Supporting this theory is the district court's finding that "(t)he 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." Id. at 560. Because of the apparent inconsistencies in
the district court's opinion, however, we prefer not to meet this issue at this
time. We believe that the better course is for the district court to reconsider the
cause with a more specific concentration on how, if at all, the SEC order of a
private investigation was not in accordance with 17 C.F.R. 202.5(a), or was
unduly tainted by third-party interference.

44

At bottom, this case raises the question whether, based on objective factors, the
SEC's decision to investigate reflected its independent determination, or
whether that decision was the product of external influences. The reality of
prosecutorial experience, that most investigations originate on the basis of tips,
suggestions, or importunings of third parties, including commercial
competitors, need hardly be noted. That the SEC commenced these proceedings
as a result of the importunings of Senator Weicker or CF&I, even with malice
on their part, is not a sufficient basis to deny enforcement of the subpoena. See
Cortese, 614 F.2d at 921. But beginning an informal investigation by collecting
facts at the request of a third party, even one harboring ulterior motives, is
much different from entering an order directing a private formal investigation
pursuant to 17 C.F.R. 202.5 (1980), without an objective determination by the
Commission and only because of political pressure. The respondents are not
free from an informal investigation instigated by anyone, in or out of
government. But they are entitled to a decision by the SEC itself, free from
third-party political pressure, that a "likelihood" of a violation exists and that a

private investigation should be ordered. See 17 C.F.R. 205.2(a). The SEC

order must be supported by an independent agency determination, not one
dictated or pressured by external forces. If an allegation of improper influence
and abdication of the agency's objective responsibilities is made, and supported
by sufficient evidence to make it facially credible, respondents are entitled to
examine the circumstances surrounding the SEC's private investigation order.
The court should be guided by twin beacons: the court's process is the focus of
the judicial inquiry and the respondent may challenge the summons on any
appropriate ground.
V.
45

Accordingly, for the reasons heretofore stated, the judgment of the district court
will be vacated, and the cause remanded for additional proceedings consistent
with the foregoing.

46

Each side to pay its own costs.

47

ADAMS, Circuit Judge, dissenting, with whom SEITZ, Chief Judge, and
Judges ROSENN and A. LEON HIGGINBOTHAM, Jr., Circuit Judges, join.

48

The majority have set forth the background of this case in some detail, and I
shall not repeat it. Rather, I shall delineate what I believe are the salient facts in
this dispute.

49

On April 27, 1979, Wheeling-Pittsburgh Steel Corporation issued its Report on

the Annual Meeting of Stockholders. In the Report the company stated (1) that
it had received "commitments" from two federal agencies for loan guarantees of
$140,000,000, which would assist it in obtaining loans for the construction of a
mill to produce steel rails; and (2) that it was "exploring future acquisitions"
that had been proposed to it.

50

At a hearing before members of the Senate Committee on Appropriations on

the question of loan guarantees, Senator Weicker confronted Mr. Carney, the
President of Wheeling-Pittsburgh, about use of the word "commitments" in the
Report. Inasmuch as the relevant federal agencies had not, in fact, issued
commitments for loan guarantees when the Annual Report was released,
Senator Weicker believed that the statements by Wheeling-Pittsburgh might
constitute a material misrepresentation of fact in violation of 10(b) of the
Securities Act. The Senator referred the matter to the Securities and Exchange
Commission.

51

The Commission undertook an investigation of whether Wheeling-Pittsburgh

and Mr. Carney had violated 10(b) and Rule 10b-5 by placing in the Annual
Report the statements concerning "commitments" and "future acquisitions."
Although the interrogation of Mr. Carney by the Senate had supplied the basic
information regarding the allegedly improper use of the term "commitments,"
Mr. Carney had not been questioned there about his statements that WheelingPittsburgh had received acquisition proposals. The SEC was aware, however,
that the price of Wheeling-Pittsburgh common stock had doubled during the six
or seven months preceding the April announcement about possible
combinations involving the company (App. at 34, 699). The SEC sought
informally to obtain information regarding the alleged merger offers, in order to
ascertain whether those persons engaged in the heavy trading of WheelingPittsburgh stock possessed information not available to the general public. But
Wheeling-Pittsburgh refused to supply the requested information voluntarily.
The SEC then secured a subpoena to obtain the necessary information.
Wheeling-Pittsburgh continued to refuse to disclose the alleged merger offers,
even on an in camera basis, and instituted suit to enjoin the subpoena. The SEC
filed a complaint seeking to enforce the subpoena.1

52

The district court conducted a four-day hearing on whether the SEC subpoena
should be enforced. At the conclusion of the hearing it found that (1) the SEC
had acted in "good faith" in initiating the investigation of Wheeling-Pittsburgh's
alleged violation of 10(b)(5), but (2) the SEC had permitted an abuse of its
investigatory function. Based on this latter determination, the district court
quashed the subpoena.

53

In considering the Commission's appeal, we do well to remind ourselves what

is not at issue in this proceeding. First, there is no question of the legality of the
Commission's investigation of Wheeling-Pittsburgh's alleged violation of the
securities laws, or of the relevancy of the subpoenaed documents to the
Commission's inquiry. The district court found the information and materials
the Commission seeks relevant to two distinct and lawful purposes: (1) to a
determination whether Mr. Carney's statement in the Annual Report concerning
"commitments" constituted material misrepresentation under 10(b) and Rule
10b-5; and (2) to a determination whether traders in Wheeling-Pittsburgh shares
prior to Mr. Carney's announcement may have acted on inside information
relating to potential combinations between Wheeling-Pittsburgh and other
entities. Wheeling-Pittsburgh does not challenge these findings. And while the
majority repeatedly refer to the district judge's labeling as "patently frivolous"
the charge that Mr. Carney violated Rule 10b-5 by using the word
"commitments," the district court's comment in this regard is dictum, for the
merits of the charges were not before that court. Moreover, the district court

ventured no similar comment concerning the charges of insider trading and

these, rather than the potential Rule 10b-5 violations, are the charges which
cannot be investigated so long as Wheeling-Pittsburgh refuses to comply with
the SEC subpoena. Indeed, it is difficult to understand how these charges may
be denominated either frivolous or meritorious until Wheeling-Pittsburgh
reveals what exchanges it had with other corporations about possible
combinations. Only then can it be known what information may have been
possessed by company insiders.
54

Second, the district court made findings regarding the good faith of the SEC.
Although Wheeling-Pittsburgh alleged that the Commission had not undertaken
its investigation in good faith, the district court found that "there is no
substantial evidence to support the contention" that the agency's motivations
were improper. The court noted that a plaintiff who alleges bad faith carries a
"heavy burden," and concluded "(t)hat burden has not been met in this case."
This critical finding, like those concerning relevancy and purpose, is not
challenged by Wheeling-Pittsburgh.

55

The question before us, then, is whether we may uphold a district court's
refusal to enforce an agency subpoena that seeks information relevant to an
investigation conducted in good faith and pursuant to a statutory purpose. The
majority conclude that such an investigation by the appropriate federal agency
may be blocked. They assert that " 'bad faith' action by the agency represents
but one ground for denying the enforcement request," and posit that
enforcement is properly denied if, despite its good faith, the agency is
attempting "an abuse of the judicial process." I believe, on the other hand, that
the Supreme Court decisions on enforcement of agency subpoenas leave no
room for an "abuse of the judicial process" theory independent of the bad faith
defense.

56

In United States v. Powell, 379 U.S. 48, 58, 85 S.Ct. 248, 255, 13 L.Ed.2d 112
(1964), the Supreme Court indicated that enforcement of an agency subpoena
should be denied when the agency does not pursue an investigation in good
faith:

57is the court's process which is invoked to enforce the administrative summons and
It
a court may not permit its process to be abused. Such an abuse would take place if
the summons had been issued for an improper purpose, such as to harass the
taxpayer or to put pressure on him to settle a collateral dispute, or for any other
purpose reflecting on the good faith of the particular investigation.
58

The Supreme Court addressed the issue of enforcement of administrative

subpoenas more directly in United States v. LaSalle National Bank, 437 U.S.
298, 98 S.Ct. 2357, 57 L.Ed.2d 221 (1977). LaSalle National Bank had refused
to obey a summons issued by the Internal Revenue Service2 on the ground that
the Service requested the information in order to advance its criminal
investigation of a third party. Among the prerequisites for enforcement of an
IRS summons, the Supreme Court identified the requirement that the agency
"must at all times use the summons authority in good-faith pursuit of the
congressionally authorized purposes" of the Act. The Supreme Court made
clear, moreover, that the good faith of the agency as an institution, rather than
the personal intent of any particular agency employee, determines whether a
summons should be enforced. Id. at 315-16, 98 S.Ct. at 2366-2367.
59

The majority today read Powell and LaSalle National Bank as countenancing a
broad discretion in the district courts to refuse enforcement of administrative
summonses. Pointing to the Supreme Court's statements in LaSalle National
Bank that the requirements for enforcement announced therein "are not
intended to be exclusive," and that "(f)uture cases may well reveal the need to
prevent other forms of agency abuse of congressional authority and judicial
process," 437 U.S. at 318 n.20, 98 S.Ct. at 2368 n.20, the majority conclude
that the Supreme Court has vested in the trial courts discretion to decline to
enforce agency subpoenas even when the agency is conducting its investigation
in good faith. In particular, the majority assume, without the citation of any
authority, that the Supreme Court has left open the door for district courts to
consider whether, notwithstanding the bona fides of the agency, enforcement of
the summons would constitute an abuse of the judicial process.

60

I do not interpret Powell and LaSalle National Bank as authorizing so wideranging an inquiry, however. The majority overlook the Supreme Court's
explicit statement in LaSalle National Bank that, at least so long as the agency
investigation is statutorily authorized and the information sought relevant, the
agency's good or bad faith determines whether its summons must be obeyed:
"The dispositive question in each case, then, is whether the (agency) is
pursuing the authorized purposes in good faith." 437 U.S. at 317 n.19, 98 S.Ct.
at 2368 n.19. (emphasis added). While the Supreme Court left open the
possibility of future development of the law on enforcement, I believe that in
doing so it recognized the need for future refinements of the concept of good
faith. Thus the Court commented that the indications in Powell that a summons
is issued for an improper purpose when intended to harass or to induce
settlement of a collateral dispute "were not intended as an exclusive statement
about the meaning of good faith. They were examples of agency action not in
good-faith pursuit of the congressionally authorized purposes of 7602." Id.
(emphasis supplied). I do not understand the Supreme Court to have authorized

district court refusals to enforce administrative subpoenas issued in good faith

pursuit of a statutorily authorized purpose.3
61

A panel of this Court had occasion to examine the issues surrounding

enforcement of administrative summonses earlier last term in United States v.
Cortese, 614 F.2d 914 (3d Cir. 1980).4 The district court in Cortese had
declined to enforce an IRS summons on the ground that the Service's
investigation was not conducted in good faith. In so finding, the district court
had focused on the effect that an informant's motive had on the Service's
purpose in issuing the summons, concluding that a biased informant had used
the Service, with its knowledge, in order to retaliate against the subjects of the
investigation. We reversed, holding that the motivations of third parties should
have no bearing on the question of agency good faith:

62 agree with appellant that the motive of an informant is not a relevant

We
consideration in determining good faith. Despite its conclusion, the district court
recognized that informants "have historically been known to hold grudges against
those who are the subject matter of the information." Informants traditionally act in
their own interest. It is a rare informant who is not interested in "pursuing his own
purposes." The motive of the informant does not taint the motive of the IRS.
614 F.2d at 921. 5
63

The majority today profess to adhere to Cortese, and several times reiterate the
teaching of Cortese that a court asked to enforce a subpoena must focus on the
motivations of the agency rather than those of third-party informants. But I fail
to see how Wheeling-Pittsburgh can avail itself of the "abuse of process"
defense embraced by the majority without alluding to the motivations of those
persons who informed the SEC of the company's possible wrongdoing. The
majority recognize that investigations brought in bad faith i. e., brought without
"a reasonable expectation of obtaining a valid conviction," Kugler v. Helfant,
421 U.S. 117, 126 n.6, 95 S.Ct. 1524, 1531-1532 n.6 44 L.Ed.2d 15 (1975) will
constitute the larger number of cases in which an agency seeks to "abuse the
process" of the courts. But the majority do not describe a case in which
enforcement would result in an "abuse of the judicial process," even though the
agency pursued its investigation in good faith. Instead, the majority's
suggestions concerning what would be evidence of abuse of process describe
just as well agency bad faith: agency pursuit of a claim it knows it cannot win,
investigations instigated by a powerful United States Senator with no
reasonable expectation of success, pursuit of a claim when the agency has not
ascertained the likelihood of a conviction. In the present case, however, further
inquiry into these issues is unnecessary. We already have the specific finding of

the district court, unchallenged on appeal, that Wheeling-Pittsburgh has

introduced no substantial evidence to show that the Commission's motivations
in conducting its investigations were improper. The district court's finding that,
despite agency good faith, the court's process was being abused can be
understood, in my view, as reflecting an undue deference to what WheelingPittsburgh alleged to be the improper motivations of the third-party informants.
The district court's consideration of third-party motives is evidenced by its
explicit rejection of the Commission's argument that "the motivations of
persons with whom the SEC has had contact concerning the investigation are
simply irrelevant."
64

In my view, the majority's "abuse of process" defense is either superfluous or

incorrect. If "abuse of process" amounts to nothing more than consideration of
the bona fides of the agency, then the defense is redundant with the "bad faith"
defense the Supreme Court recognized in Powell and LaSalle National Bank ;
moreover, I believe that the district court's unchallenged finding of the
Commission's good faith makes further inquiry into this issue unnecessary. If,
however, the majority intend to extend inquiry beyond the good faith of the
agency, then I perceive, and the majority suggest, no alternative to examination
of the motivations and conduct of third-party informants. But such inquiry, in
my opinion, would unduly encroach on the domain of the executive and
legislative branches of the government. It would also conflict with the teaching
of Cortese.

65

Moreover, today's decision threatens to cause further delays in a system already

beset with delay. The majority concede that in many instances the information
that leads to investigation is furnished to a government agency by disgruntled
citizens, competitors, or others actuated by less than altruistic motives. If the
target of an agency investigation may resist enforcement of a subpoena
whenever there is cause to believe that the agency received information from a
competitor or from a Congressman acting on behalf of a constituent, resistance
to investigations may well become the order of the day. We can expect
repeated efforts to derail investigations even though it appears quite strongly
that the investigated party has transgressed federal law.

66

I recognize, of course, the potential danger presented when members of

Congress or the Executive Branch suggest that an enforcement agency
undertake an investigation. If, for example, the head of an agency wishes to
harass a former political or personal opponent by conducting an investigation,
such conduct should not be approved. See United States v. Fensterwald, 553
F.2d 231 (D.C.Cir.1977) (per curiam). But not every investigative referral by a
Congressman or other official should be considered suspect or condemned per

se. The Supreme Court recognized in Gravel v. United States, 408 U.S. 606,
625, 92 S.Ct. 2614, 2627, 33 L.Ed.2d 583 (1972), that members of Congress
"are constantly in touch with the Executive Branch of Government they may
cajole, and exhort with respect to the administration of a federal statute." And
one commentator, addressing congressional oversight of administrative
enforcement, has remarked that "most of these actions seem well within the
constitutional authority of congressional committees and individual
congressmen." Parnell, Congressional Interference in Agency Enforcement:
The IRS Experience, 89 Yale L.J. 1360, 1368 (1980). See also Comment,
Judicial Limitation of Congressional Influence on Administrative Agencies, 73
N.U.L.Rev. 931, 937-45 (1978).
67

Because I believe that the procedures the majority adopt today go beyond the
guidelines fashioned by the Supreme Court, and indeed beyond the policy this
Court set forth only recently in Cortese, and because I believe the majority
result will serve to frustrate many future investigations of violations of federal
law, I respectfully dissent.

Honorable Joseph S. Lord, III, Chief Judge of the United States District Court
for the Eastern District of Pennsylvania, sitting by designation

W-P has advised the court that as of the time of oral argument it has completed
one EDA guaranteed borrowing in the amount of $30,989,940 for rail mill
construction and two EDA guaranteed borrowings for pollution control
installations in the amount of $13,495,285. One FmHA guaranteed loan for $6
million has been consummated. Letter from Paul A. Manion, counsel for W-P,
to the court (Nov. 24, 1980)

Senator Weicker's 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.

See App. at 225-26. The reason for Senator Weicker's peculiar interest in this
Pennsylvania-based steel company is not clear. W-P has alleged that Thomas
Mellon Evans, the chairman of Crane Co., parent company of CF&I, is a
neighbor and acquaintance of Senator Weicker. See Answer and Counterclaim
for W-P at 7, P 5

See, e. g., transcript of oral argument at 5

We assume, as do the parties, that the same standards are applicable to

enforcement of SEC subpoenas as Internal Revenue Service summonses. Thus,
the subpoena issued by the Securities and Exchange Commission, 15 U.S.C.
78u, like the administrative subpoena issued by the Federal Trade Commission,
15 U.S.C. 49, and the Interstate Commerce Commission, 49 U.S.C. 20 P 6,
as well as the administrative summons issued under 7602 of the Internal
Revenue Code, I.R.C. 7602, is subject to the same judicial scrutiny prior to
enforcement

In Brimson, the Court stated: "The inquiry whether a witness before the
Commission is bound to answer a particular question propounded to him, or to
produce books, papers, etc., in his possession and called for by that body, is one
that cannot be committed to a subordinate administrative or executive tribunal
for final determination." 154 U.S. at 485, 14 S.Ct. at 1136

United States v. LaSalle National Bank, 437 U.S. 298, 98 S.Ct. 2357, 57
L.Ed.2d 221 (1978); United States v. Bisceglia, 420 U.S. 141, 95 S.Ct. 915, 43
L.Ed.2d 88 (1975); Donaldson v. United States, 400 U.S. 517, 91 S.Ct. 534, 27
L.Ed.2d 580 (1971); Ryan v. United States, 379 U.S. 61, 85 S.Ct. 232, 13
L.Ed.2d 122 (1964); United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13
L.Ed.2d 112 (1964); Reisman v. Caplin, 375 U.S. 440, 84 S.Ct. 508, 11
L.Ed.2d 459 (1964)

This court has previously acknowledged these statements. United States v.

Garden State Nat'l Bank, 607 F.2d 61, 69 (3d Cir. 1979)

The distinction between agency bad faith and the agency acquiescence in an
abuse of its process leading to an abuse of the court's process, though subtle, is
significant. "Bad faith" connotes a conscious decision by an agency to pursue a
groundless allegation without hope of proving that allegation. See part II B
infra. In contrast, an agency could be found to be abusing the court's process if
it vigorously pursued a charge because of the influence of a powerful third
party without consciously and objectively evaluating the charge. See 17 C.F.R.
202.5(a) (1980)

10

Parnell's major concern is the public action of Congress in frustrating the

enforcement activities of the Internal Revenue Service, but the concerns he
expresses are equally applicable to private communications between individual
congressmen and administrative agencies

11

The internal rules promulgated by the SEC for itself state a procedure for staff
contacts with governmental authorities:
(T)he Commission approves the practice whereby officials of the Division of

Enforcement at the level of Assistant Director or higher, and officials in

Regional Offices at the level of Assistant Regional Administrator or higher,
may engage in, and may authorize members of the Commission's staff to
engage in, discussions with representatives of domestic or foreign governmental
authorities and self-regulatory organizations concerning information obtained in
individual investigations, including examinations and formal investigations
conducted pursuant to Commission order.
17

C.F.R. 203.2 (1980)

12

See, e. g., City of Chicago v. United States, 396 U.S. 162, 165, 90 S.Ct. 309,
311, 24 L.Ed.2d 340 (1969); Union Mechling Corp. v. United States, 566 F.2d
722, 724-25 (D.C.Cir.1977); SEC v. Howatt, 525 F.2d 226, 229 (1st Cir. 1975);
Kixmiller v. SEC, 492 F.2d 641, 645 (D.C.Cir.1974) (per curiam); SEC v.
Brigadoon Scotch Distrib. Co., 480 F.2d 1047, 1052-53 (2d Cir. 1973), cert.
denied, 415 U.S. 915, 94 S.Ct. 1410, 39 L.Ed.2d 469 (1974); Leighton v. SEC,
221 F.2d 91, 91-92 (D.C.Cir.1955) (per curiam). The reason for this policy of
non-interference was recently stated by the fifth circuit: "Judicial supervision of
agency decisions to investigate might hopelessly entangle the courts in areas
that would prove to be unmanageable and would certainly throw great amounts
of sand into the gears of the administrative process." Dresser Industries, Inc. v.
United States, 596 F.2d 1231, 1235 n.1 (5th Cir. 1979), cert. denied, 444 U.S.
1044, 100 S.Ct. 731, 62 L.Ed.2d 730 (1980)

13

The Supreme Court has recently reserved decision on whether issuance of a

complaint "solely by reason of outside pressure or with complete absence of a
'reason to believe' determination" would be grounds for dismissing an
administrative complaint. FTC v. Standard Oil Company of California, -- U.S. -, 101 S.Ct. 488, 66 L.Ed.2d 416 (1980). The Court reversed the ninth circuit's
judgment ordering the complaint dismissed, holding that the issuance of a
complaint is not "final agency action" subject to review under the
Administrative Procedure Act, 5 U.S.C. 704. In this case, of course, federal
jurisdiction arises under 21(b) of the Securities Exchange Act, 15 U.S.C.
78u(b), and the lack of finality of the SEC's action in issuing the complaint is
not a bar to our jurisdiction

The two cases were later consolidated, and Wheeling's injunctive action was
dismissed, since Wheeling could raise its objections to the subpoena as
defenses to the Commission's enforcement action

The summons was issued under Section 7602, which provides that "(f)or the
purpose of ascertaining the correctness of any return, the Secretary or his
delegate is authorized (t)o summon the person liable for tax to appear before

the Secretary or his delegate at a time and place named in the summons and to
produce books, papers, records, or other data and (t)o take such testimony of
the person concerned, under oath, as may be relevant to such inquiry."
3

See also Developments in the Law Corporate Crime: Regulating Corporate

Behavior Through Criminal Sanctions, 92 Harv.L.Rev. 1227, 1325 (1979)
(after LaSalle National Bank, "(i)n order to block enforcement (of an IRS
summons), the taxpayer must show that the IRS as an institution has abandoned
the (statutory purpose of determining) civil tax liability")
It might be noted that the constitutional concerns lurking in LaSalle National
Bank do not affect the present case. In LaSalle there was a risk that the Fifth
Amendment provision against self-incrimination might be abridged if an IRS
civil summons could be used to obtain information for use in a criminal
investigation. The Court averted this problem by reaffirming the "prophylactic
rule" that a civil summons may not issue once the IRS has referred a tax case to
the Justice Department. 437 U.S. at 308-13, 98 S.Ct. at 2363-2366. In contrast,
the disclosure by Wheeling-Pittsburgh of the information sought by the SEC
presents no constitutional problems. When the safeguarding of constitutional
rights is not in issue, it does not appear wise to fashion what is, in effect, an
exclusionary rule, by immunizing an alleged violation of federal law from
investigation based on the possible wrongdoing, not of the agency itself, but of
the third parties who alerted the agency to potential violations.

Cortese was decided on February 8, 1980, almost two months after the district
court's decision in the case before us

Judge Garth, concurring in Cortese, objected to the majority's statement that a

finding of bad faith would be appropriate if the agency had adopted the
nefarious motives of an informant. He noted that the case before the Court did
not raise this issue, and that the Court was not obliged to rule out the possibility
that, even under these circumstances, the agency might act in good faith