Professional Documents
Culture Documents
United States Court of Appeals, Third Circuit
United States Court of Appeals, Third Circuit
2d 118
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
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
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
15
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
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
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
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
B.
30
31
34
35
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
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
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
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
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
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
50
51
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
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
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
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
65
66
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)
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
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)
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
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
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 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
Cortese was decided on February 8, 1980, almost two months after the district
court's decision in the case before us