Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_07-cv-00772/USCOURTS-casd-3_07-cv-00772-0/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 15:78m(a) Securities Exchange Act

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cal 

1 07cv0772

 

 

 

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

IN THE MATTER OF AN APPLICATION

TO ENFORCE ADMINISTRATIVE

SUBPOENAS OF

SECURITIES AND EXCHANGE

COMMISSION,

Petitioner,

v.

MICHAEL NICITA and EDWARD

LEONARD,

Respondents. 

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Civil No.07CV0772 WQH (AJB)

Order Following Hearing to Show Cause

Hearing Staying Motion to Enforce

Administrative Subpoenas and Denying

Motion to Quash Subpoenas 

[Doc. Nos. 1 and 6]

 Petitioner, the Securities and Exchange Commission (“SEC”) filed an ex parte application for an

order to show cause and for an order compelling Respondents Michael Nicita and Edward Leonard to

comply with administrative subpoenas which were issued on November 7, 2006 and January 29, 2007,

respectively. Respondents’ filed an Opposition and Joint Motion to Quash these administrative

subpoenas. A Hearing to Show Cause was set by Judge Hayes and then referred to Judge Battaglia. A

hearing on the matter was held by Judge Battaglia on June 8, 2007 at 11:00 a.m. Appearing on behalf of

the SEC were Molly White and Ronnie Lasky. Appearing on behalf of Respondent Nicita were Charles

Case 3:07-cv-00772-WQH-AJB Document 11 Filed 06/13/07 Page 1 of 6
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1

 The SEC is investigating AMS, Nicita and Leonard for violations of Section 17(a) of the

Securities Act of 1933 and Section 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13 (b)(5) of the Securities

Exchange Act of 1934, and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13a-14, 13b2-1, and 12b2-2 thereunder.

2

 During the period of production of documents by AMS, AMS was represented by two law

firms, Hughes, Hubbard & Reed (HH&R) and then later O’Melveny & Meyers (OMM). OMM has

since been replaced by current counsel Gibson & Dunn.

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La Bella and John Kirby and Christian Humphreys appeared on behalf on Respondent Leonard. Based

upon the parties moving papers, the arguments of counsel and for the reasons set forth below, Petitioner’s Motion to Compel Respondents’ Compliance with the Administrative Subpoenas is GRANTED

as to the requests for documents and STAYED as to the requests for testimony and Respondents’ Joint

Motion to Quash the Administrative Subpoenas is DENIED.

Background

On September 23, 2003, the Securities and Exchange Commission (SEC) issued a formal order

of private investigation entitled In the Matter of Advanced Marketing Services, Inc. (AMS) to determine

whether AMS, Mr. Nicita, Mr. Leonard, or any other persons or entities engaged in the offer and sale of

securities to investors in violation of the anti-fraud provisions of the federal securities laws.1 AMS,

through its various attorneys,2

 produced approximately six million pages of responsive documents in

electronic format in a database to both the U.S. Attorney and the SEC. 

The SEC also served administrative subpoenas on Respondents Mr. Nicita and Mr. Leonard on

November 7, 2006 and January 29, 2007, respectively, seeking responsive documents and testimony. 

Respondents were permitted access to the database of documents produced by AMS to the U.S.

Attorney and the SEC in December of 2006. Respondents notified the SEC on January 22, 2007, that

some of the documents produced by AMS to both the U.S. Attorney and the SEC contained privileged

material. Neither Respondent has produced documents or provided testimony to date in response to the

administrative subpoenas, because each claims that AMS wrongfully produced privileged documents to

the U.S. Attorney and SEC. Respondents’ counsels’ insist that they cannot permit their respective

clients to respond to the SEC’s administrative subpoenas until the allegedly privileged documents are

returned or destroyed and the taint upon the SEC’s investigation created by their receipt of this allegedly

privileged information can be evaluated. 

Discussion

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The following issues were raised during the hearing: 1) how to best handle the Respondents’

claims of privilege regarding the documents produced by AMS; 2) the SEC’s request that the Court

enforce the administrative subpoenas; and 3) Respondents Joint Motion to Quash the administrative

subpoenas.

1. Respondents’ Claims of Privilege Regarding Documents Produced by AMS 

 From the information provided by the parties to the Court, it appears that AMS inadvertently

produced privileged documents to both the U.S. Attorney and the SEC in response to the SEC’s

administrative subpoenas. Respondents were permitted access to the database of documents produced

by AMS to review such documents for privilege in December of 2006. Respondents have concluded

their review of the database of documents and provided the SEC with a list of documents that they

believe to be privileged, however, Respondents’ reference numbers for these documents do not

correspond to the bates numbers on the database of documents provided to the SEC and U.S. Attorney

because AMS utilized a program that bates stamped the documents as they were exported from the

database to compact discs produced to the government. As such, the parties have reached an impasse as

to how to reconcile the reference numbers Respondents’ have provided in their list of privileged

documents with the actual bates numbers stamped on the documents produced to the government.

After careful consideration of the parties suggestions and concerns, the Court hereby ORDERS:

Petitioner will segregate all documents produced by AMS until Respondents claims of privilege

can be evaluated by the Court;

Respondents will produce a privilege log categorizing each document to which a claim of

privilege is made by date, who the document was to and from, and provide a statement specifically

identifying why Respondent’s believe the document to be privileged. Respondents shall provide this

privilege log to Petitioner on or before June 22, 2007;

Petitioner shall have until July 3, 2007 to review Respondents’ privilege log and provide a

response either conceding or objecting to each claim of privilege made by Respondents;

A telephonic hearing is set for July 10, 2007 at 9:00 a.m. before Judge Battaglia to discuss

resolution of any claims of privilege that remain at issue between the parties, and Respondents shall

initiate the conference call.

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3

 The Supreme Court set forth the standard for judicial enforcement of administrative subpoenas

in United States v. Morton Salt Co., 338 U.S. 632 (1950). The Court stated that an agency's investigation

is lawful if “the inquiry is within the authority of the agency, the demand is not too indefinite and the

information sought is reasonably relevant.” Id. at 652; see also United States v. Stuart, 489 U.S. 353,

360 (1989).

 The Ninth Circuit has stated that “[t]he scope of our inquiry in an agency subpoena is

narrow.” NLRB v. North Bay Plumbing, Inc., 102 F.3d 1005, 1007 (9th Cir.1996); see also EEOC v.

Children's Hosp. Med. Ctr. of N. Cal., 719 F.2d 1426, 1428 (9th Cir.1983) (en banc). Generally, a court

must ask “(1) whether Congress has granted the authority to investigate; (2) whether procedural

requirements have been followed; and (3) whether the evidence is relevant and material to the

investigation.” Children's Hosp., 719 F.2d at 1428. An affidavit from a government official is sufficient

to establish a prima facie showing that these requirements have been met. See Stuart, 489 U.S. at 360.

Finally, “[i]f the agency establishes these factors, the subpoena should be enforced unless the party

being investigated proves the inquiry is unreasonable because it is overbroad or unduly burdensome.”

Children's Hosp., 719 F.2d at 1428.

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2. The SEC’s Request that the Court Order Compliance with the 

SEC’s Administrative Subpoenas 

During the hearing and in their moving papers, the SEC requested that the Court require

Respondents to comply with the outstanding administrative subpoenas. Respondents’ objected to the

SEC’s request and insist that they cannot permit their respective clients to respond to the SEC’s

administrative subpoenas until the allegedly privileged documents are returned or destroyed and the

taint upon the SEC’s investigation created by their receipt of these allegedly privileged documents can

be fully evaluated by the Court. While the Court is aware of the standards for enforcement of administrative subpoenas,3

 the Court finds arguable merit in Respondents’ concerns. As such, the Court

ORDERS the SEC’s administrative subpoenas seeking documents and testimony from the Respondents

STAYED until the Respondents’ claims of privilege and allegations of taint on the SEC’s investigation

regarding the database of documents produced by AMS can be evaluated and resolved by the Court. 

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3. Respondents’ Motion to Quash the SEC’s Administrative Subpoenas 

The SEC is entitled to considerable latitude in conducting its investigations. However, if a

subpoena is not issued in good faith, but to harass or pressure the subject of an investigation, or for any

other improper purpose, then the court would be bound not to enforce the subpoena as issued. United

States v. Powell, 379 U.S. 48, 58 (1964). Likewise, if it could be demonstrated that compliance with an

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4

 “For purposes of an administrative subpoena, the notion of relevancy is a broad one. An agency

‘can investigate merely on the suspicion that the law is being violated, or even just because it wants

assurance that it is not.’ So long as the material “ ‘touches a matter under investigation,’ ” an

administrative subpoena will survive a challenge that the material is not relevant.” (citations omitted).

Collins v. Commodity Futures Trading Com'n., 737 F. Supp. 1467, 1479 (N.D.Ill.,1990) (quoting

Sandsend Financial Consultants, Ltd. v. Federal Home Bank Bd., 878 F.2d 875, 882 (5th Cir.1989)).

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agency subpoena would be unnecessarily burdensome, some limitation of the materials required would

be warranted. Id.

However, the burden of showing that an agency subpoena is unreasonable remains with the

respondent, and where, as here, the agency inquiry is authorized by law and the materials sought are

relevant to the inquiry, that burden is not easily met. See United States v. Powell, 379 U.S. at 58; United

States v. Donaldson, 400 U.S. 517, 527 (1971); cf. Adams v. F. T. C., 296 F.2d 861 (8th Cir. 1961), cert.

denied, 369 U.S. 864(1962). The Respondents do not appear to contest the validity of the administrative subpoenas issued by the SEC.4

 Respondents only argue that the subpoenas should be quashed

because AMS inadvertently produced privileged documents to the SEC. Respondents contend that the

SEC’s possession of these documents has hopelessly tainted the government’s investigation. However,

during the hearing, the Petitioner asserted that none of the documents in dispute have been used in the

investigation to date, and Respondents have offered no proof to contradict this assertion. Thus the mere

suggestion by Respondents of the possibility of taint upon the SEC’s investigation as a result of their

inadvertent receipt of privileged documents from AMS, is not sufficient to block an authorized inquiry

into relevant matters. See e.g., Newmark & Co. v. Wirtz, 330 F.2d 576, 578 (2d Cir. 1964). As such,

Respondents’ Joint Motion to Quash the SEC’s administrative subpoenas is DENIED WITHOUT

PREJUDICE. 

Conclusion

 For the reasons set forth above, Petitioner’s Motion to Compel Respondents’ Compliance with

the Administrative Subpoenas is GRANTED as to the requests for documents and STAYED as to the

requests for testimony. Respondents shall produce to Petitioner on or before June 22, 2007: 1) a

privilege log for the database of documents produced by AMS, categorizing each document to which a

claim of privilege is made by date, who the document was to and from, and provide a statement

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K:\COMMON\BATTAGLI\CASES\SEC\07cv772.SEC.v.Nicita.Order.fol.OSC.wpd 6 07cv0772

specifically identifying why Respondent’s believe the document to be privileged. Petitioner shall have

until July 3, 2007 to review both of Respondents’ privilege logs and provide a response either

conceding or objecting to each claim of privilege made by Respondents 

All contested claims of privilege will be addressed by the Court at the telephonic hearing set for

July 10, 2007, at 9:00 a.m. and further proceedings set as needed. 

Respondents’ Joint Motion to Quash the Administrative Subpoenas is DENIED WITHOUT

PREJUDICE.

IT IS SO ORDERED.

DATED: June 13, 2007

Hon. Anthony J. Battaglia

U.S. Magistrate Judge

United States District Court

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