of its subordinates upon whom a subpoena was served shall respond
as heretofore described.

ENTER:

lia. 7_ bert —

UNITED STATES DISTRICT JUDGE
/

DATED: MARCH 2): 2002

-12-


quash the subpoenas. In response thereto, defendant appears to
narrow his request to those documents specifically addressing
whether Loutos should be included as a defendant in the civil
action and any recommendation regarding pursuing criminal charges
against Loutos. Based on purported conversations with Norris and
Quilling, Loutos assumes that any determinations or
recommendations were that Loutos should not be named as a civil
or criminal defendant.

The SEC contends the subpoenas should be quashed because
they should have been served on the SEC itself in Washington,
D.C. or its General Counsel located in Washington, D.C.
Alternatively, the SEC contends the requested documents are not
relevant and outside the scope of permissible discovery under
Fed. R. Crim. P. 17(c). If those arguments were to be rejected,
the SEC also indicates that the documents are likely not subject
to disclosure because privileged. In its opening brief, the SEC
represented that no formal findings regarding Loutos's guilt or
innocence existed, but left open the possibility that internal
memoranda on that subject might exist. In its reply, the SEC
contends that no documents responsive to Loutos's request even
exist. That last representation, though, may be based on an
overly narrow view of Loutos's request.

As to investigations pursuant to the Securities Exchange
Act of 1934, SEC regulations provide:

Information or documents obtained by

officers or employees of the Commission in the
course of any examination or investigation .


considered whether to civilly proceed against Loutos. Therefore,
Norris expressly states that he did not prepare any written (or
even oral) findings regarding Loutos's culpability or liability
under federal securities laws. He also states that he has "no
knowledge of any Commission attorney or employee having prepared
any such oral or written findings, recommendations, or
conclusions regarding Peter Loutos."*

Obviously, if no responsive documents exist, no documents
need be provided in response to the subpoenas. However, it is
not absolutely clear that no responsive documents exist. As
trial attorney in the civil proceeding, presumably Norris would
have been provided with any memoranda regarding liability or
nonliability that were prepared as part of the SEC's
investigation in preparation for filing a civil complaint. But
even that is not absolutely clear. Also, it is not clear that
Norris would have knowledge of any recommendations regarding
criminal prosecution that may have been provided to the United
States Attorney. Additionally, it is unclear if the SEC now
contends no responsive documents exist because it views the
subpoenas as being limited to documents created by Norris

himself.

‘Loutos's attorney provides an affidavit stating that
Norris told him that such findings existed. Norris denies having
made such statements to Loutos's attorney. But regardless of any
prior representations, Norris now states that no such findings
exist. Neither he, the SEC, nor any other SEC employee can be
compelled to produce documents that they insist do not exist.


agent were acting pursuant to a regulation (Dept. of Justice
Order No. 3229 (May 2, 1946)) issued under the authority of

5 U.S.C. § 22 (1951).3 The Supreme Court reversed the contempt
finding, holding that the Attorney General had authority under

§ 22 to issue regulations concerning the custody, use, and
preservation of records, including prohibiting one of his agents
from disclosing documents without the Attorney General's
approval. 340 U.S. at 468-70. Because the Attorney General
himself was not before the court, the Supreme Court did not reach
the issue of the propriety of withholding the particular
documents that were requested. See id. at 467. Following Touhy,
some courts have held or indicated that, when an agency has a
regulation similar to that involved in Touhy, a subpoena must be
served on the agency employee having authority to approve
disclosure of the documents, or at least served on the agency

itself at its headquarters. See Seafirst Corp. v. Boyd, 1985 WL

188558 *3 (W.D. Wash. Aug. 29, 1985) (collecting cases). Contra

NLRB v. Capitol Fish Co., 294 F.2d 868, 873-74 (Sth Cir. 1961);

F.A.C., Inc. v. Cooperativa De Sequros De Vida, 188 F.R.D. 181

3Ssection 22 was subsequently amended and recodified as 5
U.S.C. § 301. Section 301 currently provides: "The head of an
Executive department or military department may prescribe
regulations for the government of his department, the conduct of
its employees, the distribution and performance of its business,
and the custody, use, and preservation of his records, papers,
and property. This section does not authorize withholding
information from the public or limiting the availability of
records to the public." The last sentence was not included in
§ 22 at the time Touhy was decided.


shall, unless made a matter of public record, be
deemed confidential. Except as provided by 17
C.F.R. 203.2, officers and employees are hereby
prohibited from making such confidential
information or documents or any other non-public
records of the Commission available to anyone
other than a member, officer or employee of the
Commission, unless the Commission or the General
Counsel, pursuant to delegated authority,
authorizes the disclosure of such information or
the production of such documents as not being
contrary to the public interest. Any officer or
employee who is served with a subpoena requiring
the disclosure of such information or the
production of such documents shall appear in
court and, unless the authorization described in
the preceding sentence shall have been given,
shall respectfully decline to disclose the
information or produce the documents called for,
basing his or her refusal upon this section. Any
officer or employee who is served with such a
subpoena shall promptly advise the General
Counsel of the service of such subpoena, the
nature of the information or documents sought,
and any circumstances which may bear upon the
desirability of making available such information
or documents.

17 C.F.R. § 240.0-4. An identical provision applies to
investigations pursuant to the Securities Act of 1933. See
17 C.F.R. § 230.122.?

United States ex rel. Touhy v. Ragen, 340 U.S. 462

(1951), was a state habeas corpus case in which a subpoena duces
tecum was served on an FBI agent. On instructions from the
United States Attorney General, the FBI agent declined to provide
the documents to the habeas petitioner and the District Court

found the agent to be in contempt. The Attorney General and FBI

*The referenced exception contained in 17 C.F.R. § 203.2
is limited to disclosures to specified persons and entities. See
17 C.F.R. § 240.24c-1(b).


report the Commission's decision to preclude disclosure.
Loutos's service of a subpoena upon an SEC attorney in Texas was
consistent with the SEC's regulations.

The present case is also distinguishable from Touhy. In
Touhy, the FBI agent himself, represented by the United States
Attorney, reported that he was instructed not to disclose the
materials. Here, however, the Commission has voluntarily
appeared in this court to challenge the subpoena. Although the
subpoenas were directed to three SEC attorneys and a Keeper of
Records, none of them has appeared in court to decline to provide
the materials or to move to quash the subpoenas. Instead, the
SEC has chosen to bring the motion to quash in its own name.
Therefore, even if the regulations had required the SEC's
presence, the SEC has chosen to appear on its own behalf to
directly express its views, which would be sufficient to bring

the merits of disclosure before this court. Cf. United States v.

Reynolds, 345 U.S. 1 (1953); Rosee v. Board of Trade of City of
Chicago, 35 F.R.D. 512, 514 (N.D. Ill. 1964); Denny v. Carey, 78

F.R.D. 370, 372 (E.D. Pa. 1978). See also Alexander v. FBI, 186

F.R.D. 66, 69-70 (D.D.C. 1998) (Touhy holding does not apply to
cases in which the United States is a party).

Having resolved that the merits of the subpoena are
properly before this court, the merits do not presently raise any
difficult question. Norris states in a declaration that he was
trial counsel in the civil action, but that he received the case

after others had investigated. At that point, it was not being


Mite Order Form (997)

United States District Court, Northern District of Illinois

Name of Assign P Sitting Judge if Oth
vor Magistrate Judge | __ WELLIAM T. HART than Assigned Judge
CASE NUMBER 01 CR 882 - 3 DATE MARCH a ( , 2002
CASE UNITED STATES OF AMERICA v. FRANK L. PEITZ, et al.
TITLE

[In the following box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
of the motion being presented.)

MOTION:

DOCKET ENTRY:

qd) oO Filed motion of [ use listing in “Motion” box above.]

(2) oO Brief in support of motion due

(3) qa Answer briefto motion due___. Reply to answer brief due___

(4) oO Ruling/Hearingon__setfor____at

(5) im Status hearing [held/continued to] (set for/re-set for] on___ set for__at

(6) 0 Pretrial conference[held/continued to] [set for/re-set for]on___———s set for at,
(7) o Trial[set for/re-set for]on at.

(8) Qo [Bench/Jury trial] [Hearing] held/continuedto at

(9) im This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]

CUFRCP4(m) O General Rule21 OFRCP41(a)(1) [ FRCP41(a)(2).

qo) +o [Other docket entry] Motion to quash subpoenas duces tecum [66] is denied. Defendant
Loutos's motion for evidentiary hearing and/or in-camera inspection is denied without
prejudice. Defendant Loutos’s motion to produce pursuant to Rule 16 and/or Brady v.
Maryland is denied without prejudice. By April 10, 2002, the Securities and Exchange
Commission or one of its subordinates upon whom a subpoena was served shall respond as
described in today's Memorandum Opinion and Order.

[ ‘one
lumber:

iw

—/

(11) [For further detail see order attached to the original minute order.] {

No notices required, advised in open court.

7

No notices required. umber of wotces

R29 2002

o | Notices mailed by judge’s staff.

Notified counsel by telephone. date docketed

Docketing to mail notices.

Mail AO 450 form.

Copy to judge/magistrate judge. pened J

3/2002

date msiled notice

courtroom ee
ow deputy’s Hl
initials

ate/time received in; _—
ehtcal Cletk’s Office mailing nial



Even if there are no responsive documents, the SEC
(either directly or through Gordimer, Norris, or Barasch) should
formally respond to the subpoena by stating that there are no
responsive documents. Therefore, the SEC shall inquire as to all
appropriate personnel regarding whether any written documents
were prepared in which the question of Loutos's civil or criminal
liability related to FLP Capital, Active International, Inc. or
Lennox Investment Group, Ltd. was addressed. If it is determined
that no such documents exist, the SEC or one of the subpoenaed
attorneys shall respond to Loutos by so stating. If it is found
that such documents exist, then the SEC or one of the subpoenaed
attorneys shall provide the documents and/or a privilege log
identifying each withheld document and the reason for withholding
it.§ If there are responsive documents that are withheld, Loutos
will thereafter have to bring a motion to enforce the subpoena to
the extent he believes documents are wrongfully withheld.*®

On March 19, 2002, Loutos filed two motions without

noticing them for presentation. His motion for evidentiary

®Since no specific documents have yet been identified,
any issues as to relevance, the scope of a Rule 17 subpoena, and
privilege are not yet ripe for consideration.

*To the extent that issues of privilege or relevance are
subsequently raised before this court, the SEC must provide a
representation, supported by declaration or affidavit, regarding
whether it or any of its employees should be considered part
of the "prosecution team" in the criminal case. See United
States v. Peitz, 2002 WL 226865 *3 (N.D. Ill. Feb. 14, 2002)
("Reitz I"). The United States Attorney will also be required
to present his position as to that issue.

- 10 -


considered whether to civilly proceed against Loutos. Therefore,
Norris expressly states that he did not prepare any written (or
even oral) findings regarding Loutos's culpability or liability
under federal securities laws. He also states that he has “no
knowledge of any Commission attorney or employee having prepared
any such oral or written findings, recommendations, or
conclusions regarding Peter Loutos."*

Obviously, if no responsive documents exist, no documents
need be provided in response to the subpoenas. However, it is
not absolutely clear that no responsive documents exist. As
trial attorney in the civil proceeding, presumably Norris would
have been provided with any memoranda regarding liability or
nonliability that were prepared as part of the SEC's
investigation in preparation for filing a civil complaint. But
even that is not absolutely clear. Also, it is not clear that
Norris would have knowledge of any recommendations regarding
criminal prosecution that may have been provided to the United
States Attorney. Additionally, it is unclear if the SEC now
contends no responsive documents exist because it views the
subpoenas as being limited to documents created by Norris

himself.

‘Loutos's attorney provides an affidavit stating that
Norris told him that such findings existed. Norris denies having
made such statement's to Loutos's attorney. But regardless of
any prior representations, Norris now states that no such
findings exist. Neither he, the SEC, nor any other SEC employee
can be compelled to produce documents that they insist do not
exist.


183-84 (D.P.R. 1999); Ghandi v. Police Department of City of

Detroit, 74 F.R.D. 115, 121-22 (E.D. Mich. 1977).

Even assuming they correctly state the current law, the
lower court cases cited by the SEC are all distinguishable from
the present case. In Seafirst, the pertinent regulation provided
that the party requesting materials must submit directly to the
Comptroller of the Currency a request to grant authority to
release the materials. See Seafirst, 1985 WL 188558 at *2-3

(applying 12 C.F.R. § 4.19 (1985)). Marcoux v. Mid-States

Livestock, 66 F.R.D. 573 (W.D. Mo. 1975), also involved the
Comptroller of the Currency and 42 C.F.R. § 4.19. See id. at
577. Similarly, in Cates v. LTV Aerospace Corp., 480 F.2d 620
(5th Cir. 1973), regulations provided that the document had to be
requested from the Secretary of the Navy. See id. at 622-23 &
n.3 (citing 32 C.F.R. §§ 720.30(a), 720.31(a)). Unlike these
three cases, the SEC regulations provide that the employee served
with the subpoena is to forward the pertinent information to the
Commission's General Counsel along with the employee's views of
the desirability of releasing the materials. The Commission or
General Counsel then advises the employee as to whether to
disclose the materials. See 17 C.F.R. §§ 240.0-4, 230.122.
Nothing in the SEC regulations provide that the party seeking the
material may or must make the request directly to the Commission
or General Counsel. To the contrary, the regulation indicates
that the subpoena may be served directly on a lower level

employee and that employee will either provide the materials or


judgment was obtained against all defendants and relief
defendants and Michael Quilling was appointed as receiver to
obtain and conserve funds on the investors' behalf. When the
indictment was returned in the present case, the SEC issued a
litigation release stating "[t]he indictment is based on the same
conduct alleged in a civil action brought by the Commission's
Forth Worth District Office in June of 1998.”

In January and February 2002 at the SEC's Forth Worth,
Texas offices, defendant Loutos served or attempted to serve
subpoenas duces tecum on SEC attorneys Douglas Gordimer, Jeffery
B. Norris, and Spencer B. Barasch, and the "Keeper of Records."?
The subpoenas request all SEC conclusions, determinations, or
pronouncements regarding or relating to Loutos's position, role
in, and/or knowledge of the scheme to defraud alleged in the
present criminal case and the SEC civil case. The subpoenas also
request any referrals and/or transmittals related to criminal
prosecution that the SEC made to the Department of Justice
regarding the two cases. This latter request is not specifically

stated to be limited to Loutos. The SEC itself has moved to

‘Neither side provides a copy of the subpoenas. It is
unclear if the person named in the subpoena was the Forth Worth
Keeper of Records or the Keeper of Records for the SEC generally.
The SEC concedes that Gordimer has been adequately served. It
apparently disputes whether the others have been adequately
served. Loutos contends that an assistant United States
Attorney, speaking on behalf of the SEC, represented that service
at the Fort Worth SEC offices would be considered acceptable
service on Norris and Barasch. For purposes of today's ruling,
it is sufficient that at least one of the SEC attorneys has been
adequately served. It need not be decided if Norris and Barasch
were also adequately served.


well as by repaying earlier, disgruntled

investors with funds from new investors.
Indictment 7 3.

All six defendants are charged with eight substantive
counts of wire fraud in violation of 18 U.S.C. §§ 1343 and 2.
The alleged wire communications underlying these counts occurred
from October 10, 1996 through May 22, 1997. Defendants Peitz,
Benson, Loutos, and Paladino are also charged with a conspiracy
in violation of 18 U.S.C. § 1956(h) under which they agreed to
(1) engage in wire fraud violations that were designed to conceal
the source and ownership of unlawful proceeds in violation of 18
U.S.C. § 1956(a) and (2) engage in monetary transactions in
criminally derived property with a value greater than $10,000 in
violation of 18 U.S.C. § 1957(a). The conspiracy allegedly began
no later than October 1994 and continued until at least June
1998. The four alleged conspirators are also charged with four
substantive counts of violating 18 U.S.C. §§ 1957 and 2 and two
substantive counts of violating 18 U.S.C. §$§ 1956(a) (1) (B) (i)
and 2.

In June 1998, the Securities and Exchange Commission
("SEC") filed a civil action in the Northern District of Texas
alleging that certain defendants had defrauded investors
utilizing a fictitious "prime bank security” investment that
never existed. Law, Iles, Peitz, and Benson were named as
defendants in that action, as well as was James Wardell.

Paladino and various entities were named as relief defendants. A


UNITED STATES OF AMERICA,

BENSON,

LAW,

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

Defendants.

)
)
Plaintiff, )
)
v. ) No. 01 CR 852
) |
FRANK L. PEITZ, DANIEL B. ) Lb ex, “e
PETER A. LOUTOS, SR., ) ha &D
ROBERT D, PALADINO, RANDALL W. ) Ree,
and MONICA M. ILES, ) ” £002
)
)

MEMORANDUM OPINION AND ORDER

The indictment in this case alleges:

defendants FRANK PEITZ, DANIEL BENSON, PETER
LOUTOS, ROBERT PALADINO, RANDALL LAW, MONICA ILES
and others, through FLP Capital, Active
International[, Inc.] and Lennox [Investment
Group, Ltd.], sought to and did obtain and retain
funds from prospective investors and investors by
offering and selling investments purportedly in
the international trading of bank financial
instruments. In offering and selling these
investments, the defendants made and caused to be
made material misrepresentations and omissions
about, among other things: the risk involved

in the investment; the expected return on

the investment; the use of money raised from
investors; and the previous investment experience
and the criminal and regulatory background of
those offering and selling the investment. As a
part of the scheme, the defendants raised over
$11,000,000 from at least 30 investors and then
misappropriated almost all of the funds for their
own benefit. In order to retain the use of
investors' funds and obtain additional funds from
new investors and to conceal various parts of

the scheme from victim investors and others,
defendants continued to lull investors through a
series of misrepresentations and omissions about
the nature and status of their investments as


hearing and/or in-camera inspection requests that any responsive
documents be provided to the court for in-camera inspection and,
if necessary, seeks a hearing on the disputed conversation
between Loutos's attorney and Norris. Both those issues are moot
in light of the court's ruling on the motion to quash subpoenas.
Any issue as to the need for an in-camera inspection can be
raised after the SEC responds to the subpoena as required by
today's order.

The other motion seeks to require the government to
produce pursuant to Fed. R. Crim. P. 16 and/or Brady v. Maryland.
Peitz I makes clear the government's obligation to provide Brady
material and it is assumed that the government recognizes its
continuing obligation to provide such material. It is also
assumed that, following Peitz I, the government has carefully
considered whether the SEC is part of the prosecution team and
whether that requires that further documents be disclosed. At
this time, this motion will be denied without prejudice to
raising further issues, if necessary, after the SEC responds to
the subpoena.

IT IS THEREFORE ORDERED that the motion to quash
subpoenas duces tecum [66] is denied. Defendant Loutos's motion
for evidentiary hearing and/or in-camera inspection is denied
without prejudice. Defendant Loutos's motion to produce pursuant
to Rule 16 and/or Brady v. Maryland is denied without prejudice.

By April 10, 2002, the Securities and Exchange Commission or one

-~1l1l-