Opinion ID: 220152
Heading Depth: 4
Heading Rank: 1

Heading: The SEC Investigation

Text: The text of the SEC's formal order stated that the SEC was empowered to investigate whether AIG and other insurance companies, including MBIA, engaged in securities fraud, accounting misstatements, reporting misstatements, or other acts, practices, or courses of business of similar purport or object. J.A. at 201. The district court held that the investigation into these two transactions was an investigation of a course[] of business of similar purport or object and, thus, within the scope of the formal order. We agree. As we described, the three transactions at issue here all involved MBIA's attempts not to report or to delay reporting a loss. The subpoena that accompanied the formal order stated that the SEC sought documents involving transactions designed to affect the timing or amount of revenue or expense recognized, including extinguishing liabilities, and deferring the recognition of a known and quantifiable loss. Id. at 212. Although the mechanics MBIA employed in each of the three transactions differed somewhat (as we described above), there can be no doubt that all of them involved efforts to delay, reduce, or eliminate the reporting of a loss, precisely as described in the subpoena. Indeed, the AHERF transaction involved an attempt not to book a loss at all, the Capital Asset transaction involved an attempt to spread the recognition of a loss out over time, and the U.S. Airways transaction involved an effort to avoid booking a loss (and, in fact, to represent that MBIA was making an investment in the airplanes it repossessed). These courses of business fall within the scope of the transactions for which documents were subpoenaed by the SEC as Non-Traditional Product[s]. This circumstance is highly probative of the scope of the investigation authorized by the SEC's formal order. The formal order authorized the SEC to investigate any of the broadly described acts and courses of business listed in the formal order. Combined with the specific definition of the items subpoenaed by the SEC, we conclude that the plain meaning of the formal order includes these transactions within its scope because they involved a course of business of similar purport or object to that described in the formal order. Cf. RNR Enters., Inc. v. SEC, 122 F.3d 93, 98 (2d Cir.1997) (concluding that a formal order predating company under investigation included the company because of similarly inclusive wording). The insurers essay several reasons why they think the formal order does not include the Capital Asset and U.S. Airways transactions. First, they point to the caption of the SEC's formal order, In re Loss Mitigation Insurance Products, to argue that this phrase delimits the scope of the SEC's investigation to a certain sub-class of financial transactions. This argument is unpersuasive. We do not doubt that [t]he purposes of such an order seem to be to define the scope of the ensuing investigation and to establish limits within which the staff may resort to compulsory process. SEC v. Jerry T. O'Brien, Inc., 467 U.S. 735, 738 n. 1, 104 S.Ct. 2720, 81 L.Ed.2d 615 (1984). But the caption alone does not serve these functions; the whole order does. The only place this phrase occurs is in the caption to the formal order, and the operative language contains no limitation in scope to a certain product, nor does it appear to contemplate such a limitation. Instead, it announces a broad but definite investigatory scope that includes these transactions as we described. In this way, it is quite telling that the actual subpoenas issued cover allegations involved in the Capital Asset and U.S. Airways transactions. And SEC subpoenas are enforceable only when they request reasonably relevant information in connection with the investigation. RNR Enters., 122 F.3d at 97 (quoting United States v. Morton Salt Co., 338 U.S. 632, 652, 70 S.Ct. 357, 94 L.Ed. 401 (1950)); see H.R.Rep. No. 96-1321, pt. 1, pt. 2 (1980), reprinted in 1980 U.S.C.A.A.N. 3874, 3889. In short, the caption to the formal order does not operate in the way advanced by the insurers here to narrow the scope of the SEC's investigatory authority as set out in the text of the order. Cf. RNR Enters., 122 F.3d at 97 (deferring to SEC's determination of relevance in challenge to subpoena by measuring value of information against general purposes of the agency's investigation). The insurers next argue that these investigations were conducted by way of oral request rather than subpoena or other formal process. This argument is meritless. The investigation, oral or by way of subpoena, was connected to the formal order. The sole reason the SEC did not issue subpoenas is that MBIA requested this procedure, and the SEC believed that MBIA would fully comply on a voluntary basis. The insurers cannot require that as an investigation proceeds, a company must suffer extra public relations damage to avail itself of coverage a reasonable person would think was triggered by the initial investigation. The insurers also argue that the SEC began investigating these transactions because it was tipped off by a disenchanted investor in Capital Asset and by New York insurance regulators questioning the U.S. Airways transaction. Whatever the accuracy of this assertion, we fail to see how the SEC's investigative source is relevant to the coverage determination. Finally, the insurers argue that because the SEC official who made the oral requests was not named on the formal order, the requests were not pursuant to that order. This argument, too, fails. The individuals named on the formal order are empowered to compel testimony, Jerry T. O'Brien, 467 U.S. at 737-38, 104 S.Ct. 2720, but the investigation authorized by the formal order need not be pursued only by those individuals. In addition, this policy provides coverage for informal investigative orders, and the oral inquiries fit that description. [3] As with the AHERF transaction, the SEC's investigation of the Capital Asset and U.S. Airways transactions was commenced by the SEC's formal order. MBIA's Securities Loss related to responding to it is therefore covered because the investigation was pursuant to a formal or informal investigative order.