Opinion ID: 381789
Heading Depth: 1
Heading Rank: 3

Heading: applicability of

Text: United States v. LaSalle Nat'l Bank 32 Dresser principally relies on an analogy to United States v. LaSalle Nat'l Bank, 437 U.S. 298, 98 S.Ct. 2357, 57 L.Ed.2d 221 (1978), 23 in which the Supreme Court said in dictum that the Internal Revenue Service (IRS) may not use its summons authority to investigate possible violations of the tax laws after it has referred those violations to Justice for criminal prosecution. See id. at 311-313, 98 S.Ct. at 2365. 24 Dresser argues that the SEC's transmittal of Dresser's file to Justice was equivalent to a referral under LaSalle, and thus that the SEC's power to enforce investigative subpoenas against Dresser in connection with that file lapsed at that time. Alternatively, Dresser suggests that, even if transmittal of the file was not analogous to a referral under LaSalle, initiation of the grand jury investigation precluded subsequent enforcement of SEC investigative subpoenas into the same matters. 33 These two alternatives are vulnerable to the same objection: the LaSalle rule applies solely to the statutory scheme of the Internal Revenue Code, in which the IRS's civil authority ceases for all practical purposes upon referral of a taxpayer's case to Justice; it does not apply to the securities laws, in which the SEC's civil enforcement authority continues undiminished after Justice initiates a criminal investigation by the grand jury. 25 34 The IRS summons authority derives from Section 7602 of the Internal Revenue Code, 26 U.S.C. § 7602 (1976). Its authority is restricted to the terms and purposes of that provision. The Supreme Court said in LaSalle : 35 In § 7602 Congress has bestowed upon the Service the authority to summon production for four purposes only: for ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax . . . or collecting any such liability. Congress therefore intended the summons authority to be used to aid the determination and collection of taxes. These purposes do not include the goal of filing criminal charges against citizens.   United States v. LaSalle Nat'l Bank, supra, 437 U.S. at 316-317 n.18, 98 S.Ct. at 2367 n.18 (first ellipsis in original). 36 In the pre-referral stage of an IRS investigation the civil and criminal elements of the investigation are intertwined. Id. at 308-311, 98 S.Ct. at 2363-2364. The same information is useful in negotiating with the taxpayer, in suing in court for additional taxes, or in deciding whether to recommend criminal prosecution. Thus the IRS at that stage is empowered to issue investigative summonses under Section 7602, even though the fruits of such summonses may be useful for the illegitimate purpose of filing criminal charges against citizens as well as the legitimate purposes of determining and collecting taxes. 37 However, upon referral of the case to Justice with a recommendation for criminal prosecution, the criminal and civil aspects of a tax fraud case begin to diverge. Id. at 311, 98 S.Ct. at 2365. After that point the IRS loses its ability to compromise the case, either criminally or civilly. All such authority devolves upon Justice. Id. at 312, 98 S.Ct. at 2365. Although theoretically the IRS might use its summons power during the pendency of the criminal proceeding to discover information for the purpose of a future civil tax suit, id. at 311-312, 98 S.Ct. at 2364-2365, in practice the IRS holds all civil action in abeyance until the criminal proceeding is completed. 26 Only then does the IRS turn its attention again to the civil aspects of the case. 38 Thus, in the LaSalle Court's view, the authorized purposes for summonses under Section 7602 cease as a practical matter during the pendency of the criminal proceeding. Because of this the Court was willing to impose a prophylactic rule flatly forbidding any use of the Section 7602 authority once a case has been referred to Justice for criminal prosecution. Id. at 312, 98 S.Ct. at 2365. This rule restricts the IRS within the confines of its statutory authority and also safeguards    two policy interests, id. at 313, 98 S.Ct. at 2365. These interests are to avoid broadening the Justice Department's right of criminal litigation discovery and to avoid infringing on the role of the grand jury as a principal tool of criminal accusation. Id. at 312, 98 S.Ct. at 2365. 39 Dresser asks this court to extend the reasoning of LaSalle to govern the conduct of the SEC under the securities laws. But IRS investigative and enforcement proceedings are not analogous to those of the SEC. The language of the securities laws and the nature of the SEC's civil enforcement responsibilities require that the SEC retain full powers of investigation and civil enforcement action, even after Justice has begun a criminal investigation into the same alleged violations. 40 The investigative provisions of the securities laws are far broader than Section 7602 of the Internal Revenue Code, as interpreted in LaSalle. See SEC v. Arthur Young & Co., 584 F.2d 1018, 1022-1024 (D.C.Cir.1978), cert. denied, 439 U.S. 1071, 99 S.Ct. 841, 59 L.Ed.2d 37 (1979). SEC investigations are not confined to four purposes only. Cf. United States v. LaSalle Nat'l Bank, supra, 437 U.S. at 316 n.18, 98 S.Ct. at 2367 n.18. Rather, the SEC may, in its discretion, make such investigations as it deems necessary to determine whether any person has violated, is violating, or is about to violate any provision of the '34 Act, Section 21(a) of the '34 Act, 15 U.S.C. § 78u(a) (1976) (emphasis added). Moreover, the SEC is authorized in its discretion    to investigate any facts, conditions, practices, or matters which it may deem necessary or proper to aid in the enforcement of such provisions, in the prescribing of rules and regulations under this chapter, or in securing information to serve as a basis for recommending further legislation concerning matters to which this chapter relates. Id. (emphasis added). See also Section 19(b) of the '33 Act, 15 U.S.C. § 77s(b) (1976). Given this broad statutory mandate, there is virtually no possibility that in issuing this subpoena the SEC was acting ultra vires. The investigation of Dresser based as it was on the staff's conclusion that Dresser may have engaged in conduct seriously contravening the securities laws 27 falls squarely within the Commission's explicit investigatory authority. 28 Unlike the Internal Revenue Code as interpreted in LaSalle, the securities laws offer no suggestion that the scope of the SEC's investigative authority shrinks when a grand jury begins to investigate the same matters. Since the validity of summonses or subpoenas depend(s) ultimately on whether they were among those authorized by Congress, United States v. LaSalle Nat'l Bank, supra, 437 U.S. at 307, 98 S.Ct. at 2362, we conclude that this subpoena is enforceable under the rule of that case. 29 41 Fulfillment of the SEC's civil enforcement responsibilities requires this conclusion. Unlike the IRS, which can postpone collection of taxes for the duration of parallel criminal proceedings without seriously injuring the public, the SEC must often act quickly, lest the false or incomplete statements of corporations mislead investors and infect the markets. Thus the Commission must be able to investigate possible securities infractions and undertake civil enforcement actions even after Justice has begun a criminal investigation. For the SEC to stay its hand might well defeat its purpose. 42 Dresser attempts to prevent enforcement of this subpoena by invoking the policy interests identified by the LaSalle Court: to avoid broadening Justice's right of criminal litigation discovery and to avoid infringing the role of the grand jury as a principal tool of criminal accusation. Brief of respondent-appellant at 21-23; supplemental brief of appellant Dresser Industries, Inc. at 10-21; see United States v. LaSalle Nat'l Bank, supra, 437 U.S. at 312, 98 S.Ct. at 2365. We reject this argument for two reasons. 43 First, Dresser disregards the context in which these policy interests arose in LaSalle. Only after the Court had determined that the IRS had no practical authorized purpose for issuing a summons after referral of a case to Justice did it direct its attention to these policy interests. Then it did so solely to explain its imposition of a prophylactic rule forbidding any use of the IRS summons authority after referral to Justice, as opposed to forbidding only such uses as are unrelated to the purposes of Section 7602. 30 The Court did not impose such a prophylactic rule in any situation where it would significantly restrict the legitimate investigative authority of the IRS. 31 In the case of an SEC investigation there is no call for a prophylactic rule, and thus no need to ponder the import of these policy interests, because the SEC's authority to issue the subpoena remains undiminished after the start of a grand jury investigation. 44 Second, the policy interests of LaSalle have little practical significance in this context. The first to avoid broadening Justice's right to criminal discovery is flatly inapplicable, as Dresser admits. 32 The strict limitations on discovery in criminal cases, embodied in Federal Rules of Criminal Procedure 15-17, do not take effect until after a grand jury has returned an indictment. Until then there is no danger that Justice might broaden its discovery rights, because the subpoena power of the grand jury is as broad as perhaps broader than that of the SEC. Justice can procure from Dresser directly whatever materials it might procure indirectly through the SEC. 33 In fact, a party investigated under SEC rules instead of grand jury procedures is accorded far greater procedural protection, and has no cause to complain. See 17 C.F.R. §§ 203.6-203.7 (1979). 34 45 In its brief Dresser has concentrated upon the second policy interest identified in LaSalle : avoiding infringement upon the role of the grand jury. Dresser suggests two ways in which the SEC civil investigation might infringe the role of the grand jury. First, it argues that enforcement of the SEC subpoena would undermine the secrecy protections of the grand jury because the SEC subpoena covers many or all of the Dresser documents that have already been subpoenaed by the grand jury. 35 In this argument Dresser misconceives the nature of the secrecy protections of the grand jury. 46 Federal Rule of Criminal Procedure 6(e) provides in relevant part: 47 (e) Secrecy of Proceedings and Disclosure 48 (1) General rule. A grand juror, an interpreter, a stenographer, an operator of a recording device, a typist who transcribes recorded testimony, an attorney for the Government, or any person to whom disclosure is made under paragraph (2)(A)(ii) of this subdivision shall not disclose matters occurring before the grand jury, except as otherwise provided for in these rules. No obligation of secrecy may be imposed on any person except in accordance with this rule.    49 We note that the Rule prohibits disclosure of matters occurring before the grand jury(.) This serves to protect the identities of witnesses or jurors, the substance of testimony, the strategy or direction of the investigation, the deliberations or questions of jurors, and the like. It does not require, however, that a veil of secrecy be drawn over all matters occurring in the world that happen to be investigated by a grand jury. 36 It is well established that 50 when testimony or data is sought for its own sake for its intrinsic value in the furtherance of a lawful investigation rather than to learn what took place before the grand jury, it is not a valid defense to disclosure that the same information was revealed to a grand jury or that the same documents had been, or were presently being, examined by a grand jury.    51 United States v. Interstate Dress Carriers, Inc., 280 F.2d 52, 54 (2d Cir. 1960). 37 Dresser's documents at issue here were created for an independent corporate purpose, not directly related to the prospect of a grand jury investigation. The SEC has subpoenaed them directly from Dresser, without mention of the grand jury. They do not reveal what has occurred before the grand jury; they reveal only what has occurred in Dresser's foreign operations. See United States v. Stanford, 589 F.2d 285, 291 (7th Cir. 1978), cert. denied, 440 U.S. 983, 99 S.Ct. 1794, 60 L.Ed.2d 244 (1979). The fact that a grand jury has subpoenaed documents concerning a particular matter does not insulate that matter from investigation in another forum. 38 In fact, if the grand jury proceedings are genuinely secret, other agencies and courts will not know the subject matter of the grand jury investigation and thus will not be able to determine whether their own inquiry would overlap that of the grand jury. 52 In this case Dresser is obligated under the securities laws to provide documents to the SEC in obedience to a lawful subpoena. The existence of a grand jury proceeding neither adds to nor detracts from Dresser's rights before the SEC. Whatever rights to secrecy or confidentiality Dresser may have are the product solely of the laws governing the SEC; they are unaffected by the parallel grand jury proceeding. 53 The second way in which Dresser argues that enforcement of this subpoena might infringe the role of the grand jury is that the SEC could interpret and selectively disclose parts of the subpoenaed information to the grand jury through Justice, thereby undermining the independence of the grand jury's inquiry. 39 Of course, this argument is purely speculative since, as Dresser is well aware, 40 the SEC's general policy is to grant Justice continuing access to the entirety of a given investigative file once the Commission formally grants access. 41 As of now the SEC has not received any confidential documents from Dresser, and thus we have had no opportunity to see how this policy operates in practice. It would be altogether inappropriate for this court to presume that the SEC will pre-select documents for release to Justice in order to prejudice the grand jury. 54 In another sense Dresser's complaint on this score has little practical significance. No one would suggest that the grand jurors, unassisted by accountants, lawyers, or others schooled in the arcana of corporate financial accounting, could sift through the masses of Dresser's corporate documents and arrive at a coherent picture of the company's foreign payments and disclosure practices. In this area, as in many areas of great complexity, the grand jurors are assisted guided and influenced, in fact not only by the United States Attorneys assigned to the investigation, but also by experts provided by the federal regulatory agencies with experience in the particular subject areas. This expert assistance is permitted under Rule 6(e), and it promotes the efficiency and rationality of the criminal investigative process. See In re Perlin, 589 F.2d 260 (7th Cir. 1978); Robert Hawthorne, Inc. v. Director of IRS, 406 F.Supp. 1098, 1106-1107 (E.D.Pa.1975); Developments in the Law Corporate Crime: Regulating Corporate Behavior Through Criminal Sanctions, 92 Harv.L.Rev. 1227, 1314-1315 (1979). In this case two SEC agents have been assigned to Justice's task force on transnational payments to assist in the investigation of companies possibly involved in illegal foreign payments. 42 There can be little doubt that the grand jury's deliberations will be influenced by the work of these SEC agents. Any additional influence that might arise as a result of enforcement of the SEC subpoena and transmittal of documents to Justice thereafter is likely to be inconsequential. 43 55 Finally, we note that if Dresser is genuinely worried that the SEC might disclose only those documents prejudicial to the company, it may provide the grand jury with copies of all the documents it provides to the SEC, thereby obviating the danger. Alternatively, if Dresser obtains evidence that the SEC is in fact abusing its power to transmit documents to Justice, and is thereby distorting the grand jury's perception of the case, Dresser may apply to the courts at that time for appropriate relief. 56 We conclude that the danger that enforcement of this subpoena might infringe the role of the grand jury is too speculative and remote at this point to justify so extreme an action as denying enforcement of this subpoena. 44 57 In essence, Dresser has launched this attack on the parallel SEC and Justice proceedings in order to obtain protection against the bare SEC proceeding, which it fears will result in public disclosure of sensitive corporate documents. The prejudice Dresser claims it will suffer from the parallel nature of the proceedings is speculative and undefined if indeed Dresser would suffer any prejudice from it at all. 45 Any entitlement to confidential treatment of its documents must arise under the laws pertaining to the SEC; the fortuity of a parallel grand jury investigation cannot expand Dresser's rights in this SEC enforcement action. Thus Dresser's invocation of LaSalle can avail the company nothing.