Securities and Exchange Commission v. Dresser Industries, Inc., United States, Intervenor. Securities and Exchange Commission v. Dresser Industries, Inc., Edward R. Luter, United States, Intervenor

Dresser Industries, Inc. (Dresser) appeals from a decision of the District Court1 requiring obedience to a subpoena duces tecum issued by the Securities and Exchange Commission (SEC) on April 21, 1978, and denying Dresser's motion to quash the subpoena.2 The subpoena was issued in connection with an SEC investigation into Dresser's use of corporate funds to make what are euphemistically called "questionable foreign payments," and into the adequacy of Dresser's disclosures of such payments under the securities laws.

The principal issue facing this en banc court is whether Dresser is entitled to special protection against this SEC subpoena because of a parallel investigation into the same questionable foreign payments now being conducted by a federal grand jury under the guidance of the United States Department of Justice (Justice). Dresser argues principally that the SEC subpoena abuses the civil discovery process of the SEC for the purpose of criminal discovery and infringes the role of the grand jury in independently investigating allegations of criminal wrongdoing. On November 19, 1979 a panel of this court issued a decision affirming the District Court but, with Judge Robb dissenting, attaching a condition prohibiting the SEC from providing Justice with the information received from Dresser under this subpoena. Because of the importance of this issue to enforcement of the regulatory laws of the United States, this court voted to vacate the panel opinions and rehear the case en banc.

Illegal and questionable corporate payments surfaced as a major public problem in late 1973, when several major scandals implicated prominent American corporations in improper use of corporate funds to influence government officials in the United States and foreign countries. The exposure of these activities disrupted public faith in the integrity of our political system and eroded international trust in the legitimacy of American corporate operations abroad.3 SEC investigation revealed that many corporate officials were falsifying financial records to shield questionable foreign and domestic payments from exposure to the public and even, in many cases, to corporate directors and accountants. Since the completeness and accuracy of corporate financial reporting is the cornerstone of federal regulation of the securities markets, such falsification became a matter of grave concern to the SEC.4

Beginning in the spring of 1974 the SEC brought a series of injunctive actions against certain American corporations. It obtained consent decrees prohibiting future violations of the securities laws and establishing internal corporate procedures for investigation, disclosure, and prevention of illegal corporate payments. However, the problem of questionable foreign payments proved so widespread that the SEC devised a "Voluntary Disclosure Program" to encourage corporations to conduct investigations of their past conduct and make appropriate disclosures without direct SEC coercion.5 Participation in the Voluntary Disclosure Program would not insulate a corporation from an SEC enforcement action, but the Commission would be less likely to exercise its discretion to initiate enforcement actions against participants.6 The most important elements of the Voluntary Disclosure Program were (1) an independent committee of the corporation would conduct a thorough investigation into questionable foreign and domestic payments made by the corporation; (2) the committee would disclose the results of this investigation to the board of directors in full; (3) the corporation would disclose the substance of the report to the public and the SEC on Form 8-K; and (4) the corporation would issue a policy statement prohibiting future questionable and illegal payments and maintenance of false or incomplete records in connection with them.7 Except in "egregious cases" the SEC would not require that public disclosures include specific names, dates, and places. Rather, the disclosures might be "generic" in form.8 Thus companies participating in the Voluntary Disclosure Program would ordinarily be spared the consequences to their employees, property, and business that might result from public disclosure of specific instances of foreign bribery or kickbacks. However, companies participating in the Voluntary Disclosure Program had to agree to grant SEC requests for access to the final report and to the unexpurgated underlying documentations.9

On January 27, 1976 an attorney and other representatives of Dresser met with members of the SEC staff to discuss a proposed filing. At the meeting Dresser agreed to conduct an internal inquiry into questionable foreign payments, in accordance with the terms of the Voluntary Disclosure Program.10 The next day Dresser submitted a Form 8-K describing, in generic terms, one questionable foreign payment. Joint Appendix (JA) 100-102. On November 11, 1976 Dresser filed a second Form 8-K reporting the results of the internal investigation. JA 103-108. On February 10, 1977 the company supplemented this report with a third Form 8-K concerning a questionable payment not reported in the earlier reports. JA 109-113. The reports concerned Dresser's foreign activities after November 1, 1973. All disclosures were in generic, not specific, terms.

As part of its general monitoring program the SEC staff requested access to the documents underlying Dresser's report. On July 15, 1977 Dresser refused to grant such access. The company argued that allowing the staff to make notes or copies might subject its documents to public disclosure through the Freedom of Information Act.11 Dresser stated that such disclosure could endanger certain of its employees working abroad.12 During the ensuing discussions with the staff Dresser attempted to impose conditions of confidentiality upon any SEC examination of its documents, but the staff did not agree.13 Instead, it issued a recommendation to the Commission for a formal order of investigation in the Dresser case. This recommendation was predicated on the staff's conclusions that Dresser:

1. may have used corporate funds for non-corporate purposes;

2. may have made false and misleading statements concerning the existence of and circumstances surrounding material obligations of Dresser to certain foreign governments and to other entities; and

3. may have made false entries and caused false entries to be made upon the books and records of Dresser, and its affiliates and subsidiaries with respect to, among other things, payments to foreign government officials.

JA 7-8 (order directing private investigation and designating officers to take testimony). Moreover, the staff reported that Dresser's proxy soliciting materials, reports, and statements may have been misleading with respect to the potential risks involved in its conduct of business through questionable foreign payments, and may have included false statements in connection with such payments. JA 8. Dresser vigorously opposed issuance of an order of investigation.14

Meanwhile, the Department of Justice had established a task force on transnational payments to investigate possible criminal violations arising from illegal foreign payments. Two SEC attorneys participated in the task force. In the summer of 1977 the Justice task force requested access to SEC files on the approximately 400 companies, including Dresser, that had participated in the Voluntary Disclosure Program.15 Pursuant to Commission authorization the SEC staff transmitted all such files to the Justice task force in August 1977.16 After its preliminary investigation of the Form 8-K's submitted by Dresser under the Voluntary Disclosure Program, Justice presented Dresser's case to a grand jury in the District of Columbia on January 25, 1978.

Before any summons or subpoena had issued in either the SEC or the grand jury investigation, Dresser filed suit in the Southern District of Texas against the SEC and Justice to enjoin any further investigation of it by either agency.17 While Dresser's suit was pending in the Southern District of Texas, the District of Columbia grand jury subpoenaed Dresser's documents on April 21, 1978. At roughly the same time the SEC issued a formal order of private investigation, authorizing the staff to subpoena the documents and to obtain other relevant evidence. JA 7-9 (April 11, 1978). Pursuant to that order the staff issued a subpoena duces tecum, returnable on May 4, 1978. JA 14-16 (April 21, 1978). This subpoena covered substantially the same documents and materials subpoenaed by the grand jury, and more. Dresser did not respond to the subpoena.18

On May 1, 1978 the District Court in Houston, Texas dismissed Dresser's suit against Justice without opinion. Three days later, after the period for compliance with its subpoena had lapsed, the SEC applied to the District Court for the District of Columbia for enforcement. In the meantime, Dresser had appealed the adverse judgment in the Texas action to the Fifth Circuit, and sought interim relief. On May 5 Judge Coleman of the Fifth Circuit enjoined further prosecution of the SEC subpoena enforcement action until after the District Court for the Southern District of Texas had ruled on Dresser's action against the SEC. Judge Coleman also obtained a stipulation from Justice that Justice would not require Dresser or its agents to appear before the grand jury until after the Company had filed a motion to quash the grand jury subpoena in the District of Columbia and had received a ruling on such motion.

On May 8, 1978 Dresser filed a motion to quash the grand jury subpoena in the District Court for the District of Columbia. On May 19 the District Court (Parker, J.) denied Dresser's motion to quash, but imposed a protective order requiring strict confidentiality in accordance with Rule 6(e) of the Federal Rules of Criminal Procedure. In imposing the protective order the court stated that the "concern of Dresser and especially its employees is not illusory and should not be lightly considered." See JA 163. This was in reference to Dresser's argument that public disclosures of the names, places, and dates connected with its questionable foreign payments could endanger the lives of its employees in certain turbulent foreign countries. Dresser thereafter complied with this grand jury subpoena.

On May 26, 1978 the Southern District of Texas dismissed Dresser's action against the SEC without reaching the merits. Dresser appealed to the Fifth Circuit and on June 8 obtained an order from the court that:

Until the appeal in this case shall have been decided in this court, and except for proceedings before the Grand Jury in the District of Columbia, the Securities and Exchange Commission, its officers and employees, are enjoined to preserve inviolate the confidentiality of any information obtained by the subpoena here in issue. This order is not intended to interfere with pending proceedings in the District of Columbia to enforce the SEC subpoenas.

JA 202. On June 2, 1978 the District Court for the District of Columbia issued an order to Dresser to show cause why it should not be required to appear, give testimony, and produce records in obedience to the SEC subpoena. JA 141. On June 7 Dresser filed a motion for leave to obtain discovery from the SEC concerning the agency's alleged bad faith and attempted abuse of the judicial process, JA 27, and on June 13 filed a motion to quash the SEC subpoena. JA 160.

The District Court (Flannery, J.) denied Dresser's motion to compel discovery on June 16, without opinion. Judge Flannery explained in court that he had carefully examined the papers filed by Dresser, that discovery is rarely necessary in subpoena enforcement cases, and that he did not think this was an appropriate case for it. JA 256. Then, on June 30, 1978, the District Court (Flannery, J.) issued a memorandum opinion and order rejecting all of Dresser's objections to the SEC subpoena and requiring Dresser to comply with the subpoena within ten days after notice from the SEC. JA 301, reported at 453 F.Supp. 573 (D.D.C.1978). Rehearing was denied on July 15. This appeal followed.

Meanwhile, the United States Court of Appeals for the Fifth Circuit affirmed the decisions of the District Court for the Southern District of Texas dismissing Dresser's actions against Justice and the SEC in that court, largely on ripeness grounds. Dresser Industries, Inc. v. United States, 596 F.2d 1231 (5th Cir. 1979), cert. denied, 444 U.S. 1044, 100 S.Ct. 731, 62 L.Ed.2d 730 (1980). Accordingly, the interlocutory injunction requiring the SEC to preserve inviolate the confidentiality of Dresser's materials pending a decision on appeal was dissolved.

Having set forth the complicated procedural history of this case, we turn now to the principles that govern parallel administrative and criminal proceedings concerning the same conduct.

The civil and regulatory laws of the United States frequently overlap with the criminal laws, creating the possibility of parallel civil and criminal proceedings, either successive or simultaneous.19 In the absence of substantial prejudice to the rights of the parties involved, such parallel proceedings are unobjectionable under our jurisprudence. As long ago as 1912 the Supreme Court recognized that under one statutory scheme that of the Sherman Act a transaction or course of conduct could give rise to both criminal proceedings and civil suits. Standard Sanitary Manufacturing Co. v. United States, 226 U.S. 20, 52, 33 S.Ct. 9, 16, 57 L.Ed. 107 (1912). The Court held that the government could initiate such proceedings either "simultaneously or successively," with discretion in the courts to prevent injury in particular cases. Id. It explained:

The Sherman Act provides for a criminal proceeding to punish violations and suits in equity to restrain such violations, and the suits may be brought simultaneously or successively. The order of their bringing must depend upon the Government; the dependence of their trials cannot be fixed by a hard and fast rule or made imperatively to turn upon the character of the suit. Circumstances may determine and are for the consideration of the court. An imperative rule that the civil suit must await the trial of the criminal action might result in injustice or take from the statute a great deal of its power. * * *

Id.

The Supreme Court returned to this theme in United States v. Kordel, 397 U.S. 1, 90 S.Ct. 763, 25 L.Ed.2d 1 (1970). In that case the Food and Drug Administration (FDA) investigated a company and certain of its officers in connection with possible violations of the Federal Food, Drug, and Cosmetic Act, 21 U.S.C. § 301 et seq. Early in the investigation the FDA recommended and the United States Attorney filed an in rem action in federal district court seeking civil seizure of certain products. In connection with this suit the FDA filed extensive interrogatories with the company. Before the company had responded the FDA notified it that the agency was contemplating a criminal proceeding against it in connection with the same alleged violations of the statute. The company therefore moved to stay civil proceedings or, in the alternative, to extend the time for answering the interrogatories until after disposition of the criminal proceedings. The District Court denied this motion. Thereafter, but still before the company had filed its answers to the interrogatories, the regional and divisional offices of the FDA formally recommended criminal prosecution to the General Counsel. After it received the answers, the Department of Health, Education, and Welfare formally recommended criminal prosecution to the Justice Department. Justice obtained an indictment, and subsequently convictions. The case reached the Supreme Court upon appeal of the convictions of several of the company's officers.

The officers in Kordel argued that use of the civil discovery process to compel answers to interrogatories that could be used to build the government's case in a parallel criminal proceeding "reflected such unfairness and want of consideration for justice" as to require reversal. 397 U.S. at 11, 90 S.Ct. at 769. The Supreme Court did not agree. The Court noted that the government had not brought the civil action "solely to obtain evidence for its criminal prosecution," id. at 11-12, 90 S.Ct. at 769, or without notice to the defendants that it contemplated a criminal action, id. at 12, 90 S.Ct. at 769. Moreover, the defendant was not unrepresented by counsel, id., and had no reason to fear "prejudice from adverse pretrial publicity or other unfair injury," id. Nor were there any other "special circumstances" suggesting that the parallel proceedings were unconstitutional or improper. Id. In the absence of such "special circumstances" the Court recognized that prompt investigation of both civil and criminal claims can be necessary to the public interest. It said:

The public interest in protecting consumers throughout the Nation from misbranded drugs requires prompt action by the agency charged with responsibility for administration of the federal food and drug laws. But a rational decision whether to proceed criminally against those responsible for the misbranding may have to await consideration of a fuller record than that before the agency at the time of the civil seizure of the offending products. It would stultify enforcement of federal law to require a governmental agency such as the FDA invariably to choose either to forgo recommendation of a criminal prosecution once it seeks civil relief, or to defer civil proceedings pending the ultimate outcome of a criminal trial.

Id. at 11, 90 S.Ct. at 769 (footnote omitted).

The Constitution, therefore, does not ordinarily require a stay of civil proceedings pending the outcome of criminal proceedings. See Baxter v. Palmigiano, 425 U.S. 308, 98 S.Ct. 1551, 47 L.Ed.2d 810 (1976); DeVita v. Sills, 422 F.2d 1172, 1181 (3d Cir. 1970). Nevertheless, a court may decide in its discretion to stay civil proceedings, postpone civil discovery, or impose protective orders and conditions "when the interests of justice seem( ) to require such action, sometimes at the request of the prosecution, * * * sometimes at the request of the defense(.)" United States v. Kordel, supra, 397 U.S. at 12 n.27, 90 S.Ct. at 770 (citations omitted); see Horne Brothers, Inc. v. Laird, 463 F.2d 1268, 1271-1272 (D.C.Cir.1972). The court must make such determinations in the light of the particular circumstances of the case.

Other than where there is specific evidence of agency bad faith or malicious governmental tactics, the strongest case for deferring civil proceedings until after completion of criminal proceedings is where a party under indictment for a serious offense is required to defend a civil or administrative action involving the same matter. The noncriminal proceeding, if not deferred, might undermine the party's Fifth Amendment privilege against self-incrimination, expand rights of criminal discovery beyond the limits of Federal Rule of Criminal Procedure 16(b), expose the basis of the defense to the prosecution in advance of criminal trial, or otherwise prejudice the case.20 If delay of the noncriminal proceeding would not seriously injure the public interest, a court may be justified in deferring it. See, e.g., United States v. Henry, 491 F.2d 702 (6th Cir. 1974); Texaco, Inc. v. Borda, 383 F.2d 607, 608-609 (3d Cir. 1967); Silver v. McCamey, 221 F.2d 873, 874-875 (D.C.Cir.1955).21 Such cases have frequently arisen in the tax field, following the leading case of United States v. O'Connor, 118 F.Supp. 248 (D.Mass.1953). Cf. Boren v. Tucker, 239 F.2d 767, 772-773 (9th Cir. 1956) (distinguishing IRS summons enforcement before and after indictment). In some such cases, however, the courts may adequately protect the government and the private party by merely deferring civil discovery or entering an appropriate protective order. Gordon v. FDIC, 427 F.2d 578, 580-581 (D.C.Cir.1970). The case at bar is a far weaker one for staying the administrative investigation. No indictment has been returned; no Fifth Amendment privilege is threatened; Rule 16(b) has not come into effect; and the SEC subpoena does not require Dresser to reveal the basis for its defense.

The case at bar concerns enforcement of the securities laws of the United States, especially the Securities Act of 1933 ('33 Act), 48 Stat. 74, 15 U.S.C. § 77a et seq. (1976), and the Securities Exchange Act of 1934 ('34 Act), 48 Stat. 881, 15 U.S.C. § 78a et seq. (1976). These statutes explicitly empower the SEC to investigate possible infractions of the securities laws with a view to both civil and criminal enforcement, and to transmit the fruits of its investigations to Justice in the event of potential criminal proceedings. The '34 Act provides in relevant part: "The Commission 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 this chapter(.)" Section 21(a) of the '34 Act, 15 U.S.C. § 78u(a) (1976). This investigative authority includes the power to administer oaths and affirmations, subpoena witnesses, take evidence, and require production of any books, papers, correspondence, memoranda, or other records which the SEC deems relevant or material. Id., Section 21(b), 15 U.S.C. § 78u(b). If it determines that a person "is engaged or is about to engage in acts or practices constituting a violation" of the Act, the SEC may bring an action in federal district court to enjoin such acts or practices. Id., Section 21(d), 15 U.S.C. § 78u(d). Under the same subsection of the '34 Act the SEC may "transmit such evidence as may be available concerning such acts or practices * * * to the Attorney General, who may, in his discretion, institute the necessary criminal proceedings under this chapter." Id. The '33 Act is to similar effect. See Sections 19(b), 20(a), (b) of the '33 Act, 15 U.S.C. §§ 77s(b), 77t(a), (b) (1976).22

Effective enforcement of the securities laws requires that the SEC and Justice be able to investigate possible violations simultaneously. Dissemination of false or misleading information by companies to members of the investing public may distort the efficient workings of the securities markets and injure investors who rely on the accuracy and completeness of the company's public disclosures. If the SEC suspects that a company has violated the securities laws, it must be able to respond quickly: it must be able to obtain relevant information concerning the alleged violation and to seek prompt judicial redress if necessary. Similarly, Justice must act quickly if it suspects that the laws have been broken. Grand jury investigations take time, as do criminal prosecutions. If Justice moves too slowly the statute of limitations may run, witnesses may die or move away, memories may fade, or enforcement resources may be diverted. See United States v. Fields, 592 F.2d 638, 646 (2d Cir. 1978), cert. denied, 442 U.S. 917, 99 S.Ct. 2838, 61 L.Ed.2d 284 (1979). The SEC cannot always wait for Justice to complete the criminal proceedings if it is to obtain the necessary prompt civil remedy; neither can Justice always await the conclusion of the civil proceeding without endangering its criminal case. Thus we should not block parallel investigations by these agencies in the absence of "special circumstances" in which the nature of the proceedings demonstrably prejudices substantial rights of the investigated party or of the government. See United States v. Kordel, supra, 397 U.S. at 11-13, 90 S.Ct. at 769-770.

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.

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

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 :

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).

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.

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.

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.

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.

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 inve