UNITED STATES DISTRICT COURT
MEMORANDUM OF THE SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission ("Commission") respectfully submits this memorandum in support of its Application for an Order to Show Cause ("Application") and for an Order Requiring Obedience to Subpoena. Respondent Andrew S. Fastow, the former CFO of Enron Corp., has failed to comply with a validly issued and served subpoena for testimony and documents relating to an investigation of Enron and others associated with Enron.
Section 21(c) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78u(c), authorizes this Court to order enforcement of a Commission subpoena. As this Court has previously held, the "order to show cause" procedure "is appropriate for a subpoena enforcement proceeding." United States v. Stoltz, 525 F. Supp. 617, 620 (D.D.C. 1981) (Department of Energy subpoena); see also Federal Election Commission v. Committee to Elect Lyndon LaRouche, 613 F.2d 849, 853-62 (D.C. Cir. 1979) (affirming district court's enforcement of Federal Election Commission subpoenas through order to show cause proceeding), cert. denied, 444 U.S. 1074 (1980). Proposed orders to show cause and requiring obedience to the subpoena are submitted herewith for the Court's convenience. In addition, the Commission has filed the declaration of Douglas B. Paul, a staff attorney, with attached exhibits.
Because of Mr. Fastow's failure to comply with the subpoena, the Commission is unable to obtain testimony necessary for the conduct of its investigation. Accordingly, the Commission requests that the Court act expeditiously to grant this application and order the requested relief. See SEC v. Jerry T. O'Brien, Inc., 467 U.S. 735, 751 (1984) (noting importance that investigations into violations of federal securities laws be conducted in an expeditious manner).
A. The Commission's Investigation
On October 30, 2001, pursuant to Sections 21(a) and 21(b) of the Exchange Act, 15 U.S.C. § 78u(a)-(b), the Commission issued an Order Directing Private Investigation and Designating Officers to Take Testimony in an investigation captioned, In the Matter of Enron Corp. (the "Formal Order"). Paul Dec. at ¶ 4 (filed simultaneously herewith). The Formal Order enumerates the parameters of the investigation. The staff of the Commission is investigating, among other things, whether Enron and certain persons and entities associated with Enron, misstated or caused the misstatement of the financial condition and results of operations of Enron and disclosures related thereto, and whether certain persons and entities violated the anti-fraud provisions of the federal securities laws in connection withthe purchase and sale of Enron securities. The Commission believes that Mr. Fastow, the former CFO of Enron, was directly involved in and has personal knowledge of several matters under investigation.
B. The Subpoena and Respondent's Failure to Comply
On October 31, 2001, pursuant to the Formal Order and the Commission's Rules of Practice and Investigations, 17 C.F.R. 203.8, 201.232(c) and 201.150(c)(2), Mr. Fastow was served with a subpoena requiring that he appear for testimony on November 14, 2001. Paul Dec. at ¶ 10. Service was proper. Id. At the request of Mr. Fastow's counsel the date of testimony was rescheduled to December 12, 2001. Id. at ¶ 16. Mr. Fastow did not appear for testimony on December 12, 2001. Id. at ¶ 26. Mr. Fastow's failure to comply with the subpoena has impeded and continues to impede the Commission's investigation.
II. THIS COURT HAS THE POWER TO ENFORCE THE SUBPOENA.
A. This Court Has Jurisdiction, and Venue Properly Lies in this District
When Congress created the Commission and assigned to it the responsibility of protecting investors and ensuring the fairness and honesty of the nation's capital markets, Congress gave the Commission broad authority to conduct investigations and to demand production of evidence relevant to such investigations. See Section 20(a) of the Securities Act, 15 U.S.C. § 77t(a); Section 21(a) and (b) of the Exchange Act, 15 U.S.C. § 78u(a) and (b); Jerry T. O'Brien, 467 U.S. 735; SEC v. Dresser Industries, Inc., 628 F.2d 1368, 1379 (D.C. Cir.) (en banc), cert. denied, 449 U.S. 993 (1980); SEC v. Arthur Young & Co., 584 F.2d 1018, 1023 (D.C. Cir. 1978), cert. denied, 439 U.S. 1071 (1979). The Commission and its officers may, among other things, administer oaths, and subpoena witnesses and compel their testimony and attendance. Section 20(a) of the Securities Act, 15 U.S.C. § 77t(a);Section 21(b) of the Exchange Act, 15 U.S.C. § 78u(b).
When a subpoenaed party, such as Respondent Fastow, refuses to comply with a subpoena issued by the Commission, the Commission has the authority to seek a court order compelling such compliance. See Section 22(b) of the Securities Act, 15 U.S.C. § 77v(b); Section 21(c) of the Exchange Act, 15 U.S.C. § 78u(c). Congress has explicitly conferred jurisdiction on the United States District Courts, upon application by the Commission, to enforce the subpoena. Id. Accordingly, this Court has jurisdiction over the subject matter of this Application.
Venue is proper in this district because a Commission subpoena enforcement action may be brought in any United States District Court "within the jurisdiction of which such investigation or proceedings is carried on." Section 21(c) of the Exchange Act, 15 U.S.C. § 78u(c). Here, the investigation is being managed by the Commission's headquarters staff in Washington, D.C., and the subpoena was issued in and made returnable to Washington, D.C. Therefore, venue appropriately lies in this district. See Comm. To Elect Lyndon La Rouche, 613 F.2d at 853-862 (FEC subpoena).
B. The Commission's Subpoena Satisfies All Requirements for Enforcement
To enforce an administrative subpoena, a court must be satisfied that: (1) the inquiry is being conducted for a legitimate purpose, within the power of Congress to command; (2) the subpoena was issued in accordance with the required administrative procedures; and (3) the information sought is relevant to that legitimate purpose. SEC v. Howatt, 525 F.2d 226, 229 (1st Cir. 1975); See also Arthur Young, 584 F.2d at 1024; SEC v. Brigadoon Scotch Distributing Co., 480 F.2d 1047, 1056 (2d Cir. 1973), cert. denied, 415 U.S. 915 (1974). Once these threshold criteria are met, the burden shifts to the opposing party to establish that the subpoena is unreasonable. Brigadoon Scotch, 480F.2d at 1056; Arthur Young, 584 F.2d at 1034 n.139. When the Commission's inquiry is legally authorized and the information sought is relevant to the inquiry, the burden of showing unreasonableness "is not easily met." Brigadoon Scotch, 480 F.2d at 1056.
1. The Commission's purpose is lawful.
As stated above, the Commission's investigation is being conducted pursuant to a Formal Order issued by the Commission in accord with Sections 21(a) and 21(b) of the Exchange Act, 15 U.S.C. § 78u(a)-(b). These provisions authorize the Commission to conduct investigations in its discretion to determine whether any provisions of the Securities Act or the Exchange Act, or the rules or regulations promulgated thereunder, "have been or are about to be violated." 15 U.S.C. § 77t(a); see 15 U.S.C. § 78u(a).
The Formal Order authorizes the designated officers of the Commission to investigate, among other things, whether violations of the anti-fraud provisions of the federal securities laws have occurred.1 The Commission possesses regulatory authority over the anti-fraud provisions and has a Congressional mandate to enforce them. See, e.g., 15 U.S.C. § 77t(b) and 15 U.S.C. § 78u(d) (authorizing the Commission to commence injunctive actions in federal district court).
Moreover, the Commission need not show "probable" or "reasonable" cause to conduct an investigation. Howatt, 525 F.2d at 229; Brigadoon Scotch, 480 F.2d at 1053. In United States v. Morton Salt Co., 338 U.S. 632 (1950), the Supreme Court compared an agency inquiry to that of agrand jury, which can investigate on mere suspicion that the law has been violated, without a showing of probable cause:
338 U.S. at 642. The Commission performs a function similar to that of a grand jury, and the scope of its inquiries should not be limited narrowly by questions or forecasts of the probable results of its investigations. See United States v. Bisceglia, 420 U.S. 141, 147-48 (1975) (citing Blair v. United States, 250 U.S. 273, 287 (1919)); Arthur Young, 584 F.2d at 1023-24; Brigadoon Scotch, 480 F.2d at 1052-53. See also SEC v. First Security Bank of Utah, 447 F.2d 166, 168 (10th Cir. 1971), cert. denied, 404 U.S. 1038 (1972); Penfield Co. v. SEC, 330 U.S. 585 (1947).
In this matter, the Commission seeks to investigate the conduct and financial affairs of Enron, and persons and entities associated with Enron, during the time period at issue. Mr. Fastow, as the former CFO of Enron, played a central role in Enron's activities. Paul Dec at ¶¶ 6-9. The Commission's purpose in obtaining Mr. Fastow's testimony therefore is undoubtedly lawful and within the parameters of the authorizing statutes and case law.
2. The Commission has satisfied all administrative requirements.
The Commission issued the subpoena at issue here in accord with all applicable administrativerequirements. Section 19(b) of the Securities Act, 15 U.S.C. § 77s(b), and Section 21(b) of the Exchange Act, 15 U.S.C. § 78u(b), provide that the Commission may, in the course of conducting investigations, designate officers and empower them, among other things, to subpoena witnesses. In this instance, a staff attorney of the Division of Enforcement, designated in a Formal Order as an officer of the Commission, issued the subpoena to Mr. Fastow. Paul Dec. at ¶ 10.
Pursuant to Rule 8 of the Commission's Rules Relating to Investigations, and Rule 14(b)(3) of its Rules of Practice, an officer of the Commission may serve an investigative subpoena by several methods, including by any method conveying actual notice. 17 C.F.R. §§ 203.8 and 201.14(b)(3). While receipt of the subpoena by Mr. Fastow is not in controversy here, the subpoena was validly issued and served in compliance with applicable administrative procedures. Paul Dec. at ¶ 10.
3. The Commission's subpoena seeks relevant information
The Court of Appeals for the District of Columbia Circuit, in addressing the issue of relevance in a subpoena enforcement action, has held that "the test is relevance to the specific purpose, and the purpose is determined by the investigators." Arthur Young, 584 F.2d at 1031. Moreover, information is reasonably relevant to an investigation when "not plainly incompetent or irrelevant to any lawful purpose." 584 F.2d0 at 1029 (quoting Endicott Johnson Corp. v. Perkins, 317 U.S. 501, 509 (1943)).2 The D.C. Circuit has also emphasized that "law enforcing agencies have a legitimate right to satisfy themselves that corporate behavior is consistent with the law and the public interest." ArthurYoung, 584 F.2d at 1030 (quoting Morton Salt, 338 U.S. at 652).
In this case, the information sought from Mr. Fastow falls well within the applicable standard. The Commission seeks to learn, among other things, whether Mr. Fastow and others have violated the anti-fraud provisions of the federal securities laws. As Enron's CFO from 1998 to October 2001, Mr. Fastow occupied an important position within Enron and has personal knowledge of Enron's financial affairs. Paul Dec. at ¶¶ 3, 9.
C. The Commission Requests that the Court Consider its Application Expeditiously
Mr. Fastow's flouting of the Commission's subpoena has frustrated the Commission's investigation. Accordingly, the Commission respectfully asks that the Court act quickly to grant this application and order the requested relief. See Jerry T. O'Brien, 467 U.S. at 751 (noting importance that investigations into violations of federal securities laws be conducted in expeditious manner). Notably, Commission subpoena enforcement proceedings are generally summary in nature. See SEC v. Lavin, 111 F.3d 921, 926 (D.C. Cir. 1997); SEC v. Sprecher, 594 F.2d 317, 319-320 (2nd Cir. 1979); Donaldson v. United States, 400 U.S. 517, 528-529 (1971) (approving summary enforcement proceeding for IRS summons). Moreover, questions about the validity of subpoenas and the production of evidence are important matters of court business; and "[t]hese matters should be given precedence above other business . . . ." United States v. Davey, 426 F.2d 842, 845 (2d Cir. 1970) (IRS summons). See also United States v. Exxon Corp., 628 F.2d 70, 77 n.7 (D.C. Cir.) (DOE subpoena enforcement), cert. denied, 446 U.S. 964 (1980).
For the reasons stated above and in the Commission's Application, the Commission requests that the Court grant the Application and enter: (i) an Order, in the form submitted, requiring Mr. Fastow to show cause why he should not be ordered to appear for testimony pursuant to the subpoena properly issued by the Commission and served upon him; and (ii) an Order, in the form submitted, requiring obedience to the subpoena.
CERTIFICATE OF SERVICE
I hereby certify that on this ___ day of December 2001, I caused true and correct copies of the foregoing, "Application of the Securities and Exchange Commission for an Order to Show Cause and for an Order Requiring Obedience to Subpoena Ad Testificandum," along with a memorandum and declaration of Douglas Paul, submitted in support thereof, and two proposed orders, to be served to the following by the means specified: