UNITED STATES DISTRICT COURT
SECURITIES AND EXCHANGE COMMISSION'S APPLICATION
The United States Securities and Exchange Commission ("Commission") respectfully applies to this Court for: (i) an Order to Show Cause why Respondent Lawrence Artz should not comply with the Commission's administrative subpoenas for documents; and (ii) an Order compelling the Respondent to produce to the Commission's Boston District Office ("BDO") all documents responsive to the Commission's subpoenas dated March 20, 2003 and June 17, 2003, served upon him by the Commission staff.
This matter arises out of the Respondent's failure to comply with administrative subpoenas for documents that were properly issued by the Commission. As part of its formal investigation concerning possible material false statements made by Neurotech Development Corporation ("Neurotech"), on March 20, 2003 and June 17, 2003, an authorized member of theCommission staff issued administrative subpoenas to Lawrence Artz requiring that Mr. Artz produce documents relevant to the Commission's investigation. Pursuant to Mr. Artz's request, the staff subsequently agreed to extend the final return dates for both subpoenas to July 11, 2003. Although Mr. Artz has produced some documents responsive to the March 20, 2003 subpoena, he has failed to produce all documents responsive to that subpoena; moreover, Mr. Artz has not produced any documents in response to the June 17, 2003 subpoena. Mr. Artz has provided no explanation for his failure to comply with the subpoenas.
The Respondent's dilatory tactics are impeding and delaying a properly authorized investigation into possible violations of the federal securities laws. Accordingly, the Commission respectfully requests that this Court order the Respondent to produce all documents responsive to the subpoenas. In particular, the Commission requests that this Court issue: (i) an Order to Show Cause why Respondent Lawrence Artz should not comply with the Commission's administrative subpoenas for documents; and (ii) an Order compelling the Respondent to produce documents at the Commission's Boston District Office ("BDO") pursuant to the subpoenas dated March 20, 2003 and June 17, 2003, served upon him by the Commission staff.1
On March 20, 2003 the Commission issued a formal order of private investigation entitled In the Matter Neurotech Development Corporation, File No. B-01933 ("Formal Order"), pursuant to Sections 21(a) and Section 21(b) of the Securities Exchange Act of 1934 ("Exchange Act"). On April 17, 2003, the Commission issued a Supplemental Formal Order Designating anAdditional Officer, designating Martin F. Healey as an additional officer for the purposes of conducting the investigation described in the Formal Order. The Formal Order, as supplemented, directed certain Commission staff members to undertake a private investigation to determine if there were violations of the federal securities laws, including violations of the antifraud, reporting, and books and records provisions of the Exchange Act. See Declaration of Andrew D. Caverly in Support of the Securities and Exchange Commission's Application for an Order to Show Cause and an Order Requiring Lawrence Artz to Comply with Administrative Subpoenas ("Caverly Declaration"), ¶¶5-6.
Pursuant to the Formal Order and Supplemental Order, the BDO staff began investigating possible material false statements made by Neurotech Development Corporation ("Neurotech"), a publicly traded entity whose primary business purports to be the marketing of "rapid deployment healthcare systems," including prefabricated hospitals, in developing countries. Those statements were made in periodic reports filed with the Commission pursuant to the Exchange Act, as well as in press releases issued by Neurotech. Caverly Declaration, ¶ 7. Lawrence Artz is the vice president of Neurotech. He prepared the press releases and signed and was involved in the preparation of the periodic reports filed with the Commission that contained the statements that are the subject of the investigation. Caverly Declaration, ¶ 8.
The Commission staff initially requested, by letter dated February 12, 2003, that Mr. Artz produce documents voluntarily by February 18, 2003 and appear voluntarily for testimony on February 20, 2003. After those deadlines were extended at the request of Stephen Hill, Mr. Artz's attorney, Mr. Artz appeared for testimony and produced some documents on March 20, 2003. When Mr. Artz appeared on March 20, 2003, he was served with a subpoena, issued bythe Commission staff pursuant to the Formal Order, requiring him to testify and produce documents on that date. The document requests in the subpoena were identical to those in the February 12, 2003 voluntary request. Caverly Declaration, ¶ 9.
During his testimony on March 20, 2003 and March 27, 2003, Mr. Artz admitted that he had failed to produce all documents responsive to the subpoena. Mr. Artz stated that he had not searched for responsive e-mails and had not produced documents that were provided to a brokerage firm in connection with an attempted deposit of Indonesian bank guarantees and documents reflecting modifications to Neurotech's agreements to build hospitals in Indonesia. Mr. Artz and Mr. Hill indicated that some or all of those documents were located at Mr. Artz's office in China and that he would search for documents when he returned to China. Caverly Declaration, ¶ 10.
In a June 16, 2003 telephone conversation with Mr. Hill and in a June 17, 2003 letter to him, the Commission staff reiterated its request that Mr. Artz produce responsive documents that he identified in his testimony. In the telephone conversation, Mr. Hill indicated that Mr. Artz was returning to China the following week where he would have access to the responsive documents. Caverly Declaration, ¶ 11. On June 17, 2003, the Commission staff issued another subpoena to Mr. Artz requiring that he produce documents by June 25, 2003. The subpoena was sent by Federal Express to Mr. Hill who had confirmed in the June 16, 2003 telephone conversation that he still represented Mr. Artz. Caverly Declaration, ¶ 12.
At Mr. Hill's request, the Commission staff, by letter dated July 1, 2003, agreed to extend the return dates of the June 17, 2003 subpoena and the documents that were due from the March 20, 2003 subpoena to July 11, 2003. The staff informed Mr. Hill that this would be the onlyextension for the June 17, 2003 subpoena and the final extension for the March 20, 2003 subpoena. Caverly Declaration, ¶ 13.
On July 11, 2003, the Commission staff called Mr. Hill to inquire whether Mr. Artz would be producing the documents responsive to the two Commission subpoenas that were due that day. Mr. Hill informed the staff that he did not believe that Mr. Artz would produce the documents that day. As of today, Mr. Artz has not produced all documents responsive to the Commission's subpoenas and has offered no explanation for his failure to do so. Caverly Declaration, ¶ 14.
The staff needs the documents that Mr. Artz has failed to produce in response to the subpoenas to evaluate the statements made by Neurotech in its filings with the Commission and in its press releases and to determine whether Mr. Artz profited from trading in Neurotech stock when those statements were released. Caverly Declaration, ¶ 15.
A. The Federal Securities Laws Authorize This Court To Enforce
Section 21(c) of the Exchange Act, 15 U.S.C. § 78u(c), authorizes this Court to order enforcement of the Commission's subpoenas upon application of the Commission. Pursuant to this section, in the case of a refusal to obey a Commission subpoena by any person, the Commission "may invoke the aid of any court of the United States within the jurisdiction of which such investigation or proceeding is carried on. . . ." 15 U.S.C. § 78u(c). Courts in this district have utilized the show cause practice in subpoena enforcement proceedings filed by the BDO. See, e.g., SEC v. Calvin, MBD No. 02-10132-WGY (D. Mass. June 6, 2002); SEC v.Timson, MBD No. 02-10076-RCL (D. Mass. March 15, 2002); SEC v. DiBella, MBD No. 00-10235-NG (D. Mass. July 7, 2000); SEC v. Cottrill, MBD No. 99-10096-EFH (D. Mass. March 5, 1999); SEC v. Blizzard, MBD No. 97-10222-MLW (D. Mass. April 23, 1997).
Additionally, this subpoena enforcement action may properly be filed in the District of Massachusetts. The enabling statute provides that the Commission may file an application in any district court "within the jurisdiction of which such investigation or proceeding is carried on, or where such person resides or carries on business." 15 U.S.C. § 78u(c). See FTC v. MacArthur, 532 F.2d 1135, 1139-41(7th Cir. 1976) (discussing comparable venue provision for Federal Trade Commission petition for an order requiring compliance with a subpoena duces tecum). See also FEC v. Committee To Elect Lyndon La Rouche, 613 F.2d 849, 853-58 (D.C. Cir. 1979), cert. denied, 444 U.S. 1074 (1980) (discussing comparable venue provision for enforcing Federal Election Commission subpoena and holding that of the "hub of investigative activity" was proper jurisdiction for enforcing subpoena). Here the Commission's investigation in which Lawrence Artz was subpoenaed is being conducted by BDO staff and the subpoenas at issue were returnable in Boston. Accordingly, this application is properly before this Court.
B. The Commission's Subpoena Satisfies All Applicable Requirements To enforce an administrative subpoena, a court must be satisfied that: (1) the inquiry is being conducted for a proper purpose; (2) the subpoena was issued in accordance with the required administrative procedures; and (3) the information sought is relevant to that legitimate purpose. United States v. Powell, 379 U.S. 48, 57-58 (1964); SEC v. Howatt, 525 F.2d 226, 229 (1st Cir. 1975); SEC v. Murray Director Affiliates, Inc., 426 F. Supp. 684, 686 (S.D.N.Y. 1976).
Once the Commission meets these criteria, the opposing party bears the burden ofestablishing that the agency's purpose was unlawful or its subpoena unreasonable. United States v. Powell, 379 U.S. at 58 (unlawful purpose); SEC v. Arthur Young & Co., 584 F.2d 1018, 1034 n.139 (D.C. Cir. 1978), cert. denied, 439 U.S. 1071 (1979) (unreasonable burden); see also Howatt, 525 F.2d at 229 (court's role in enforcing subpoena is to ensure that process is not abused and agency is not acting in bad faith). When the Commission's inquiry is authorized and the information sought is relevant to the inquiry, the opponent's burden of showing unreasonableness "is not easily met." SEC v. Brigadoon Scotch Dist. Co., 480 F.2d 1047, 1056 (2d Cir. 1973), cert. denied, 415 U.S. 915 (1974). Here, the Commission's subpoenas satisfy all applicable standards.
1. The Commission's Inquiry is for a Proper Purpose
The Commission is authorized by Section 21(a) of the Exchange Act to exercise its discretion to conduct investigations to determine whether any person "has violated, is violating, or is about to violate" any provisions of the Exchange Act or the rules or regulations promulgated thereunder. 15 U.S.C. § 78u(a). This investigation is being conducted pursuant to the March 20, 2003 Formal Order, as supplemented on April 17, 2003, issued by the Commission pursuant to Section 21(a). Accordingly, this investigation is lawful and falls within the scope of authority that Congress granted to the Commission. See SEC v. Dresser Industries, Inc., 628 F.2d 1368, 1376 (D.C. Cir.), cert. denied, 449 U.S. 993 (1980); Treats International Enterprises, Inc., v. SEC, 828 F. Supp. 16, 18 (S.D.N.Y. 1993).2
2. The Commission Has Satisfied All Administrative Requirements
The subpoenas at issue satisfy all applicable administrative requirements. Pursuant to Section 21(b) of the Exchange Act, 15 U.S.C. § 78u(b), officers designated by the Commission are empowered to subpoena witnesses and require the production of relevant evidence. Andrew D. Caverly, senior counsel at the BDO, who issued the subpoenas to the Respondent, is specifically empowered by the Formal Order with authority to subpoena witnesses and documents for the Commission's investigation as to whether there had been violations of the federal securities laws. See Caverly Declaration, Exhibit A attachment, thereto.
In addition, pursuant to Rule 8 of the Commission's Rules Relating to Investigations, and Rule 14(b)(3) of the Rules of Practice, investigative subpoenas may be served by several methods, including in person and by express delivery service. 17 C.F.R. §§ 203.8, 201.232(c), 201.150(c). The March 20, 2003 subpoena was served on the Respondent personally and the June 17, 2003 subpoena was served on his attorney via overnight delivery. See Caverly Declaration, ¶¶ 9, 12. Accordingly, the subpoenas were issued properly, by an authorized officer of the Commission, and were served in compliance with applicable administrative procedures.
3. The Commission Is Seeking Relevant Information
For purposes of subpoena enforcement, relevance is established when the information sought is not "plainly incompetent or irrelevant for any lawful purpose." Arthur Young & Co.,584 F.2d at 1029 (citing Endicott Johnson Corp. v. Perkins, 317 U.S. 501, 509 (1943)). The Arthur Young court held that "the test is relevance to the specific purpose, and the purpose is determined by the investigators." 584 F.2d at 1031.
Here, the information sought by the Commission is relevant to the Commission's ongoing investigation of securities violations. The Commission seeks to learn, among other things, the basis for certain statements in reports that Neurotech filed with the Commission and in the company's press releases and whether Lawrence Artz profited from trading in Neurotech stock when those statements were released. The documents requested by the subpoenas are directly relevant to those issues.
C. The Respondent Has Failed to Provide Meritorious Reasons For His
Four months have elapsed since the issuance of the March 20, 2003 subpoena and Mr. Artz has still not provided a complete response. Mr. Artz also has not produced any documents responsive to the June 17, 2003 subpoena. Mr. Artz has given no reason for his failure to comply with the subpoenas.
D. The Commission's Application Should Be Granted Expeditiously
Because of the need for expeditious action, the law clearly provides that subpoena enforcement proceedings generally are summary in nature. SEC v. Sprecher, 594 F.2d 317, 319-320 (2d Cir. 1979); SEC v. First Security Bank of Utah, N.A., 447 F.2d 166, 168 (10th Cir. 1971), cert. denied sub nom. Nemelka v. SEC, 404 U.S. 1038 (1972). As the Court of Appeals for the Second Circuit stated in United States v. Davey:
426 F.2d 842, 845 (2d. Cir. 1970) (discussing IRS Summons).
The Respondent's failure to produce the subpoenaed documents already has delayed the staff's investigation of this matter significantly. The documents are important to the completion of the investigation. Accordingly, the Commission, by the undersigned counsel, respectfully requests this Court to act expeditiously to grant this Application and the requested relief.
For the reasons stated above, the Commission requests that its Application be granted in all respects and that this Court enter: (i) an Order to Show Cause why Respondent Lawrence Artz Should not Comply with the Commission's administrative subpoenas for documents; and (ii) an Order compelling the Respondent to produce to the Commission's Boston District Office all documents
responsive to subpoenas dated March 20, 2003 and June 17, 2003, served upon him by the Commission staff.