Petition — Dresser Industries, Inc. v. Securities & Exchange Commission

Supreme Court brief1980

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IN THE

Supreme Court of the United States

Ocroser Term, 1980

DRESSER INDUSTRIES, INC.,

Petitioner,

SECURITIES AND EXCHANGE COMMISSION,

Respondent,

UNITED STATES OF AMERICA,

Intervenor.

PETITION FOR A WRIT OF CERTIORARI

TO THE COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Davip R. MacponaLp

Counsel of Record for Petitioner

Francis D. Morrissrty

Paut McCarty

Epwarp E. Dyson

Baker & McKenziz

Attorneys for Petitioner,

Dresser Industries, Inc.

Baker & McKenzie

130 East Randolph Drive

Chicago, Illinois 60601

(312) 861-8000

A ETI NE ES TE, SOE RES TER ES SE NOT STR SRR AAP Tm

La Salle Street Press — Chicago Printed in U.S.A.

QUESTIONS PRESENTED

1. Whether the rule adopted by the Supreme Court in

Donaldson v. United States, 400 U.S. 517 (1971), and United

States v. LaSalle National Bank, 437 U.S. 298 (1978), pro-

hibiting the enforcement of administrative subpoenas to

protect the role of an empaneled grand jury, is limited to

summonses issued by the Internal Revenue Service or ex-

tends to subpoenas issued by the Securities and Exchange

Commission (“SEC”) and other administrative agencies.

2. Whether the Court of Appeals’ endorsement of post-

referral enforcement of an SEC subpoena and subsequent

exchange of information with the Justice Department:

a. Permits the Justice Department to conduct dis-

covery during a grand jury investigation outside of the

grand jury, contrary to a holding of the Court of Ap-

peals for the First Circuit ;

b. Permits the SEC (and other agencies empowered

to conduct their own litigation) to infringe on the role

of the grand jury as a principal tool of criminal accu-

sation, contrary to this Court’s interpretation of Article

II, Section 3 of the United States Constitution; and

c. Permits the SEC and Justice Department to avoid

the protections of Rule 6(e) of the Federal Rules of

Criminal Procedure, contrary to holdings of the Courts

of Appeals for the Third and Seventh Circuits and of

the District Court for the Northern District of Cali-

fornia.

3. Whether an agreement entered into by a federal

agency, governing the procedures under which its investi-

gation will be conducted, may be enforced against that

agency.

PARTIES

In the United States Court of Appeals for the District

of Columbia Circuit, the parties originally appearing before

the Court of Appeals panel (the “panel”) were Dresser

Industries, Inc., appellant, and the Securities and Exchange

Commission, appellee.

After the panel’s opinion was rendered, the United States

(through thesDepartment of Justice) was allowed to inter-

vene. The Court of Appeals vacated the panel’s opinion

and ordered a rehearing en banc. The United States then

participated in the rehearing.

Edward R. Luter, Vice President of Dresser, on behalf

of himself and certain other Dresser employees, applied

to the District Court and to the Court of Appeals to inter-

vene in the proceeding. This application was denied by both

courts.

Service of this petition has been made upon all of the

above parties.

iii

TABLE OF CONTENTS

Seema. Freee a osc a bhi sins os oe anv ete eke

POR vn bc kp rucedv is vhs £08 4le Nnccena tetas sonal

CII, FO pre 955945 os he an Ms oe a se

BB eee Eee VCE: LOT ry Tee a EP See L

Constitutional Provisions, Statutes

aE SE RAIN 5 36 ee Now Sg hee 00k wea ues,

NUS AE TR TE ins 6 oreo aac oboe naw ee eeerer

Reasons for Granting the Writ ..............0eeeee:

I. The Opinion of the Court of Appeals Conflicts

with this Court’s Opinions in United States v.

LaSalle National Bank, 437 U.S. 298 (1978), and

Donaldson v. United States, 400 U.S. 517 (1971) ..

II. The Court of Appeals Decision Conflicts with De-

cisions of This Court and with Decisions of Other

Federal Courts of Appeals by (a) Expanding the

Justice Department’s Criminal Discovery Powers;

(b) Permitting the SEC to Infringe on the Role of

the Grand Jury; and (c) Allowing Information to

be Exchanged between the Agencies Outside the

Protections of Rule 6(e) of the Mederal Rules of

Criminal POROGO si oid os 0 ike wh avaeas ecass

A. The Court of Appeals Decision Conflicts with

the Requirement of In Re Melvin That During

a Grand Jury Investigation the Prosecutor

Must Conduct Discovery Only Through the

CUNUNE OUND ec ckcacdeae hdr hes tein eeetieas

Ill.

B. The Court of Appeals Justified Its Decision

by Attributing to the SEC Powers That the

SEC Does Not and Constitutionally Cannot

SN EECA) ea sAos dm ce Thos hanes ewer es 14

C. The Court of Appeals Decision Is the First

To Authorize an Exchange of Information be-

tween the Justice Department and the SEC

Without Providing for the Protection of Rule

6(e) of the Federal Rules of Criminal Pro-

RS ss ce ey cent cat bh k Oca kw de Meee 17

The Subpoena Should Not Be Enforced Until the

SEC Honors the Agreement That It Has Ad-

mittedly Entered into with Dresser Governing the

Means by Which the SEC Would Conduct Its

I 5k nc SON AN i eee OK Baie eik eee bs 21

cds os bin Sie eey a tv oe kha 6 das bees Cue 24

Appendices

A. Opinior of the en bane Court of Appeals ...... A-1

B. Opinion of the Panel of the Court of Appeals .. B-1

C. Opinion of the District Court ................ C-1

D. Constitutional Provisions, Statutes and

ee dae cere ng. wa ea es antes D-1

TE. RGU OE W. EOE PEO son cect ewe cdece E-1

F. Affidavit of Barbara N. Brandon .............. F-1

TABLE OF AUTHORITIES

Cases

PAGE

Buckley v. Valeo, 424 U.S. 1 (1976) .............005. 11, 16

Donaldson v. United States, 400 U.S. 517 (1971) ..... i, 4, 5, 6,

7, 8, 10, 24

Dow Jones & Co., Inc. v. SEC, No. 79-1238 (D.D.C.,

EY Oe ME, 5 ob uGs.o ce nehe Ay awks aketes cawne 4

Humphrey’s Executor v. United States, 295 U.S. 602

SE Sx 1 ok UG Kaa wie hbckee ek baa nw eee hoa aces 16

ICC v. Southern Ry., 543 F.2d 534, 536 (5th Cir. 1976) 15

In re Grand Jury (General Dynamics Corp.), [Cur-

rent] Fed. Sec. L. Rep. (CCH) § 97,562 ...........

In re Melvin, 546 F.2d 1 (1st Cir. 1976) ............. 11,13

| In re Perlin, 589 F.2d 260 (7th Cir. 1978) ........... 19

Ponzi v. Fessenden, 258 U.S. 254 (1922) ............. 16

Santobello v. New York, 404 U.S. 257 (1971) ......... 23

SEC v. Dresser Industries, Inc., 453 F. Supp. 573

SR: SE, ho caceens Cc dhas ohne den whaeeoans 1, 10, 21

SEC v. Fourth National Bank, [1979 Transfer Binder]

Fed. Sec. L. Rep. (CCH) 96,940 (N.D. Okla. 1979) 8,9

SEC v. Gilbert, 79 F.R.D. 683 (S.D.N.Y. 1978) ...... 8,9

SEC v. OKC Corp., 474 F. Supp. 1031 (N.D. Tex.

ee tl a ee 8, 9, 22

Sherman v. United States, 356 U.S. 369 (1958) ....... 23

Springer v. Philippine Islands, 277 U.S. 189 (1928) ... 16

PAGE

Standard Sanitary Manufacturing Co. v. United States,

et AED -chetnukeye hy Pane cetnedas Ahweas 5

The Grey Jacket, 72 U.S. (5 Wall) 370 (1867) ........ 15

United States v. Birdman, 602 F.2d 547 (3d Cir. 1979),

cert. denied, 444 U.S. 1032 (1980) ................. 20

United States v. Dionisio, 410 U.S. 1 (1973) .......... 13

United States v. Dondich, 460 F.Supp. 849 (N.D. Cal.

EE Cds Piss cutee nen a cannd ae akan eebee ahd 19

United States v. Fields, 592 F.2d 638, cert. denied, 442

Ss OT SE oka tas ke Aud NGas earn ce mehke oe 18

United States v. Kordel, 397 U.S. 1 (1970) ........... 4,5, 20

United States v. LaSalle National Bank, 437 U.S. 298

RNs Gans <kteins Jaws Jaks Ano ee sa aa enone Meee s i, 4, 5, 6, 7,

8, 9, 10, 11,

12, 13, 14,

15, 16, 18,

19, 20, 24

Constitution

SP, Ss EE a bk a pened hae sock aed xecs eer i, 2

Statutes

Foreign Corrupt Practices Act., P.L. 95-213, 91 Stat.

RPE LAUD, ec ccdes caus nitadasceshecisrebian ests 18, 20

Pe es PI hs CUE, CUED Gs wink c'cep cenweeedescecuan 2,14

RG GEG 554s as ob Gs 6ee eae oM Rd owee ns S 2,14

EE ss vn pe dadenac enna ban hedbnent 2,15

ET SOG APS een cc rte tae 2,15

Vii

Rules

Federal Rules of Criminal Procedure

Ng 5.4075" ate Bile Abie Wd 00 4,4. 64 WER ee 8 Oe 17

Legislative History

Excerpts from Legislative History of Foreign Corrupt

Practices Act:

S. Rep. No. 114, 95th Cong., Ist Sess. 11-12 (1977) .. 18, 20

H.R. Rep. No. 95-640, 95th Cong., Ist Sess. 9-11

SU "has dls has hc kM crue Sd 4 oo ewe lee ek ade 18, 20

Miscellaneous

Huffman, “Circuit Opens Door to Parallel Investiga-

tions in Dresser Ruling”, Legal Times of Washing-

Ps has one boo bw hans ee eeene ake 6

“Civil War Among the Federal Agencies,” Barrister,

ee eS nO oot a als ued a Sk noobie we 17

“When the Government Goes to Court, Who Should

Speak for Uncle Sam?”, National Journal, July 5,

Ren RE RS ee Ree ee Sacer, Po wy Ot, MMi 17

IN THE

Supreme Court of the Anited States

Ocroser Term, 1980

DRESSER INDUSTRIES, INC.,

Petitioner,

SECURITIES AND EXCHANGE COMMISSION.

Respondent,

UNITED STATES OF AMERICA,

Intervenor.

PETITION FOR A WRIT OF CERTIORARI

TO THE COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

The petitioner, Dresser Industries, Inc. (“Dresser”)

prays that a writ of certiorari issue to review the judg-

ment of the United States Court of Appeals for the Dis-

trict of Columbia Circuit in this case.

OPINIONS BELOW

The opinion of the District Court for the District of

Columbia is reproduced at Appendix C, infra and pub-

lished at 453 F.Supp. 573 (D. D.C. 1978). The opinion of

the panel of the Court of Appeals is reproduced at Appendix

B, infra. The opinion of the Court of Appeals en banc is

not yet reported. It is reproduced at Appendix A, infra.

JURISDICTION

A judgment was rendered by the Court of Appeals on

July 16, 1980, after a rehearing en banc, which affirmed the

order of the District Court. The mandate of the Court of

Appeals was stayed by the Court of Appeals on August 11,

1980.

The jurisdiction of this Court to issue a writ of certiorari

is invoked under 28 U.S.C. § 1254(1).

CONSTITUTIONAL PROVISIONS, STATUTES

AND RULES INVOLVED

Article II, Section 3 of the United States Constitution

provides :

[The President] shall ... take Care that the Laws be

faithfully executed.

Other statutes and rules involved in this case are set

forth in Appendix D. They are:

15 U.S.C. § 78 u(a), (b) and (d)

26 U.S.C. § 7602

28 U.S.C. §§ 516-519

28 U.S.C. § 547

Federal Rules of Criminal Procedure, Rule 6(e)

STATEMENT OF THE CASE

The Court of Appeals below, after a rehearing en banc,

vacated a prior decision of its panel (Bazelon, Sr. J., and

Bryant, Dist. J., sitting by designation; Robb, J.

dissenting) and affirmed the judgment and order of the

District Court, enforcing an SEC administrative sub-

poena against Dresser. The Court of Appeals reached this

decision in the face of the following facts:

(1) The same matter under investigation by the

SEC had previously been referred by the SEC to

the Justice Department for criminal investigation

pinder the same federal securities laws that govern

vue SEC investigation.

(2) The Justice Department, after this referral,

convened a grand jury, which is continuing its investi-

gation and which has subpoenaed and received from

Dresser some (but not all) of the same documents which

the SEC has subpoenaed.

(3) The grand jury investigation is being conducted

under a specific protective order, entered by the Dis-

trict Court supervising the grand jury investigation,

which order extends the secrecy provisions of Rule

6(e) of the Federal Rules of Criminal Procedure

(“Rule 6(e)”) and includes documents as well as testi-

mony, for the purpose of protecting certain Dresser

employees and their families who live or travel abroad.

(4) The documents produced to the SEC by Dresser

will be transmitted by the SEC to the Justice Depart-

ment attorneys conducting the grand jury investigation.

(5) The Justice Department attorneys conducting

the grand jury investigation will share information

and enter into a “close working relationship” with the

SEC attorneys conducting the civil investigation, all

outside the protection of Rule 6(e) and the District

Court’s protective order.

(6) The SEC has represented to Dresser that there

is no way that it can assure that the subpoenaed docu- -

ments will not be disclosed pursuant to demands under

the Freedom of Information Act, and has admitted that

such demands have already been made and that a suit

has been filed to obtain the documents in question.

(Dow Jones & Co., Inc. v. SEC, No. 79-1238 (D.D.C.,

filed May 4, 1979)).

The Court of Appeals also approved enforcement of the

SEC subpoena despite the fact that the SEC had failed to

honor an agreement with Dresser that it would in the first

instance examine Dresser’s documents at Dresser’s premises

without taking notes revealing names of persons or coun-

tries, for the purpose of protecting certain Dresser em-

ployees and their families who live or travel abroad.

The panel opinion had allowed enforcement of the SEC

subpoena, but had required the SEC to withhold “the fruits

of the Commission’s civil discovery . . .” in order to “main-

tain the integrity of the criminal discovery process.” Panel

slip op. at 22. The panel’s opinion was based upon the ap-

plicability of this Court’s decisions in United States v.

LaSalle National Bank, 437 U.S. 298 (1978), and Donaldson

v. Umted States, 400 U.S. 517 (1971) to the SEC.

The Court of Appeals, however, authorized the enforce-

ment of the SEC subpoena and the transmission of the sub-

poenaed information to the Justice Department. In doing

so, it limited the application of LaSalle to the IRS and con-

strued four Supreme Court decisions in a manner diamet-

rically contrary to the panel.' To Dresser’s knowledge, no

other court has limited the application of LaSalle to the IRS.

1 These decisions are :

(a) United States v. LaSalle National Bank, 437 U.S. 298

(1978). The panel opinion interpreted LaSalle as applying

to the SEC (panel slip op. at 14, 21) while the en banc

The Court of Appeals proceeded to approve a “close work-

ing relationship” and the “sharing of information” be-

tween the two agencies in their respective criminal and

civil investigations. En banc slip op. at 36, 38. The Court

approved this sharing of information outside the protections

of Rule 6(e), Fed R. Crim. P., on the basis of this Court’s

statement in LaSalle that: “[I]t i* unrealistic to attempt

to build a partial information barrier between the two

branches of the executive.” 437 U.S. at 312. All other

courts that have examined this matter have construed this

statement to authorize interagency cooperation only within

the protection of Rule 6(e).

1 (Continued)

opinion held that decision to be limited to the Internal

Revenue Service (en banc slip op. at 19).

(b) Donaldson v. United States, 400 U.S. 517 (1971). The en

banc opinion also held Donaldson to be restricted to the

Internal Revenue Service (en banc slip op. at 19 n. 25)

while the panel opinion interpreted that decision as pro-

hibiting the enforcement of all post-referral civil subpoenas

(panel slip op. at 14 n. 30).

opinion recognized that Kordel did not involve parallel

criminal a1 . civil investigations (panel slip op. at 16 n. 37)

while the en bane opinion characterized that decision as

sanctioning parallel criminal and civil investigations by

agencies other than the Internal Revenue Service (en bane

slip op. at 13, 18).

(d) Standard Sanitary Manufacturing Co. v. United States, 226

U.S. 20 (1912). The panel opinion interpreted Standard

Sanitary as sanctioning parallel civil and criminal enforce-

ment proceedings but not simultaneous investigations

(panel slip op. at 16 n. 37) while the en banc opinion held

that that decision permitted parallel civil and criminal

investigations (en bance slip op. at 11).

REASONS FOR GRANTING THE WRIT

Preliminary Statement

The Court of Appeals opinion fundamentally alters the

means by which a citizen’s conduct can be investigated by

the executive branch of the government. All parties to this

litigation have acknowledged the far reaching importance

of the issues raised herein. The Court of Appeals itself

noted that it vacated the panel’s decision “[b]ecause of the

importance of this issue [of parallel investigations and

exchange of information between the SEC and the Justice

Department] to enforcement of the regulatory laws of the

United States ...”. En banc slip op. at 3. Moreover, the

SEC general counsel has noted that the Court of Appeals

decision will apply not only to the SEC but to all other

agencies authorized to conduct their own litigation.”

The Court of Appeals decision permits what this Court

sought to avoid by prohibiting the post-referral use of

administrative subpoenas in LaSalle: “The likelihood that

discovery would be broadened or the role of the grand jury

infringed [by] post-referral use of the summons author-

ity ...” 437 U.S. at 312. The decision also allows unlimited

exchange of information between civil and criminal investi-

gative agencies during a grand jury investigation, which

inevitably will result in a breach of grand jury secrecy and

loss of control by the grand jury over its own investiations.

Perhaps more important, the Court of Appeals’ opinion

draws a distinction between the relationship of the SEC and

the IRS vis a vis the Justice Department that has never been

authorized by Congress. Moreover, even were such a dis-

tinction authorized, it would result in an unconstitutional

delegation of executive branch power to the SEC.

2 See Huffman, Circuit Opens Door to Parallel Investigations in

Dresser Ruling, Legal Times of Washington, July 21, 1980 at 1.

Dresser respectfully submits that the Court of Appeals’

characterization of the role and functioning of the grand

jury; of the protections accorded by grand jury investiga-

tions; of the relationship between these investigations and

simultaneous civil investigations into the same matters;

and of the Court’s delegation of unlimited subpoena author-

ity to the SEC after that agency refers a matter for criminal

investigation, are appropriate subjects for review by this

Court.

THE OPINION OF THE COURT OF APPEALS

CONFLICTS WITH THIS COURT’S OPINIONS IN

UNITED STATES v. LASALLE NATIONAL BANK,

437 U.S. 298 (1978), AND DONALDSON v. UNITED

STATES, 400 U.S. 517 (1971).

The Court of Appeals’ opinion on rehearing has restricted

the application of this Court’s decisions in LaSalle and

Donaldson to the IRS; the panel of the Court of Appeals

and every lower court confronting this issue have interpreted

the policy concerns of LaSalle and Donaldson to be —

cable to investigations by the SEC.

In United States v. LaSalle National Bank, 437 U.S. 298

(1978), this Court explained a prophylactic rule that

had been propounded in Donaldson v. United States, 400

U.S. 517, 536 (1971). The Donaldson Court had stated that

an IRS summons “may be issued in aid of an [IRS] in-

vestigation if it is issued in good faith and prior to a recom-

mendation for criminal prosecution.” 400 U.S. at 536

(emphasis added). The LaSalle opinion, expanding upon

Donaldson, identified two “policy interests” that preclude

enforcement of a civil summons after criminal reference:

A referral to the Justice Department permits crim-

inal litigation to proceed. The IRS cannot try its own

prosecutions. Such authority is reserved to the Depart-

ment of Justice and, more particularly, to the United

States Attorneys. 28 U.S.C. § 547(1). Nothing in § 7602

or its legislative history suggests that Congress in-

tended the summons authority to broaden the Justice

Department’s right of criminal litigation discovery or

to infringe on the role of the grand jury as a principal

tool of criminal accusation. Accord, United States v.

Morgan Guaranty Trust Co., 572 F.2d 36 (CA2 1978) ;

United States v. Weingarden, 473 F.2d 454, 458-459

(CA6 1973); United States v. O’Connor, 118 F.Supp.

248, 250-251 (Mass. 1953); see Donaldson v. United

States, 400 U.S. at 536; cf. Abel v. United States, 362

U.S. 217, 226 (1960). The likelihood that discovery

would be broadened or the role of the grand jury

infringed is substantial if post-referral use of the

summons authority were permitted. 437 U.S. at 312.

Although the majority determined that a “good faith”

test must be saticfied by the IRS prior to referral to the

Justice Department, the Supreme Court was unanimous in

reaffirming the Donaldson rule prohibiting the enforcement

of a civil summons after criminal referral, even if issued

in good faith. See as to the minority opinion, 437 U.S. at

320-21.

The panel of the Court of Appeals, as well as every

other court that has faced the issue, has interpreted the

policy concerns expressed by the Supreme Court in LaSalle

to apply also to the SEC. See the panel slip op. at 14, 21;

SEC v. Fourth National Bank, [1979 Transfer Binder]

Fed. Sec. L. Rep. (CCH) 96,940 (N.D. Okla. 1979); SEC

v. Gilbert, 79 F.R.D. 683, 687 (S.D.N.Y. 1978) ; SEC v. OKC

Corp., 474 F.Supp. 1031, 10388 (N.D. Tex. 1979). See also

In re Grand Jury Subpoena (General Dynamics Corp.),

[Current] Fed. Sec. L. Rep. (CCH) § 97, 562 (D. Conn. May

19, 1980).

The panel opinion (Bazelon, Sr. J.) recognized that

the Justice Department may not “use the SEC’s broad

subpoena power to subvert the limitations of criminal dis-

covery.” Panel slip op. at 18. The panel concluded, how-

ever, that the specific remedy of LaSalle need not be ap-

plied in this case. The panel therefore allowed both civil

and criminal investigations to proceed, but prohibited the

SEC from transferring to the Justice Department the fruits

of the SEC’s subpoena. This remedy was based upon re-

peated representations made to the panel by the SEC that

the civil and criminal investigations were separate from

each other. “In this way,” concluded the panel, “we respect

the need to maintain the integrity of the criminal discovery

process and of the grand jury, while permitting the SEC to

go forward with its responsibilities to protect the investing

public.” Panel slip op. at 22-23.

‘ue same solution prescribed by the panel was found to

be appropriate in protecting a grand jury investigation in

the case of SEC v. Fourth National Bank, [1979 Transfer

Binder] Fed. Sec. L. Rep. (CCH) 96,940, at 95,942 (N.D.

Okla. 1979), based upon the SEC’s similar representations

of independence (“The SEC has demonstrated through affi-

davits that no exchange of information is occurring with

respect to the criminal inquiry by the DOJ... .”) and in

SEC v. Gilbert, 79 F.R.D. 683, 687 (S.D.N.Y. 1978), in which

a similar protective order was granted (“However, to pre-

vent the possibility of abuse, the Commission is ordered

not to furnish the U.S. Attorney specially with any informa-

tion procured in the course of discovery in this case.”).

In SEC v. OKC Corp., supra, the district court, applying

the LaSalle doctrine, distinguished situations in which the

SEC did not refer the matter for prosecution. Assuming

‘hat it was possible to build an information barrier between

the Justice Department and a non-referring agency, the

court stated:

By prohibiting post-reference use of the agency

subpoena, the [Supreme] Court recognized that it was

promoting agency cooperation without expanding Jus-

tice’s criminal discovery or infringing upon the role of

[the] grand jury .... Only if the non-referring agency

[the SEC] actively assists the Department of Justice

in its investigation do the dangers of broadening Jus-

tice’s discovery and infringing on the province of the

grand jury arise. The cooperation that is both unavoid-

able and encouraged between Justice and the referring

agency, however, is neither inevitable nor even expected

between Justice and a nonreferring agency. The court

is therefore unwilling to hold as a matter of law that

a nonreferring agency’s investigation, commenced inde-

pendently of a criminal investigation referred by a

different agency, must cease simply because of the

pendency of the independent criminal investigation.

474 F. Supp. at 1038.

The Court of Appeals, however, ruled that the LaSalle

and Donaldson opinions did not express a generalized con-

cern of the Supreme Court; and that the LaSalle decision “is

not based on principles generally applicable to parallel civil

and criminal proceedings, but on limitations unique to the

IRS.” En banc slip op. at 19 n. 25. The Court of Appeals did

recognize that the concerns expressed by this Court might

well be generally applicable to all administrative agencies

after an indictment has been returned, a matter stressed

in a separate concurring opinion of Judge Edwards. En

banc slip op. at 14; concurring op. at 1. Prior to an indict-

ment, however, the Court of Appeals concluded that “the

‘policy interests’ of LaSalle have little practical signifi-

cance” in the context of a subpoena enforcement action

of an agency other than the IRS. En banc slip op. at 25.

The first reason for granting the writ of certiorari, there-

fore, is that this Court should resolve the conflict whether

the concerns expressed in LaSalle and Donaldson for the

grand jury process apply generally to civil enforcement

proceedings or whether these concerns are limited to the

IRS.

THE COURT OF APPEALS DECISION CONFLICTS

WITH DECISIONS OF THIS COURT AND WITH DECI-

SIONS OF OTHER FEDERAL COURTS OF APPEALS

BY (A) EXPANDING THE JUSTICE DEPARTMENT'S

CRIMINAL DISCOVERY POWERS; (B) PERMITTING

THE SEC TO INFRINGE ON THE ROLE OF THE GRAND

JURY; AND (C) ALLOWING INFORMATION TO BE

EXCHANGED BETWEEN THE AGENCIES OUTSIDE

THE PROTECTIONS OF RULE 6(e) OF THE FEDERAL

RULES OF CRIMINAL PROCEDURE.

The Court of Appeals decision would permit the SEC

and the Justice Department to conduct parallel civil and

criminal investigations into the same matter and freely

exchange the fruits of their respective investigations even

after the matter has been referred to the Justice Depart-

ment and a grand jury has begun its investigation. In addi-

tion to misconstruing and misapplying this Court’s opinion

in Umited States v. LaSalle National Bank, 437 U.S. 298

(1978), the Court of Appeals decision:

(a) Permits the Justice Department to conduct crim-

inal discovery through the SEC, thereby conflicting

with the decision of the Court of Appeals for the First

Circuit in In re Melum, 546 F.2d 1 (1st Cir. 1976), which

holds that, during a grand jury investigation, the Jus-

tice Department may only corduct criminal discovery

through the grand jury;

(b) Allows the SEC and other agencies empowered

to conduct their own litigation to act independently

of the Justice Department in a manner that must result

in infringement on the role of the grand jury, thereby

conflicting with the holding of this Court in Buckley v.

Valeo, 424 U.S. 1 (1976), that the Executive Department

must exercise ultimate control over litigation by the

United States ; and

between the agencies, thereby conflicting with the plain

language of Rule 6(e) of the Federal Rules of Criminal

Procedure, as interpreted by the Courts of Appeals for

the Third and Seventh Circuits and the District Court

for the Northern District of California, all of which

have interpreted LaSalle as sanctioning interagency

cooperation only within the protections of Rule 6(e).

Each of these points is discussed below.

A. The Court of Appeals Decision Conflicts With The

Requirement Of In Re Melvin That During a Grand

Jury Investigation The Prosecutor Must Conduct

Discovery Only Through The Grand Jury.

The Court of Appeals decision dismissed the contention

that the Justice Department should solicit and obtain grand

jury approval if it intends to obtain evidence through

coercive discovery of another agency, concluding that:

Obtaining the approval of the grand jury itself is

not a serious impediment to Justice’s efforts; indeed,

the common practice is for grand jury subpoenas to

be issued in blank, with the contents to be filled in by

the prosecutor. See In re Grand Jury Proceedings, 486

F.2d 85, 87 (3d Cir. 1973). En bane slip op. at 26 n. 33.

Thus, the Court concluded that because grand jury ap-

proval is normally a formality in the issuance of a grand

jury subpoena, grand jury approval is not required, and

the Justice Department can, in effect, utilize the SEC’s

subpoena powers to obtain evidence.

Dresser is not naive regarding the relationship between

prosecutor and grand jury. Dresser does not believe, how-

ever, that because the grand jury is rarely a shield between

the prosecuter and the ordinary citizen, the grand jury has

lost control over its own investigation as a matter of law.

Rather, Dresser understands this Court’s concern in

LaSalle, 437 U.S. at 312, that a post-referral summons may

“infringe on the role of the grand jury as a principal

tool of criminal accusation” to mean that the grand jury

should not lose its power to decide whether, when, and in

what manner witnesses or targets of its investigation may

be subjected to coercive discovery. Similarly, the concern

expressed by this Court in LaSalle that the Justice Depart-.

ment’s right of criminal discovery not be broadened may

only be given effect if the Justice Department is required

to conduct that discovery through the grand jury rather

than through an SEC subpoena.

This interpretation is buttressed by the statement of this

Court in United States v. Dionisio, 410 U.S. 1, 17-18 (1973),

that:

The grand jury may not always serve its historic

role as a protective bulwark standing solidly between

the ordinary citizen and an overzealous prosecutor, but

if it is even to approach the proper performance of its

constitutional mission, it must be free to pursue its

investigations unhindered by external influence or

supervision so long as it does not trench upon the

legitimate rights of any witness called before it.

At least one Court of Appeals has interpreted Dionisio as

preventing the Justice Department from obtaining evidence

through coercive process other than a grand jury subpoena

once a grand jury investigation has begun. In In re Melvin,

546 F.2d 1 (1st Cir. 1976), the prosecutor had requested and

obtained a court order under Rule 17, Fed. R. Crim. P., for

the purpose of forcing the defendant to appear at a police

lineup. The Court of Appeals vacated the order, noting that:

[T]he broadcast delegation of a power of this mag-

nitude to the United States Attorney cannot be accepted

if the grand jury’s own role is to remain at all mean-

ingful. Cf. United States v. Dionisio, supra, 410 U.S.

at 23-24, 93 S.Ct. 764 (Douglas J., dissenting). Assum-

ing without deciding that a directive to appear in a

lineup is within the grand jury’s power to issue, we

think that the directive has to come from the grand

jury itself and has to be conveyed by the grand jury

to the witness in an appropriately formal fashion.

Thereafter, if the witness will not comply, the court

upon petition of the United States Attorney may in

supplemental proceedings assist the grand jury in

securing compliance. 546 F.2d at 5.

This Court should resolve this conflict and determine

whether the grand jury should control (albeit with the

guidance of the prosecutor) the direction, scope and pace

of its own investigation, or whether that control may be

avoided by the Justice Department’s use of coercive powers

residing in civil agencies.

B. The Court of Appeals Justified Its Decision By

Attributing To The SEC Powers That The SEC Does

Not And Constitutionally Cannot Have.

The Court of Appeals realized that neither the IRS nor

the SEC is statutorily prohibited from issuing subpoenas

in furtherance of their respective statutory mandates after

referring a case to the Justice Department for criminal

investigation. Compare 26 U.S.C. § 7602 with 15 U.S.C.

§ 78u(a), (b), (d). The Court of Appeals, however, refused

to apply this Court’s prophylactic rule against post-referral

summons enforcement to the SEC, because it concluded that

the SEC (but not the IRS) is empowered to conduct its

own enforcement proceedings:

[T]he 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. En banc slip op. at 19.

This justification for ignoring LaSalle, however, raises

a fundamental statutory and constitutional problem. That

problem results from the fact that the authority of the

SEC to enforce the laws, even though it is greater than the

enforcement authority of the IRS, is subject to the over-

riding responsibility of the Justice Department to protect

the integrity of the criminal investigatory process. The

SEC, therefore, as a quasi-judicial, quasi-legislative body,

cannot constitutionally separate its enforcement authority

from that of the executive branch of government in order

to justify infringement on the grand jury.

The Justice Department has been designated by law as

the agent of the President to control all litigation, civil and

criminal, in which the Attorney General determines that

the United States is interested. See 28 U.S.C. §§ 516-519 and

28 U.S.C. § 547. (Appendix D at D3-D4). Section 518(b),

in particular, reads:

When the Attorney General considers it in the in-

terests of the United States, he may personally con-

duct and argue any case in a court of the United States

in which the United States is interested, or he may

direct the Solicitor General or any officer of the De-

partment of Justice to do so.

In ICC v. Southern Ry., 543 F.2d 534, 536 (5th Cir.

1976), the Fifth Circuit reaffirmed “the traditional re-

sponsibility of the Attorney General over the conduct of all

litigation on behalf of the United States and its agencies.”

See also The Grey Jacket, 72 U.S. (5 Wall) 370 (1867).

There is no provision in the securities laws that negates

the effect of these statutes and decisions. Thus, the Depart-

ment of Justice retains supervisory control over agency

litigation, even over agencies that are statutorily author-

ized to conduct their own court proceedings. If Justice does

retain such control, why should it not supervise all civil liti-

gation whenever necessary to give effect to the “policy in-

terests” promulgated by this Court?

Moreover, the concerns here are not solely statutory. In

Buckley v. Valeo, 424 U.S. 1, 138 (1976), this Court held

that “[a] lawsuit is the ultimate remedy for a breach of law,

and it is to the President, and not to the Congress, that the

Constitution entrusts the responsibility to ‘take Care that

the Laws be faithfully executed,’ [U.S. Const.] Article II,

§ 3.” This Court has further identified the Department of

Justice as “the hand of the President in taking care that

the laws of the United States in protection of the interests

of the United States in legal proceedings and in the prose-

cution of offenses be faithfully executed”. Ponzi v. Fessen-

den, 258 U.S. 254, 262 (1922).

In the light of Buckley v. Valeo, any delegation of “un-

diminished” authority to the SEC to violate the policy in-

terests governing the role of the grand jury would be an

unconstitutional delegation of executive power to an agency

outside of the control of the President. See Springer v.

Philippine Islands, 277 U.S. 189, 202 (1928) ; Humphrey’s

Executor v. United States, 295 U.S. 602 (1935).

Nevertheless, the Court of Appeals concluded that the

LaSalle opinion’s policy interests are inapplicable to the

SEC:

In the case of an SEC investigation there is no call

for a “prophylatic rule”, and thus no need to ponder

the import of these “policy interests,” because the

SEC’s authority to issue the subpoena remains undi-

minished after the start of a grand jury investigation.

En banc slip op. at 25.

This Court should ate oa the issue whether

the SEC (unlike the IRS) can justify trenching upon the

independence of the grand jury by reason of its statutory

litigative power, when the entire litigative power of the

government is vested in the executive branch.®

CO. The Court Of Appeals Decision Is The First To

Authorize An Exchange Of Information Between The

Justice Department And The SEC Without Pro-

viding For The Proteciion Of Rule 6(e) Of The

Federal Rules Of Criminei Procedure.

Rule 6(e) (2) explicitly prohibits disclosure by “attorneys

for the government” of “matters occurring before the

grand jury” except as specifically authorized in Rules

6(e)(3)(A) and (C). Neither of these exceptions authorizes

the unregulated sharing of grand jury investigatory in-

formation between the Justice Department and the SEC

for the purpose of furthering the SEC’s civil investigation.

Nevertheless, the Court of Appeals decision specifically

authorized both the “sharing of information” and “a close

working relationship” between the two agencies “when they

3 The power to litigate civil cases has recently become the subject

of heated discussion within the executive branch and among the

“independent” agencies. See “Civil War Among the Federal Agen-

cies,” Barrister, Fall 1978, Vol. 5, No. 4 at 8; “When the Govern-

ment Goes to Court, Who Should Speak for Uncle Sam?” National

Journal, July 5, 1980 at 1098-9.

*“Attorney for the government” as defined in Rule 54(c), Fed.

R. Crim. P., as follows:

“Attorney for the government” means the Attorney General,

an authorized assistant of the Attorney General, a United

States Attorney, an authorized assistant of a United States

Attorney and when applicable to cases arising under the laws

of Guam means the Attorney General of Guam or such other

person or persons as may be authorized by the laws of Guam to

act therein.

are investigating the same sort of offense” under the secu-

rities laws, even after a grand jury has been convened.

See generally en banc slip op. at 34-40. If aliowed to remain

as law, this authorization to a prosecuting attorney conduct-

ing a grand jury investigation will inevitably result in

repeated breaches of grand jury secrecy that will plague

this Court and lower courts with litigation.

As authority for this unprecedented breach of grand jury

secrecy, the Court of Appeals cited (1) this Court’s state-

ment in LaSalle, 437 U.S. at 312, that “it is unrealistic to

attempt to build a partial information barrier between the

two branches of the executive” and (2) the legislative his-

tory of the Foreign Corrupt Practices Act of 1977, 91 Stax.

1494. Excerpts of the legislative history are reproduced in

App. D at D6-D10.5

When read in context, this Court’s statement concerning

the “partial information barrier” does not license an ex-

change of information outside the protections of Rule 6(e).

The full statement reads as follows: |

For example, the IRS upon referral loses its ability

to compromise both the criminal and the civil aspects

of a fraud case. 26 USC § 7122(a). After the referral,

the authority to settle rests with the Department of

Justice. Interagency cooperation on the calculation of

the civil liability is then to be expected and probably

encourages efficient settlement of the dispute. But such

cooperation, when combined with the inherently inter-

twined nature of the criminal and civil elements of the

5’ The Court of Appeals opinion also relied upon the Second

Circuit’s opinion in United States v. Fields, 592 F.2d 638, 646

(2d Cir. 1978), cert. denied, 442 U.S. 917 (1979). The Fields

opinion, however, quite clearly lends no authority to the proposition

that grand jury information can be shared with the SEC outside of

Rule 6(e), because the Court in Fields dealt only with pre-referral

cooperation.

case, suggests that it is unrealistic to attempt to build

a partial information barrier between the two branches

of the executive. Effective use of information to de-

termine civil liability would inevitably result in crim-

inal discovery. The prophylactic restraint on the use

of the summons effectively safeguards the two policy

interests while encouraging maximum interagency

cooperation. 437 U.S. at 312-13 (footnote omitted).

Every court other than the Court of Appeals that has

had occasion to construe this passage has construed it to

mean that the “interagency cooperation” between a civil

agency and the Justice Department should take place within

Rule 6(e). As was noted in United States v. Dondich, 460

F.Supp. 849 (N.D. Cal. 1978), after quoting the above

passage from LaSalle:

In cases in which the disclosure of grand jury infor-

mation to civil investigators would be inappropriate,

safeguards short of dismissing the indictment are

available. Rule 6(e) is, after all, designed to regulate

government attempts to obtain such disclosure. Pro-

tective orders against the disclosure of grand jury

testimony can be issued, and, if in fact information

has been improperly disclosed, it would appear more

appropriate to halt the civil proceeding, which has

improperly benefited from the grand jury investiga-

tion, than to dismiss the indictment. 460 F.Supp. at 858.

And in In re Perlin, 589 F.2d 260 (7th Cir. 1978), the

Court of Appeals for the Seventh Circuit cited LaSalle

as authority for the participation of Commodities Futures

Trading Commission attorneys in grand jury proceedings

but the Court left no doubt that it required such coopera-

tion to take place within the confines of Rule 6(e). The

Court of Appeals noted:

[T]he history of the amendments of Rule 6(e) so

clearly indicates the continuing Congressional support

for interagency cooperation and the active participa-

tion of agency personnel, including agency attorneys,

in grand jury proceedings.

The purpose of the amendments to Rule 6(e) was

to enable Federal agents to lend their assistance to

government prosecutors ....589 F.2d at 267.

In United States v. Birdman, 602 F.2d 547 (3rd Cir.

1979), cert. denied, 444 U.S. 1032 (1980), the Court of Ap-

peals referred to the policy of favoring “intergovernmental

cooperation in criminal prosecutions” as follows:

This policy is implemented in 28 U.S.C. §515(a) and

in the recent amendments to F. R. Crim. P. 6(e). The

Supreme Court has recently noted the importance of

such intragovernmental cooperation in United States v.

LaSalle National Bank, 437 U.S. 298, 312-13, 98 S. Ct.

2357, 57 L. Ed.2d 221 (1978). 602 F.2d at 563 (foot-

notes omitted).

Nor does the legislative history of the Foreign Corrupt

Practices Act authorize the novel disclosure rule promul-

gated by the Court of Appeals. Without arguing the point

at length in this petition, it will suffice to quote the panel’s

response to this argument:

Indeed, the very passage cited by the SEC [from the

Foreign Corrupt Practices Act] lends support to our

interpretation. Cooperation between the SEC and Jus-

tice is consistent with Kordel [397 U.S. 1 (1970)] and

LaSalle while the investigation is undifferentiated in

its civil and criminal aspects. It is only after the civil

and criminal aspects of a case diverge [i.e., after com-

mencement of the grand jury proceedings] that it is

appropriate to protect a potential criminal defendant

from abuse of the civil discovery process. (panel slip

op. at 20 n. 48).

This Court should clarify the LaSalle opinion’s endorse-

ment of “interagency cooperation” to specify whether such

cooperation should take place within or outside Rule 6(e).

IIT.

THE SUBPOENA SHOULD NOT BE ENFORCED UNTIL

THE SEC HONORS THE AGREEMENT THAT IT HAS

ADMITTEDLY ENTERED INTO WITH DRESSER

GOVERNING THE MEANS BY WHICH THE SEC

WOULD CONDUCT ITS INVESTIGATION.

This is not a typical SEC investigation into possible

wrongdoing by a corporate registrant. Rather, this dispute

arose because Dresser was one of 400 companies to volun-

teer for what later became known as the SEC’s Voluntary

Disclosure Program. The Program was designed to induce

disclosure of overseas corporate payments, as to which the

SEC was for the first time developing a disclosure policy.®

At a meeting between Dresser personnel and the SEC staff

in January of 1976, Dresser expressed concern that dis-

closure of such transactions, accompanied by wide publicity

abroad, could endanger both Dresser’s employees stationed

abroad and their families. Dresser’s preliminary review had

indicated that many of the transactions that Dresser might

disclose in a Form 8-K had occurred in third world countries,

some of which are quite hostile to the United States. Certain

Dresser employees and their families are located in these

countries and would be exposed to retaliation by foreign

nationals should any of these transactions receive local

publicity.’ Also, many of the payments appeared to have

been made as a result of extortionate demands that threat-

® Response of Commissioner Loomis to Congressman Nix, August

5, 1975.

7 J. A. p. 492 (Luter Affidavit, par. 6) : “In one such country the

company employees, by necessity, live in a small, self-sufficient

compound, behind walls, and they and their families could be com-

pletely exposed to terrorist activities in retaliation against Dresser

for any action for which Dresser might be blamed.”

ened Dresser employees’ lives and property overseas.®

Dresser agreed to enter the Voluntary Disclosure Program

in return for the SEC’s commitment of confidentiality de-

scribed below and in the Affidavit of W. Lyall Milde, re-

produced as Appendix E.

The District Court, without considerine the agreement

that had actually been reached between Dresser and the

SEC, concluded that “[t]hroughout the voluntary disclos-

ure program the SEC reserved its rights to pursue a formal

investigation and issue subpoenas if necessary. It is readily

apparent that the SEC never agreed to completely forego

its rights to subpoena the material in question.” 453 F.Supp.

at 575.

The Court of Appeals below concluded that this deter-

_ mination was not “clearly erroneous”. En banc slip op. at 41.

Dresser has never contended that the SEC did not reserve

its rights to pursue a formal investigation and issue sub-

poenas if necessary. Dresser does contend, however, that

the SEC, in an agreement of a kind commonly entered into

by lawyers of good will to facilitate a solution to difficult and

potentially litigious problems, committed itself to examine

Dresser’s documents in the first instance without taking

copies or making notes that would identify names and

countries. The SEC admits that the SEC staff “agreed to

conduct an initial review of such documents on the premises

of Dresser’s counsel, and that any notes taken at the time

would not include the names of individuals or foreign coun-

8 J. A. p. 492, (Luter Affidavit, par. 6): “On one occasion a

Dresser employee was approached by a government official who

solicited a bribe in connection with a review of Dresser’s taxes. The

Dresser employee was told by local counsel hired in the country in

question that if he reported the bribe, the employee would not leave

that country alive.”

tries.” Affidavit of Barbara N. Brandon, SEC attorney,

Appendix F at F-2. A failure to determine the existence

of an agreement explicitly admitted by the SEC must be

clearly erroneous.

Had the SEC honored its agreement, this litigation would

probably never have been necessary, because the SEC would

have satisfied itself that Dresser’s SEC filings were accu-

rate and complete.

While normally this Court should not concern itself with

issues of contract law, this agreement arose out of a far

reaching program of the SEC to induce corporations to

join with it in order to solve a problem that the SEC had

never previously faced and which it found to be too large

for its staff. The SEC was successful. Based on various

inducements, no fewer than 400 major corporations joined

the SEC’s program and conducted extensive investigations

into their own affairs.

Voluntary participation in government programs is fun-

damental to the proper functioning of government admin-

istration. Such participation must be based upon public

confidence in the government, which Justice Frankfurter

once characterized as a “transcending value.” Sherman v.

Umted States, 356 U.S. 369, concurring opinion at 380

(1958). This Court has demonstrated a willingness to order

the enforcement of government commitments where an

“essential component of the administration of justice” is

involved. See Santobello v. New York, 404 U.S. 257, 260

(1971), which involved a plea bargaining agreement. The

public’s willingness to rely on governmental inducements

to voluntary action is of no less importance to the proper

functioning of government.

CONCLUSION

The net effect of the decision of the Court of Appeals, if

allowed to stand, will be:

(a) To enable the use of information to determine

civil liability inevitably to result in criminal discovery,

thus expanding the Justice Department’s right of

criminal discovery and infringing on the role of the

grand jury as a principal tool of criminal accusation.

(b) To enable the subpoenaed documents to be in

the possession of, and examined by, both the SEC and

the Justice Department outside of the secrecy provi-

sions of Rule 6(e) and, indeed, outside of the safe-

guards provided by the order entered by the District

Court supervising the grand jury.

Dresser, upon which Dresser relied to its detriment

and to the detriment of its employees and their fam-

ilies who live and travel overseas.

The opinion of the Court of Appeals, if allowed to

stand, will result in the circumvention of the requirements

of this Court in LaSalle and Donaldson; the evasion of

the protections and limitations embodied in Rule 6(e);

and a conflict among the Circuits regarding the means by

which grand jury investigations are to be conducted. For

these reasons, we respectfully suggest that a writ of cer-

tiorari be granted.

Respectfully submitted,

Davi R. MacponaLp

Counsel of Record for Petitioner

Francis D. Morrisszty

Pavut McCartuy

Epwarp 5. Dyson

Baxer & McKenzie

Attorneys for Petitioner,

Dresser Industries, Inc.

Baker & McKenziz

130 East Randolph Drive

Chicago, Illinois 60601

(312) 861-8000

; A-1 Appendix A

Notice: This opinion is subject to formal revision before publication

in the Federal Reporter or U.S.App.D.C. Reports. Users are requested

to notify the Clerk of any formal errors in order that corrections may be

made before the bound volumes go to press.

United States Court of Appeal

FOR TilE DISTRICT OF COLUMBIA CIRCUIT

No. 78-1702

SECURITIES AND EXCHANGE COMMISSION

Vv.

DRESSER INDUSTRIES, INC., APPELLANT

UNITED STATES, INTERVENOR °

No. 78-1705

SECURITIES AND EXCHANGE COMMISSION

DRESSER INDUSTRIES, INC.

EDWARD R. LUTER, APPELLANT

UNITED STATES, INTERVENOR

Bills of costs must be filed within 14 days after entry of judgment. The

court looks with disfavor upon motions to file bills of costs out of time.

A-2

Appeals from the United States District Court

for the District of Columbia

(D.C. Miscellaneous No. 78-0141)

Argued en bane April 15, 1980

Decided July 16, 1980

David R. MacDonald, with whom Francis D. Morrissey

and Edward E. Dyson were on the brief, for appellant

Dresser Industries, Inc.

Raymond G. Larroca, Herbert J. Miller, Jr., and

Thomas B. Carr were on the supplemental memorandum

for appellant Edward R. Luter.

Paul Gonson, Principal Associate General Counsel, Se-

curities and Exchange Commission, with whom Ralph C.

Ferrara, General Counsel, Michael K. Wolensky, Asso-

ciate General Counsel, and James H. Schropp and John

P. Sweeney, Assistant General Counsel, Securities and

Exchange Commission, were on the brief, for appellee.

Irvin B. Nathan, Deputy Assistant Attorney General,

with whom Phillip B. Heymann, Assistant Attorney Gen-

eral, and Stephen G. Milliken, Attorney, Department of

Justice, were on the brief, for intervenor.

Before WRIGHT, Chief Judge, and MCGOWAN, TAMM,

ROBINSON, MACKINNON, ROBB, WILKEY, WALD, MIKvA,

and EDWARDS, Circuit Judges.

Opinion for the court filed by Chief Judge WRIGHT.

Concurring statement filed by Judge EDWARDS.

WRIGHT, Chief Judge: Dresser Industries, Inc. (Dres-

ser) appeals from a decision of the District Court? re-

quiring obedience to a subpoena duces tecum issued by

1 Reported at 458 F.Supp. 573 (D. D.C. 1978).

A-3

the Securities and Exchange Commission (SEC) on April

21, 1978, and denying Dresser’s motion to quash the sub-

poena.? 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 dis-

covery process of the SEC for the purpose of criminal

discovery and infringes the role of the grand jury in

independently investigating allegations of criminal wrong-

doing. 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 re-

ceived 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.

I. BACKGROUND

A. Origin of the Investigations

Illegal and questionable corporate payments surfaced

as a major public problem in late 1973, when several

major scandals implicated prominent American corpora-

2In No. 78-1705 Mr. Edward R. Luter, a senior vice presi-

dent of Dresser, appeals from an order denying his motion to

intervene in the subpoena enforcement proceeding. See text

at pp. 34-35 infra.

A-4

tions in improper use of corporate funds to influence

government officials in the United States and foreign

countries. The exposure of these activities disrupted pub-

lic faith in the integrity of our political system and

eroded international trust in the legitimacy of American

corporate operations abroad.* SEC investigation revealed

that many corporate officials were falsifying financial

records to shield questionable foreign and domestic pay-

ments from exposure to the public and even, in many

cases, to corporate directors and accountants. Since the

completeness and accuracy of corporate financial report-

ing is the cornerstone of federal regulation of the securi-

ties markets, such falsification became a matter of grave

concern to the SEC.*

Beginning in the spring of 1974 the SEC brought a

series of injunctive actions against certain American cor-

porations. It obtained consent decrees prohibiting future

? The Senate Committee on Banking, Housing, and Urban

Affairs reported in May 1977:

Recent investigations by the SEC have revealed corrupt

foreign payments by over 300 U.S. companies involving

hundreds of millions of dollars. These revelations have

had severe adverse effects. Foreign governments friendly

to the United States in Japan, Italy, and the Netherlands

have come under intense pressure from their own people.

The image of American democracy abroad has been

tarnished. Confidence in the financial integrity of our

corporations has been impaired. The efficient functioning

of our capital markets has been hampered.

S. Rep. No. 114, 95th Cong., 1st Sess. 3 (1977).

* The history of the SEC’s involvement with questionable

and illegal foreign payments is recounted briefly in Report

of the Securities and Exchange Commission on Questionable

and Illegal Corporate Payments and Practices, submitted to

the Senate Committee on Banking, Housing, and Urban

Affairs, 94th Cong., 2d Sess. (Comm. Print 1976), reprinted

in CCH FEDERAL SECURITIES LAW REPORTS, No. 642 (May 19,

1976) (hereinafter cited as Report).

A-5

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 wide-

spread that the SEC devised a “Voluntary Disclosure

Program” to encourage corporations to conduct investiga-

tions of their past conduct and make appropriate dis-

closures without direct SEC coercion.® 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.* The

most important elements of the Voluntary Disclosure

Program were (1) an independent committee of the cor-

poration 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 pro-

hibiting future questionable and illegal payments and

maintenance of false or incomplete records in connection

with them.” 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.* Thus companies participating in the

Voluntary Disclosure Program would ordinarily be spared

the consequences to their employees, property, and busi-

ness that might result from public disclosure of specific

5 The Voluntary Disclosure Program is described in id. at

8-13.

* Jd. at 8 n.7.

7 See id. at 8-10.

8 Jd. at $2.

A-6

instances of foreign bribery or kickbacks. However, com-

panies participating in the Voluntary Disclosure Program

had to agree to grant SEC requests for access to the

final report and to the unexpurgated underlying docu-

mentations.°®

B. The Dresser Investigations

On January 27, 1976 an attorney and other repre-

sentatives 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.’® 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 supple-

mented this report with a third Form 8-K concerning a

questionable payment not reported in the earlier reports.

JA 109-118. The reports concerned Dresser’s foreign

activities after November 1, 1978. All disclosures were

in generic, not specific, terms.

As part of its general monitoring program the SEC

staff requested access to the documents underlying Dres-

ser’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." Dresser stated that such disclosure could endanger

*Jd. at 9 n.8.

10 The meeting is described by Mr. W. Lyall Milde in a depo-

sition reprinted in Joint Appendix (JA) 64-66.

u JA 71-76.

A-7

certain of its employees working abroad. During the

ensuing discussions with the staff Dresser attempted to

impose conditions of confidentiality upon any SEC ex-

amination of its documents, but the staff did not agree."®

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 conclu-

sions 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

8. 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 for-

eign government officials.

JA 7-8 (order directing private investigation and desig-

nating officers to take testimony). Moreover, the staff

reported that Dresser’s proxy soliciting materials, re-

ports, 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.

BJA 74.

13 The staff offered to give Dresser 10 days notice before

releasing any Dresser documents to the public, to enable the

company to challenge such release in court. JA 12.

14 See JA 77 et seq.

A-8

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.** Pursuant to Com-

mission authorization the SEC staff transmitted all such

files to the Justice task force in August 1977.'* 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.” 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 sub-

poena covered substantially the same documents and

materials subpoenaed by the grand jury, and more.

Dresser did not respond to the subpoena.”*

15 JA 295-296 (statement by Marvin G. Pickholz).

16 Jd.

17 Dresser Industries, Inc. v. United States, Civil Action No.

H-78-405 (S.D. Tex.).

18 The procedural history of this case is recounted in Dres-

ser’s motion to quash the SEC subpoena, JA 160-163.

A-9

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 judg-

ment 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 stipula-

tion 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 Dis-

trict of Columbia. On May 19 the District Court (Parker,

J.) denied Diesser’s motion to quash, but imposed a

protective order requiring strict confidentiality in accord-

ance 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 con-

sidered.” 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 tur-

bulent foreign countries. Dresser thereafter complied with

this grand jury subpoena.

On May 26, 1978 the Southern District of Texas dis-

missed Dresser’s action against the SEC without reach-

ing the merits. Dresser appealed to the Fifth Circuit and

on June 8 obtained an order from the court that:

A-10

Until the appeal in this case shall have been de-

cided 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 con-

fidentiality of any information obtained by the sub-

poena 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 Dis-

trict of Columbia issued an order to Dresser to show

cause why it should not be required to appear, give testi-

mony, and produce records in obedience to the SEC sub-

poena. 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 18 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,

A-1l

Inc. v. United States, 596 F.2d 1281 (5th Cir. 1979),

cert. denied, —— U.S. ——, 48 U.S. L. WEEK 3465

(January 21, 1980). Accordingly, the interlocutory in-

junction 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 concern-

ing the same conduct.

II. GENERAL PRINCIPLES

A. Parallel Investigations

The civil and regulatory laws of the United States fre-

quently overlap with the criminal laws, creating the pos-

sibility of parallel civil and criminal proceedings, either

successive or simultaneous.'’* In the absence of substan-

tial prejudice to the rights of the parties involved, such

parallel proceedings are unobjectionable under our juris-

prudence. As long ago as 1912 the Supreme Court recog-

nized 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 (1912). The Court held that the govern-

ment could initiate such proceedings either “simultane-

ously or successively,” with discretion in the courts to

prevent injury in particular cases. Jd. 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 simul-

taneously or successively. The order of their bringing

must depend upon the Government; the dependence

19 See generally Note, Concurrent Civil and Criminal Pro-

ceedings, 67 COLUM. L. REV. 1277 (1967).

A-12

of their trials cannot be fixed by a hard and fast

rule or made imperatively to turn upon the charac-

ter of the suit. Circumstances may determine and

are for the consideration of the court. An imperative

rule that the civii 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 (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 Cos-

metic Act, 21 U.S.C. § 301 et seg. Early in the investiga-

tion the FDA recommended and the United States At-

torney 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 alter-

native, to extend the time for answering the interroga-

tories 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 De-

partment of Health, Education, and Welfare formally

recommended criminal prosecution to the Justice Depart-

ment. 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.

A-13

The officers in Kordel argued that use of the civil dis-

covery 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. 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, or without notice to the de-

fendants that it contemplated a criminal action, id. at 12.

Moreover, the defendant was not unrepresented by coun-

sel, id., and had no reason to fear “prejudice from ad-

verse pretrial publicity or other unfair injury,” id. Nor

were there any other “special circumstances” suggesting

that the parallel proceedings were unconstitutional or

improper. Jd. In the absence of such “special circum-

stances” 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 through-

out the Nation from misbranded drugs requires

prompt action by the agency charged with responsi-

bility for administration of the federal food and drug

laws. But a rational decision whether to proceed

criminally against those responsible for the misbrand-

ing 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 gov-

ernmental 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

Pet a pending the ultimate outcome of a crimi-

nal trial.

Id. at 11 (footnote omitted).

The Constitution, therefore, does not ordinarily re-

quire a stay of civil proceedings pending the outcome of

A-14

criminal proceedings. See Baxter v. Palmigiano, 425

U.S. 808 (1976); DeVita v. Sills, 422 F.2d 1172, 1181

(8d Cir. 1970). Nevertheless, a court may decide in its

discretion to stay civil proceedings, postpone civil dis-

covery, or impose protective orders and conditions “when

the interests of justice seem[J to require such action,

- sometimes at the request of the prosecution, * * * some-

times at the request of the defense[.]” United States v.

Kordel, supra, 397 U.S. at 12 n.27 (citations omitted) ;

see Horne Brothers, Inc. v. Laird, 463 F.2d 1268, 1271-

1272 (D.C. Cir. 1972). The court must make such deter-

minations 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 comple-

tion of criminal proceedings is where a party under in-

dictment for a serious offense is required to defend a

civil or administrative action involving the same matter.

The noncriminal proceeding, if not deferred, might under-

mine 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 ad-

vance of criminal trial, or otherwise prejudice the case.”

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 (8d Cir. 1967); Silver v. McCamey, 221

20In some cases the government seeks postponement of the

noncriminal proceeding, to prevent the criminal defendant

from broadening his rights of criminal] discovery against the

government. E.g., Campbell v. Eastland, 307 F.2d 478 (5th

Cir. 1962), cert. denied, 871 U.S. 955 (1968).

A-15

F.2d 873, 874-875 (D.C. Cir. 1955).7* 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 or-

der. 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 sub-

poena does not require Dresser to reveal the basis for its

defense.

B. SEC Investigations

The case at bar concerns enforcement of the securities

laws of the United States, especially the Securities Act

of 1988 (’83 Act), 48 StTaT. 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 seg. (1976).

These statutes explicitly empower the SEC to investigate

possible infractions of the securities laws with a view to

21 Silver v. McCamey, 221 F.2d 873 (D.C. Cir. 1955), held

that “due process is not observed if an accused person is sub-

jected, without his consent, to an administrative hearing on

a serious criminal charge that is pending against him.” /d.

at 874-875. As we have noted in text, cases decided since

Silver have established that, as a general matter, due process

is not infringed merely because an accused person is subjected,

without his consent, to an administrative hearing concerning

matters involved in a pending criminal proceeding. Never-

theless, as Silver recognized and more recent cases have

affirmed, such an administrative proceeding can in some cir-

cumstances prejudice the rights of a citizen or the govern-

ment. In such cases the agencies and courts may have a duty

to take appropriate corrective action.

A-16

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 deter-

mine whether any person has violated, is violating, or is

about to violate any provision of this chapter[.]” Sec-

tion 21(a) of the 384 Act, 15 U.S.C. § 78u(a) (1976).

This investigative authority includes the power to ad-

minister 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. Jd., 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 con-

stituting a violation” of the Act, the SEC may bring an

action in federal district court to enjoin such acts or prac-

tices. 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 proceed-

ings under this chapter.” Jd. 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 Sections 20(a) and 19(b) of the ’83 Act provide the basis

for the SEC’s investigative authority:

Whenever it shall appear to the Commission, either

upon complaint or otherwise, that the provisions of this

subchapter, or of any rule or regulation prescribed under

authority thereof, have been or are about to be violated,

it may, in its discretion, either require or permit such

person to file with it a statement in writing, under oath,

or otherwise, as to all the facts and circumstances con-

cerning the subject matter which it believes to be in the

public interest to investigate, and may investigate such

facts.

[Continued]

A-17

Effective enforcement of the securities laws requires

that the SEC and Justice be able to investigate possible

violations simultaneously. Dissemination of false or mis-

leading information by companies to members of the in-

vesting 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 dis-

closures. 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

22 [Continued]

Section 20(a) of the ’83 Act, 15 U.S.C. § 77t(a) (1976).

For the purpose of all investigations which, in the

opinion of the Commission, are necessary and proper for

the enforcement of this subchapter, any member of the

Commission or any officer or officers designated by it are

empowered to administer oaths and affirmations, subpena

witnesses, take evidence, and require the production of

any books, papers, or other documents which the Commis-

sion deems relevant or material to the inquiry. * * *

Id. $19(b), 15 U.S.C. § 77s(b). From § 20(b) derives the

authority to initiate civil injunctive actions and to transmit

evidence to Justice:

Whenever it shall appear to the Commission that any

person is engaged or about to engage in any acts or prac-

tices which constitute or will constitute a violation of the

provisions of this subchapter, or of any rule or regulation

prescribed under authority thereof, it may[,] in its dis-

cretion, bring an action in any district court of the United

States or United States court of any Territory. to enjoin

such acts or practices, and upon a proper showing a

permanent or temporary injunction or restraining order

shall be granted without bond. The Commission may

transmit such evidence as may be available concerning

such acts or practices to the Attorney General who may,

in hi. discretion, institute the necessary criminal pro-

ceedinzs under this subchapter. * * *

Id. § 20(b), 15 U.S.C. § 77t(b).

A-18

if necessary. Similarly, Justice must act quickly if it

suspects that the laws have been broken. Grand jury in-

vestigations 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 688, 646 (2d Cir.

1978), cert. denied, 442 U.S. 917 (1979). The SEC can-

not 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.

III. APPLICABILITY OF

United States v. LaSalle Nat’l Bank

Dresser principally relies on an analogy to United

States v. LaSalle Nat’l Bank, 437 U.S. 297 (1978), in

which the Supreme Court said in dictum that the Internal

Revenue Service (IRS) may not use its summons au-

thority to investigate possible violations of the tax laws

after it has referred those violations to Justice for crimi-

nal prosecution. See id. at 311-313.% Dresser argues that

23 Dresser’s other arguments, in summary, are (1) that the

SEC subpoena breached an enforceable agreement of confi-

dentiality with Dresser; (2) Dresser was erroneously denied

certain discovery rights; and (3) enforcement of the-sub-

poena might violate Dresser’s attorney-client privilege. See

brief of respondent-appellant at 11-12. These arguments are

discussed in Part V infra.

2% This portion of LaSalle is properly characterized as

dictum, because the controversy concerned investigation of a

A-19

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 trans-

mittal of the file was not analogous to a “referral” under

LaSalle, initiation of the grand jury investigation pre-

cluded subsequent enforcement of SEC investigative sub-

poenas into the same matters.

These two alternatives are vulnerable to the same objec-

tion: 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 Jus-

tice initiates a criminal investigation by the grand jury.”

taxpayer prior to referral to Justice. The Court held that a

taxpayer challenging an IRS summons prior to such referral)

bears the heavy burden of showing that the summons was

issued in “bad faith,” 437 U.S. at 316, which the Court inter-

preted as being “solely [for] criminal purposes.” Jd. The

Supreme Court has never decided a case concerning an IRS

sumrhons issued after referral to Justice but before indict-

ment. See note 25 infra.

2° The LaSalle rule—prohibiting enforcement of an IRS

summons after the IRS had referred the case to Justice for

criminal prosecution—derives from Donaldson v. United

States, 400 U.S. 517 (1971). In Donaldson the Court said:

We hold that under § 7602 [of the Internal Revenue

Code, 26 U.S.C. § 7602 (1970)] an internal revenue

summons may be issued in aid of an investigation if it is

issued in good faith and prior to a recommendation for

criminal prosecution.

Id. at 586. The Donaldson Court recognized that under prior

precedent the limitation on the IRS summons authority came

into effect only in “the situation of a pending criminal charge

A-20

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 summen production for four pur-

poses only: for “ascertaining the correctness of any

return, making a return where none has been made,

determining the liability of any person for any in-

ternal revenue tax... or collecting any such liabil-

ity.” Congress therefore intended the summons au-

thority to be used to aid the determination and col-

or, at most, of an investigation solely for criminal purposes.”

Id. at 583 (emphasis added). See Reisman v. Caplin, 375 U.S.

440, 449 (1964) (citing Boren v. Tucker, 289 F.2d 767, 772-

773 (9th Cir. 1956)). “Any other holding,” according to the

Donaldson Court, “would thwart and defeat the appropriate

investigatory powers that the Congress has placed in ‘the

Secretary or his delegate.’” 400 U.S. at 533. Nevertheless,

after a detailed discussion of the enforcement scheme of the

Internal Revenue Code, the Court reiterated the rule in modi-

fied form: instead of prohibiting enforcement of an IRS

summons if there is a pending criminal charge, the Court

prohibited such enforcement if there had been a referral to

Justice for criminal prosecution. Compare 400 U.S. at 5338

with id. at 586. Obviously, the difference between these two

formulations is substantial. The Court did not explicitly state

why it shifted from the one to the other, but the best available

explanation lies in its discussion of the statutory scheme,

which appears between the two conflicting statements of the

rule. In LaSalle Justice Blackmun, who also wrote the opinion

for the Court in Donaldson, explained that the decision in

Donaldson was not predicated on its analysis of precedent.

United States v. LaSalle Nat’l Bank, 487 U.S. 298, 307 (1978).

Rather, the decision relied on its review of the statutory

scheme. Jd. “The validity of the summonses depended ulti-

mately on whether they were among those authorized by

Congress,” the Justice said. Jd. This emphasizes that the rule

espoused in LaSalle and Donaldson is not based on principles

generally applicable to parallel civil and criminal proceedings,

but on limitations unique to the IRS.

A-21

lection of taxes. These purposes do not include the

goal of filing criminal charges against citizens. * * *-

United States v. LaSalle Nat’l Bank, supra, 487 U.S. at

316-317 n.18 (first ellipsis in original).

In the pre-referral stage of an IRS investigation the

civil and criminal elements of the investigation are inter-

twined. Jd. at 308-311. 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 Sec-

tion 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 pur-

poses 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. After that point the IRS loses its ability to

compromise the case, either criminally or civilly. All such

authority devolves upon Justice. Jd. at 312. Although

theoretically the IRS might use its summons power dur-

ing the pendency of the criminal proceeding to discover

information for the purpose of a future civil tax suit,

id. at 311-312, in practice the IRS holds all civil action

in abeyance until the criminal proceeding is completed.”*

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 pur-

poses for summonses under Section 7602 cease as a prac-

tical matter during the pendency of the criminal proceed-

26 See POLICIES OF THE IRS HANDBOOK, P-4-84, reprinted in

1 CCH INTERNAL REVENUE MANUAL 1805-1310 (1978) ; Office

of the Chief Counsel, IRS, Civil Considerations in Pending

Criminal Matters, Order No. 3050.1 (March 23, 1978).

A-22

ing. Because of this the Court was willing to impose a

“prophyiactic” rule flatly forbidding any use of the Sec-

tion 7602 authority once a case has been referred to

Justice for criminal prosecution. 7d. at 312. This rule

restricts the IRS within the confines of its statutory au-

thority and also “safeguards * * * two policy interests,”

id. at 313. 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. Jd. at 312.

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 enforce-

ment action, even after Justice has begun a criminal in-

vestigation 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, 489 U.S. 1071 (1979). SEC investigations

are not confined to “four purposes only.” Cf. United

States v. LaSalle Nat’l Bank, supra, 487 U.S. at 316 n.18.

Rather, the SEC may, “in its discretion, make such in-

vestigations as it deems necessary to determine whether

any person has violated, is violating, or is about to vio-

late any provision” of the ’34 Act, Section 21(a) of the

384 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 en-

forcement of such provisions, in the prescribing of rules

and regulations under this chapter, or in securing in-

A-23

formation to serve as a basis for recommending further

legislation concerning matters to which this chapter re-

lates.” Jd. ‘emphasis added). See also Section 19(b) of

the ’83 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 mmay have engaged in con-

duct seriously contravening the securities laws **“—falls

squarely within the Commission’s explicit investigatory

authority.** Unlike the Internal Revenue Code as inter-

preted 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 mat-

ters. Since the validity of summonses or subpoenas “de-

pend[s] ultimately on whether they were among those

authorized by Congress,” United States v. LaSalle Nat’l

Bank, supra, 487 U.S. at 307, we conclude that this

subpoena is enforceable under the rule of that case.”

27 See text at note 14 supra.

28 Dresser argued unsuccessfully in the District Court that

the SEC had exceeded its authority by issuing the subpoena

where there was no likelihood that a violation had been or

was about to be committed. 453 F.Supp. at 575. On appeal

Dresser makes this argument only obliquely in the form of

an objection to the denial of discovery. Brief of respondent-

appellant at 39-42. In any event, the argument is without

merit. Our task is merely to ensure that “the inquiry is with-

in the authority of the agency, the demand is not too indefinite

and the information sought is reasonably relevant.” SEC v.

Arthur Young & Co., 584 F.2d 1018, 1024 (D.C. Cir. 1978),

cert. denied, 489 U.S. 1071 (1979) (quoting United States v.

Morton Salt Co., 838 U.S. 632, 652-653 (1950) ) ; see also SEC

v. Howatt, 525 F.2d 226, 229 (ist Cir. 1975). We agree with

the District Court that “[t]his investigation has a legitimate

purpose and the inquiry is relevant to that purpose.” 453

F.Supp. at 576.

2° Cf. SEC v. OKC Corp., 474 F.Supp. 1031, 1088 (N.D. Tex.

1979) (SEC subpoena enforced although Department of

A-24

Fulfillment of the SEC’s civil enforcement responsi-

bilities requires this conclusion. Unlike the IRS, which

can postpone collection of taxes for the duration of payral-

lel 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 un-

dertake civil enforcement actions even after Justice has

begun a criminal investigation. For the SEC to stay its

hand might well defeat its purpose.

Dresser attempts to prevent enforcement of this sub-

poena 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; sup-

plemental brief of appellant Dresser Industries, Inc. at

10-21; see United States v. LaSalle Nat’l Bank, supra,

437 U.S. at 312. We reject this argument for two rea-

sons.

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 in-

terests.” 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 pur-

poses of Section 7602.%° The Court did not impose such

Energy had made criminal reference to Justice in related

matter).

80 See United States v. LaSalle Nat’l Bank, supra note 25,

437 U.S. at 311-312:

A-25

a “prophylactic” rule in any situation where it would

significantly restrict the legitimate investigative author-

ity of the IRS.“ 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 re-

mains undiminished after the start of a grand jury in-

vestigation.

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

We recognize, of course, that even upon recommendation

to the Justice Department, the civil and criminal] elements

do not separate completely. The Government does not sac-

rifice its interest in unpaid taxes just because a criminal

prosecution begins. Logically, then, the IRS could use its

summons authority under § 7602 to uncover information

about the tax liability created by a fraud regardless of the

status of the criminal case. But the rule forbidding such

is a prophylactic intended to safeguard the following

policy interests.

32 The LaSalle Court underscored, in a footnote, its belief

that a “prophylactic” rule need not be imposed in every cir-

cumstance presenting the potentiality for infringement of

the grand jury’s role or broadening of Justice’s right to

criminal discovery. The Court disapproved the position

adopted by the Third Circuit in United States v. Lafko, 520

F.2d 622, 625 (8d Cir. 1975), which it characterized as hold-

ing that the IRS summons authority must cease at the point

when the special agent recommends prosecution to the district

office, rather than at the point when the IRS recommends

prosecution to Justice. 437 U.S. at 313 n.15. The Supreme

Court admitted that “the potential for expanding the criminal

discovery rights of the Justice Department or for usurping

the role of the grand jury exists at the point of the recom-

mendation by the special agent.” Jd. But it called the possi-

bilities of abuse “remote,” id., and stated that they “do not

justify imposing an absolute ban on the use of the summons

before that point.” Jd.

A-26

flatly inapplicable, as Dresser admits.** The strict limi-

tations on discovery in criminal cases, embodied in Fed-

eral 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.* 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) .™

82 Supplemental! brief of appellant Dresser Industries, Inc.

at 19 n.16.

33 See Developments in the Law—Corporate Crime: Regulat-

ing Behavior Through Criminal Sanctions, 92 Harv. L. REV.

' 1227, 1812-18138 (1979). Obtaining the approval of the grand

jury itself is not a serious impediment to Justice’s efforts;

indeed, the common practice is for grand jury subpoenas to

_ be issued in blank, with the contents to be filled in by the

prosecutor. See In re Grand Jury Proceedings, 486 F.2d 85,

87 (3d Cir. 1973).

“17 C.F.R. §§ 203.6-2038.7 (1979) provide in relevant part:

§ 208.6 Transcripts.

* * * A person who has submitted documentary evi-

dence or testimony in a formal investigative proceeding

shall be entitled, upon written request, to procure a copy

of his documentary evidence or a transcript of his testi-

mony on payment of the appropriate fees: Provided,

however, That in a nonpublic formal investigative pro-

ceeding the Commission may for good cause deny such

request. In any event, any witness, upon proper identifi-

cation, shal] have the right to inspect the official tran-

script of the witness’ own testimony.

§ 208.7 Rights of witnesses.

‘

(a) Any person who is compelled or requested to fur-

nish documentary evidence or testimony at a formal

‘

A-27

In its brief Dresser has concentrated upon the second

“policy interest” identified in LaSalle: avoiding infringe-

ment upon the role of the grand jury. Dresser suggests

two ways in which the SEC civil investigation might in-

fringe 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.™

In this argument Dresser misconceives the nature of the

secrecy protections of the grand jury.

Federal Rule of Criminal Procedure 6(e) provides in

relevant part:

investigative proceeding shall upon request be shown the

Commission’s order of investigation. * * *

(b) Any person compelled to appear, or who appears

by request or permission of the Commission, in person

at a formal investigative proceeding may be accompanied,

represented and advised by counsel * * *.

vised by counsel shall mean the right of a person testify-

ing to have an attorney present with him during any

formal investigative proceeding and to have this attorney

(1) advise such person before, during and after the con-

clusion of such examination, (2) question such person

briefly at the conclusion of the examination to clarify

any of the answers such person has given, and (3) make

summary notes during such examination solely for the

use of such person.

(d) Unless otherwise ordered by the Commission, in

any public formal investigative proceeding, if the record

shall contain implications of wrongdoing by any person,

such person shall have the right to appear on the record ;

and in addition to the rights afforded other witnesses

hereby, he shall have a reasonable opportunity of cross-

examination and production of rebuttal testimony or

documentary evidence. * * *

35 Supplemental brief of appellant Dresser Industries, Inc.

at 18-17.

A-28

(e) Secrecy of Proceedings and Disclosure

(1) General rule. A grand juror, an interpreter,

a stenographer, an operator of a recording device, a

typist who transcribes recorded testimony, an at-

toney 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. * * *

We note that the Rule prohibits disclosure of “matters

occurring before the grand jury[.]” This serves to pro-

tect the identities of witnesses or jurors, the substance

of testimony, the strategy or direction of the investiga-

tion, 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. It is well

established that

36 The rationales for grand jury secrecy are well established:

“(1) To prevent the escape of those whose indictment

may be contemplated; (2) to insure the utmost freedom

to the grand jury in its deliberations, and to prevent

persons subject to indictment or their friends from im-

portuning the grand jurors; (8) to prevent subornation

of perjury or tampering with the witness who may testify

before [the] grand jury and later appear at the trial of

those indicted by it; (4) to encourage free and untram-

meled disclosures by persons who have information with

respect to the commission of crimes; (5) to protect in-

nocent accused wno is exonerated from disclosure of the

fact that he has been under investigation, and from the

expense of standing trial where there was no probability

of guilt.”

Douglas Oil Co. v. Petrol Stops Northwest, 441 U.S. 211, 219

n.10 (1979) (brackets in original) (quoting United States

v. Rose, 215 F.2d 617, 628-629 (8d Cir. 1954), approved in

A-29

when testimony or data is sought for its own sake—

for its intrinsic value in the furtherance of a law-

ful 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. oe *

United States v. Interstate Dress Carriers, Inc., 280 F.2d

52, 54 (2d Cir. 1960).*7 Dresser’s documents at issue

United States v. Proctor & Gamble Co., 356 U.S. 677, 681

n.6 (1958)). See also Note, Administrative Agency Access

to Grand Jury Materials, 75 CoLuM. L. REV. 162, 166 (1975)

(suggesting a further rationale: “to prevent the grand jury

from being diverted from its primary concern—the investiga-

tion of criminal activity’). None of these rationales has any

application to an independent agency subpoena of corporate

documents. No witnesses or targets will be frightened from

testifying fully, no grand jurors will be threatened or sub-

orned, no target will be embarrassed—any more than it might

be embarrassed by any other SEC subpoena. Since the fact

that Dresser is the target of a grand jury investigation is

already public knowledge—as witness this case—there is no

danger of exposing the identi:y of an innocent grand jury

taryet.

87 Accord, United States v. Stanford, 589 F.2d 285, 290-291

(7th Cir. 1978), cert. denied, 440 U.S. 988 (1979); In re

Search Warrant for Second Floor Bedroom, —— F.Supp.

(D. R.I. No. 80-0018M-01, slip op. issued May 9, 1980), Jn re

Grand Jury Investigation of Ven-Fuel, 441 F.Supp. 1299,

1802-1803 (M.D. Fla. 1977) ; Brink v. DaLesio, 82 F.R.D. 664,

668-669 (D. Md. 1979) ; Michelin Tire Corp. v. United States,

453 F.Supp. 897, 898 (Cust. Ct. 1978) ; see also In re Grand

Jury Investigation (Lance), 610 F.2d 202, 217 (5th Cir.

1980) ; State of Illinois v. Sarbaugh, 552 F.2d 768, 771-772

(7th Cir.), cert. denied, 484 U.S. 889 (1977). Some courts

have adopted a broad interpretation of “matters occurring

before the grand jury” as documents that ‘“‘may tend to reveal

what transpired before the grand jury.” United States v.

Armco Steel Corp., 458 F.Supp. 784, 790 (W.D. Mo. 1978);

A-30

here were created for an independent corporate purpose,

not directly related to the prospect of a grand jury in-

vestigation. 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 opera-

tions. See United States v. Stanford, 589 F.2d 285, 291

(7th Cir. 1978), cert. denied, 440 U.S. 983 (1979). The

fact that a grand jury has subpoenaed documents con-

cerning a particular matter does not insulate that matter

from investigation in another forum.** In fact, if the

grand jury proceedings are genuinely secret, other agen-

cies 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.

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 proceed-

ing neither adds to nor detracts from Dresser’s rights

before the SEC. Whatever rights to secrecy or confiden-

tiality Dresser may have are the product solely of the

laws governing the SEC; they are unaffected by the

parallel grand jury proceeding.

The second way in which Dresser argues that enforce-

ment of this subpoena might infringe the role of the

accord, In re Grand Jury Investigation (Lance), supra, 610

F.2d at 216. Even under this test courts should permit dis-

closure of documents in the hands of private parties, inde

pendently identified and sought for a lawful and independent

purpose.

38 We recognize that in some circumstances the courts have

protected materials not technically within the range of Rule

6(e) where disclosure would jeopardize the effective. func-

tioning of the grand jury. See In re Search Warrant for

Second Floor Bedroom, supra note 37, ——— F.Supp. at ;

This case presents no such problem.

A-31

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 independ-

ence of the grand jury’s inquiry.” Of course, this argu-

ment is purely speculative since, as Dresser is well

aware, 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.*? 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.

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 ac-

counting, could sift through the masses of Dresser’s cor-

porate 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 par-

ticular subject areas. This expert assistance is permitted

under Rule 6(e), and it promotes the efficiency and ra-

tionality of the criminal investigative process. See In re

Perlin, 589 F.2d 260 (7th Cir. 1978) ; Robert Hawthorne,

89 Supplemental brief of appellant Dresser Industries, Inc.

at 17-18.

# See id. at 5 n.10.

41 See letter from James H. Schropp to this court dated

April 3, 1979.

A-32

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 Crimi-

nal Sanctions, 92 Harv. L. REV. 1227, 1814-13815 (1979).

In this case two SEC agents have been assigned to Jus-

tice’s task force on transnational payments to assist in

the investigation of companies possibly involved in illegal

foreign payments.** 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.**

Finally, we note that if Dresser is genuinely worried

that the SEC might disclose only those documents preju-

dicial 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 distort-

ing the grand jury’s perception of the case, Dresser may

apply to the courts at that time for appropriate relief.

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 sub-

poena.“

42 See text following note 14 supra.

43 Dresser implicitly admits that it would be proper for the

SEC to conduct and complete a civil investigation, and then

to transmit all relevant materials to Justice for possible

criminal prosecution. See supplemental brief of appellant

Dresser Industries, Inc. at 22-24. Yet such a procedure would

create as severe a problem of grand jury infringement as

the procedure complained of in this case.

#4 Dresser seeks to minimize the effect an order denying

enforcement of this subpoena would have on the SEC’s ability

A-33

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 corpo-

rate documents. The prejudice Dresser claims it will

suffer from the pzarallel nature of the proceedings is

speculative and undefined—if indeed Dresser would suffer

any prejudice from it at all.** Any entitlement to confi-

to carry out its mandate by suggesting that the SEC could

continue its civil enforcement efforts through obtaining access

to the grand jury materials under Rule 6(e) (2) (C) (i), which

permits disclosure “when so directed by a court preliminarily

to or in connection with a judicial proceeding[.]” This dis-

regards the fact that some courts have held that the SEC must

demonstrate a “particularized need” for grand jury materials

in order to obtain access to them, e.g., In re Grand Jury In-

vestigation, 414 F.Supp. 74, 76 (S.D. N.Y. 1976), and that

administrative investigative proceedings may not be consid-

ered preliminary to or in connection with a judicial proceeding

for purposes of the Rule. See United States v. Bates, ——

F.2d —— (D.C. Cir. No. 79-1930, decided April 18, 1980)

(per curiam) (concerning a Federal Maritime Commission

investigation).

46 During ora] argument before the panel Dresser’s attorney

was asked what prejudice the company suffered from the

parallel proceedings. Transcript of oral argument at 49

(Dec. 11, 1978). He responded that Dresser was prejudiced

in two ways. First, he complained that “the SEC does not

have anywhere near the confidentiality protection that Rule

6(e) provides.” Of course, this complaint is properly ad-

dressed to Congress, which explicitly granted the SEC the

power to “publish” the results of its investigations. Section

21(a) of the ’34 Act, 15 U.S.C. § 78u(a) (1976). We do not

express any opinion on whether the SEC would he justified in

exercising the power to publish in this case; we merely note

that the Commission is not governed, and is not intended to

be governed, by Rule 6(e). Second, the attorney invoked

Dresser’s “right to a fair criminal investigation, including

the fact that the Rules of Discovery of the Federal Rules of

Criminal Procedure apply to it.” Transcript of oral argument

at 49 (Dec. 11, 1978). If he was referring to Rule 16(b),

A-34

dential 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 invoca-

tion of LaSalle can avail the company nothing.

IV. COOPERATION BETWEEN SEC AND JUSTICE

In its initial decision in this case a panel of this court

ruled that “the broad prophylactic rule enunciated in

LaSalle is inappropriate where the SEC and the Justice

Department are simultaneously pursuing civil and crimi-

nal investigations.” Slip opinion at 18. The panel there-

fore affirmed the District Court and ordered enforcement

of the SEC subpoena. Out of a concern that the SEC

subpoena might somehow “subvert the limitations of

criminal discovery,” id., however, the panel, with one

judge dissenting, modified the terms of the subpoena en-

forcement order. It required that “once the Justice De-

partment initiates criminal proceedings by means of a

grand jury, the SEC may not provide the Justice Depart-

ment with the fruits of the Commission’s civil discovery

gathered after the decision to prosecute.” Jd. at 22.*

We affirm the judgment of the District Court and reject

the panel’s modification.

then he was mistaken, for Rule 16(b) comes into play only

after indictment. In fact, the grand jury’s investigative pow-

ers are as broad as or broader than those of the SEC. Dresser

cannot claim to be prejudiced by the breadth of the SEC

investigative authority.

‘6 Under the panel’s terminology the decision to prosecute

and the beginning of “criminal discovery” occur at the time

when Justice begins to present its case to the grand jury.

See slip op. at 21. After indictment by the grand jury, when

genuine criminal discovery under Rule 16(b) begins, differ-

ent considerations would govern. See text and notes at notes

20-21 supra; supplemental brief of the SEC at 23-24; supple-

mental brief of appellant Dresser Industries, Inc. at 9 n.16.

A-35

First, we note that no party to this case had suggested

or requested a modification such as that imposed by the

panel majority, either in the District Court or in this

court.‘? In supplemental briefs submitted to the en banc

court both the SEC and Justice vigorously oppose the

modification, while Dresser’s support for it is lukewarm

at most. Dresser had argued that the SEC investigation

is flatly prohibited by the rule of LaSalle; the panel’s

modification, according to Dresser, “may have had a

similar effect” to that of LaSalle—“though not as assured

in its operation.” Supplemental brief of appellant Dresser

Ir dustries, Inc. at 30. Dresser characterized the panel’s

decision to “relax” the LaSalle rule as “unsound,” id. at

29, and described the motivating factor in the panel’s

decision—the supposed need to protect the “criminal dis-

covery process * * * of the grand jury,” slip opinion at

22—as “irrelevant to this litigation.” Supplemental brief

of appellant Dresser Industries, Inc. at 9 n.16. The reac-

tions of the parties, therefore, suggest that the panel’s

modification might serve more to impede securities law

enforcement than to protect the interests of Dresser.

Second, we note that there is no support for the panel’s

modification in either the relevant statutes or legislative

history. Both the ’33 Act and the ’84 Act—and other

statutes related to securities law enforcement as well **—

expressly authorize the SEC to “transmit such evidence

as may be available * * * to the Attorney General, who

may, in his discretion, institute the necessary criminal

proceedings under this subchapter.” Section 20(b) of the

47 Mr. Luter, appellant in No. 78-1705, has taken no position

regarding the panel’s modification of the District Court’s.

order.

48Investment Company Act of 1940, §42(e), 15 U.S.C.

§ 80a-41(e) (1976); Investment Company Act of 1940,

§ 209(e), 15 U.S.C. § 80b-9(e) (1976) ; Public Utility Holding

Company Act of 1935, § 18(f), 15 U.S.C. § 79r(f) (1976).

A-36

’83 Act, 15 U.S.C. § 77t(b) (1976); Section 21(d) of

the ’84 Act, 15 U.S.C. § 78u(d) (1976). The statutes

impose no limitation on when this transmittal may occur.

The parties have not cited any portions of the legislative

histories of these Acts relevant to this question, nor have

we found any. But the SEC and Justice find consider-

able support for their interpretation in the legislative

history of the Foreign Corrupt Practices Act of 1977,

91 STaT. 1494, Title I, 15 U.S.C. $$ 78a, 78m, 78dd-1,

78dd-2, 78ff (Supp. I 1977).

The Foreign Corrupt Practices Act outlaws corporate

bribery of foreign officials and associated inaccurate or

misleading financial recordkeeping. In passing the stat-

ute Congress recognized the role of the SEC in combat-

‘ting such practices under the ’83 and ’34 Acts, and

sought to “strengthen the Commission’s ability to enforce

compliance with the existing reguirements [sic] of the

securities laws[.]” S. Rep. No. 114, 95th Cong., 1st Sess.

12 (1977). Both the Senate and the House reports on

the bill acknowledged the SEC’s dual investigative role

in preparing cases for civil and criminal enforcement

actions. They also recognize the necessity of close co-

operation between the SEC and Justice in preparing such

cases. The Senate Committee said:

The committee expects that close cooperation will

develop between the SEC and the Justice Department

at the earliest stage of any investigation in order

to insure that the evidence needed for a criminal

proscution does not become stale. * * *

Id. at 12. It stated that it expected the SEC and Justice

to “work out” between themselves certain “arrangements

* * * on criminal matters” that would preserve the au-

thority of each within its jurisdiction. Jd. The House

Committee said:

Traditionally, there has been a close working rela-

tionship between the Justice Department and the

A-37

SEC. The Committee fully expects that this coop-

eration between the two agencies will continue with

respect to the enforcement of the provisions of this

bill.

H.R. Rep. No. 640, 95th Cong., lst Sess. 10 (1977).

Although the legislative history of the Foreign Corrupt

Practices Act is not directly probative of congressional

intent governing the ’33 and ’34 Acts, these statements

by the 95th Congress are nevertheless entitled to some

weight. The remarks in the committee reports concerning

the investigative practices of the SEC and Justice were

not intended to change, but to reaffirm, past practice.

This indicates that Congress understands and approves

of the “close working relationship” between the agencies

in their investigative capacities. Since such a “close work-

ing relationship” will govern the activities of the agen-

cies in enforcing the laws against questionable foreign

payments under the new statute, it would be impractical

for us to attempt to screen the agencies from each other

when they are investigating the same sort of offense

under the former statutes.

Congress manifestly did not intend that the SEC be

forbidden to share information with Justice at this stage

of the investigation. Under the panel majority’s theory

of the case the SEC would be foreclosed from sharing the

fruits of its investigation with Justice as soon as Justice

begins its own investigation through a grand jury. Only

by waiting until the close of the SEC pvwceeding before

initiating its own grand jury investigacion could Justice

obtain access to the evidence procured by the SEC. In

view of Congress’ concern that the agencies share infor-

mation “at the earliest stage of any investigation in

order to insure that the evidence needed for a criminal

prosecution does not become stale,” S. Rep. No. 114,

supra, at 12, and that the agencies avoid “a costly dupli-

cation of effort,” H.R. Rep. No. 640, supra, at 9, it would

A-38

be unreasonable to prevent a sharing of information at

this point in the investigation.

Third, we note that there is little or no judicial prece-

dent for the panel’s modification. The only support ad-

duced by the panel opinion is a District Court opinion

in SEC v. Gilbert, 79 F.R.D. 683 (S.D. N.Y. 1978). In

that case, which arose on the defendant’s request for a

protective order under the discovery rules of the Federal

Rules of Civil Procedure—as contrasted to an investiga-

tive subpoena enforcement proceeding as in this case—

the court ordered the SEC “not to furnish the U.S. At-

torney specially with any information procured in the

course of discovery in this case.” Jd. at 687. The court

offered no authority for this order nor, indeed, any rea-

son for its application. While we recognize the similarity

of Gilbert to this case in many respects, its lack of rea-

soning and its distinguishable procedural posture make

it but weak authority.*

In fact, the reasoning of the Supreme Court in LaSalle

is contrary to that of the panel in two respects, and

should govern this case in lieu of Gilbert. The LaSalle

Court considered, and explicitly rejected, the course

adopted by the panel majority: “[I]t is unrealistic to

attempt to build a partial information barrier between

the two branches of the executive.” United States v.

LaSalle Nat’l Bank, supra, 487 U.S. at 312. More funda-

mentally, the LaSalle Court conceived of the controversy

before it as an analysis of the good or bad faith of the

IRS investigation. A bad faith investigation, in the

**° The panel majority did not deal directly with two deci-

sions much closer to the instant case on their facts. Both

were decided in favor of the SEC without modification. SEC

v. Drucker, [Transfer Binder 1979] Fed.Sec.L.Rep. (CCH)

7 96,821 (S.D. N.Y. March 30, 1979); Gellis v. Casey, 338

F.Supp. 651 (S.D. N.Y. 1972). See panel slip op. at 12 n.29,

14 1.81.

A-39

Court’s conception, is one conducted solely for criminal

enforcement purposes. See id. at 307-308, 316, & 316

n.18. Where the agency has a legitimate noncriminal

purpose for the investigation, it acts in good faith under

the LaSalle conception even if it might use the informa-

tion gained in the investigation for criminal enforcement

purposes as well.” In the present case the SEC plainly

has a legitimate noncriminal purpose for its investiga-

tion of Dresser. It follows that the investigation is in

good faith, in the absence of complicating factors. There

is, therefore, no reason to impose a protective order such

as that imposed by the panel majority.

Finally, we note that the panel’s modification would

serve no compelling purpose, and might interfere with

enforcement of the securities laws by the SEC and Jus-

tice. As the Second Circuit has said, the procedure per-

mitting the SEC to communicate with Justice during the

preliminary stages of an investigation has “significant

advantages.” United States v. Fields, supra, 592 F.2d

at 646.

Allowing early participation in the case by the

United States Attorney minimizes statute of limi-

tations problems. The more time a United States

Attorney has, the easier it is for him to become

familiar with the complex facts of a securities fraud

case, to prepare the case, and to present it to a

grand jury before expiration of the applicable stat-

ute of limitations. Earlier initiation of criminal

proceedings moreover is consistent with a defendant’s

right to a speedy trial. * * °

Id. The panel’s modification would “interfere with this

commendable example of inter-agency cooperation,” id.,

to the detriment of securities law enforcement and in

50 So long as the Commission evinces no other indicium of

bad faith. See United States v. LaSalle Nat'l Bank, supra note

25, 487 U.S. at 317 n.19.

A-40

contravention of the will of Congress.*! On the other side

of the balance, the panel’s concern for preserving the

limitations on criminal discovery is largely irrelevant at

this stage of the proceedings, as Dresser agrees.** Thus

this would be an inappropriate situation to impose a

“prophylactic” rule against cooperation between the agen-

cies. We believe the courts can prevent any injustice that

may arise in the particular circumstances of parallel in-

vestigations in the future. We decline to adopt the posi-

tion of the panel majority.

V. OTHER ISSUES

Several issues remain.

First, Dresser argues that enforcing the SEC subpoena

would breach an agreement of confidentiality made at

the January 27, 1976 meeting between SEC and Dresser

representatives. The District Court held that “[t}hrough-

out the voluntary disclosure program the SEC reserved

its rights to pursue a formal investigation and issue

51 In its brief Justice suggests a number of practical prob-

lems that might ensue from the panel’s modification: (1) that

Justice might have to forego any assistance from the SEC in

enforcing the Foreign Corrupt Practices Act or other regula-

tory laws involving parallel investigations; (2) that agency

attorneys might.not be legitimately appointed as special assist-

ant United States Attorneys to assist in preparing cases for

grand juries; (3) that a grand jury witness might gain effec-

tive immunity from criminal prosecution by providing sole,

original copies of inculpatory documents to the SEC; (4) that

prosecutors might be unable to learn of prior testimony by

grand jury witnesses; (5) that prosecutors might be denied

access to exculpatory information, evidence of perjury, or a

prior inculpatory statement; and (6) that the prosecutor

might find it impossible to comply with his responsibilities

under Brady v. Maryland, 373 U.S. 83 (1963), and Jencks

v. United States, 353 U.S. 657 (1957).

52 See text at notes 33-34 supra.

A-41

subpoenas if necessary. It is readily apparent that the

SEC never agreed to completely forego its rights to sub-

poena the material in question.” 453 F.Supp. at 575. We

have examined the record and do not find that the Dis-

trict Court’s determination on this point was clearly

erroneous.

Second, Dresser argues that the District Court erred

in granting judgment for the SEC without permitting

Dresser to conduct discovery into the propriety of the

SEC investigation. Although the precise nature of Dres-

ser’s desired discovery is not clear, the company appar-

ently would investigate: (1) the SEC criminal referral

and the concurrent criminal investigation, with a view

to the possibility that the SEC has proceeded in bad

faith; (2) the ethical propriety of SEC agents’ partici-

pation in the criminal investigation; (3) the existence of

an SEC commitment of confidentiality; and (4) the basis

for the SEC staff’s decision to request a formal investi-

gation of Dresser. See brief of respondent-appellant at

36-42.

We recognize that discovery may be available in some

subpoena enforcement proceedings where the circum-

stances indicate that further information is necessary

for the courts to discharge their duty. United States v.

Fensterwald, 553 F.2d 231 (D.C. Cir. 1977) (per cu-

riam) ;.United States v. Wright Motor Co., 586 F.2d 1090

(5th Cir. 1976). For example, the Supreme Court in

LaSalle apparently contemplated some degree of discovery

in IRS summons cases to determine the institutional good

faith of the IRS in issuing such summonses. United

States v. LaSalle Nat’l Bank, supra, 437 U.S. at 316-317;

id. at 320 (dissenting opinion) ; United States v. Marine

Midland Bank, 585 F.2d 36, 38-39 (2d Cir. 1978) (per

curiam). However, district courts must be cautiof®*in

granting such discovery rights, lest they transform sub-

poena enforcement proceedings into exhaustive inquisi-

A-42

tions into the practices of the regulatory agencies. See

FTC v. Anderson, F.2d , (D.C. Cir. No.

78-1082, decided September 17, 1979) (slip opinion at

5). Discovery should be permitted only where the re-

spondent is able to distinguish himself from “the class

of the ordinary [respondent],” United States v. Fenster-

wald, supra, 553 F.2d at 231-2382, by citing special cir-

cumstances that raise doubts about the agency’s good

faith. Even then, district courts must limit discovery to

the minimum necessary in the interests of justice by

requiring specific interrogatories or affidavits rather than

“full-dress discovery and trial.” United States v. Marine

Midland Bank, supra, 585 F.2d at 39; see United States

v. Fensterwald, supra, 553 F.2d at 232-233.

We conclude that the District Court acted within its

discretion in denying Dresser discovery in this case, and

that it properly granted judgment to the SEC on the

record before it. There was nothing improper about the

SEC’s decision to transmit the files of the participants

in the Voluntary Disclosure Program to Justice, or about

the subsequent concurrent investigations by the two agen-

cies. Nor does the participation of two SEC attorneys

in the Justice task force cast doubt upon the good faith

of the Commission. Dresser’s allegations of an agreement

by the SEC not to subpoena the documents underlying its

voluntary report are not substantiated by any writing,

and are directly contrary to the published terms of the

Voluntary Disclosure Program. Finally, Dresser’s sug-

gestion that the order of investigation is improper be-

cause there was no “likelihood that a violation has been

or is about to be committed,” see 17 C.F.R. § 202.5

(1979), does not distinguish Dresser from any other

recalcitrant subpoena respondent. At this stage of the

investigation neither this court nor the SEC could know

58 Report, supra note 4, at 32; see text at note 8 supra.

A-43

whether Dresser has violated the law. The Commission’s

discretion concerning which potential violators to investi-

gate is, while not unbounded, extremely broad. Dresser

has suggested no improper motive for the SEC investiga-

tion, cf. United States v. Fensterwald, supra, 553 F.2d

at 232 (respondent’s political and professional activities

“could easily have spurred the Internal Revenue Service

to take an extraordinary interest in this particular tax-

payer’). Dresser’s bare protestations of innocence do

not suffice to call the SEC’s bona fides into question.”

We therefore affirm the District Court’s decision on this

point.

Two remaining substantive issues raised by Dresser do

not require decision by this court at this time. Those

issues are: the asserted right of Dresser or its employees

to protect portions of the documents from public disclo-

sure because of the possibility of hostile and injurious

foreign reaction, and the asserted attorney-client privi-

lege of Dresser or its employees with respect to some of

the documents. Despite Dresser’s suggestion to the con-

trary, see brief of respondent-appellant at 42-47, we con-

clude that the District Court did not reach the merits of

Dresser’s claims on these points.

With respect to confidentiality, the court noted that

the SEC had offered to give Dresser ten days notice in

advance of disclosure of the documents to the public, to

enable the company to challenge the decision to disclose.

This offer the court found to be “adequate” to protect

Dresser’s interests at this stage of the proceeding. 453

5% Dresser’s allegation that the staff “repeatedly told Dresser

that it knew of no securities violation,” brief of respondent-

appellant at 41, does not alter the case. By the time the Com-

mission decided to issue the order of investigation, the staff

had officially concluded otherwise. See order directing private

investigation and designating officers to take testimony, JA 7-

A-44

F.Supp. at 576.% With respect to the attorney-client

privilege, the District Court properly declined to evaluate

Dresser’s claims in generality, stating that such claims

at this point are “vague and conclusory.” Id. The court

further said that “[cJertainly not all of the material

sought is privileged,” and indicated that the investigative

report prepared by Dresser as part of the Voluntary

Disclosure Program is not privileged. Jd. Dresser ap-

parently does not dispute either of these specific conclu-

sions. Brief of respondent-appellant at 43, 44.

We agree with the District Court that Dresser’s claims

of confidentiality and of attorney-client privilege cannot

be judged by the courts on this record at this stage of

the proceeding. Rather, once the subpoena has been en-

forced the SEC will have the opportunity to rule on

specific requests for confidential treatment and assertions

of attorney-client privilege. This procedure will follow

the outlines described by this court in FTC v. Texaco,

Inc., 555 F.2d 862, 883-885 (D.C. Cir.) (en bance), cert.

denied, 481 U.S. 974 (1977), and the Supreme Court in

FCC v. Schreiber, 381 U.S. 279, 290-291, 295-296 (1965).

We recognize that Judge Parker in the grand jury

investigation of Dresser said that Dresser’s concern for

the lives of its employees and their families and property

55 The court said:

Furthermore, the Commission has offered to give Dresser

ten days notice in the event that there is a FOIA request

and the SEC determines the material is not exempt and

must be disclosed. These assurances of confidentiality

are adequate and Dresser is entitled to no more. * * *

453 F.Supp. at 576. We interpret the SEC’s offer as encom-

passing any decision to release the documents, whether or not

pursuant to the FOIA. Moreover, we assume that, upon

examination of particular documents or groups of documents,

the SEC has the authority to stiffen the confidentiality or

notice agreement.

A-45

abroad in the event of public disclosure of portions of

the documents is “not illusory and should not be lightly

considered,” see JA 1638, but we believe that the SEC

will be in a better position to evaluate this claim than

the courts are now. This court has commented before

that the danger that confidential materials might be

wrongfully released to the public through the Freedom

of Information Act is “by no means frivolous,” FTC v.

Anderson, supra, —— F.2d at —— n.1l, slip opinion

at 12 n.11. Courts have held an offer of ten days notice

before release of information to be adequate protection

in several cases involving business information. /d., -—

F.2d at ——, slip opinion at 8; FTC v. Texaco, Inc.,

supra, 555 F.2d at 884-885; SEC v. Wheeling-Pittsburgh

Steel Corp., 482 F.Supp. 555, 563 (W.D. Pa. 1979). The

District Court approved a similar arrangerrent in this

case with respect to Dresser’s subpoenaed documents in .

general. We do not read the opinion as approving such

a procedure with respect-to all documents in this case,

no matter how sensitive they may prove to be. The deci-

sion whether to accord greater protection to certain docu-

ments where release might endanger employees’ lives

abroad must be made in the first instance by the Com-

mission, which will be able to inspect the documents and

hear argument on the issue.”

The question of the attorney-client privilege must be

resolved in a similar manner: viewed initially by the

Commission with later review in the courts if necessary.

We see no ground for reversal in the District Court’s

determinations on the confidentiality and attorney-client

privilege issues.

56 We note that, except in “egregious cases,” the SEC has

stated it would not require more than “generic” disclosure to

the public of questionable foreign payments. Report, supra

note 4, at 9 n.8.

A-46

The final issue in this case is that raised in No. 78-

1705: whether the District Court erred in its decision

of June 28, 1978, JA 582, reconsideration denied, JA

559, denying Mr. Edward R. Luter, a senior vice presi-

dent of Dresser, the right to intervene in this enforce-

ment proceeding on behalf of himself and other employees

of Dresser. Mr. Luter claims an interest in the proceed-

ing on bases of an alleged confidentiality interest on the

part of the employees in certain documents and an alleged

attorney-client privilege. The District Court rejected Mr.

Luter’s motion to intervene, saying:

Mr. Luter has failed to demonstrate any proper basis

for reconsideration, for intervention as a matter of

right, or for intervention as a matter of discretion.

Even if there was an attorney-client privilege to be

invoked in this case, it would be the corporation’s

and not the employees’. In addition, the employees

had no constitutional right of privacy concerning the

communications in question. * * *

JA 559 (order denying reconsideration).

We are somewhat troubled by the District Court’s

treatment of Mr. Luter’s motion. It appears that the

court rejected his claim on the merits without first allow-

ing him to pass the threshold. In this circuit an appli-

cant to intervene need only show that the representation

of his interest may be inadequate; the burden of proof

rests on those resisting intervention. Nuesse v. Camp,

885 F.2d 694, 702 (D.C. Cir. 1967). In cases of alleged

corporate misconduct it is especially important for the

courts to be alert to the possibilities of conflict between

the interests of the corporation and those of its employees.

In this case, however, we need not judge whether the

court was correct in its conclusion that Mr. Luter had

asserted no cognizable interest in the proceedings. With

the benefit of hindsight, and informed by the arguments

Mr. Luter has made on his behalf in this appeal, we are

A-47

able to conclude that Dresser has adequately represented

the inte of its employees through this stage of the

litigation. “So far, the disputes have centered on the en-

forceability of the SEC subpoena, not on particular ques-

tions of confidentiality or privilege pertaining to indi-

vidual documents. We do not understand the District

Court as having rejected the right of Mr. Luter or any

other Dresser employees to intervene in future proceed-

ings concerning this investigation. On the understanding

that Mr. Luter or his fellow employees may seek to inter-

vene in future SEC proceedings concerning confidentiality

and the attorney-client privilege, and in any court pro-

ceedings that might follow, and that the SEC and the

courts will evaluate any such motions to intervene afresh

and on their merits, we affirm the judgment of the Dis-

trict Court in No. 78-1705. As previously indicated, we

affirm the judgment of the District Court in No. 78-1702

as well.

The judgments of the District Court are

Affirmed.

A-la

Concurring Opinion of Circuit Judge Epwarps: I con-

cur in the opinion of the court in this case. I wish

to point out, however, that I do not read the court’s

opinion as expressing any view as to the proper outcome

in a case of this sort once an indictment has issued. See

text of opinion at notes 33-34, supra. Once an indictment

has issued, the policy interest expressed in United States

v. LaSalle National Bank, 4837 U.S. 298, 312 (1978),

concerning the impermissibility of broadening the scope

of criminal discovery through the summons authority of

an agency, may come into play. I express no opinion as

to whether or not the summons authority of a govern-

ment agency may continue once an indictment has been

issued or, if it may, whether protective conditions need

be placed on the exercise of that power. These issues

raise questions which are not presented here. The resolu-

tion of these questions, therefore, must await another day.

Appendix B

Bl pp

Notice: This opinion is subject to formal revision before publication

in the Federal Reporter or U.S.App.D.C. Reports. Users are requested

to notify the Clerk of any formal errors in order that corrections may be

made before the bound volumes go to press.

United States Coot of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

No. 78-1702

SECURITIES AND EXCHANGE COMMISSION

DRESSER INDUSTRIES, INC., APPELLANT

No. 78-1705

SECURITIES AND EXCHANGE COMMISSION

Vv.

DRESSER INDUSTRIES, INC., EDWARD R. LUTER,

APPELLANT

Appeal from the United States District Court

for the District of Columbia

(Miscellaneous No. 78-0141)

Argued December 11, 1978

Decided Novernber 19, 1979

Bills of costs must be filed within 14 days after entry of judgment. The

court looks with disfavor upon motions to file bills of costs out of time.

B-2

David R. MacDonald with whom Edward E. Dyson

and Francis D. Morrissey were on the brief, for appel-

lant in No. 78-1702.

Raymond G. Larroca with whom Herbert J. Miller, Jr.

and Thomas B. Carr were on the brief, for appellant in

No. 78-1705.

James H. Schropp, Assistant General Counsel, Securi-

ties and Exchange Commission with whom Paul Gonson,

General Counsel, Securities and Exchange Commission

was on the brief, for respondent.

Before: BAZELON, Senior Circuit Judge, ROBB, Circuit

Judge and BRYANT,* Chief Judge, United States District

Court for the District of Columbia.

Opinion for the Court filed by Senior Circuit Judge

BAZELON.

BAZELON, Senior Circuit Judge: Appellant Dresser In-

dustries, Inc. (Dresser) appeals from an order of the

district court enforcing a subpoena duces tecum issued by

the SEC. The SEC subpoenaed Dresser’s documents

while investigating possible securities law violations aris-

ing out of certain “questionable” foreign payments alleg-

edly made by the company. Dresser primarily bases its

resistance to the subpoena on the Supreme Court’s recent

decision in United States v. LaSalle National Bank, 437

U.S. 298 (1978), arguing that the SEC’s civil subpoena

must be quashed since the Commission referred Dresser’s

case to the Department of Justice for criminal prosecu-

tion and Justice has in fact begun presenting Dresser’s

case to a grand jury. We affirm the district court’s

order enforcing the subpoena, with modifications to main-

* Sitting by designation pursuant to 28 U.S.C. § 292(a).

B-3

tain the separation between the criminal and civil en-

forcement proceedings.’

I. BACKGROUND

The SEC’s Inquiry

In 1974, in the wake of reports that several American

corporations had made illegal political contributions, the

SEC began an investigation to determine whether the

nondisclosure of those payments might constitute a vio-

lation of the federal securities laws.2 The Commission’s

inquiry quickly grew to encompass securities law viola-

tions arising out of illegal foreign transactions as well

as domestic payments. The SEC brought a number of

enforcement actions as a result of its investigations, but

the Commission soon determined that the magnitude of

the problem required additional measures to bring corpo-

rations into compliance with the securities laws.* The

SEC therefore instituted a “voluntary disclosure pro-

gram.” The SEC encouraged corporations to conduct

internal investigations under the direction of those not

involved in the “questionable activities,” to determine if

previously undisclosed matters should be reported to the

SEC and the investing public.

1In No. 78-1705, Edward R. Luter, a senior vice president

of Dresser, appeals from an order denying Luter’s motion

to intervene in the subpoena enforcement proceeding. For the

reasons that appear below, see section IV infra, we affirm

the order denying intervention.

2 The history of the SEC’s inquiry into questionable do-

mestic and foreign payments is outlined in Securities and

Exchange Commission, Report on Questionable and Illegal

Corporate Payments and Practices, submitted to Senate Com-

mittee on Banking, Housing and Urban Affairs, 94th Cong.,

2d Sess. (May 12, 1976), reprinted in CCH Federal Securities

Law Reports 642 (May 19, 1976) [hereinafter Report].

* Id. at 6-7.

B-4

The “unique problems involved in the disclosure of

questionable or illegal foreign payments’’* led the SEC

to establish special procedures for handling disclosures

pursuant to the voluntary disclosure program.’ The Com-

* Jd. at 7.

5 Specifically, companies that may have engaged in ques-

tionable or illegal activities were required to take the fol-

lowing steps:

1. Authorize a careful in-depth investigation of the facts

relating to questionable or illegal foreign or domestic

activities by persons not involved in the activities in

question. If practicable, such persons should report

and be responsible to a committee comprised of mem-

bers of the board of directors who are not officers of

the company and who were not involved in the sus-

pected questionable or illegal practices.

Generally, assistance should be sought from the in-

dependent accounting firm that regularly audits the

corporation unless the circumstances suggest other-

wise.

The committee also should consider retaining outside

counsel. The investigation should encompass the prior

five years, the period covered by the financial state-

ments required in annual reports and registration

statements filed pursuant to the federal securities

laws, but also should examine any events occurring

prior to that time that may appear to be part of a

continuing program or to be related to existing ma-

terial contracts or business operations. At the con-

clusion of the investigation, the committee should

prepare and submit to the full board of directors

a report setting forth its findings. The report should,

to the extent possible, contain detailed information

about each payment; its purpose and amount; the

recipient; the country in which the payment was

made and the circumstances in. which payment

occurred

2. The board of directors should issue an appropriate

policy statement with respect to transactions involv-

ing illegal or questionable activities in the United

States or abroad, or reiterate any relevant, pre-

B-5

mission urged companies to consult with the SEC staff

to resolve any uncertainties concerning the nature and

scope of the required disclosures.°

In 1976, Dresser’s counsel met with representatives of

the SEC to discuss Dresser’s participation in the volun-

tary disclosure program. At that meeting Dresser indi-

cated it would conduct an internal inquiry concerning

“questionable” transactions,’ and in 1976 and early 1977,

Dresser reported the results of its investigation in three

filings submitted to the SEC.’

The Commission staff, however, was unsatisfied with

both the scope and detail of Dresser’s disclosures. Ac-

cordingly, the Commission staff sought access to Dresser’s

——— |

existing policy statement. Normally, this statement

should include a declaration of cessation of such

activities, if any, and a prohibition against the

maintenance of improper books and records and

inadequate supporting documentation relating to such

activities. The adoption of such a policy should be

cornmunicated to appropriate corporate personnel,

implemented by adequate internal controls and safe-

guards, and monitored by auditing programs estab-

lished by the independent auditors.

8. The corporation should consider whether interim

public disclosure of the results should be made prior

to completion of the investigation. This disclosure

generally is made on a Form 8-K filed with the Com-

mission, supplemented in some cases by the issuance

of a press release.

4. At the conclusion of the investigation, a final report

of material facts must be filed with the Commission,

generally on Form 8-K.

Id. at 8-10 (footnotes omitted).

‘7d. at 7 & n.5.

7 Affidavit of W. Lyall Milde, Joint Appendix (J.A.) 64-65.

* Dresser filed three Form 8-K’s with the SEC reporting

questionable payments: January 28, 1976 (J.A. 100-02);

November 11, 1976 (J.A. 103-08); and February 10, 1977

(J.A. 109-18).

B-6

internal report and underlying documents to verify the

completeness and accuracy of the disclosures. Dresser

denied the staff’s request, citing an alleged promise of

confidentiality and Dresser’s concern that the documents

might be disclosed publicly pursuant to the Freedom of

Information Act. The Commission denied that the staff

had ever made any commitment not to seek Dresser’s

internal documents.*° Further, the SEC promised to re-

spect Dresser’s interest in confidentiality by notifying

Dresser 10 days before the release of any documents

under FOIA." Dresser would thus have an opportunity

to seek protection and review from the courts.

* Letter of David R. Macdonald, counsel to Dresser, July

15, 1977 (J.A. 71-76). Dresser and its employees fear that

they may be subject to physical reprisals if the allegedly

illegal foreign transaction» are revealed publicly. Indeed,

Luter has suggested that tie disclosure of certain informa-

tion furnished to Dresser by its employees “could place in

jeopardy the lives of Dresser’s employees abroad.” Luter Br.

at 4.

10In support of its position, the SEC cites a letter from

Vice President Luter to the SEC, dated January 12, 1977,

which provides in pertinent part:

Dresser Industries, Inc. undertakes to provide the staff

of the Enforcement Division access to its report and

supporting documents prepared in connection with the

special inquiry described in * * * Form 8-K. We under-

stand that the confidentiality of such information will

be preserved with respect to details as to countries and

parties subject, of course, to the fact that if a formal

inquiry is instituted by the Commission, it will be gov-

erned by your usual procedures.

Exhibit B to Commission Opposition to Motion for Discovery ;

SEC Br. at 6-7 & n.15. The Commission also maintains that

access to underlying documents was a requirement of the

voluntary disclosure program from its inception. See Report,

supra note 2, at 9 n.8.

11 Letter of Marvin G. Pickholz, April 20, 1978, J.A. 12;

J.A. 285. This promise was noted in the district court’s de-

cision in this case SEC v. Dresser Industries, Inc., 453 F.

Supp. 578, 576 (D.D.C. 1978).

B-7

The Justice Department’s Investigation

At the same time that the SEC was conducting its in-

quiry into possible securities law violations arising out

of questionable foreign payments, the Justice Department

convened a “Task Force on Transnational Payments” to

investigate possible crimina! violations of the securities

and other federal laws. Two SEC attorneys partici-

pated in the Task Force’s work, although the SEC main-

tains that those representatives were not connected with

the SEC’s civil investigation of Dresser.”

Pursuant to an order of the Commission, the SEC

made available its investigative files on Dresser and

other corporations to the Justice Department Task Force

in August, 1977.4 The Task Force began a criminal

investigation and, in January, 1978, the Justice Depart-

ment began presenting Dresser’s case to a federal grand

jury in the District of Columbia.*

The Ensuing Litigation

Dresser initially sought to enjoin both the civil and

criminal investigations by filing a complaint in the Dis-

trict Court for the Southern District of Texas in March

1978.'° While that proceeding was pending, the grand

jury subpoenaed a number of documents from Dresser.

Dresser moved unsuccessfully to quash the grand jury

12 The Task Force is said to have begun its investigation

in May, 1976. See Dresser Br. at 5; J.A. 284, 357.

18 J.A. 284-85. See TAN 59 infra.

14 Dresser Br. at 7; J.A. 296.

18 Affidavit of David R. Macdonald, J.A. 68-70.

16 Dresser Industries, Inc. v. United States, Civil Action

No. H-78-405 (S.D. Tex.).

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subpoena.’* However, Judge Parker did agree to enter

an order requiring the grand jury secrecy provisions of

Rule 6(e) of the Federal Rules of Criminal Procedure

to be “strictly enforced.” Thereafter, Dresser complied

with the grand jury subpoena.

Meanwhile, the SEC went forward with its own in- .

quiry. On April 11, 1978, the SEC ordered a formal —

investigation '* and on April 21, 1978 the SEC issued the

subpoena for Dresser’s records that is at issue in this

case.’® According to Dresser, although the SEC subpoena

concerned the same “matter” as that under investigation

by the grand jury, the SEC requested “many additional

documents” beyond those required by the grand jury

subpoena.”

In May 1978, the District Court for the Southern Dis-

trict of Texas dismissed Dresser’s injunctive action

against both the SEC and Justice.** Dresser then re-

turned to the District of Columbia and attempted to

quash the SEC subpoena. In support of its motion to

17 Judge Parker’s order of May 19, 1978 is unreported. The

order and accompanying memorandum have been filed under

seal with this court as Exhibit D to SEC’s Statement of

Points and Authorities in Opposition to Motion for Discovery.

18JIn re Dresser Industries, File No. HO-1089 (April 11,

1978), J.A. 7-9. The order was entered pursuant to the

SEC’s authority under § 20(a) of the Securities Act of 1933,

as amended, 15 U.S.C. § 77t (1976), and under § 21(a) of

the Securities and’ Exchange Act of 1934, as amended, 15

U.S.C. § 78u(d) (1976).

19 J.A. 15-16.

20 Dresser Br. at 8.

21 The Justice Department’s motion to dismiss was granted

on May 1, 1978 (J.A. 162), that of the SEC on May 26,

1978 (J.A. 114-82). Both district court orders were affirmed

on appeal. See Dresser Industries, Inc. v. United States,

Fed. Sec. L. Rep. (CCH) { 96,925 (5th Cir. June 18, 1979).

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quash, Dresser sought to conduct discovery. Judge Flan-

nery denied the motion for discovery on June 16, 1978.7"

Two weeks later, the district court denied Dresser’s mo-

tion to quash and simultaneously granted the SEC’s

cross-motion for enforcement of the subpoena.” After

the district court denied Dresser’s motion for reconsider-

ation and stay, this court stayed the district court’s deci-

sion on August 14, 1978.**

II. THE APPLICABILITY OF LaSalle

The principle issue raised in this appeal is whether

the Supreme Court’s decision in United States v. LaSalle

National Bank, supra, forbids an SEC subpoena of Dress-

er’s records after the agency has “referred”.** the case

22SEC v. Dresser Industries Inc., Misc. No. 78-0141

(D.D.C. June .16, 1978), J.A. 257.

23 Judge Flannery’s decision is reported at 453 F. Supp.

573 (D.D.C. 1978).

24SEC v. Dresser Industries Inc., Nos. 78-1702, 78-1705

(D.C. Cir. Aug. 14, 1978), J.A. 482.

28 The Commission is authorized by statute to transmit

‘evidence concerning possible criminal violations of the securi-

ties and other laws to the attorney general. See § 20(b) of

the Securities Act, 15 U.S.C. § 77t (1976); §21(a) of the

Exchange Act, 15 U.S.C. § 78u(d) (1976). In practice, the

Commission’s cooperation with the Justice Department and

in particular the U.S. Attorneys’ offices takes a variety of

forms. See generally Amicus Curiae Brief of SEC in United

States v. Fields, J.A. 404-20. These range from a casual

sharing of information that may be of interest to the United

States Attorney when the Commission has not begun a formal

investigation (J.A. 415-17), to more formal procedures used

after the SEC institutes a formal investigation (J.A. 417-19).

In the latter case the SEC may make either an “informa!”

criminal reference, making all investigating files available

to the U.S. Attorney, or a formal criminal reference, where

the authorization of access is accompanied by a formal re-

port by the Commission staff including recommendation con-

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to the Department of Justice and Justice has sought an

indictment against Dresser.

LaSalle is the most recent in a series of Supreme Court

decisions elaborating the propriety of compelling a tax-

payer to produce documents under § 7602 of the Internal

Revenue Code (IRC)** when the taxpayer may also be

subject to criminal prosecution. In LaSalle, the Supreme

Court determined that § 7602 did not authorize the IRS

to issue a civil summons after the IRS had recommended

a case to the Justice Department for prosecution. 437

U.S. at 311-313. The Court reasoned that permitting

civil discovery after recommendation to the Justice De-

partment might substantially broaden the criminal dis-

covery rights of the Justice Department and infringe the

traditional role of the grand jury. 7d. at 312, 313 n.15.

Yet the Court found no evidence in § 7602 or its legisla-

tive history that Congress intended to alter the estab-

lished framework for criminal discovery or to infringe

the role of the grand jury. Zd.

Dresser argues that LaSalle is directly applicable here.

In Dresser’s view, the SEC’s decision to transmit its files

to Justice was equivalent to the IRS’s recommendation

to prosecute in LaSalle. Dresser contends that permitting

cerning prosecution. Both the informal and formal reference

require Commission approval. J.A. 417.

The reference made in this case was “informal,” i.e., the

SEC made its investigating files available to the Justice

Department pursuant to an order of the SEC, but the refer-

ence was not accompanied by a recommendation for

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