UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA
__________________________________________
U.S. Securities and Exchange Commission, ) ) Petitioner, ) ) -v.- ) 11 Misc. 512 GK/DAR ) Deloitte Touche Tohmatsu CPA Ltd., ) ) Respondent. ) __________________________________________)
SECURITIES AND EXCHANGE COMMISSION’S MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO OBJECTIONS TO
MAGISTRATE JUDGE’S MARCH 4, 2013 ORDER
DAVID MENDEL (D.C. Bar #470796) Assistant Chief Litigation Counsel U.S. Securities and Exchange Commission – Enforcement Division 100 F Street, NE Washington, DC 20549 (202) 551-4418 (phone) (202) 772-9282 (fax) [email protected]
Of Counsel: ANTONIA CHION New York Bar Attorney Registration No. 1873405 LISA WEINSTEIN DEITCH California Bar No. 137492 HELAINE SCHWARTZ New York Bar Attorney Registration No. 1917046
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TABLE OF CONTENTS TABLE OF AUTHORITIES ........................................................................................................... ii
PRELIMINARY STATEMENT ..................................................................................................... 1
BACKGROUND ............................................................................................................................. 4
A. DTTC’s Registration With The Board And Receipt of Board Warning ....................... 4
B. This Action Seeks to Enforce the Subpoena .................................................................. 5
C. Administrative Proceedings ........................................................................................... 7
D. Timeframe for Resolution of the Administrative Proceeding ....................................... 8
E. The Magistrate Judge’s Denial of DTTC’s Motion To Extend The Stay ...................... 9
ARGUMENT .................................................................................................................................. 9
A. The Magistrate Judge’s Decision To Deny DTTC’s Requested Stay Was Neither Contrary to Law Nor Clearly Erroneous ..................................................................... 10
1. The Absence Of Any Pressing Need For A Stay Merits Its Rejection ................... 11
2. The Balance Of Interests Also Merits Rejection Of The Requested Stay .............. 12
3. The Magistrates Judge’s Assessment of Potential Judicial Efficiency Was Not Contrary To Law Or Clearly Erroneous ................................................................ 15
B. The Magistrate Judge Did Not Err By Holding A Motions Hearing On March 13, 2013 ............................................................................................................ 19
1. This Subpoena-Enforcement Action Is A Summary One ...................................... 20
2. DTTC Voluntarily Chose Not To Seek Leave To File A Sur-reply....................... 21
3. DTTC Has Not Identified A “Special Circumstance” Justifying Discovery ......... 21
a. DTTC’s Proposed Expert Discovery Is Unnecessary ................................. 23
b. The SEC-CSRC Correspondence Can Provide DTTC With No Basis For Resisting Enforcement Of The Subpoena ................................................. 24
c. Discovery Of The Reasons For The SEC’s Failed Negotiations With The CSRC Also Cannot Provide A Basis For Resisting Enforcement Of The Subpoena ................................................................................................... 25
4. The Magistrate Judge Provided DTTC With An Opportunity To Request An Evidentiary Hearing............................................................................................... 26
5. The Parties Should Not Be Required To Re-Brief The Case To The Magistrate Judge ...................................................................................................................... 27
CONCLUSION ............................................................................................................................. 30
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TABLE OF AUTHORITIES
CASES Am. Ctr. for Civil Justice v. Ambush, 794 F. Supp. 2d 123 (D.D.C. 2011)................................................................................... 10, 19 *Belize Soc. Dev. Ltd. v. Gov’t of Belize, 668 F.3d 724 (D.C. Cir.), cert. denied, 133 S. Ct. 274 (2012)......................................................................... 3, 10, 11, 12 *Cherokee Nation of Okla. v. United States, 124 F.3d 1413 (Fed. Cir. 1997) ......................................................................................... 11, 12 Clinton v. Jones, 520 U.S. 681 (1997) .................................................................................... 10, 13 Dellinger v. Mitchell, 442 F.2d 782 (D.C. Cir. 1971) ................................................................... 12 Dependable Highway Exp., Inc. v. Navigators Ins. Co., 498 F.3d 1059 (9th Cir. 2007) ................................................................................................. 15 Endicott Johnson v. Perkins, 317 U.S. 501 (1943) ......................................................................... 3 Fed. Savs. & Loan Ins. Corp. v. Commonwealth Land Title Ins. Co., 130 F.R.D. 507 (D.D.C. 1990) ................................................................................................ 19 FTC v. Atl. Richfield Co., 567 F.2d 96 (D.C. Cir. 1977) ......................................................... 20, 27 FTC v. Texaco, Inc., 555 F.2d 862 (D.C. Cir. 1977) ................................................................. 3, 16 Gordon v. FDIC, 427 F.2d 578 (D.C. Cir. 1970) .......................................................................... 15 In re Grand Jury Proceedings the Bank of N.S., 740 F.2d 817, 821 (11th Cir. 1984) ................................................................................... 14, 17 Johnson v. SEC, 87 F.3d 484, 490 (D.C. Cir. 1996) ..................................................................... 17 *Landis v. N. Am. Co., 299 U.S. 248, 254 (1936) ............................................................. 10, 11, 12 Mathis v. SEC, 671 F.3d 210, 217 (2d Cir. 2012) ......................................................................... 18 McCurdy v. SEC, 396 F.3d 1258,1264 (D.C. Cir. 2005)............................................................... 17 N.H. Fire Ins. Co. v. Scanlon, 362 U.S. 404 (1960) ................................................................ 20, 27 Okla. Press Publ’g Co. v. Walling, 327 U.S. 186 (1946) .............................................................. 16 Rubin, Release No. 295, 2005 WL 2180440 (RGM Sept. 8, 2005) (Initial Decision) ...................................................................................................................... 17
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SEC v. Dresser Indus., Inc., 628 F.2d 1368 (D.C. Cir. 1980) .......................................... 13, 15, 21 SEC v. Lavin, 111 F.3d 921 (D.C. Cir. 1997) ................................................................... 21, 22, 23 SEC v. McCarthy, 322 F.3d 650 (9th Cir. 2003) ........................................................................... 20 SEC v. Sprecher, 594 F.2d 317 (2d Cir. 1979) ........................................................................ 20, 21 Touche Ross & Co. v. SEC, 609 F.2d 570 (2d Cir. 1979) ............................................................ 17 United States v. Hubbard, 650 F.2d 293(D.C. Cir. 1980) ............................................................ 20 United States v. Kordel, 397 U.S. 1 (1970) ................................................................................... 15 United States v. McCarthy, 514 F.2d 368 (3d Cir. 1975) ........................................................ 20, 21 United States v. Morton Salt Co., 338 U.S. 632 (1950) ................................................................ 16 United States v. Philip Morris USA Inc., 841 F. Supp. 2d 139 (D.D.C. 2012)......................................................................................... 12 Wonsover v. SEC, 205 F.3d 408 (D.C. Cir. 2000) ......................................................................... 18
STATUTES, RULES AND REGULATIONS 15 U.S.C. § 77s(c) ......................................................................................................................... 17 15 U.S.C. § 78d-3 ............................................................................................................................ 8 15 U.S.C. § 78u(b) ......................................................................................................................... 17 15 U.S.C. § 7202(b)(1) .................................................................................................................... 7 15 U.S.C. § 7216(b)(1) .................................................................................................................... 7 15 U.S.C. § 7216(e) ......................................................................................................................... 7 17 C.F.R. § 201.102(e)(1)(iii) ......................................................................................................... 7 17 C.F.R. § 201.360(a)(3) ............................................................................................................... 8 17 C.F.R. § 201.410(a) .................................................................................................................... 8 Fed. R. Civ. P. 44.1 ....................................................................................................................... 24
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Fed. R. Civ. P. 72(a) ........................................................................................................................ 9 Local Civ. R. 72.2.......................................................................................................................... 10
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Pursuant to Federal Rule of Civil Procedure 72(a) and Local Civil Rule 72.2(b), the
U.S. Securities and Exchange Commission (“SEC” or “Commission”) respectfully submits this
Memorandum of Points and Authorities In Opposition To the Objections of Deloitte Touche
Tohmatsu CPA Ltd. (now known as Deloitte Touche Tohmatsu CPA LLP) (“DTTC”) to
Magistrate Judge Robinson’s March 4, 2013 Memorandum Opinion and Order (“March 4
Order”).
PRELIMINARY STATEMENT
Through this proceeding, the SEC seeks a court order requiring DTTC to produce
documents in response to an administrative subpoena (the “Subpoena”) that the SEC served on
DTTC in May 2011. The Commission needs the requested documents to investigate possible
securities laws violations involving Longtop Financial Technologies Limited (“Longtop”), a
foreign private issuer the securities of which were registered with the Commission and traded
on U.S. markets. The SEC began the investigation shortly after DTTC, Longtop’s auditor for
several years, disclosed that it had uncovered numerous indicia of financial fraud at Longtop
and further indicated that DTTC’s prior audit reports for Longtop, which it had filed with the
SEC, could no longer be relied upon by investors. At the time, Longtop had a market
capitalization of over $1 billion. The Subpoena called for DTTC to produce, among other
things, audit workpapers it had prepared while auditing the financial statements of Longtop. It
has not done so.
DTTC does not dispute the legitimacy of either the SEC’s investigation or its need for
the requested documents. But DTTC still refuses to comply with the Subpoena claiming,
among other things, that to do so would constitute a violation of the laws of the People’s
Republic of China (“China”). DTTC has maintained this refusal notwithstanding the facts that:
it has registered in the United States with the Public Company Accounting Oversight Board
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(the “Board”); it has conducted numerous audits for U.S.-listed companies; and it knew about
the purported Chinese-law restrictions long before it conducted the audit work for Longtop that
is at issue.
On March 13, 2013, the Magistrate Judge held a motions hearing on the merits of the
SEC’s Application for an order requiring compliance with the Subpoena. In addition to the
extensive oral argument by the parties at the hearing, the Magistrate Judge has for her
consideration some 230 pages of briefs and declarations by the parties that comprehensively
address the merits issues raised by the SEC’s Application. The Magistrate Judge’s decision on
the merits is now pending.
Notwithstanding these events, DTTC now still seeks – 18 months after the SEC filed its
Application, in September 2011; 20 months after the SEC served the Subpoena, in May 2011;
and after the Magistrate Judge already has heard arguments on the merits of the Application –
to put this proceeding and the SEC’s Longtop investigation on indefinite hiatus. DTTC here
challenges the Magistrate Judge’s procedural decision in the March 4 Order denying DTTC’s
motion for an indefinite stay of this case. DTTC argues, as it did before the Magistrate Judge,
that the Court should disregard the SEC’s interest in promptly advancing the Longtop
investigation. DTTC argues that the proposed stay should last until “resolution” of the
Commission’s wholly separate administrative proceeding, now pending before an
Administrative Law Judge, against DTTC and four other China-based public accounting firms
alleging violations of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), based on conduct
unrelated to Longtop (the “Administrative Proceeding”). See Objections at 18.
Contrary to DTTC’s contentions in its Objections, the Magistrate Judge’s denial of the
requested stay in her March 4 Order was not contrary to law or clearly erroneous, and should
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be upheld. As the Magistrate correctly found, the requested stay “does not have an
ascertainable end date,” and, therefore, only can be justified by “a finding of a pressing need”
under this Circuit’s precedents – a showing that DTTC clearly failed to make. March 4 Order
at 9 (quoting Belize Soc. Dev. Ltd. v. Gov’t of Belize, 668 F.3d 724, 732 (D.C. Cir.), cert.
denied, 133 S. Ct. 274 (2012)); id. at 10. The Magistrate Judge also correctly found that the
SEC’s need for the requested documents and opposition to a further delay of this proceeding
“comport with the purpose behind the summary nature of administrative subpoena enforcement
proceedings.” Id. at 11. DTTC had argued that a stay would promote judicial efficiency on the
asserted ground that the Administrative Proceeding allegedly will address similar issues, but
the Magistrate Judge correctly rejected this argument as a basis for the stay; whether or not an
audit firm’s noncompliance with a document request under Section 106 of Sarbanes-Oxley
constituted “a willful violation” of that Act “is not material to this court’s determination of
whether” the Subpoena, invoking different provisions of the securities laws, “is enforceable.”
Id. at 8.
The only aspect of the Magistrate Judge’s decision that DTTC now challenges is her
evaluation of the potential overlap between the two proceedings. DTTC contends that this
evaluation was allegedly flawed because it was based on the Magistrate Judge’s observation –
consistently shared by federal courts over the last 70 years – that a “court’s role in a proceeding
to enforce an administrative subpoena is a strictly limited one.” FTC v. Texaco, Inc., 555 F.2d
862, 871-72 (D.C. Cir. 1977) (citing Endicott Johnson v. Perkins, 317 U.S. 501 (1943)); see
also March 4 Order at 5 (citing authorities). DTTC’s objection is meritless. The Magistrate
Judge correctly characterized the scope of this proceeding, and her assessment of judicial
efficiencies to be gained through a stay was not clearly erroneous. The Administrative
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Proceeding involves different legal claims that arise from different SEC investigations, present
different legal standards, and seek different remedies. The Longtop investigation is not even at
issue in the Administrative Proceeding, nor can the Administrative Proceeding compel the
production of any documents. Furthermore, it may well be years before either the Commission
or the D.C. Circuit resolves in the Administrative Proceeding the parties’ very different views
as to what constitutes a “willful violation” of Sarbanes-Oxley Section 106. Thus, DTTC’s
claimed efficiencies – even assuming they could overcome the Magistrate Judge’s other bases
for rejecting the extended stay – are wholly speculative. For this Court now to halt
consideration of the merits of this subpoena-enforcement action pending such “resolution”
would be the height of judicial inefficiency.
DTTC also objects to the March 4 Order’s directive that the parties appear for a
motions hearing on March 13, 2013, without first allowing DTTC additional time in which to
submit an additional merits brief, or further to stall the proceeding by taking unnecessary
discovery. These objections, obviously an alternative stratagem by DTTC to delay this
proceeding in the absence of an extended stay, are also without merit.
BACKGROUND
A. DTTC’s Registration With The Board And Receipt of Board Warning
On June 4, 2004, DTTC became registered with the Board. In submitting its
application for registration to the Board, DTTC acknowledged potential difficulty in providing
information required by Board requests because of restrictions imposed by Chinese law. See
DTTC Opposition to SEC’s Application, at 9 (Docket No. 23) (“DTTC Merits Opp.”);
Warden Decl. Exh. 3 (Docket No. 23-5 to 23-6). In response, the Board wrote to DTTC that
the Board’s approval of DTTC’s registration did not mean that the Board agreed with DTTC’s
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assertions about Chinese law. See SEC Merits Reply, at 19 n.11 (Docket No. 38); Declaration
of Sarah Williams, Exh. A (Docket Nos. 38-8, 38-9). Also in 2004, the Board issued guidance
stating that an audit firm’s failure to cooperate with information requests could subject the
firm to disciplinary sanctions, regardless of whether the non-cooperation was caused by the
firm’s inability to obtain consents required under non-U.S. law. See SEC Merits Reply, at 19-
20 n.12; Williams Decl. Exh. B (Docket No. 38-10). Notwithstanding these warnings, DTTC
proceeded to take on audit engagements with companies whose securities are registered with
the SEC and traded on U.S. exchanges. In Longtop’s case, DTTC prepared and issued audit
reports filed by the company with the SEC as it raised hundreds of millions of dollars through
securities offerings. Declaration of Lisa Deitch ¶ 7-9 (Document 1-2) (“Deitch Decl.”).
B. This Action Seeks to Enforce the Subpoena1
In May 2007, Longtop publicly announced that DTTC had resigned as its auditor.
DTTC’s resignation letter, also made public, described numerous indicia of fraud at Longtop.
Deitch Decl. ¶¶11-13. The Commission promptly opened a formal investigation and, on May
27, 2011, served the Subpoena on DTTC. Service was effected by sending the subpoena to
DTTC’s U.S. counsel, who days before had confirmed to SEC staff that he was authorized and
willing to accept service of the Subpoena on DTTC’s behalf. Id. ¶ 17. On September 8, 2011,
the Commission initiated this action by filing Application for an Order to Show Cause and for
an Order Requiring Compliance With a Subpoena. On January 4, 2012, the Court issued the
1 The SEC has provided additional details about the Subpoena, the circumstances of its issuance, and the SEC’s prosecution of this enforcement action (including its request for a stay in the summer of 2012) in other briefing. See SEC’s Memorandum of Points and Authorities in Support of Application for Order to Show Cause and Order Requiring Compliance with A Subpoena, at 2-5 (Docket No. 1-1); Unopposed Motion for a Stay of this Action (Docket No. 29); Motion to Lift the Stay, at 2-5 (Docket No. 36).
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Order to Show Cause directing DTTC to show cause why it should not be ordered to
comply with the Subpoena. On April 11, 2012, DTTC filed a brief in response. See DTTC
Merits Opp.
By minute order on August 7, 2012, the Magistrate Judge granted the SEC’s unopposed
request for a six-month stay of the proceedings, to allow the SEC to continue the discussions it
was then having with the China Securities Regulatory Commission (“CSRC”). (Docket Nos.
27, 29). Through these negotiations, the SEC hoped to use international cooperative
mechanisms to facilitate production of the needed Longtop documents to the SEC; those
negotiations, if successful, could have significantly impacted the appropriate resolution of this
case. In connection with the stay, the Magistrate Judge also entered an additional order
denying without prejudice the SEC’s Application for enforcement of the Subpoena, and stating
that such denial “shall not impact any of the prior orders issued in this case” and the SEC
Application “may be re-filed at any time, including prior to January 18, 2013, if accompanied
by a motion to terminate the stay.” August 9, 2012 Order (Docket Nos. 32, 33).
As detailed in SEC declarations filed on December 3, 2012, the SEC’s efforts to reach
an arrangement with the CSRC concluded unsuccessfully. See Declarations of Alberto
Arevelo and Ethiopis Tafara (Docket Nos. 38-1 to 38-5). On December 3, having no other
option for obtaining the Longtop documents, the SEC moved to lift the stay (Docket No. 36)
and re-filed its Application for Order Requiring Compliance with Subpoena (Docket No. 37),
as the Court had previously instructed. Also on that date, consistent with the understanding
that this case would resume course upon the re-filing of its Application, the SEC completed
briefing on the merits of the Application by filing its Merits Reply Brief and supporting
declarations (Docket Nos. 38 through 38-10), which responded to DTTC’s April 2011 filing.
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C. The Administrative Proceedings
Also on December 3, 2012, the Commission instituted the Administrative Proceeding
against five China-based public accounting firms, including DTTC (the “respondents” or “audit
firms”). See Order Instituting Administrative Proceedings Pursuant to Rule 102(e)(1)(iii) of
the Commission’s Rules of Practice and Notice of Hearing, File No. 3-15116, Ex. 1 to
Kowalski Declaration (Docket No. 42-1) (“OIP”). This Administrative Proceeding was
subsequently consolidated with another, earlier-filed, SEC administrative proceeding involving
similar allegations against only DTTC.2 The OIP alleges that the Commission requested the
audit firms to provide audit workpapers and other materials prepared in connection with audit
work they had performed for various U.S. issuer-clients (with China-based operations), under
Section 106 of Sarbanes-Oxley, as amended by Section 929J of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (“Section 106”). OIP ¶¶ 1-16. In response to these
requests, the audit firms informed the Commission that they would not produce the requested
documents because of asserted constraints under Chinese law. Id. ¶ 17. The OIP contends
that, based on this conduct, each respondent willfully refused to provide the requested
documents in violation of both the firm’s obligations under Section 106 and the Securities
Exchange Act of 1934 (“Exchange Act”). Id. ¶¶ 19-32; Sarbanes-Oxley Section 3(b)(1), 15
U.S.C. 7202(b)(1).3
2 See Second Corrected OIP for DTTC Proceeding, Ex. 1 to Mot. to Consolidate, Ex. 2 to Kowalski Declaration (Document 42-3). 3 Section 106(b) of Sarbanes-Oxley directs a foreign public accounting firm that performs audit work to “produce the audit workpapers of the foreign public accounting firm and all other documents of the firm related to any such audit work” to the Commission upon request. 15 U.S.C. § 7216(b)(1); OIP ¶ 19. Section 106(e) of Sarbanes-Oxley provides, in pertinent part, “A willful refusal to comply, in whole or in part, with any request by the Commission . . . under this section, shall be deemed a violation of this Act.” 15 U.S.C. § 7216(e).
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The OIP directs that the Administrative Proceeding “be brought pursuant to Rule
102(e)(1)(iii) of the Commission’s Rules of Practice to determine whether respondents should
be censured or denied the privilege of appearing and practicing before the Commission for
having willfully violated Section 106 of Sarbanes-Oxley.” OIP ¶ 32.4 The OIP does not seek
the production of any documents relating to any of the relevant requests from any of the audit
firms. None of the issuer-clients that relate to the audit firms’ underlying conduct is Longtop.
D. Timeframe for Resolution of the Administrative Proceeding
Under the OIP and the Commission’s rules, the Hearing Officer is required to issue an
initial decision in the Administrative Proceeding in October 2013, assuming the OIP has been
properly served on respondents. See OIP (directing Hearing Officer to issue an initial decision
no later than 300 days from the date of service of the OIP).5 The rules permit the SEC’s Chief
Administrative Law Judge to ask the Commission for an extension of time in which the initial
decision may be issued. See Rule 360(a)(3); 17 C.F.R. § 201.360(a)(3). Any party to the
proceeding may file a petition for review of the initial decision with the Commission. See Rule
410 (a), 17 C.F.R. § 201.410(a).
4 Rule 102(e) is captioned “Suspension and disbarment” and provides, in pertinent part, “The Commission may censure a person or deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found . . . to have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and regulations thereunder.” Rule 102(e)(1)(iii), 17 C.F.R. § 201.102(e)(1)(iii). The current Rule 102(e) was codified by Congress as part of the Sarbanes-Oxley Act, at the same time that it passed Section 106. 15 U.S.C. § 78d-3. 5 At a prehearing conference held January 9, 2013 in the Administrative Proceeding, the Hearing Officer noted the respondents’ objection that they had not been properly served with the OIP, and he indicated that resolution of that objection would affect the due date for his initial decision. Thus, it is possible that the Hearing Officer will decide that the deadline for his initial decision is later than October 2013.
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E. The Magistrate Judge’s Denial Of DTTC’s Motion To Extend The Stay
In response to the SEC’s December 3, 2012 motion to lift the stay, DTTC opposed the
motion and separately moved to extend the stay, for reasons wholly unrelated to why the
Magistrate Judge granted the stay in the first place. DTTC urged the Court to further delay this
proceeding in light of the ongoing Administrative Proceeding. On January 29, 2013, the
Magistrate Judge held a hearing on the parties’ competing motions on the stay issue. The
March 4 Order granted the SEC’s motion, denied DTTC’s motion to extend the stay, and set a
hearing on the merits of the SEC’s Application for March 13, 2013. On March 6, 2013, DTTC
filed an Emergency Motion For Continuance of March 13, 2013 Hearing (Docket No. 50)
(“DTTC Continuance Motion”) on grounds, among others, that the March 4 Order did not
provide DTTC “with an appropriate opportunity for limited discovery or to respond to the
SEC’s newly filed brief and voluminous declarations” (id. at 6). However, DTTC failed in that
motion to identify what discovery it sought or why it was justified. 6 DTTC did not seek leave
to file a sur-reply to the SEC’s filing made three months earlier, on December 3, 2012.
The Magistrate Judge denied DTTC’s Continuance Motion and held the merits hearing
as planned. The Magistrate Judge’s decision on the merits is now pending.
ARGUMENT
Federal Rule of Civil Procedure 72(a) provides that the District Court “must consider
timely objections” to a magistrate judge’s order on non-dispositive matters and “modify or set
6 DTTC did not purport to identify the areas of discovery that it believes it needs until its March 11, 2013 Reply in support of its Continuance Motion (Document 52). As explained below, infra Argument Section B.3, the discovery topics that DTTC belatedly described – the which are the same as the topics listed in DTTC’s present Objections – are not justified by any special circumstance, nor are they necessary for this Court to rule on the merits of the SEC’s Application.
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aside any part of the order that is clearly erroneous or is contrary to law.” See also Local Civ.
R. 72.2(c); Am. Ctr. for Civil Justice v. Ambush, 794 F. Supp. 2d 123, 129 (D.D.C. 2011).
“The clearly erroneous standard applies to factual findings and discretionary decisions.” Am
Ctr., 794 F. Supp. 2d at 129 (internal quotations omitted). Because DTTC objects to the
Magistrate Judge’s non-dispositive decisions to lift the stay, and to hold a motions hearing
without first permitting discovery or further briefing, Rule 72(a)’s standard of review applies.
A. The Magistrate Judge’s Decision To Deny DTTC’s Requested Stay Was Neither Contrary To Law Nor Clearly Erroneous
The Magistrate Judge’s exercise of her discretion to deny DTTC’s requested stay was
neither contrary to law nor clearly erroneous. As the March 4 Order correctly stated – and
DTTC nowhere disputes – “[a] district court has ‘broad discretion’ in determining whether to
stay proceedings.” March 4 Order at 4 (quoting Clinton v. Jones, 520 U.S. 681, 706 (1997)).
“‘The power to stay proceedings is incidental to the power inherent in every court to control
the disposition of the causes on its docket with economy of time and effort for itself, for
counsel, and for litigants.’” March 4 Order at 4 (quoting Landis v. N. Am. Co., 299 U.S. 248,
254 (1936)). “The court must, in an ‘exercise of judgment,’ ‘weigh competing interests and
maintain an even balance.’” March 4 Order at 4 (quoting Landis, 299 U.S. at 254-55).
“The party requesting a stay ‘bears the burden of establishing its need.’” March 4
Order at 4 (quoting Clinton, 520 U.S. at 708). “‘In cases of extraordinary public moment, the
individual may be required to submit to delay not immoderate in extent and not oppressive in
its consequences if the public welfare or convenience will thereby by promoted,’” March 4
Order at 4 (quoting Landis, 299 U.S. at 256), “and ‘the scope of the stay and the reasons for its
issuance determine whether a stay is immoderate,’” March 4 Order at 4-5 (quoting Belize Soc.,
668 F.3d at 732).
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1. The Absence Of Any Pressing Need For A Stay Merits Its Rejection
Although DTTC challenges the Magistrate Judge’s assessment of potential judicial
efficiencies to be obtained from a stay, the Court can and should uphold the denial of the stay
without even considering this factor. That is because DTTC improperly seeks a stay that
would last indefinitely without identifying a “pressing need” for such a stay as required under
this Circuit’s precedents. Even “in cases of extraordinary public moment,” a delay imposed on
a plaintiff must be “not immoderate in extent and not oppressive in its consequences.” Landis,
299 U.S. at 256. As the D.C. Circuit recently recognized, “a court abuses its discretion in
ordering a stay ‘of indefinite duration in the absence of a pressing need.’” Belize Soc., 668
F.3d at 731-32 (quoting Landis, 299 U.S. at 255)); see also Cherokee Nation of Okla. v. United
States, 124 F.3d 1413, 1416 (Fed. Cir. 1997); (“In deciding to stay proceedings indefinitely, a
trial court must first identify a pressing need for the stay.”)
Here, DTTC’s proposed stay is indefinite because it would have no clear ending point;
it would last pending “resolution” of Administrative Proceeding. Objections at 18. This could
take years. After the ALJ renders an initial decision in the Administrative Proceeding, any
party can appeal to the full Commission, and from there to the D.C. Circuit. See DTTC’s
Opposition To Motion To Lift The Stay, at 12 (Docket No. 42) (“DTTC Stay Br.”) (seeking
stay for duration of Administrative Proceeding “subject to review by the full Commission and
subsequently by the D.C. Circuit”). Meanwhile, in its brief to the Magistrate Judge, the only
asserted hardship claimed by DTTC in moving forward with this proceeding was the need to
litigate this action and the Administrative Proceeding simultaneously, while the other four
respondent firms in the Administrative Proceeding do not have subpoena enforcement actions
pending against them. See DTTC Stay Br. at 17. The Magistrate Judge correctly found that
DTTC failed to identify a “pressing need” that warrants a stay of any “prolonged duration.”
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March 4 Order at 10. Given this failure, DTTC’s request for an indefinite stay is plainly
“immoderate” and “oppressive,” and must be rejected irrespective of DTTC’s claimed judicial
efficiencies that a stay allegedly would bestow. See Landis, 299 U.S. at 256-58; Clinton, 520
U.S. at 707; Cherokee Nation, 124 F.3d at 1416-17; Dellinger v. Mitchell, 442 F.2d 782, 786
(D.C. Cir. 1971) (rejecting stay that would “persist[] until completion of all appellate and
remand proceedings”); United States v. Philip Morris USA Inc., 841 F. Supp. 2d 139, 141
(D.D.C. 2012) (Kessler, J.) (rejecting stay pending another case that would “take at least one or
more years to get resolved” and further review that was “lengthy and indefinite”).7
2. The Balance Of Interests Also Merits Rejection Of The Requested Stay
Regardless of the length of the stay sought by DTTC, the balance of interests merits
rejection of the stay. Under Supreme Court precedent, “the suppliant for a stay must make out
a clear case of hardship or inequity in being required to go forward if there is even a fair
possibility that the stay for which he prays would work damage to some one else.” Landis,
299 U.S. at 255 (emphasis added). Here, an additional stay would work obvious damage to the
SEC and investors by further stalling the now 20-month-old Longtop investigation.
DTTC’s statement, that “[t]here is no reason for haste in pushing ahead here,” could not
be more wrong. (Objections at 2). “If the SEC suspects that a company has violated the
7 DTTC here seeks – as it did its earlier briefs to the Magistrate Judge – a stay pending resolution of the Administrative Proceeding. However, during the January 29, 2013 hearing, DTTC limited its request to a stay pending determination only by the ALJ. March 4 Order at 8-9. But the Magistrate Judge correctly found that even DTTC’s more limited request was unjustified, as the proceedings before the ALJ would take many months and did “not have an ascertainable end date.” March 4 Order at 9; see also Belize Soc., 668 F.3d at 732 (district court exceeded proper exercise of discretion in staying case pending consideration of another case by its current tribunal). In any event, DTTC now appears to have reverted to its original gambit for a stay pending all appeals of the Administrative Proceeding, which must be rejected under Landis and this Circuit’s case law.
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securities laws, it must be able to respond quickly: it must be able to obtain relevant
information concerning the alleged violation and to seek prompt judicial redress if necessary.”
SEC v. Dresser Indus., Inc., 628 F.2d 1368, 1377 (D.C. Cir. 1980) (en banc); see also Clinton,
520 U.S. at 707-08 (rejecting stay where “delaying trial would increase the danger of prejudice
resulting from the loss of evidence, including the inability of witnesses to recall specific facts,
or the possible death of a party.”). But a stay of this proceeding would virtually guarantee that
the SEC does not obtain documents that are critical to its ongoing Longtop investigation within
any reasonable timeframe. The Longtop investigation involves an apparently massive fraud at
a company that raised hundreds of millions of dollars from U.S. investors. See Deitch Decl. ¶¶
7-9, 12-13. The documents sought by the Subpoena are important because they may reveal
information as to DTTC’s discovery of false financial records at Longtop, and how any fraud
schemes at Longtop were able to continue for years undetected. Id. ¶ 26.
Any suggestion that the SEC is now somehow estopped from seeking prompt access to
the Longtop documents, because the SEC earlier sought a stay to facilitate negotiations with
Chinese regulators, is meritless. (Objections 1-2). Far from being motivated by delay, the
SEC sought the earlier stay in an effort to expedite the production of the Longtop documents.
Indeed, DTTC supported the stay for this purpose. See 8/7/12 Tr. at 5:5-8 (Docket No. 31)
(“We do . . . support this six-month stay. It’s important that the SEC and the CSRC have an
opportunity to negotiate the resolution, the ‘CSRC’ being the China Securities Regulatory
Commission.”). Unfortunately, those efforts concluded unsuccessfully. That does not mean,
however, that the SEC and investors now should be penalized by a stay that would freeze
efforts to advance the Longtop investigation through Subpoena enforcement.
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DTTC’s suggestion that it would refuse to abide by this Court’s order requiring
compliance with the Subpoena (Objections at 14 n.6), also must be rejected as a reason for an
additional stay. Adoption of DTTC’s logic would perversely reward DTTC for its own
contumacious conduct. And whatever DTTC may now say about its present intentions to
produce documents, circumstances could change depending on how the Court rules on the
SEC’s Application. Chinese regulators that allegedly have instructed DTTC not to produce
documents directly to the SEC conceivably could modify this alleged instruction. See In re
Grand Jury Proceedings the Bank of N.S., 740 F.2d 817, 821 (11th Cir. 1984) (although bank
moved to quash subpoena based on assertion that compliance would violate Bahamian secrecy
laws, following compliance order but before sanctions took effect, Attorney General of
Bahamas issued order allowing bank to produce requested documents). Or, alternatively,
DTTC might change its professed assessment of possible penalties under Chinese law and
produce the documents regardless of what the China regulators have said. In short,
notwithstanding DTTC’s current stance toward the Subpoena, there remains a “fair possibility”
that a stay “would work damage to” the SEC and investors, by dramatically lowering the odds
that that the SEC will ever get the Longtop documents.
Finally, as noted, DTTC cannot claim any serious hardship or inequity in going forward
with this proceeding. See March 4 Order at 10. “[B]eing required to defend a suit if a stay is
vacated . . . does not constitute a clear case of hardship or inequity within the meaning of
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Landis.” Dependable Highway Exp., Inc. v. Navigators Ins. Co., 498 F.3d 1059, 1066 (9th Cir.
2007) (internal quotation omitted).8 DTTC is not being treated unfairly compared to the other
respondent audit firms in the Administrative Proceeding, because, among other reasons, DTTC
can point to no comparable circumstances in which another China-based firm’s U.S. counsel
agreed to accept service of an administrative subpoena. Moreover, this action does not unfairly
prejudice DTTC. This action involves a different investigation and different documents, and
seeks quite different relief than the Administrative Proceeding under different legal standards.
Whatever “profession-wide” resolution the Administrative Proceeding obtains, it will not result
in a production of the Longtop documents.9
3. The Magistrate Judge’s Assessment Of Potential Judicial Efficiency Was Not Contrary To Law Or Clearly Erroneous
DTTC argues that because the Magistrate Judge allegedly “misappl[ied] . . . the legal
standard that governs subpoena enforcement actions in which the recipient would be required
to violate foreign law,” she allegedly erred in examining “the nature and scope of overlap
between this action” and the Administrative Proceeding. (Objections at 12). However, the
8 DTTC’s contention that the Magistrate Judge improperly assessed “the balance of interests between the parties” based on an improper legal standard is a non-sequitur. (Objections at 12). To the extent the Magistrate Judge misstated the legal standard (which she did not), this could only cause “hardship” to DTTC by requiring it to produce documents; this is a merits point and has nothing to do with whether the Magistrate Judge properly denied the stay. 9 Case precedents involving parallel civil and criminal proceedings further reinforce the inadequacy of DTTC’s complaint here about being required to litigate in two forums. “In the absence of substantial prejudice to the rights of the parties involved, such parallel proceedings are unobjectionable under our jurisprudence.” Dresser, 628 F.2d at 1374; see also Gordon v. FDIC, 427 F.2d 578, 580 (D.C. Cir. 1970) (“It would stultify enforcement of federal law to require a governmental (regulatory) agency invariably to choose either to forgo recommendation of criminal prosecution once it seeks civil relief, or to defer civil proceedings pending the ultimate outcome of a criminal trial.” (quoting United States v. Kordel, 397 U.S. 1 (1970)). A continued stay of this subpoena proceeding would “stultify enforcement” of the securities laws by the SEC, by unduly narrowing its options for seeking different relief in different forums.
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Magistrate Judge did not misstate the legal standard. The March 4 Order (at 5-6) stated, in
relevant part, “This court has a limited role in a proceeding to enforce an administrative
subpoena: ‘it is sufficient if the inquiry is within the authority of the agency, the demand is not
too indefinite and the information sought is reasonably relevant.’” (quoting Texaco, 555 F.2d
at 871-72 (quoting United States v. Morton Salt Co., 338 U.S. 632 (1950))); see also March 4
Order at 6 (“the scope of issues which may be litigated in an enforcement proceeding must be
narrow. . .”). These statements were wholly consistent with seven decades of judicial
precedent, much of which the Magistrate Judge cited in her ruling. See March 4 Order at 6
(citing authorities); see also Okla. Press Publ’g Co. v. Walling, 327 U.S. 186, 209 (1946);
Endicott Johnson, 317 U.S. at 509.
DTTC contends that the Magistrate erred by not also referencing various factors, some
drawn from the Restatement on Foreign Relations Law, that prior courts have considered in
determining whether to require the production of documents from a foreign jurisdiction that
allegedly restricted such production (“foreign law factors”). This contention fails. The
Magistrate Judge concluded that the legal questions raised in the Administrative Proceeding
were “not material to this court’s determination of whether another document request [i.e., the
Subpoena], invoking different statutory authority, is enforceable.” March 4 Order at 8. The
presence or absence of foreign-law factors was irrelevant to this conclusion. First, this
subpoena enforcement action indisputably does not raise the question whether Respondent’s
conduct constitutes, or could constitute, a “willful refusal” to comply with a document request
under Section 106 of Sarbanes-Oxley. Second, even assuming for the sake of argument that
the “willful refusal” issue could be analogized to the questions this Court must decide in this
case, as the Magistrate Judge correctly found, the “willful refusal” issue could not be
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“pertinent” at this stage of the action where this Court has not yet ordered compliance with the
Subpoena. March 4 Order at 7-8. Third, the ALJ in the Administrative Proceeding
indisputably will not consider the validity or enforceability of any subpoena issued under the
Commission’s authority provided at 15 U.S.C. § 77s(c) or § 78u(b), as this Court may do in
this case. Fourth, the two proceedings seek very different forms of relief, reflecting different
regulatory objectives. It cannot be disputed that, “[i]n this matter, Petitioner seeks to compel
compliance with a subpoena in order to obtain documents, whereas in the administrative
proceeding, Petitioner contemplates disciplinary sanctions.” March 4 Order at 8.10
Finally, any alleged “overlap” among the issues to be resolved in the proceedings is
speculative at best. There is no predicate fact or issue of law that must be decided in the
Administrative Proceeding, in order for this Court to issue a merits ruling on the SEC’s
Application. Nor does DTTC contend that the Commission has any exclusive expertise on the
issues raised here – indeed, DTTC argues in the Administrative Proceeding that the SEC’s
claims there first should be heard in federal court. See Objections at 7. More fatal still, the
foreign law factors that DTTC contends are important to this Court’s inquiry are irrelevant to
the ALJ’s analysis of whether the audit firms conduct amounts to a “willful refusal” under
Section 106 of Sarbanes-Oxley. The ALJ’s analysis will require only the narrow
10 If this Court were to find DTTC in contempt, the Court could consider imposing a daily fine on DTTC to encourage future compliance. See Bank of N.S., 740 F.2d at 820. By contrast, the SEC instituted the Administrative Proceeding “essentially to protect the integrity of its own processes.” Touche Ross & Co. v. SEC, 609 F.2d 570, 581 (2d Cir. 1979). In that Proceeding, the purpose of any remedial relief would be “not to punish, but to protect the public from future” improper conduct by professionals who practice before the Commission. Rubin, Release No. 295, 2005 WL 2180440, at *19 (RGM Sept. 8, 2005) (Initial Decision) (citing McCurdy v. SEC, 396 F.3d 1258,1264 (D.C. Cir. 2005); Johnson v. SEC, 87 F.3d 484, 490 (D.C. Cir. 1996)). Thus, the ALJ would consider factors relevant to whether respondents should be censured or barred from appearing and practicing before the Commission.
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determination of whether the audit firms were cognizant of their refusal to produce the
requested documents. The limited nature of this inquiry is compelled by the fact that “willful”
means “knowing,” as courts and the Commission repeatedly have defined the term under the
securities laws. See, e.g., Mathis v. SEC, 671 F.3d 210, 217 (2d Cir. 2012) (concluding
“willfully” as used in Exchange Act “means intentionally committing the act which constitutes
the violation” (internal quotation omitted)); Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir.
2000) (same).
Thus, contrary to DTTC’s contentions here, the straightforward willfulness inquiry will
not require the ALJ to consider the alleged restrictions on production imposed by Chinese law
or any of the other foreign law factors – or, for that matter, whether the audit firms have acted
in good faith in failing to produce the requested documents, despite having consciously availed
themselves of U.S. markets. The Division of Enforcement made this point clear in a recent
filing in the Administrative Proceeding.11 While DTTC apparently contests this view, the
scope of the “willful refusal” issue under Sarbanes-Oxley is a question of first impression for
the Commission. It is highly speculative to assume that the ALJ will reject the Division’s
position and undertake to address the much broader “enforceability” question as formulated by
DTTC. And regardless of the ALJ’s decision on this point, either party might appeal such
decision to the full Commission and, after that, to the D.C. Circuit. Given what may well be
years of additional uncertainty on the “willful refusal” issue – and, hence, on the extent of any
11 See Division of Enforcement’s Consolidated Opposition To Respondents’ Motions For Summary Disposition As To Certain Threshold Issues, at 3, In the Matter of BDO China Dahua CPA Co., Ltd., SEC Admin. Proc. File Nos. 3-14872, 3-15116 (filed Feb. 22, 2013) (“[I]f and when [the willful refusal] question is addressed, it will require only the narrow determination of whether Respondents were in fact cognizant of their refusal to produce the requested documents.”).
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alleged “overlap” between this action and the Administrative Proceeding – the Magistrate
Judge’s denial of the stay is not contrary to law or clearly erroneous. There is no compelling
reason to unwind that ruling and inject into this proceeding the further delay that DTTC seeks.
B. The Magistrate Judge Did Not Err By Holding A Motions Hearing On March 13, 2013
Although DTTC objects to the Magistrate Judge’s decision to hold a motions hearing
on the merits of the SEC’s Application on March 13, 2013, without first allowing DTTC
“limited discovery, supplemental declarations and briefing, and an opportunity to request an
evidentiary hearing” (Objections at 14), these objections are now moot. DTTC already
presented these same arguments to the Magistrate Judge in its Continuance Motion, which the
Magistrate Judge denied in a minute order. Thereafter the Magistrate Judge held the motions
hearing as planned, during which the parties presented extensive argument on the merits of the
Application. At this juncture, there is no reason to create further delay by halting the
Magistrate Judge’s consideration of this case.
In any event, the Magistrate Judge’s decision to move forward with the motions hearing
was not contrary to law or clearly erroneous. Because this decision was discretionary in
nature, the “clearly erroneous” standard applies. See Am. Ctr., 794 F. Supp. 2d at 129. “Under
that deferential standard, a magistrate judge’s . . . discretionary decisions must be affirmed
unless, ‘although there is evidence to support them, the reviewing court on the entire evidence
is left with the definite and firm conviction that a mistake has been committed.’” Id. (quoting
Federal Savs. & Loan Ins. Corp. v. Commonwealth Land Title Ins. Co., 130 F.R.D. 507, 508
(D.D.C. 1990)). DTTC’s objections cannot be sustained under this standard.
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1. This Subpoena-Enforcement Action Is A Summary One
Although DTTC faults the Magistrate Judge for characterizing this proceeding as
“summary” (Objections at 3, 18), the Magistrate Judge was exactly correct. It is well-
established that subpoena-enforcement actions commenced by application, such as this one, are
summary in nature and must be “conducted in a prompt and simple manner.” U.S. v. Hubbard,
650 F.2d 293, 310-11 n. 66 (D.C. Cir. 1980) (internal quotation omitted); SEC v. Sprecher, 594
F.2d 317, 320 (2d Cir. 1979) (holding that SEC could enforce investigatory subpoenas in
summary proceedings “upon application” to a district court). As the Supreme Court has
recognized, “[t]he very purpose of summary” proceedings is to avoid procedures required for
full-blown litigation; summary proceedings “may be conducted without formal pleadings, on
short notice, without summons and complaints, generally on affidavits, and sometimes even ex
parte.” New Hampshire Fire Ins. Co. v. Scanlon, 362 U.S. 404, 406 (1960)); SEC v.
McCarthy, 322 F.3d 650, 655 (9th Cir. 2003) (same). Thus, “[d]epending on the circumstances
of the case, [an] adversary proceeding [for enforcement of administrative subpoena] may take
the form of an evidentiary hearing, oral arguments without the taking of evidence, or, as is
doubtless the appropriate course in many applications for enforcement orders, consideration
based on the papers submitted by the parties to the court.” FTC v. Atl. Richfield Co., 567 F.2d
96, 106 n. 22 (D.C. Cir. 1977) (emphasis added). It was well within the discretion of the
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Magistrate Judge to hold a motions hearing on the SEC’s Application under these precedents.12
2. DTTC Voluntarily Chose Not To Seek Leave To File A Sur-reply
Any argument by DTTC that it was denied an opportunity to file an additional brief in
response the SEC’s December 3, 2012 filing is meritless. DTTC had over three months in
which to prepare a sur-reply to this filing, and it could have sought leave to submit such a sur-
reply promptly after the Court’s March 4 Order. The same is true of any additional expert
declarations it wished to submit. DTTC declined to take these steps. DTTC’s statement to the
Magistrate Judge that it planned to file an additional merits brief at some future time did not
justify a continuance of the motions hearing, where it already had ample opportunity to file
such a brief.
3. DTTC Has Not Identified A “Special Circumstance” Justifying Discovery
DTTC’s stated desire to take discovery similarly did not justify further delay of the
motions hearing. “Because subpoena enforcement proceedings are generally summary in
nature and must be expedited, discovery is not usually permitted.” SEC v. Lavin, 111 F.3d 921,
926 (D.C. Cir. 1997); see also Dresser, 628 F.2d at 1388 (noting that “district courts must be
cautious in granting such discovery rights, lest they transform subpoena enforcement
12 DTTC’s selective quotation from United States v. McCarthy, 514 F.2d 368, 373 (3d Cir. 1975), in purported support for the contention that “an evidentiary hearing ordinarily ‘will be required’” in the circumstances of this case, is unavailing. (Objections at 15). Unlike this proceeding which was commenced by the SEC’s filing of an application, United States v. McCarthy involved the very different context of enforcement of an IRS summons, in which the Federal Rules of Civil Procedure presumptively apply. See 514 F.2d at 372 & n.4; contrast Sprecher, 594 F.2d at 320 (concluding federal rules do not apply to summary proceedings to enforce SEC subpoenas). Moreover, even in the context of an IRS summons, the court made clear that “not every summons enforcement proceeding will require an evidentiary hearing” and certain “matter[s] can be decided on the pleadings.” Id. at 373. Nothing in United States v. McCarthy demonstrates that the Magistrate Judge has erred by not scheduling an evidentiary hearing to date in this case.
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proceedings into exhaustive inquisitions into the practices of the regulatory agencies”). The
Commission recognizes that, in such proceedings, “when the circumstances indicate that
further information is necessary for the courts to discharge their duty, discovery may be
available.” Lavin, 111 F.3d at 926 (internal quotation omitted). Here, however, DTTC points
to no such special circumstance.
In its April 2011 Merits Opposition, DTTC argued that it should not be forced to
comply with the Subpoena because, it claimed, the SEC has alternative means to obtain the
subpoenaed documents. See DTTC Merits Opp. at 37-38. DTTC also contended that it was
entitled to discovery regarding any requests by the SEC to the CSRC for access to the Longtop
workpapers. See id.at 13 n.9. But in its December 3, 2012 filing, the Commission submitted
two declarations from the SEC’s Office of International Affairs (“OIA”), totaling 30 pages,
that provided numerous details about the SEC’s requests for assistance to the CSRC regarding
audit workpapers (including the Longtop workpapers) and other documents over the prior
several years. (Docket Nos. 38-1 through 38-5). These declarations unequivocally established
that the Commission had not obtained the Longtop workpapers through alternative means, and
that it presently does not have those documents.
These declarations comprehensively addressed the purported factual issues that DTTC
raised in its Merits Opposition – whether the SEC had tried to obtain or could obtain the audit
workpapers through international sharing mechanisms – and obviated any purported need for
DTTC to take discovery in this summary proceeding. Nevertheless, in the spirit of
compromise, the SEC stated in a footnote of its December 3, 2012 Merits Reply (Docket No.
38), in relevant part:
DTTC purports to identify topics on which discovery is allegedly needed here. In light of the facts set forth in these declarations, we respectfully
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submit that DTTC’s discovery requests are, for the most part, moot. However, to the extent DTTC has specific requests for further information, the SEC will make good-faith efforts to consider them in advance of any hearing ordered by the Court on the present briefs.
SEC Merits Reply at 13 n. 4. But in the three-plus months after the SEC made this overture,
DTTC did not make any specific requests for further information in this proceeding. Thus,
there was nothing for the SEC to consider. Tellingly, even in its March 6, 2013 Continuance
Motion, DTTC failed to identify what, if any, discovery it needed, much less explain, as
required, how such unidentified information was necessary for the Court to “discharge its
duty,” Lavin, 111 F.3d at 926. Only in its reply brief in support of its Continuance Motion and
in its present objections, both filed on March 11, 2013 – two days before scheduled motions
hearing – did DTTC purport to identify supposedly necessary discovery. Then as now,
DTTC’s belated efforts fall far short of its required showing.
a. DTTC’s Proposed Expert Discovery Is Unnecessary
The SEC’s December 3, 2012 submission of Professor Clarke’s declaration addressing
certain contentions of DTTC’s supposed experts with respect to Chinese law was neither “late-
breaking” nor inconsistent with the SEC’s statements in this proceeding or the Administrative
Proceeding. (Objections at 16-17).13 DTTC does not specify the additional information that it
13 Professor Clarke opined: (1) that the Chinese-law provisions cited by DTTC did not require DTTC to notify and receive pre-approval from the CSRC or China’s Ministry of Finance upon receipt of the Subpoena and prior to producing the requested documents to the SEC; and (2) DTTC could not be subject to criminal liability under Chinese law relating to archives for producing Longtop audit workpapers that do not contain state secrets. Declaration of Donald Clarke ¶¶ 8, 9. Neither opinion is inconsistent with the SEC’s acknowledgement in its Reply Brief that (i) “the CSRC may now take the position that at direct production of workpapers by DTTC to the SEC would contravene the CSRC’s instruction to DTTC, after DTTC voluntarily consulted with the CSRC regarding its obligations under the Subpoena,” and (ii) given the course of events, the Chinese government now “could take some form of punitive action against DTTC if it chose to comply with the Subpoena.” SEC Merits Reply at 15-16 (emphasis added).
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allegedly needs from Professor Clarke. Furthermore, because the Court can enforce the
Subpoena without even addressing the different views on Chinese law contained in the
declarations,14 and because any determination of Chinese law by the Court “must be treated as
a ruling on a question of law,” Fed. R. Civ. P. 44.1, it is not “necessary” for DTTC to conduct
discovery regarding Professor Clarke’s opinions, or to make “additional evidentiary
submissions.”
b. The SEC-CSRC Correspondence Can Provide DTTC With No Basis For Resisting Enforcement Of The Subpoena
The December 3, 2012, declarations submitted by the SEC’s OIA include the following
dispositive facts: (1) the Commission has asked the CSRC to assist in providing the Longtop
workpapers to the Commission, and (2) as of now, the Commission has not received them.
Declaration of Alberto Arevalo ¶¶54-56, 62-64 (Docket No. 38-5) (“Arevalo Decl.”). DTTC
does not dispute these facts. For this reason alone, discovery surrounding these facts is
unnecessary. Further, any efforts by DTTC to gather additional information about relations
between the SEC and the CSRC (or any other foreign regulator) cannot change these
14 As the SEC explained during the March 13, 2013 hearing, the Court can and should order DTTC to comply with the Subpoena regardless of what DTTC contends are the prohibitions imposed by Chinese law, because, among other reasons: (1) the United States’ interest in enforcing the securities laws clearly outweighs China’s interest in secrecy; (2) at present, the SEC has no alternative means for obtaining all of the documents sought by the Subpoena; (3) DTTC, having availed itself of U.S. markets with full knowledge of U.S. rules requiring that it respond to information requests, cannot show that it has acted in good faith in relying on asserted Chinese law prohibitions; and (4) DTTC indisputably has not shown that any of the requested documents in fact contain state secrets protected from disclosure under Chinese law. See also SEC Merits Reply at 16-24 (discussing balancing of Restatement factors); SEC’s Initial Merits Brief, at 14-22 (same) (Document 1-1). That said, DTTC’s claims about Chinese law are exaggerated and speculative. The CSRC has not issued a written “directive” to DTTC specifically requiring CSRC approval before DTTC produces documents to the SEC, and it is not at all clear that sanctions, if any, that might be imposed on DTTC for producing documents would be “severe.” See SEC Merits Reply at 14-16 & notes 6-8
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undisputed facts, or that the CSRC to date has failed to provide any meaningful assistance with
respect to audit workpapers generally. See id. ¶¶4, 56, 59, 64.
Nevertheless, DTTC now argues that it should be permitted to review correspondence
between the SEC and the CSRC referenced in the OIA declarations, on the alleged ground that
such correspondence “could be highly relevant to the ‘competing interests’ of China and the
United States that are a factor under the multi-factor balancing test that must be applied in this
proceeding.” (Objections at 17). But there is no reason to expect that any of this
correspondence will shed light on, let alone establish, China’s alleged “competing interest” in
prohibiting DTTC from producing the Longtop audit workpapers, ostensibly to protect “state
secrets” or “archives.” The OIA declarations do not address this issue at all; rather, they
address the CSRC’s inability or unwillingness to produce the desired documents – without
reference to restrictions, if any, that may be imposed on direct production by an audit firm.
The other “competing interest” at stake is the interest of the SEC and investors in advancing
the Longtop investigation, but DTTC already has conceded the legitimacy of this interest. See
DTTC Opp. at 35 (“DTTC does not dispute that the SEC has an interest in obtaining the
subpoenaed documents in connection with its investigations.”). DTTC’s failure to identify any
factual issues that materially could affect this Court’s merits determination wholly undermines
its request for discovery of the SEC-CSRC correspondence.15
c. Discovery Of The Reasons For The SEC’s Failed Negotiations With The CSRC Also Cannot Provide A Basis For Resisting Enforcement Of The Subpoena
15 In addition, some or all of the SEC-CSRC correspondence is confidential and subject to privileges, including the law enforcement investigatory privilege and a privilege concerning international communications between foreign regulators pursuant to a memorandum of understanding. See Sections 24(d) and (f) of the Exchange Act, 15 U.S.C. §§ 78x(d), (f).
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DTTC argues that it should be permitted to discover the “terms and conditions” on
which the CSRC purported to offer to produce the Longtop workpapers. (Objections at 17).
But any such discovery cannot alter the dispositive and undisputed fact that the CSRC to date
has not provided the SEC with the requested documents. In any event, the OIA declarations
more than sufficiently describe these terms and conditions. As these declarations explain, the
CSRC’s position changed significantly over time, but at various points the CSRC indicated that
it would deliver some of the requested information subject to the following caveats, among
others: (1) the SEC would have to agree to a “Letter of Consent” that would preclude the SEC
from using the information in any legal action or for any related purpose, without the CSRC’s
advance written authorization; (2) the CSRC would produce only an unspecified portion of the
requested documents; and (3) the CSRC would exercise its own judgment as to which
documents were relevant to the SEC’s investigations. Arevalo Decl. ¶¶37, 62; see also
Declaration of Ethiopis Tafara ¶19. These and other conditions were plainly unacceptable to
the SEC. Arevalo Decl. ¶¶39-41. Not only would these conditions have precluded the SEC
from reviewing all potentially relevant documents, but they were contrary to international
protocols to which both the United States and China were signatories, id. ¶40, and risked
rendering the documents useless for their primary intended purpose – i.e., for use in an SEC
enforcement action. Discovery designed to second-guess the SEC’s judgment on these issues
is plainly unnecessary for the Court to discharge its duty on whether the Subpoena to DTTC
should be enforced.
4. The Magistrate Judge Provided DTTC With An Opportunity To Request An Evidentiary Hearing
Although DTTC appears to contend that it was denied an opportunity to request an
evidentiary hearing, this is incorrect. DTTC was provided such an opportunity at the March
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13, 2013 motions hearing. Indeed, DTTC could have asked to present witnesses at that very
hearing, but it did not do so.16 In any event, the Magistrate Judge committed no error by
holding the motions hearing on the merits, without also expressly scheduling an evidentiary
hearing. See N.H. Fire Ins, 362 U.S. at 406; Atl. Richfield, 567 F.2d at 106 n. 22.
5. The Parties Should Not Be Required To Re-Brief The Case To The Magistrate Judge
Although DTTC repeats its contention from its earlier briefs that the SEC’s filing of its
merits reply brief with supporting declarations on December 3, 2012 was “procedurally
improper” (Objections at 3), this contention is without merit. So too is DTTC’s assertion that
the SEC’s re-filing of its Application on the same date triggered an opportunity for DTTC to
re-brief the case. (Objections at 6-7 n.3). The Magistrate Judge properly ignored these
arguments, which directly contradicted the Court’s prior orders and discussion with the parties
and defied common sense. The Magistrate Judge’s determination during the January 29, 2012
hearing (addressing the stay issue) that the SEC’s Application had been “fully briefed” was
correct. See 1/29/13 Tr. at 2:8-16 (Docket No. 48). 17
When the Magistrate Judge granted the SEC’s unopposed motion for a stay during the
August 7, 2012, hearing, the Court indicated – and DTTC appeared to agree – that the SEC
16 On March 8, 2013, the undersigned counsel and counsel for DTTC called the chambers of the Magistrate Judge to inquire about the scope of the planned motions hearing, including, specifically, whether the Magistrate Judge expected to hear from live witnesses. The information provided by the chambers’ representative did not foreclose either party from asking permission to present witnesses at the hearing. 17 In its earlier papers, DTTC suggested that the parties were required to completely re-brief the case. (DTTC Merits Opp. at 5 n.4). DTTC now appears to have moderated its position and says it needs only “supplemental briefing.” (Objections at 6-7 n.3). In any event, as explained above, DTTC already has had ample opportunity to seek leave to file a supplemental brief.
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would not be required to re-litigate the case in the event it had to proceed with enforcement of
the Subpoena. The Magistrate Judge indicated that she would deny pending motions without
prejudice for case management purposes, 8/7/12 Tr. at 7:4-6 (Docket No. 31); however, she
emphasized this was not equivalent to dismissal of the SEC’s action, 8/7/12 Tr. at 5:13-17
(noting the “import of an order denying the motion without prejudice is not tantamount to a
dismissal of the case”). The Court also made clear, with the apparent agreement of DTTC’s
counsel, that, in the event litigation resumed, the SEC could simply “renew” its Application,
and the parties would not have to start the case over again.
MR. LANPHER: But again, Your Honor, the matter is, and perhaps there is a way to clarify this, but certainly our understanding is that denying the SEC’s underlying motion would be tantamount to dismissing the action because that is the only – that is the application that is pending before this Court, that is the application that has initiated the entire proceedings, and so for it to be denied, we would then be back at square one. We would have to file a new application, re-serve it on the Respondent, re-apply for an order to show cause --
THE COURT: May I assume that the Respondent would not object to any request to simply renew the motion, should it develop that the parties’ negotiations are unsuccessful?
MR. WARDEN: We would not object to that, Your Honor, and –
THE COURT: Very well.
. . .
I have already assured you that the case will not be dismissed. If it is the case that the Respondent does not object or will not object to any request to renew the motion, should the negotiations prove unsuccessful, I see no reason why you cannot work out language which will accomplish that, and that will permit the Court, with your consent, to deny the motions without prejudice.
8/7/12 Tr. at 6:9-7:17 (emphasis added). Nothing in this colloquy suggested that, upon
resumption of the litigation, the SEC would need the Court’s permission to complete briefing
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on its Application, or that the parties otherwise would be required or entitled to re-brief the
case.
The Order entered by the Court on August 9, 2012, similarly reflects that the case could
resume where it left off upon termination of the stay. This Order “denied without prejudice”
the “Motion for an Order Requiring Compliance with a Subpoena filed by Petitioner Securities
and Exchange Commission” (identified in the Order as “Document Number 1, Part 2). The
Order also stated:
This subpoena enforcement action remains pending but stayed in accordance with this Court’s August 7, 2012 Minute Order. This Order shall not impact any of the prior orders issued in this case. Accordingly, either of the above-referenced motions may be re-filed at any time, including prior to January 18, 2013, if accompanied by a motion to terminate the stay.
August 9, 2012 Order (Docket Nos. 32, 33) (emphasis added). Thus, the SEC was authorized
to “re-file” or “renew” its Application “at any time,” without triggering a re-briefing
requirement. DTTC has not pointed to any reason why the SEC should have been further
delayed – or should be further delayed now – in seeking to enforce the Subpoena through a
requirement that the parties file additional briefs on issues that DTTC already has had ample
opportunity to address. See SEC’s Opposition to Motion To Extend The Stay, at 25-26
(Docket No. 45) (summarizing parties’ prior briefing).
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CONCLUSION
For the reasons set forth above, DTTC’s Objections To Magistrate Judge’s March 4,
2013 Order should be overruled and denied.
Dated: Washington, D.C. Respectfully submitted, March 28, 2013 /s/ David Mendel David Mendel (D.C. Bar #470796) Assistant Chief Litigation Counsel U.S. Securities and Exchange
Commission – Enforcement Division 100 F Street, NE Washington, DC 20549 (202) 551-4418 (phone) (202) 772-9362 (fax) [email protected]
Of Counsel: ANTONIA CHION New York Bar Attorney Registration No. 1873405 LISA WEINSTEIN DEITCH California Bar No. 137492 HELAINE SCHWARTZ New York Bar Attorney Registration No. 1917046
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CERTIFICATE OF SERVICE
I hereby certify that on March 28, 2013, I served, via email, a copy of the foregoing
Securities and Exchange Commission’s Memorandum of Points and Authorities In Opposition
To Objections to Magistrate Judge’s March 4, 2013 Order on counsel for the Respondent:
Michael D. Warden Sidley Austin LLP 1501 K Street, NW Washington, DC 20005 (202) 736-8000 [email protected] Gary F. Bendinger, pro hac vice Sidley Austin LLP 787 Seventh Avenue New York, NY 10019 (212) 839-5300 [email protected] Miles N. Ruthberg Jamie L. Wine 885 Third Avenue New York, NY 10022-4834 (212) 906-1200 [email protected] [email protected]
Dated: March 28, 2013
/s/ David Mendel David Mendel
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