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From Securities Regulation Daily, July 7, 2014

House committee, subcommittee leader fight SEC subpoenas with Speech or Debate Clause

By Amy Leisinger, J.D.

In response to an order to show cause and to move for dismissal of an SEC enforcement action against them, the House of Representatives Ways and Means Committee and Brian Sutter, the staff director of the committee’s health subcommittee, have asserted protection under the doctrine of sovereign immunity, as well as a lack of personal jurisdiction and proper venue in the U.S. District Court for the Southern District of New York. Further, according to the respondents, the Speech or Debate Clause of the U.S. Constitution prevents enforcement of the SEC’s subpoenas, as the information and documents sought by the Commission involve protected legislative activity (SEC v. Committee on Ways and Means of the U.S. House of Representatives, July 4, 2014).

Background. The SEC is investigating whether material, nonpublic information concerning an April 2013 announcement by the U.S. Centers for Medicare and Medicaid Services of 2014 reimbursement rates for the Medicare Advantage program was improperly leaked to certain members of the public in advance of the announcement, and whether such action resulted in insider trading in violation of the federal securities laws. The SEC has asked the court to order the committee and Sutter to comply with investigative subpoenas that the Commission issued and served on the committee. In a memorandum of law filed with the court in support of its application for an order requiring compliance with the subpoenas (covered in the Securities Regulation Daily Wrap Up for July 3, 2014), the Commission said that the subpoenas seek documents critical to its investigation. Further, according to the SEC, reliance on the doctrine of sovereign immunity is misplaced, as there is no case law to support the proposition that the doctrine may be invoked against an agency of the federal government serving as a plaintiff. Even assuming sovereign immunity could apply here, continued the memorandum, the argument would fail based on Congress’ explicit waiver of immunity in the STOCK Act.

Independent dismissal grounds. The respondents first argue that the SEC’s enforcement action should be dismissed because it is barred by the doctrine of sovereign immunity. The federal government is immune from judicial process under this doctrine, according to the respondents, absent a clear waiver of immunity. The SEC’s contention that the STOCK Act provides the requisite “unequivocally express” waiver of legislative branch sovereign immunity “simply is not true,” the respondents argue, as that legislation provides only that members of Congress and congressional employees are not exempt from the insider trading prohibitions and says nothing about “waiving any privileges or immunities otherwise available [when] responding to investigative subpoenas.”

Further, the respondents note, for the purposes of personal jurisdiction, due process requires minimum contacts with the jurisdiction in which the action is brought, as well as constitutional reasonableness. While acknowledging that contacts exist with the United States courts generally, the respondents contend that they have insufficient contacts with New York and that it is not constitutionally reasonable for the Southern District to exercise personal jurisdiction. Most of relevant pieces of evidence in this action, as well as the pertinent parties, are located in the District of Columbia, the respondents explain, and any interest the Southern District may have in this action is outweighed by the potential burden of litigating outside the capital. Relatedly, the respondents also argue that venue in the Southern District is improper, as the Exchange Act identifies two appropriate venues for SEC subpoena enforcement actions: the jurisdiction in which the subpoenaed person or entity “resides or carries on business” and the jurisdiction where the “investigation or proceeding is carried on.” Even if the Southern District could be deemed a proper venue, the action should be transferred to the District Court for the District of Columbia because that would promote convenience, for both the respondents and the SEC.

Speech or Debate Clause. Separately, according to the respondents, this action must be dismissed because the committee and the staff director are “absolutely” immune from this suit and the related subpoenas under the Speech or Debate Clause of the U.S. Constitution because the SEC seeks production of information from “within the sphere of legitimate legislative activity” that cannot be compelled. Courts have broadly construed this protection to cover all activities that are integral to the deliberative and communicative processes of members of Congress and their aides with respect to the consideration of legislation, including both formal processes and less-formal investigations and knowledge-gathering activities. “[T]he Clause is not abrogated by allegations that a Legislative Branch official acted unlawfully or with an unworthy purpose,” the respondents note, and the information and matters the SEC is pursuing are legislative and, therefore, constitutionally protected.

Federal common law. Finally, the respondents argue that the SEC has not established the exceptional circumstances necessary to permit it to depose Sutter as the subcommittee staff director. “Long-settled federal common law establishes that, absent exceptional circumstances, high-ranking government officials may not be forced to testify in litigation to which they are not parties,” the respondents explain, and Sutter has been classified as “very senior staff” for internal reporting purposes. Compliance with the subpoenas would interfere with Sutter’s official duties and responsibilities, and the SEC is able to obtain the information it seeks from Sutter from other knowledgeable individuals of lower rank, if necessary, the respondents posited.

The case is No. 14 Misc. 00193.

Attorneys: Amanda Lynn Straub for the SEC. Kerry William Kircher, General Counsel, U.S. House of Representatives for The Committee on Ways and Means of the U.S. House of Representatives.

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