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Frankel v. Securities and Exchange Commission

decided: May 4, 1972.

FRANK FRANKEL ET AL., APPELLEES,
v.
SECURITIES AND EXCHANGE COMMISSION ET AL., APPELLANTS



Hays and Oakes, Circuit Judges, and Clarie, District Judge of the District of Connecticut, sitting by designation. Oakes, Circuit Judge (dissenting).

Author: Hays

HAYS, Circuit Judge.

The Securities and Exchange Commission appeals from an order of the United States District Court for the Southern District of New York enjoining the Commission from withholding certain documents that the appellees, relying on the Freedom of Information Act, 5 U.S.C. § 552 (1970), sought to inspect and to copy. The district court, 336 F. Supp. 675, held that the documents, which the Commission had compiled in an investigation and used in civil litigation against persons who are not parties to this action, were not exempt from disclosure under the Freedom of Information Act, 5 U.S.C. § 552(b) (7) (1970) as "investigatory files," because the Commission apparently did not intend to commence further law enforcement proceedings in which the documents would be used. We reverse.

I. The Facts

In November, 1970, the Commission began a nonpublic investigation of Occidental Petroleum Corporation and some of its officers and directors. The Commission sought to determine whether certain statements of, and omissions to state, facts relating to various real estate transactions, in documents filed with the Commission and in press releases, violated § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1970) and Rule 10b-5, 17 C.F.R. 240. 10b-5 (1972). During the course of this investigation the Commission heard testimony from at least 23 witnesses and obtained numerous documents from Occidental, individuals connected with that corporation, and third persons. The Commission amassed an investigatory file totaling over 7000 pages of testimony and documents relating to the affairs of Occidental and individuals connected with it, corporations with which Occidental dealt, and third persons. On the basis of information obtained during the investigation, the Commission commenced a civil action against Occidental and its president, Armand Hammer, on March 4, 1971 in the United States District Court for the Southern District of New York. The complaint alleged that Occidental and Hammer violated § 10(b) and Rule 10b-5; the Commission sought injunctive relief against further violations of the statute and the Rule. On March 5, the Commission and the defendants agreed upon a consent decree, and both the investigation and the suit were terminated when the court entered judgment on the basis of the consent decree.

Appellees in this action are shareholders of Occidental. They commenced a class action for damages against Occidental and Hammer, alleging various violations of the securities laws. The source of the facts alleged in their complaint was apparently the complaint filed by the Commission in its suit against Occidental and Hammer.

On March 22, 1971, appellees' attorneys wrote the Commission "seeking documentary support for" the allegations of their complaint, and requested that appellees be permitted to inspect and to copy:

"as to each and every violation of Section 10b . . . and/or of Rule 10(b)-5 . . ., which occurred during the period January 1, 1966 to March 4, 1971 referred to or alleged in the complaint filed by the [Commission in its suit against Occidental and Hammer] . . . each and every document [defined as including 'all letters, telegrams, reports, studies, memoranda, notes, lists, tabulations, press releases, summaries, analyses and other writings, including drafts'] which supports, explains and/or discusses such claimed violations.

". . . Each and every document written by or to any employee of the Securities and Exchange Commission discussing any facts which supports [sic] the allegations in the SEC complaint. . . ."

The Commission notified appellees' attorneys that the request was being considered by the Commission's staff. On April 22, the appellees' attorneys renewed the request for the documents. On May 27, having received no ruling on their requests, the appellees commenced this action seeking injunctive relief against continued withholding of the documents. The appellees alleged that the Commission was withholding the documents in violation of the provisions of the Freedom of Information Act. The Commission's answer set forth various affirmative defenses, including the defenses that the documents were not subject to the mandatory public disclosure requirements of the Freedom of Information Act by virtue of the "investigatory files" exemption, 5 U.S.C. § 552(b) (7) (1970), the "trade secrets" exemption, 5 U.S.C. § 552(b) (4) (1970), the "inter-agency or intra-agency memorandums" exemption, 5 U.S.C. § 552(b) (5) (1970), and the exemption for documents "specifically exempted from disclosure by statute," 5 U.S.C. § 552(b) (3) (1970). The Commission moved for summary judgment.

II. The District Court Ruling

The district court denied the Commission's motion for summary judgment and granted in part appellees' motion for an injunction against continued withholding of the documents. The district court ruled that the "investigatory files" provision of the Freedom of Information Act exempts an agency from the disclosure requirements of the Act only "for so long as it [the agency] is actually or reasonably likely to be involved in an investigation for law enforcement purposes. . . ." The court took the position that, since the original investigation of Occidental and Hammer had been concluded on the date of the entry of the consent judgment, and since the Commission has taken no affirmative action "to maintain the file as a legitimate one 'compiled for [current] law enforcement purposes,'" the exemption from disclosure provided by § 552(b) (7) no longer applied to the documents requested by the appellees. The court further held that "18 U.S.C. § 1905 [the Trade Secrets Act] does not establish an exemption from the Freedom of Information Act [under § 552(b) (3)], but merely penalizes a disclosure of non-exempt material." The court deferred decision on appellees' motion for an injunction pending receipt of the report of a special master appointed by the court to review the voluminous file and to report whether or not any of the requested documents fell within the coverage of § 552(b) (4), which exempts an agency from having to disclose "trade secrets and commercial or financial information obtained from a person and privileged or confidential," and § 552(b) (5) which exempts "inter-agency or intra-agency memorandums or letters which would not be available by law to a party other than an agency in litigation with the agency." The court granted appellees' motion for an injunction requiring the Commission to allow the appellees to inspect and to copy all the records that the Commission did not claim to be exempt under § 552(b) (4) or (b) (5).

III.

The question presented by this appeal is whether the exemption from disclosure to "any person" of "matter" contained in an "investigatory file" compiled and utilized by an agency in an enforcement proceeding applies after the investigation and the enforcement proceeding have terminated. The Commission's investigation of Occidental and Hammer and its enforcement proceeding were successfully concluded on March 5, 1971; the appellees first requested copies of the documents contained in the investigatory file on March 22. The Commission has not commenced any further enforcement proceedings based on information obtained during the investigation. On the other hand the Commission has not affirmatively decided that no further action will be taken against individuals or corporations connected with the transactions and occurrences which were investigated.

The relevant sections of the Freedom of Information Act,*fn1 5 U.S.C. § 552 (1970), provide:

(b) This section [of the Administrative Procedure Act requiring agencies to make information available to the public] does ...


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