The opinion of the court was delivered by: BRIEANT
Before the Court for decision are motions by the Securities and Exchange Commission ("SEC") to enforce subpoenae duces tecum issued to respondents Touche Ross & Co. and Misag Tabibian, and motions by respondents to vacate same.
The facts are not in dispute. As a result of proceedings had with respect to the motions, the SEC has now modified its position and the nature of its request. See Transcript of proceedings of July 22, 1977, at p. 8.
Touche Ross & Co. is one of the nation's leading accounting partnerships, providing auditing and related services to clients throughout the world. At all relevant times it was the independent auditor for the National Bank of North America ("NBNA"). It had no professional relationship with Bohack Corporation ("Bohack"), a publicly held corporation, operating a chain of grocery supermarkets.
In 1972 NBNA loaned in excess of $3 Million Dollars to Bohack. In connection with this loan, and its renewals or extensions, and in waiving rights under the loan agreement, NBNA relied, at least in part, on financial statements of Bohack certified by the accounting firm of Peat, Marwick, Mitchell & Co. ("Peat Marwick"). Neither Touche Ross nor Tabibian ever performed any accounting services for Bohack.
On July 30, 1974, in the United States District Court for the Eastern District of New York, Bohack filed a Petition for Reorganization pursuant to Chapter XI of the Bankruptcy Act. Those proceedings have not yet been completed, although a Plan of Reorganization has been filed, found acceptable by a majority of creditors and awaits a confirmation hearing. It appears, however, that NBNA will be unable to collect substantial amounts due under its loan, and members of the general public who invested in securities of Bohack will suffer financial loss.
This latter fact is properly of interest to the SEC, which on March 23, 1976 issued an order directing a private investigation, pursuant to §§ 21(a) and (b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78u(a) and (b). By reason of that Order, as subsequently amplified, specified members of the SEC's staff are now conducting a private investigation to determine whether there were any violations of the federal securities laws by Bohack, or others, leading up to its collapse. As part of this effort, the SEC staff is investigating possible material misstatements or omissions in Bohack's financial statements and other filings for the period beginning January 1, 1973.
It would seem clear that the investigation is entirely within the power and jurisdiction of the SEC, also that the public interest will be served by a full and vigorous exploration of all relevant evidence, and information which could lead to relevant evidence.
When NBNA perceived that it was faced with a serious loss with respect to its Bohack loan, it began to explore, directly and through counsel, whether or not it had any basis for prosecuting a civil action or claim against third parties, specifically, Bohack's accountants, Peat Marwick.
In a commendable effort to avoid the expense and delay associated with recourse to the Courts, NBNA and Peat Marwick entered into an agreement on November 5, 1976, seeking to resolve, without litigation, whether there was in fact any evidentiary basis for NBNA to prosecute a claim against Peat Marwick for professional malpractice, negligence or otherwise. Under this agreement, Peat Marwick was to make available to Touche Ross, acting for NBNA, all of its work papers and files in connection with its examination of Bohack's financials. Touche Ross was to review these papers, investigate, consider and then express to NBNA its conclusion as to whether there were material deficiencies in the professional services rendered by Peat Marwick. The parties agreed that if Touche Ross found no material deficiencies, NBNA would release Peat Marwick from all claims it might have in connection with its loss on the Bohack loan, and were the conclusion otherwise, Peat Marwick would be afforded an opportunity to present its side of the situation to NBNA and its attorneys before NBNA would sue Peat Marwick.
The parties proceeded accordingly, and respondent Tabibian did conduct a review of Peat Marwick's audit procedures with respect to Bohack. This was done by an office examination of the Peat Marwick work papers, already available directly to the SEC in connection with its investigation, and by interviewing persons at Peat Marwick who were familiar with the matter. Those persons are also amenable to subpoena in connection with the SEC's investigation. While these motions were pending, the SEC has taken the testimony of most of such Peat Marwick's employees.
NBNA is not formally before the Court in these proceedings, although letters have been exchanged and submitted in its behalf, and its counsel has been heard informally. At the initial hearing before me, NBNA, through counsel, advised the Court that it had no interest in the issue and was not asserting any proprietary interest of its own in confidentiality or litigation work product. Cf. Hickman v. Taylor, 329 U.S. 495, 508, 510, 511, 91 L. Ed. 451, 67 S. Ct. 385 (1947).
Whatever the situation might be if NBNA were trying to protect the litigation work product of accountants retained by its lawyers to investigate the facts bearing on the scope and validity of a proposed or pending lawsuit that issue is not present before us here. The original agreement and letter of engagement of Touche Ross by NBNA specifies that the matter be kept strictly confidential. Regardless of the possible interest which NBNA might have had in keeping the fruits of its investigation private, Touche ...