Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Securities and Exchange Commission v. Strauss

October 29, 2009

SECURITIES AND EXCHANGE COMMISSION PLAINTIFF,
v.
MICHAEL STRAUSS, STEPHEN HOZIE, AND ROBERT BERNSTEIN DEFENDANTS.



The opinion of the court was delivered by: Pitman, United States Magistrate Judge

OPINION AND ORDER

I. Introduction

I write to resolve two pending discovery disputes between the parties: (1) defendant Stephen Hozie's application to compel plaintiff Securities and Exchange Commission ("SEC") to produce notes taken by SEC staff of memoranda of witness interviews prepared by the FBI, as well as notes and memoranda of other witness interviews, and (2) Hozie's application to compel the SEC to grant him access to a database of work papers which is maintained by third party Deloitte and Touche ("D&T") and to which the SEC obtained remote access through an investigative subpoena.*fn1

For reasons discussed below, (1) Hozie's application to compel production of the witness interview notes and memoranda is denied and (2) Hozie's application to compel the SEC to grant him remote access to D&T's electronic database is denied.

II. Facts

This is an enforcement action brought by the SEC against defendants Michael Strauss, Stephen Hozie and Robert Bernstein, senior officers of American Home Mortgage Investment Corporation ("American Home"), for accounting fraud (Complaint, dated Apr. 29, 2009 ("Compl.") ¶ 1). The complaint alleges that the defendants violated various provisions of the Securities Act and the Securities Exchange Act by setting "materially understated reserves," making misleading and incomplete public statements, misleading their auditors, and concealing information from their auditors (Compl. ¶¶ 2-3, 5, 7). The Honorable Richard M. Berman, United States District Judge, entered a final consent judgment as to defendant Michael Strauss shortly after the complaint was filed (Final Judgment as to Def. Michael Strauss, entered Apr. 29, 2009; Letter from David Stoelting, Esq. to the undersigned, dated Sept. 18, 2009 ("SEC Sept. 18 Letter") at 1). As of September 11, 2009, defendant Robert Bernstein had reached a settlement in principle with the SEC, but it had not yet been finalized. Hozie appears to be the only defendant actively pursuing discovery at this time.

A. The SEC's Notes and Memoranda of Witness Interviews

The parties' first dispute arises out of Hozie's requests for three categories of witness interview notes and the SEC's assertion that the documents are protected by the work-product doctrine.

The SEC commenced its investigation of American Home in July 2007; the SEC issued a formal order of investigation on August 23, 2007 (Declaration of Alison T. Conn, dated Sept. 18, 2009 ("Conn. Decl."), ¶¶ 3-4). Three attorneys -- Alison Conn, Vincent Sherman and Maureen Peyton King -- participated in the investigation (Conn Decl. ¶ 5). They were assisted by an accountant -- James Addison -- and two SEC "examiners" -- Debbie Chan and Kathy Murdocco (Conn Decl. ¶ 5). The individuals participating in the investigation generated three categories of notes that are in issue in the present dispute: (1) 16 sets of notes of interviews of witnesses; (2) 8 sets of notes summarizing portions of memoranda prepared by the FBI which summarize interviews with witnesses and (3) three sets of notes of proffers made by Hozie and Bernstein to the United States Attorney's Office for the Eastern District of New York (see Plaintiff's Amended Privilege Log at 6-7, annexed as Ex. A to the Letter of Lawrence Gerschwer, Esq., to the undersigned, dated Sept. 18, 2009 ("Hozie Sept. 18 Letter")). Eight sets of notes in the first category were prepared by non-attorneys; none of the notes in the second category were prepared by non-attorneys, and two of the three sets of notes in the third category were prepared by non-attorneys (Plaintiff's Amended Privilege Log at 6-7, annexed as Ex. A to Hozie Sept. 18 Letter). All of the notes in issue relate to interviews or proffer sessions conducted after the SEC issued its formal order of investigation (Plaintiff's Amended Privilege Log at 6-7, annexed as Ex. A to Hozie Sept. 18 Letter). There is no contention that any of the witnesses whose statements are purportedly reflected in the notes are unavailable for interview or deposition by Hozie or his counsel (see Conn Decl. ¶ 10).

According to the SEC,

During the investigation [the Assistant Regional Director in the SEC's New York Regional Office, Alison T. Conn], took and directed the staff to take certain investigative steps . . . . The investigative steps [Conn] undertook included preparing notes of interviews of witnesses and instructing attorney, accountant and investigative staff members to prepare notes of interviews of witnesses. The staff took these notes in furtherance of the formal investigation the purpose of which was to determine whether to recommend that the Commission initiate litigation against any entities or individuals for violations of the securities laws. Thus, these notes were made in anticipation of litigation. (Conn. Decl. ¶ 6).

The SEC has refused to produce all three categories of documents, claiming that each is protected by the work-product doctrine, the deliberative process privilege and the law enforcement privilege. Hozie challenges only the assertion of the work-product privilege.

B. The SEC's Remote Access to the Deloitte & Touche Database

Through an investigative subpoena, the SEC obtained remote access to an electronic database containing D&T's audit work papers concerning its audits and quarterly reviews of American Home (Letter from Lawrence Gerschwer, Esq., to the undersigned, dated Sept. 10, 2009 ("Hozie Sept. 10 Letter") at 1; Conn Decl. ¶ 11; Letter from Charles F. Walker, Esq., to Alison Conn, dated Feb. 6, 2008 ("Walker Letter") at 1). D&T uses software that allows it to conduct "largely paperless audits of clients by facilitating creation and control of electronic audit working papers that reflect [its] audit methodology and procedures" (Declaration of Eric T. Streck, Esq., dated Sept. 17, 2009 ("Streck Decl.") ¶ 2). D&T uses a third-party litigation support services provider, Solutions Plus, to provide secure, remote access to D&T's electronic audit working papers for litigants (Streck Decl. ¶ 4). Access is by way of the internet and requires the user to input a code from an "RSA SecureID fob," a small portable device that generates a new access code once per minute, as well as a separate password and user name (Streck Decl. ¶ 4; Walker Letter at 1-2). In order to access the database remotely, the SEC has obtained four of these "key fobs," each associated with a separate user name containing the letters "sec" and a password (Conn Decl. ¶ 12; Walker Letter at 1-2). The SEC pays Solutions Plus $2,500.00 a month for this access, plus a $66.00 one-time charge for each fob (Streck Decl. ¶ 7).

Apparently, if a user accessing the database remotely tries to open an audit file that is already being viewed by another user, the party attempting to open the file will be denied access (see SEC Sept. 18 Letter at 4; Streck Decl. ¶ 14). Additionally, that party will receive a message indicating which other user is currently viewing that file (Streck Decl. ¶ 14; Letter from David Stoelting, Esq., to the undersigned, dated Sept. 22, 2009 ("SEC Sept. 22 Letter") at 2; see SEC Sept. 18 Letter at 4).

In his discovery requests, Hozie asked the SEC to share its database access with him -- either by giving him one or more of its key fobs, or by agreeing to allow him to access the same database through additional key fobs obtained from Solutions Plus (Hozie Sept. 10 Letter at 1; Hozie Sept. 18 Letter at 2; Letter from Lawrence Gerschwer, Esq., to the undersigned, dated Sept. 22, 2009 ("Hozie Sept. 22 Letter") at 5). The SEC declined to share its remote access to the database by giving defendant Hozie a key fob, and, by letter, Hozie requested that I compel production (SEC Sept. 18 Letter at 1; Hozie Sept. 18 Letter at 2). The SEC submitted letter memoranda opposing Hozie's application on the grounds that the database is not in the SEC's "possession, custody, or control," for purposes of Federal Rule of Civil Procedure 34(a) and, further, that shared access to the database would reveal attorney work product (SEC Sept. 18 Letter at 3-4; SEC Sept. 22 Letter at 1-2). It argues that Hozie is obligated to obtain his own access to the database by serving a Rule 45 subpoena on D&T, and that he should have Solutions Plus "create a second, identical secure server environment" for him (SEC Sept. 18 Letter at 4; Streck Decl. ¶ 9). The SEC maintains that it has not refused production in order to prevent Hozie from having access to the database, but it contends that he is obligated to seek his own access directly from D&T and Solutions Plus rather than obtaining free access through the SEC (SEC Sept. 18 Letter at 3; SEC Sept. 22 Letter at 2).

D&T does not typically provide more than one party with access to the same database environment hosted by Solutions Plus (Streck Decl. ¶ 11). A letter from D&T's outside counsel to the SEC concerning the remote access arrangement stated that the database materials "remain the property of D&T and are being provided to [the SEC] in connection with the Commission's in- quiry" regarding American Home (Walker Letter at 2; Conn Decl. ¶ 13).

III. Analysis

A. The Interview Notes and Summaries

The scope of the work-product doctrine is defined in Fed.R.Civ.P. 26(b)(3), which provides:

(A) Documents and Tangible Things. Ordinarily, a party may not discover documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or representative (including the other party's attorney, consultant, surety, ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.