Victim Of Securities Fraud Successfully Relies On SEC Protective Order To Shield Tax Information From IRS
There are a variety of circumstances under which investors may provide sensitive tax-related information to the Securities and Exchange Commission; they may be victims of securities fraud eager to assist the SEC in recovering lost monies or, under the SEC's newly-developed policy of encouraging and rewarding cooperation -- previously reported here -- they may be low-level participants in the fraud anxious to prove their bona fides. No matter the scenario, the disclosing parties will desire protection against the further disclosure of their tax-related information to other arms of the government, such as the IRS. The SEC may even, in the right circumstance, consent to a protective order to facilitate the disclosure.
But what assurance does the disclosing party have, even with a protective order in place, that the SEC will not turn around and re-disclose their information to a United States Attorney's Office or to the IRS for criminal prosecution? Under a recent Tenth Circuit case, the answer is: "some."
In SEC v. Merrill Scott & Assocs., Ltd., 2010 WL 1039796 (10th Cir., Mar. 23, 2010), a victim-investor in the defendant entity turned over to the SEC confidential information pertaining to his income, and did so pursuant to two protective orders, the first for his deposition testimony, the second for his documents. Both protective orders were explicit in regards to the subsequent use of the information -- the information could only be used for purposes of the SEC litigation and no other, and could only be disclosed to the United States Attorney's Office for the District of Utah as necessary to the SEC action. Imagine the investor's surprise when, shortly after his disclosures to the SEC, agents of the IRS initiated a criminal investigation of him by dropping summonses at his banks, law firms, and brokerages. The investor moved for an order directing the return of his information; the United States intervened to seek a modification of the protective orders to permit broad disclosure. The district court not only refused to order the return of the investor's materials, but it modified the protective orders nunc pro tunc to support the broader disclosure sought by prosecutors.
The Court of Appeals reversed, directing the return of the information and negating the modification. It held that the prosecutors were barred under the terms of the original orders from further disclosing the information received from the SEC or from using the information other than in the SEC action. The court said that "[a]llowing the government to breach the promises made in the protective orders would encourage similar improper conduct in the future and would discourage future civil litigants from relying on the government's promises." Id. at *6. While there are sections within Title 15 which generally allow the SEC to disclose information to the Attorney General, they are permissive, not mandatory, and so did not override the protective orders. Id. at *8.
There is precedent holding that grand jury subpoenas, at least rebuttably, overcome any civil protective orders. E.g.,, In re Grand Jury, 286 F.3d 153 (3d Cir. 2002). The Tenth Circuit noted one such case from the Fourth Circuit, but distinguished it, since the IRS/prosecutors had in this instance been handed the protected information and had not compelled its disclosure through grand jury subpoena. But it is clear in a number of Circuits, including the Third and Fourth, that the service by an AUSA of a grand jury subpoena upon the SEC would have compelled the production of this investor's data, protective orders or not. In that light, the Merrill Scott case has limited utility. Put another way, a protective order is better than nothing, but securing one for a client in jeopardy is no guarantee of a good night's sleep, for you or for the client.
