One Week, Three Subpoena Enforcement Actions
I know you’re ready to get back to volumes 2 and 3 of SEC CustodyFest. Believe me, we all are. And I assure you, we will. But for those looking for evidence that the SEC is taking a new, tough turn under Mary Jo White, I wanted to let you know that the last week has provided some. Over an eight day period, the Commission has filed three separate actions – two in New York and one in Los Angeles – seeking enforcement of administrative subpoenas it has issued to various respondents.
Where Subpoena Enforcement Actions Come From
To understand what this means, it is probably helpful to know that under Section 21(b) of the Exchange Act, the SEC has fairly broad authority to compel testimony and production of documents from those who might have information about potential securities law violations. If a formal order is granted for an investigation (formerly by the Commission itself but now by the Enforcement Division’s senior staff), Enforcement staff has pretty free reign to gather documents and testimony. But a subpoena is only a powerful tool if it’s viewed by respondents as mandatory, and not just a suggestion. When respondents decline to, you know, respond, the SEC’s staff is in a bit of a jam. Is it really worth raising to a court’s attention? Subpoena enforcement actions require time and effort, and the potential payoff is unclear. It could take a long time for the court to rule on the SEC’s application. Further, if the court simply holds the respondent to account for its deficient document production, without further sanctions for delay, the message could be that resisting production could be a useful exercise. Merely getting the documents due under the subpoena would be useful, but still a tough pill to swallow for the Commission given the substantial costs in pressing an interlocutory matter.
The Three Actions
In one of these recent matters, the SEC’s decision to raise the stakes seems to have paid off. On Tuesday, the SEC sought enforcement of a subpoena issued to Charles T. Lawrence, relating to his formerly registered investment adviser Chasson Group, Inc., located in New York City. Judge Kimba Wood responded quickly on Wednesday, issuing an order directing compliance with the subpoena, presumably in accordance with the terms sought by the SEC. In another matter in the same court on November 5, the SEC’s application alleged that Bidtoask.com, reportedly created by Anthony Coronati, solicits investments relating to the securities of sought-after private companies that investors hope will soon hold initial public offerings, such as Facebook and Twitter. The application further alleges that certain investor funds have been commingled with other funds in an account allegedly controlled by Coronati and that personal expenses appear to have been paid out of that account. The SEC staff is investigating whether any investor funds have been misappropriated or otherwise misused. As part of its investigation, the staff in the SEC’s New York Regional office served Coronati with a document subpoena in July, and another subpoena for documents and testimony in October. The SEC’s application alleges that Coronati has ignored the subpoenas entirely. No decision has yet been rendered. Also on Wednesday, the SEC filed an application(link is external) in the Central District of California for an order to enforce subpoenas served on three individuals in Arizona and Texas and three Texas entities. The Commission’s application alleges that in June, it issued subpoenas seeking information about the possible offer or sale of unregistered securities and other potential violations in connection with licenses issued by the Federal Communications Commission. The SEC says the respondents refused to comply based on what it describes as groundless Constitutional objections. We’ll see.
Subpoena enforcement actions are a hassle. They take time and divert resources from other matters, but the SEC views them as important to be sure its subpoenas have teeth. It’s hard to tell if this recent spate is just coincidental or a planned effort to appear tough on recalcitrant respondents. But subpoena recipients who just want to test the Commission’s resolve need to consider whether they’ll merely be adding litigation costs to an already difficult situation. Update: As it turns out, Anthony Coronati ignored the subpoenas facing him long enough to get himself arrested by U.S. Marshals on January 23, 2014. Since then, Coronati has retained counsel and appears to be getting things under control.