Saturday, December 2, 2006
The SEC is usually quite closed-mouth about its investigations, at least before the filing of a civil enforcement action. When it gets into a fight about enforcing one of its subpoenas, however, the veil is lifted. Unlike grand jury subpoenas, which are presumed valid and can result in a contempt order if the recipient refuses to comply, administrative subpoenas are not self-enforcing and the agency must demonstrate the legitimacy of its investigation and the need for the information. An SEC Litigation Release (here) discusses a subpoena enforcement action filed in the District of Massachusetts seeking to compel David K. Donovan, Sr. and Concetta Donovan to provide documents and for Concetta to testify. The focus of the investigation is their son, David Jr., who worked as a trader at a subsidiary of mutual fund giant Fidelity Investments. The investigation concerns possible tipping by David Jr. to his father and mother about a large pending order at Fidelity, trading that is known as "front running" because the purchaser seeks to get out ahead of the large order that will likely drive up the stock price. According to the Litigation Release (which identifies the father as DKD Sr. and the son as DKD Jr.):
According to the Commission's application and supporting papers, during a period of approximately one month in July and August 2003, DKD Jr. accessed information in FMR Co.'s internal trade database about Covad stock on 44 occasions and thereby learned that FMR Co. was purchasing and intended to continue purchasing substantial amounts of Covad stock for its advisory clients. When DKD Jr. accessed FMR Co.'s internal trade database concerning Covad stock at 7:48 a.m. on August 5, 2003, for example, he would have been able to determine that FMR Co. had pending orders to buy 1,966,400 shares of Covad stock and no pending orders to sell any Covad stock. The Commission alleges that on August 5 and 6, 2003, at least four telephone calls were placed from DKD Jr.'s work number at FMR Co. to his parents' home, and within fifteen minutes of two of those telephone calls, purchases of Covad stock were placed in a brokerage account in Concetta's name. According to the Commission's application and supporting papers, from August 5 through August 7, 2003, a total of 55,000 shares of Covad stock were purchased in Concetta's brokerage account, resulting in profits in the amount of approximately $89,775.
Subpoena enforcement actions are fairly uncommon because the SEC and the recipient usually work out some accommodation without the need to go to court, which slows the investigation considerably. In this case, the Commission is complaining that the Donovans are refusing to provide documents without a valid privilege claim, and that Concetta is claiming physical problems that prevent her from testifying but will not provide any accommodation to allow the testimony to be taken. The law does not recognize a parent-child privilege, as Monica Lewinsky's mother discovered, and it does not sound like Concetta or David Sr. are asserting the Fifth Amendment privilege regarding production of documents or testimony, so the SEC appears to be in a good position to obtain an order to enforce the subpoena. (ph)