Anwar et al v. Fairfield Greenwich Limited et al

Filing 1181

ENDORSED LETTER addressed to Magistrate Judge Frank Maas from Laura Walker dated 8/26/2013 re: The Securities and Exchange Commission ("SEC" or "agency") is in receipt of the letter of the Defendants dated August 19, 2013, and is prepared to participate in an informal conference to address the SEC's decision not to authorize its current and former employees to testify under the Rule 45 subpoenas issued in this action. ENDORSEMENT: The Court will hold a conference to discuss the Defendants' request on September 16 at 3 p.m. in Courtroom 20-A. If this date and time are inconvenient, counsel shall place a conference call to Chambers by 9/3/13 to reschedule. (Status Conference set for 9/16/2013 at 03:00 PM in Courtroom 20A, 500 Pearl Street, New York, NY 10007 before Magistrate Judge Frank Maas.) (Signed by Magistrate Judge Frank Maas on 8/26/2013) Filed In Associated Cases: 1:09-cv-00118-VM-FM et al.(rsh)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.

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MEMO ENDORSED

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August 26,2013

By Facsimile
The Honorable Frank Maas
United States Magistrate Judge
United States Courthouse
500 Pearl Street
New York, New York 10007
Re:

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Anwar v. Fairfield Greenwich Limited,
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Dear Judge Maas:

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The Securities and Exchange Commission ("SEC" or "agency") is in receipt of the letter
of the Defendants dated August 19,2013, and is prepared to participate in an informal
conference to address the SEC's decision not to authorize its current and former employees to
testifY under the Rule 45 subpoenas issued in this action.
In anticipation of such a conference we are providing a summary of the Commission's
position below. That position is more fully described in the Commission decisions provided by
Defendants.
The Purported Relevance of the Testimony is Outweighed by the Burden on the SEC
The Anwar plaintiffs were investors in four hedge funds that were established by
Fairfield Greenwich Group ("FGG") and that invested many of their assets with Bernard Madoff
(HMadoff') or Bernard L. Madofflnvestment Securities (HBLMIS"). These plaintiffs have
asserted various federal-securities-law and state-law claims against the Defendants stemming
from the Ponzi scheme perpetrated by Madoff. Plaintiffs have alleged, among other things, that
the Defendants, as auditors, administrators, and custodians of the funds, failed to properly test
BLMIS's internal controls and to scrutinize information provided by Madoff, and that they were
negligent for failing to uncover Madoff's fraud. The Defendants want testimony from nine
current and former SEC staffto show, principally, that because Madoff successfully deceived the

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staff of the SEC, he also could have deceived the Defendants even if they had made proper
inquiries regarding investments Madoff purportedly made.
The Defendants seek to question current and former staff about examinations and
investigations they performed regarding Madoff, but the Defendants have not explained with any
specificity why these investigations and examinations have minimal relevance to the issues in the
underlying litigation. The Defendants do not contend that the testimony they seek will shed any
light on what infonnation the Defendants actually sought, on Madoff or FGG's response to those
efforts, or on whether the Defendants had a duty to seek certain information. Instead, they
contend that SEC staff testimony may show what may have happened if the Defendants had
made certain inquiries and may show obstacles that could have been present. Such speCUlative
testimony is, at best, of extremely limited relevance and appears to be far more confusing than
probative.
In their communications with the SEC, Defendants have not pointed to any specific facts
that demonstrated staff testimony would provide the information they sought. Defendants have
not been able to point to such specific facts even though the SEC has made public a detailed
report prepared by its Office of Inspector General ("OIG") regarding the examinations and
investigation that failed to uncover that Madoff was conducting a Ponzi scheme. In addition, the
SEC produced to the Defendants (1) over 10,000 pages of documents relating to the SEC's
examinations and investigations of Madoffthat the OIG gathered during its investigation into the
Madoff maUer, and (2) 136 transcripts of testimony and memoranda of interviews taken during
that investigation, including those of the nine witnesses whose testimony is sought in the
subpoenas. The witnesses are unlikely to remember anything about their role in the Madoff
examinations and investigations that was not discussed in OIG testimony or interviews or was
not in the documents from the examinations or investigation.

The SEC staff would not provide probative infonnation on what may have happened
because the SEC was in a very different position than any of the Defendants. The SEC's focus
was different (looking at Madoff's compliance with the securities laws as opposed to verifying
assets were safe), its relationship with Madoffwas different (a government regulator conducting
occasional examinations or investigations as opposed to providing services to a close business
associate of Madoff' s), and the consequences it could impose were different (bringing an
enforcement action if it had evidence of a violation of the federal securities law as opposed to
withdrawing funds if sufficient assurances were not received).
The burden that taking nine depositions would impose on the SEC easily outweighs the
very marginal relevance of the testimony sought. With respect to the four witnesses who are
current SEC employees, the cumulative impact on the SEC is significant. All four will need to
take time away from significant SEC maUers to prepare for and attend the depositions. In
addition, preparing for nine depositions places a significant burden on the additional SEC staff
members who will need to assist in preparation for the depositions, particularly in determining
what is privileged. Those staff members include not only attorneys in the SEC's Office of the
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General Counsel, but also Division of Enforcement staff responsible for ongoing investigations
and litigation regarding M~doff. BecaU5e the agency cannot simply determine that all internal
communications or deliberations are privileged, stafIwiU need to review the voluminous
documents that have been made public before determining what can and should remain
privileged and explaining those lines to each witness. Although the Defendants have committed
to seeking only "outward facing" aspects of the SEC's examinations and investigations, and to
refrain from inquiring into privileged matters, the plaintiffs (who would also have the right to
question the witnesses) have provided no such assurances.
Authorizing the Testimony Is Not Required Under Rule 45 of the Federal Rules of Civil
Procedure and Would Not Be Consistent With Sound Public Policy
The Second Circuit, the Court whose precedent applies here, has specifically stated that it
has not yet determined the appropriate standard of review where the government has refused to
comply with a subpoena. See US Envtl. Protection Agency v. General Elec. Co., 212 F.3d 689,
690 (2d Cir. 2000) (holding that statement in earlier decision that deferential standard applied
should not be viewed as a holding); Wultz v. Bank a/China Ltd, 2013 WL 1453258, at *3 (April
9,2013) (noting that Second Circuit has not decided proper standard of review when the
government has refused to comply with a subpoena). However, the Court in this jurisdiction has
applied a deferential standard of review. See Moran v. Pfizer, No. 99 civ. 9969,2000 WL
1099884, at *3 (S.D.N.Y. Aug. 4,2000) (noting that the "arbitrary and capricious standard has
been routinely applied in other circuits involving an agency's refusal to comply with a subpoena,
and upholding the FDA's decision not to authorize FDA witnesses to testify).·
The SEC's decision not to authorize the testimony of its employees should be upheld
whether it is analyzed with deference under the APA or under the more stringent Rule 45
standard, because, as explained above, the relevance of the information sought is outweighed by
the burden on the SEC. See Fed. R. Civ. P. 45(c)(3)(A)(4). The D.C. Circuit has explained the
relevant considerations in evaluating whether a subpoena imposes an undue burden, particularly
with respect to subpoenas to government agencies or employees: namely, whether the discovery
is duplicative, obtainable from some other source, and whether the burden or expense of the
discovery would outweigh its likely benefit:
With these tools, district courts in cases involving third-party subpoenas
to government agencies or employees can adequately protect both the
litigant's right to evidence and the "government's interest in not being
l Where a requestor has challenged in court a decision not to authorize the testimony of
government employees, courts have not agreed on whether in such a case a court should apply a
deferential standard of review under the Administrative Procedure Act or de novo standard of
review. Compare COMSATCorp. v. Nat. Sci. Found., 190 F.3d 269, 277 (4th Cir. 1999)
(applying deferential standard of review from Administrative Procedure Act) with Watts v. SEC,
482 F.3d 501,508 (D.C. Cir. 2007) (holding that "a challenge to an agency's refusal to comply
with a Rule 45 subpoena should proceed and be treated not as an APA action but as a Rule 45
motion to compel" and that Rule 45 "supplies the standards under which district courts assess
agency objections to a subpoena").

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used as a speakers' bureau for private litigants." Exxon Shipping,34 F.3d

at 780 (internal quotation marks omitted).

Watts v. SEC, 482 F.3d 501, 509 (D.C. Cir. 2007) (some citations omitted). Here, the court
should consider that SEC staff would be drawn away from important agency work in order to
provide testimony of little or no relevance.
There also are sound public policy reasons why agencies need to be shielded from the
burden of testifying in cases in which they are not a party so that they can focus limited resources
on their statutory duties. See COMCASTCorp. v. National Science Found, 190 F.3d 269, 277­
78 (4 th Cir. 1999) ("As an agency official must, NSF's counsel also considered whether the
public interest and the agency's taxpayer-funded mission would be furthered by compliance.");
Johnson v. Bryco Arms, 226 FRD. 441 (E.D.N.Y. 2005) (quashing deposition subpoenas to ATF
personnel where ATF was not a party to the case and had provided documents from an
investigation conducted by the ATF that were relevant to the case); Moran v. Pfizer, No. 99 civ.
9969,2000 WL 1099884, at *3 (S.D.N.Y. Aug. 4, 2000) ("Courts have regularly held that the
public interest in insuring that agency employees spend their time doing the agency's work is a
valid reason to decline to comply with a subpoena."); Moore v. Armour Pharmaceutical Co., 129
F.R.D. 551. 556 (N.D. Ga. 1990) (noting that courts routinely consider "the policy of preserving
the resources of governmental agencies from the flood of private litigation" in reviewing
decisions not to authorize depositions); Alex. v. Jasper Wyman & Son, 115 F.RD. 156, 158-59
(D.Me. 1986) (noting "important public policy favoring the conservation of government
resources and the protection of orderly government operations" in explaining why undue burden
analysis allowed court to prohibit taking of deposition altogether.) These policy reasons militate
against requiring the SEC staff to testify in this action.

Senior Counsel
Office of the General Counsel
Phone: [phone]

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