Subpoenaing Third Parties in Proceedings before the Massachusetts Securities Division

sutcliffe_thomasby Thomas Sutcliffe

Practice Tips

The Massachusetts Securities Division (“Division”) is the state agency entrusted with protecting investors.  And the scope of its power is considerable, ranging from the authority to order the disgorgement of profits to its ability to issue cease and desist demands.  But parties defending against the Division’s Registration Inspections, Compliance and Examinations (“RICE”) Section are often disadvantaged by a very limited right to discovery.

Respondents in Division proceedings can, however, request to subpoena third parties, which can be valuable considering the paucity of other discovery tools.  But getting the Division to issue a subpoena is not easy or intuitive.  This article, therefore, provides an overview of the subpoena process in adjudicatory proceedings before the Division.

 Discovery in Division Proceedings

Under the Division’s rules, respondents have no right to propound interrogatories or requests for documents.  950 C.M.R. § 10.01 et seq.  Instead, the Division has held that RICE is only required to produce documents it identifies as exhibits in its pre-trial memorandum.  Conversely, RICE may issue subpoenas even before an adjudicatory proceeding has begun.  M.G.L. c. 110A, § 407(b).

Subpoenas can mitigate this imbalance, as there are many scenarios in which third parties will hold key information. For example, in insider trading cases, establishing whether information is material or obtained in violation of a fiduciary duty could depend upon information held by the third-party company whose shares were traded. With third-party subpoenas, respondents can gain advance notice of the evidence upon which RICE may rely at trial while also potentially obtaining exculpatory evidence which RICE would otherwise not be obligated to produce.

Right to Issue of Subpoenas

How do respondents obtain subpoenas in Division proceedings?  At first, the answer may seem straightforward. Under M.G.L. c. 30A, § 12(3):

Any party to an adjudicatory proceeding shall be entitled as of right to the issue of subpoenas in the name of the agency conducting the proceeding. The party may have such subpoenas issued by a notary public or justice of the peace, or he may make written application to the agency, which shall forthwith issue the subpoenas requested.

That is, respondents appear entitled to subpoenas “as of right.”

The Division’s position, however, is that Section 12(3) does not apply to its adjudicatory proceedings because M.G.L. c. 110A, § 407(b) supplants it.  See, e.g., In the Matter of Blinder, Robinson, & Co., Docket No. E-85-27, 1986 Mass. Sec. LEXIS 63 (Mass Sec. Div. April 30, 1986). As the reasoning goes, under Section 407(b), the Division “may” issue subpoenas, but is not required to, and therefore, there is a conflict between Section 12(3) and Section 407(b).  And where Section 407(b) deals specifically with the Division but Section 12(3) is merely a default rule applicable to all agencies, Section 407(b) prevails.  Accordingly, respondents in Division proceedings are subject to 950 C.M.R. § 10.09(l), which requires a respondent to make a “written application” for a subpoena to the Presiding Officer, who “may” grant the application.

No court has yet weighed in on the Division’s interpretation, however, and its position is open to challenge. First, nothing in Section 407(b), which was enacted after Section 12(3), states that it overrides Section 12(3), and there is “a very strong presumption against [the] implied repeal” of a statute, Commonwealth v. Hudson, 404 Mass. 282, 286 (1989) (internal quotation marks omitted), particularly where the statute unequivocally confers a procedural “right.”  Nor is it clear there is a conflict between Section 12(3) and Section 407(b); the former deals with a respondent’s ability to issue subpoenas whereas Section 407(b) refers to the Division’s prerogative to do so.  Moreover, the Division, in a slightly different context, has itself stated that “[a] party to an adjudicatory proceeding before the Division is entitled as a matter of right to the issuance of [a] subpoena.”  In the Matter of Cohmad Sec. Corp., Docket No. E-2009-0015 (Mass Sec. Div. Nov. 17, 2009).  There are, therefore, ample grounds upon which to invoke subpoena rights under Section 12(3).

What should a respondent do if it wishes to issue a subpoena under Section 12(3)?  It could simply ignore Division precedent and serve a notarized subpoena pursuant Section 12(3).  But RICE will almost certainly respond with a motion to quash, which in turn may result in an order to withdraw the subpoena from the Presiding Officer.

The prudent approach would be to file a motion before the Division under both Section 12(3) and 950 C.M.R. § 10.09(l).  This approach affords two advantages.  First, the Division may simply grant the subpoena, in which case the applicability of Section 12(3) is moot.  Second, if the Division denies the subpoena, then the respondent will have preserved the issue for appeal under M.G.L. c. 30A, should the Division ultimately decide unfavorably.  If the respondent believes that it cannot wait until after a final decision, it might also consider interlocutory relief by way of a mandamus action in the Superior Court pursuant to M.G.L. c. 249, § 5.  Mandamus relief will likely be an uphill battle, however, as it is only available where a M.G.L. 30A appeal is an inadequate remedy.  Because a court can always reverse the Division’s judgment and order more discovery, there is usually an adequate remedy.  If there is an immediate need for the subpoena, however, a mandamus action may be an important option to preserve by moving for a subpoena under both Section 12(3) and Section 10.09(l).

Requesting a Subpoena

To request a subpoena from the Presiding Officer under 950 C.M.R. § 10.09(l)(1), the respondent must make a “written application,” which should consist of a copy of the proposed subpoena and a short motion.  The Presiding Officer may deny a request if she determines that the subpoena would be “unreasonable, oppressive, excessive in scope, or unduly burdensome.” Id.

Both the Division’s rules and M.G.L. c. 30A, § 12(3) allow the subpoenaed party, but no one else, to move to quash the subpoena.  Accordingly, the Division has held that only “a party to whom the subpoena is directed may move to vacate or modify the subpoena.”  In the Matter of Cohmad Sec. Corp.  RICE, however, has argued that applications for subpoenas are “motions” under 950 CMR § 10.07(a), entitling it to file an opposition.  Thus far, the Division appears to have rejected RICE’s position, and a respondent should promptly move to strike any opposition RICE files.

RICE has also argued that any subpoena served prior to the exchange of pre-trial memoranda under 950 C.M.R. § 10.09(b) is per se unreasonable because it is inherently inefficient to serve subpoenas that may overlap with the documents that RICE may produce with its memorandum.  RICE’s argument is difficult to square with the language of Section 10.09(l), which imposes no time limitation on requesting subpoenas, and Section 10.09(b), which deals solely with the exchange of documents between parties, not third-party subpoenas.  At least one Presiding Officer has rejected RICE’s position that subpoenas must be filed after the exchange of pre-trial memoranda.  In the Matter of Risk Reward Capital Management Corp., Docket No. E-2010-0057 (Sept. 23, 2014).  Nevertheless, respondents seeking to obtain subpoenas should be ready to field similar objections.

Subpoenas are a valuable tool in proceedings before the Division.  But respondents should anticipate resistance and RICE’s likely objections.  By preparing to do so, respondents can maximize their chances of success, either before the Division or (if necessary) on appeal.

Thomas Sutcliffe is an associate at Prince Lobel Tye LLP. His practice focuses on complex commercial and administrative litigation.

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