Sec v DTTC SEC Memo Dock 55 3-28-13

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

__________________________________________

U.S. Securities and Exchange Commission, ) ) Petitioner, ) ) -v.- ) 11 Misc. 512 GK/DAR ) Deloitte Touche Tohmatsu CPA Ltd., ) ) Respondent. ) __________________________________________)

SECURITIES AND EXCHANGE COMMISSION’S MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO OBJECTIONS TO

MAGISTRATE JUDGE’S MARCH 4, 2013 ORDER

DAVID MENDEL (D.C. Bar #470796) Assistant Chief Litigation Counsel U.S. Securities and Exchange Commission – Enforcement Division 100 F Street, NE Washington, DC 20549 (202) 551-4418 (phone) (202) 772-9282 (fax) [email protected]

Of Counsel: ANTONIA CHION New York Bar Attorney Registration No. 1873405 LISA WEINSTEIN DEITCH California Bar No. 137492 HELAINE SCHWARTZ New York Bar Attorney Registration No. 1917046

Case 1:11-mc-00512-GK-DAR Document 55 Filed 03/28/13 of 36

mailto:[email protected]

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TABLE OF CONTENTS TABLE OF AUTHORITIES ........................................................................................................... ii

PRELIMINARY STATEMENT ..................................................................................................... 1

BACKGROUND ............................................................................................................................. 4

A. DTTC’s Registration With The Board And Receipt of Board Warning ....................... 4

B. This Action Seeks to Enforce the Subpoena .................................................................. 5

C. Administrative Proceedings ........................................................................................... 7

D. Timeframe for Resolution of the Administrative Proceeding ....................................... 8

E. The Magistrate Judge’s Denial of DTTC’s Motion To Extend The Stay ...................... 9

ARGUMENT .................................................................................................................................. 9

A. The Magistrate Judge’s Decision To Deny DTTC’s Requested Stay Was Neither Contrary to Law Nor Clearly Erroneous ..................................................................... 10

1. The Absence Of Any Pressing Need For A Stay Merits Its Rejection ................... 11

2. The Balance Of Interests Also Merits Rejection Of The Requested Stay .............. 12

3. The Magistrates Judge’s Assessment of Potential Judicial Efficiency Was Not Contrary To Law Or Clearly Erroneous ................................................................ 15

B. The Magistrate Judge Did Not Err By Holding A Motions Hearing On March 13, 2013 ............................................................................................................ 19

1. This Subpoena-Enforcement Action Is A Summary One ...................................... 20

2. DTTC Voluntarily Chose Not To Seek Leave To File A Sur-reply....................... 21

3. DTTC Has Not Identified A “Special Circumstance” Justifying Discovery ......... 21

a. DTTC’s Proposed Expert Discovery Is Unnecessary ................................. 23

b. The SEC-CSRC Correspondence Can Provide DTTC With No Basis For Resisting Enforcement Of The Subpoena ................................................. 24

c. Discovery Of The Reasons For The SEC’s Failed Negotiations With The CSRC Also Cannot Provide A Basis For Resisting Enforcement Of The Subpoena ................................................................................................... 25

4. The Magistrate Judge Provided DTTC With An Opportunity To Request An Evidentiary Hearing............................................................................................... 26

5. The Parties Should Not Be Required To Re-Brief The Case To The Magistrate Judge ...................................................................................................................... 27

CONCLUSION ............................................................................................................................. 30


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TABLE OF AUTHORITIES

CASES Am. Ctr. for Civil Justice v. Ambush, 794 F. Supp. 2d 123 (D.D.C. 2011)................................................................................... 10, 19 *Belize Soc. Dev. Ltd. v. Gov’t of Belize, 668 F.3d 724 (D.C. Cir.), cert. denied, 133 S. Ct. 274 (2012)......................................................................... 3, 10, 11, 12 *Cherokee Nation of Okla. v. United States, 124 F.3d 1413 (Fed. Cir. 1997) ......................................................................................... 11, 12 Clinton v. Jones, 520 U.S. 681 (1997) .................................................................................... 10, 13 Dellinger v. Mitchell, 442 F.2d 782 (D.C. Cir. 1971) ................................................................... 12 Dependable Highway Exp., Inc. v. Navigators Ins. Co., 498 F.3d 1059 (9th Cir. 2007) ................................................................................................. 15 Endicott Johnson v. Perkins, 317 U.S. 501 (1943) ......................................................................... 3 Fed. Savs. & Loan Ins. Corp. v. Commonwealth Land Title Ins. Co., 130 F.R.D. 507 (D.D.C. 1990) ................................................................................................ 19 FTC v. Atl. Richfield Co., 567 F.2d 96 (D.C. Cir. 1977) ......................................................... 20, 27 FTC v. Texaco, Inc., 555 F.2d 862 (D.C. Cir. 1977) ................................................................. 3, 16 Gordon v. FDIC, 427 F.2d 578 (D.C. Cir. 1970) .......................................................................... 15 In re Grand Jury Proceedings the Bank of N.S., 740 F.2d 817, 821 (11th Cir. 1984) ................................................................................... 14, 17 Johnson v. SEC, 87 F.3d 484, 490 (D.C. Cir. 1996) ..................................................................... 17 *Landis v. N. Am. Co., 299 U.S. 248, 254 (1936) ............................................................. 10, 11, 12 Mathis v. SEC, 671 F.3d 210, 217 (2d Cir. 2012) ......................................................................... 18 McCurdy v. SEC, 396 F.3d 1258,1264 (D.C. Cir. 2005)............................................................... 17 N.H. Fire Ins. Co. v. Scanlon, 362 U.S. 404 (1960) ................................................................ 20, 27 Okla. Press Publ’g Co. v. Walling, 327 U.S. 186 (1946) .............................................................. 16 Rubin, Release No. 295, 2005 WL 2180440 (RGM Sept. 8, 2005) (Initial Decision) ...................................................................................................................... 17


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SEC v. Dresser Indus., Inc., 628 F.2d 1368 (D.C. Cir. 1980) .......................................... 13, 15, 21 SEC v. Lavin, 111 F.3d 921 (D.C. Cir. 1997) ................................................................... 21, 22, 23 SEC v. McCarthy, 322 F.3d 650 (9th Cir. 2003) ........................................................................... 20 SEC v. Sprecher, 594 F.2d 317 (2d Cir. 1979) ........................................................................ 20, 21 Touche Ross & Co. v. SEC, 609 F.2d 570 (2d Cir. 1979) ............................................................ 17 United States v. Hubbard, 650 F.2d 293(D.C. Cir. 1980) ............................................................ 20 United States v. Kordel, 397 U.S. 1 (1970) ................................................................................... 15 United States v. McCarthy, 514 F.2d 368 (3d Cir. 1975) ........................................................ 20, 21 United States v. Morton Salt Co., 338 U.S. 632 (1950) ................................................................ 16 United States v. Philip Morris USA Inc., 841 F. Supp. 2d 139 (D.D.C. 2012)......................................................................................... 12 Wonsover v. SEC, 205 F.3d 408 (D.C. Cir. 2000) ......................................................................... 18

STATUTES, RULES AND REGULATIONS 15 U.S.C. § 77s(c) ......................................................................................................................... 17 15 U.S.C. § 78d-3 ............................................................................................................................ 8 15 U.S.C. § 78u(b) ......................................................................................................................... 17 15 U.S.C. § 7202(b)(1) .................................................................................................................... 7 15 U.S.C. § 7216(b)(1) .................................................................................................................... 7 15 U.S.C. § 7216(e) ......................................................................................................................... 7 17 C.F.R. § 201.102(e)(1)(iii) ......................................................................................................... 7 17 C.F.R. § 201.360(a)(3) ............................................................................................................... 8 17 C.F.R. § 201.410(a) .................................................................................................................... 8 Fed. R. Civ. P. 44.1 ....................................................................................................................... 24


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Fed. R. Civ. P. 72(a) ........................................................................................................................ 9 Local Civ. R. 72.2.......................................................................................................................... 10


Pursuant to Federal Rule of Civil Procedure 72(a) and Local Civil Rule 72.2(b), the

U.S. Securities and Exchange Commission (“SEC” or “Commission”) respectfully submits this

Memorandum of Points and Authorities In Opposition To the Objections of Deloitte Touche

Tohmatsu CPA Ltd. (now known as Deloitte Touche Tohmatsu CPA LLP) (“DTTC”) to

Magistrate Judge Robinson’s March 4, 2013 Memorandum Opinion and Order (“March 4

Order”).

PRELIMINARY STATEMENT

Through this proceeding, the SEC seeks a court order requiring DTTC to produce

documents in response to an administrative subpoena (the “Subpoena”) that the SEC served on

DTTC in May 2011. The Commission needs the requested documents to investigate possible

securities laws violations involving Longtop Financial Technologies Limited (“Longtop”), a

foreign private issuer the securities of which were registered with the Commission and traded

on U.S. markets. The SEC began the investigation shortly after DTTC, Longtop’s auditor for

several years, disclosed that it had uncovered numerous indicia of financial fraud at Longtop

and further indicated that DTTC’s prior audit reports for Longtop, which it had filed with the

SEC, could no longer be relied upon by investors. At the time, Longtop had a market

capitalization of over $1 billion. The Subpoena called for DTTC to produce, among other

things, audit workpapers it had prepared while auditing the financial statements of Longtop. It

has not done so.

DTTC does not dispute the legitimacy of either the SEC’s investigation or its need for

the requested documents. But DTTC still refuses to comply with the Subpoena claiming,

among other things, that to do so would constitute a violation of the laws of the People’s

Republic of China (“China”). DTTC has maintained this refusal notwithstanding the facts that:

it has registered in the United States with the Public Company Accounting Oversight Board


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(the “Board”); it has conducted numerous audits for U.S.-listed companies; and it knew about

the purported Chinese-law restrictions long before it conducted the audit work for Longtop that

is at issue.

On March 13, 2013, the Magistrate Judge held a motions hearing on the merits of the

SEC’s Application for an order requiring compliance with the Subpoena. In addition to the

extensive oral argument by the parties at the hearing, the Magistrate Judge has for her

consideration some 230 pages of briefs and declarations by the parties that comprehensively

address the merits issues raised by the SEC’s Application. The Magistrate Judge’s decision on

the merits is now pending.

Notwithstanding these events, DTTC now still seeks – 18 months after the SEC filed its

Application, in September 2011; 20 months after the SEC served the Subpoena, in May 2011;

and after the Magistrate Judge already has heard arguments on the merits of the Application –

to put this proceeding and the SEC’s Longtop investigation on indefinite hiatus. DTTC here

challenges the Magistrate Judge’s procedural decision in the March 4 Order denying DTTC’s

motion for an indefinite stay of this case. DTTC argues, as it did before the Magistrate Judge,

that the Court should disregard the SEC’s interest in promptly advancing the Longtop

investigation. DTTC argues that the proposed stay should last until “resolution” of the

Commission’s wholly separate administrative proceeding, now pending before an

Administrative Law Judge, against DTTC and four other China-based public accounting firms

alleging violations of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), based on conduct

unrelated to Longtop (the “Administrative Proceeding”). See Objections at 18.

Contrary to DTTC’s contentions in its Objections, the Magistrate Judge’s denial of the

requested stay in her March 4 Order was not contrary to law or clearly erroneous, and should


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be upheld. As the Magistrate correctly found, the requested stay “does not have an

ascertainable end date,” and, therefore, only can be justified by “a finding of a pressing need”

under this Circuit’s precedents – a showing that DTTC clearly failed to make. March 4 Order

at 9 (quoting Belize Soc. Dev. Ltd. v. Gov’t of Belize, 668 F.3d 724, 732 (D.C. Cir.), cert.

denied, 133 S. Ct. 274 (2012)); id. at 10. The Magistrate Judge also correctly found that the

SEC’s need for the requested documents and opposition to a further delay of this proceeding

“comport with the purpose behind the summary nature of administrative subpoena enforcement

proceedings.” Id. at 11. DTTC had argued that a stay would promote judicial efficiency on the

asserted ground that the Administrative Proceeding allegedly will address similar issues, but

the Magistrate Judge correctly rejected this argument as a basis for the stay; whether or not an

audit firm’s noncompliance with a document request under Section 106 of Sarbanes-Oxley

constituted “a willful violation” of that Act “is not material to this court’s determination of

whether” the Subpoena, invoking different provisions of the securities laws, “is enforceable.”

Id. at 8.

The only aspect of the Magistrate Judge’s decision that DTTC now challenges is her

evaluation of the potential overlap between the two proceedings. DTTC contends that this

evaluation was allegedly flawed because it was based on the Magistrate Judge’s observation –

consistently shared by federal courts over the last 70 years – that a “court’s role in a proceeding

to enforce an administrative subpoena is a strictly limited one.” FTC v. Texaco, Inc., 555 F.2d

862, 871-72 (D.C. Cir. 1977) (citing Endicott Johnson v. Perkins, 317 U.S. 501 (1943)); see

also March 4 Order at 5 (citing authorities). DTTC’s objection is meritless. The Magistrate

Judge correctly characterized the scope of this proceeding, and her assessment of judicial

efficiencies to be gained through a stay was not clearly erroneous. The Administrative


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Proceeding involves different legal claims that arise from different SEC investigations, present

different legal standards, and seek different remedies. The Longtop investigation is not even at

issue in the Administrative Proceeding, nor can the Administrative Proceeding compel the

production of any documents. Furthermore, it may well be years before either the Commission

or the D.C. Circuit resolves in the Administrative Proceeding the parties’ very different views

as to what constitutes a “willful violation” of Sarbanes-Oxley Section 106. Thus, DTTC’s

claimed efficiencies – even assuming they could overcome the Magistrate Judge’s other bases

for rejecting the extended stay – are wholly speculative. For this Court now to halt

consideration of the merits of this subpoena-enforcement action pending such “resolution”

would be the height of judicial inefficiency.

DTTC also objects to the March 4 Order’s directive that the parties appear for a

motions hearing on March 13, 2013, without first allowing DTTC additional time in which to

submit an additional merits brief, or further to stall the proceeding by taking unnecessary

discovery. These objections, obviously an alternative stratagem by DTTC to delay this

proceeding in the absence of an extended stay, are also without merit.

BACKGROUND

A. DTTC’s Registration With The Board And Receipt of Board Warning

On June 4, 2004, DTTC became registered with the Board. In submitting its

application for registration to the Board, DTTC acknowledged potential difficulty in providing

information required by Board requests because of restrictions imposed by Chinese law. See

DTTC Opposition to SEC’s Application, at 9 (Docket No. 23) (“DTTC Merits Opp.”);

Warden Decl. Exh. 3 (Docket No. 23-5 to 23-6). In response, the Board wrote to DTTC that

the Board’s approval of DTTC’s registration did not mean that the Board agreed with DTTC’s


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assertions about Chinese law. See SEC Merits Reply, at 19 n.11 (Docket No. 38); Declaration

of Sarah Williams, Exh. A (Docket Nos. 38-8, 38-9). Also in 2004, the Board issued guidance

stating that an audit firm’s failure to cooperate with information requests could subject the

firm to disciplinary sanctions, regardless of whether the non-cooperation was caused by the

firm’s inability to obtain consents required under non-U.S. law. See SEC Merits Reply, at 19-

20 n.12; Williams Decl. Exh. B (Docket No. 38-10). Notwithstanding these warnings, DTTC

proceeded to take on audit engagements with companies whose securities are registered with

the SEC and traded on U.S. exchanges. In Longtop’s case, DTTC prepared and issued audit

reports filed by the company with the SEC as it raised hundreds of millions of dollars through

securities offerings. Declaration of Lisa Deitch ¶ 7-9 (Document 1-2) (“Deitch Decl.”).

B. This Action Seeks to Enforce the Subpoena1

In May 2007, Longtop publicly announced that DTTC had resigned as its auditor.

DTTC’s resignation letter, also made public, described numerous indicia of fraud at Longtop.

Deitch Decl. ¶¶11-13. The Commission promptly opened a formal investigation and, on May

27, 2011, served the Subpoena on DTTC. Service was effected by sending the subpoena to

DTTC’s U.S. counsel, who days before had confirmed to SEC staff that he was authorized and

willing to accept service of the Subpoena on DTTC’s behalf. Id. ¶ 17. On September 8, 2011,

the Commission initiated this action by filing Application for an Order to Show Cause and for

an Order Requiring Compliance With a Subpoena. On January 4, 2012, the Court issued the

1 The SEC has provided additional details about the Subpoena, the circumstances of its issuance, and the SEC’s prosecution of this enforcement action (including its request for a stay in the summer of 2012) in other briefing. See SEC’s Memorandum of Points and Authorities in Support of Application for Order to Show Cause and Order Requiring Compliance with A Subpoena, at 2-5 (Docket No. 1-1); Unopposed Motion for a Stay of this Action (Docket No. 29); Motion to Lift the Stay, at 2-5 (Docket No. 36).


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Order to Show Cause directing DTTC to show cause why it should not be ordered to

comply with the Subpoena. On April 11, 2012, DTTC filed a brief in response. See DTTC

Merits Opp.

By minute order on August 7, 2012, the Magistrate Judge granted the SEC’s unopposed

request for a six-month stay of the proceedings, to allow the SEC to continue the discussions it

was then having with the China Securities Regulatory Commission (“CSRC”). (Docket Nos.

27, 29). Through these negotiations, the SEC hoped to use international cooperative

mechanisms to facilitate production of the needed Longtop documents to the SEC; those

negotiations, if successful, could have significantly impacted the appropriate resolution of this

case. In connection with the stay, the Magistrate Judge also entered an additional order

denying without prejudice the SEC’s Application for enforcement of the Subpoena, and stating

that such denial “shall not impact any of the prior orders issued in this case” and the SEC

Application “may be re-filed at any time, including prior to January 18, 2013, if accompanied

by a motion to terminate the stay.” August 9, 2012 Order (Docket Nos. 32, 33).

As detailed in SEC declarations filed on December 3, 2012, the SEC’s efforts to reach

an arrangement with the CSRC concluded unsuccessfully. See Declarations of Alberto

Arevelo and Ethiopis Tafara (Docket Nos. 38-1 to 38-5). On December 3, having no other

option for obtaining the Longtop documents, the SEC moved to lift the stay (Docket No. 36)

and re-filed its Application for Order Requiring Compliance with Subpoena (Docket No. 37),

as the Court had previously instructed. Also on that date, consistent with the understanding

that this case would resume course upon the re-filing of its Application, the SEC completed

briefing on the merits of the Application by filing its Merits Reply Brief and supporting

declarations (Docket Nos. 38 through 38-10), which responded to DTTC’s April 2011 filing.


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C. The Administrative Proceedings

Also on December 3, 2012, the Commission instituted the Administrative Proceeding

against five China-based public accounting firms, including DTTC (the “respondents” or “audit

firms”). See Order Instituting Administrative Proceedings Pursuant to Rule 102(e)(1)(iii) of

the Commission’s Rules of Practice and Notice of Hearing, File No. 3-15116, Ex. 1 to

Kowalski Declaration (Docket No. 42-1) (“OIP”). This Administrative Proceeding was

subsequently consolidated with another, earlier-filed, SEC administrative proceeding involving

similar allegations against only DTTC.2 The OIP alleges that the Commission requested the

audit firms to provide audit workpapers and other materials prepared in connection with audit

work they had performed for various U.S. issuer-clients (with China-based operations), under

Section 106 of Sarbanes-Oxley, as amended by Section 929J of the Dodd-Frank Wall Street

Reform and Consumer Protection Act (“Section 106”). OIP ¶¶ 1-16. In response to these

requests, the audit firms informed the Commission that they would not produce the requested

documents because of asserted constraints under Chinese law. Id. ¶ 17. The OIP contends

that, based on this conduct, each respondent willfully refused to provide the requested

documents in violation of both the firm’s obligations under Section 106 and the Securities

Exchange Act of 1934 (“Exchange Act”). Id. ¶¶ 19-32; Sarbanes-Oxley Section 3(b)(1), 15

U.S.C. 7202(b)(1).3

2 See Second Corrected OIP for DTTC Proceeding, Ex. 1 to Mot. to Consolidate, Ex. 2 to Kowalski Declaration (Document 42-3). 3 Section 106(b) of Sarbanes-Oxley directs a foreign public accounting firm that performs audit work to “produce the audit workpapers of the foreign public accounting firm and all other documents of the firm related to any such audit work” to the Commission upon request. 15 U.S.C. § 7216(b)(1); OIP ¶ 19. Section 106(e) of Sarbanes-Oxley provides, in pertinent part, “A willful refusal to comply, in whole or in part, with any request by the Commission . . . under this section, shall be deemed a violation of this Act.” 15 U.S.C. § 7216(e).


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The OIP directs that the Administrative Proceeding “be brought pursuant to Rule

102(e)(1)(iii) of the Commission’s Rules of Practice to determine whether respondents should

be censured or denied the privilege of appearing and practicing before the Commission for

having willfully violated Section 106 of Sarbanes-Oxley.” OIP ¶ 32.4 The OIP does not seek

the production of any documents relating to any of the relevant requests from any of the audit

firms. None of the issuer-clients that relate to the audit firms’ underlying conduct is Longtop.

D. Timeframe for Resolution of the Administrative Proceeding

Under the OIP and the Commission’s rules, the Hearing Officer is required to issue an

initial decision in the Administrative Proceeding in October 2013, assuming the OIP has been

properly served on respondents. See OIP (directing Hearing Officer to issue an initial decision

no later than 300 days from the date of service of the OIP).5 The rules permit the SEC’s Chief

Administrative Law Judge to ask the Commission for an extension of time in which the initial

decision may be issued. See Rule 360(a)(3); 17 C.F.R. § 201.360(a)(3). Any party to the

proceeding may file a petition for review of the initial decision with the Commission. See Rule

410 (a), 17 C.F.R. § 201.410(a).

4 Rule 102(e) is captioned “Suspension and disbarment” and provides, in pertinent part, “The Commission may censure a person or deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found . . . to have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and regulations thereunder.” Rule 102(e)(1)(iii), 17 C.F.R. § 201.102(e)(1)(iii). The current Rule 102(e) was codified by Congress as part of the Sarbanes-Oxley Act, at the same time that it passed Section 106. 15 U.S.C. § 78d-3. 5 At a prehearing conference held January 9, 2013 in the Administrative Proceeding, the Hearing Officer noted the respondents’ objection that they had not been properly served with the OIP, and he indicated that resolution of that objection would affect the due date for his initial decision. Thus, it is possible that the Hearing Officer will decide that the deadline for his initial decision is later than October 2013.


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E. The Magistrate Judge’s Denial Of DTTC’s Motion To Extend The Stay

In response to the SEC’s December 3, 2012 motion to lift the stay, DTTC opposed the

motion and separately moved to extend the stay, for reasons wholly unrelated to why the

Magistrate Judge granted the stay in the first place. DTTC urged the Court to further delay this

proceeding in light of the ongoing Administrative Proceeding. On January 29, 2013, the

Magistrate Judge held a hearing on the parties’ competing motions on the stay issue. The

March 4 Order granted the SEC’s motion, denied DTTC’s motion to extend the stay, and set a

hearing on the merits of the SEC’s Application for March 13, 2013. On March 6, 2013, DTTC

filed an Emergency Motion For Continuance of March 13, 2013 Hearing (Docket No. 50)

(“DTTC Continuance Motion”) on grounds, among others, that the March 4 Order did not

provide DTTC “with an appropriate opportunity for limited discovery or to respond to the

SEC’s newly filed brief and voluminous declarations” (id. at 6). However, DTTC failed in that

motion to identify what discovery it sought or why it was justified. 6 DTTC did not seek leave

to file a sur-reply to the SEC’s filing made three months earlier, on December 3, 2012.

The Magistrate Judge denied DTTC’s Continuance Motion and held the merits hearing

as planned. The Magistrate Judge’s decision on the merits is now pending.

ARGUMENT

Federal Rule of Civil Procedure 72(a) provides that the District Court “must consider

timely objections” to a magistrate judge’s order on non-dispositive matters and “modify or set

6 DTTC did not purport to identify the areas of discovery that it believes it needs until its March 11, 2013 Reply in support of its Continuance Motion (Document 52). As explained below, infra Argument Section B.3, the discovery topics that DTTC belatedly described – the which are the same as the topics listed in DTTC’s present Objections – are not justified by any special circumstance, nor are they necessary for this Court to rule on the merits of the SEC’s Application.


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aside any part of the order that is clearly erroneous or is contrary to law.” See also Local Civ.

R. 72.2(c); Am. Ctr. for Civil Justice v. Ambush, 794 F. Supp. 2d 123, 129 (D.D.C. 2011).

“The clearly erroneous standard applies to factual findings and discretionary decisions.” Am

Ctr., 794 F. Supp. 2d at 129 (internal quotations omitted). Because DTTC objects to the

Magistrate Judge’s non-dispositive decisions to lift the stay, and to hold a motions hearing

without first permitting discovery or further briefing, Rule 72(a)’s standard of review applies.

A. The Magistrate Judge’s Decision To Deny DTTC’s Requested Stay Was Neither Contrary To Law Nor Clearly Erroneous

The Magistrate Judge’s exercise of her discretion to deny DTTC’s requested stay was

neither contrary to law nor clearly erroneous. As the March 4 Order correctly stated – and

DTTC nowhere disputes – “[a] district court has ‘broad discretion’ in determining whether to

stay proceedings.” March 4 Order at 4 (quoting Clinton v. Jones, 520 U.S. 681, 706 (1997)).

“‘The power to stay proceedings is incidental to the power inherent in every court to control

the disposition of the causes on its docket with economy of time and effort for itself, for

counsel, and for litigants.’” March 4 Order at 4 (quoting Landis v. N. Am. Co., 299 U.S. 248,

254 (1936)). “The court must, in an ‘exercise of judgment,’ ‘weigh competing interests and

maintain an even balance.’” March 4 Order at 4 (quoting Landis, 299 U.S. at 254-55).

“The party requesting a stay ‘bears the burden of establishing its need.’” March 4

Order at 4 (quoting Clinton, 520 U.S. at 708). “‘In cases of extraordinary public moment, the

individual may be required to submit to delay not immoderate in extent and not oppressive in

its consequences if the public welfare or convenience will thereby by promoted,’” March 4

Order at 4 (quoting Landis, 299 U.S. at 256), “and ‘the scope of the stay and the reasons for its

issuance determine whether a stay is immoderate,’” March 4 Order at 4-5 (quoting Belize Soc.,

668 F.3d at 732).


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1. The Absence Of Any Pressing Need For A Stay Merits Its Rejection

Although DTTC challenges the Magistrate Judge’s assessment of potential judicial

efficiencies to be obtained from a stay, the Court can and should uphold the denial of the stay

without even considering this factor. That is because DTTC improperly seeks a stay that

would last indefinitely without identifying a “pressing need” for such a stay as required under

this Circuit’s precedents. Even “in cases of extraordinary public moment,” a delay imposed on

a plaintiff must be “not immoderate in extent and not oppressive in its consequences.” Landis,

299 U.S. at 256. As the D.C. Circuit recently recognized, “a court abuses its discretion in

ordering a stay ‘of indefinite duration in the absence of a pressing need.’” Belize Soc., 668

F.3d at 731-32 (quoting Landis, 299 U.S. at 255)); see also Cherokee Nation of Okla. v. United

States, 124 F.3d 1413, 1416 (Fed. Cir. 1997); (“In deciding to stay proceedings indefinitely, a

trial court must first identify a pressing need for the stay.”)

Here, DTTC’s proposed stay is indefinite because it would have no clear ending point;

it would last pending “resolution” of Administrative Proceeding. Objections at 18. This could

take years. After the ALJ renders an initial decision in the Administrative Proceeding, any

party can appeal to the full Commission, and from there to the D.C. Circuit. See DTTC’s

Opposition To Motion To Lift The Stay, at 12 (Docket No. 42) (“DTTC Stay Br.”) (seeking

stay for duration of Administrative Proceeding “subject to review by the full Commission and

subsequently by the D.C. Circuit”). Meanwhile, in its brief to the Magistrate Judge, the only

asserted hardship claimed by DTTC in moving forward with this proceeding was the need to

litigate this action and the Administrative Proceeding simultaneously, while the other four

respondent firms in the Administrative Proceeding do not have subpoena enforcement actions

pending against them. See DTTC Stay Br. at 17. The Magistrate Judge correctly found that

DTTC failed to identify a “pressing need” that warrants a stay of any “prolonged duration.”


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March 4 Order at 10. Given this failure, DTTC’s request for an indefinite stay is plainly

“immoderate” and “oppressive,” and must be rejected irrespective of DTTC’s claimed judicial

efficiencies that a stay allegedly would bestow. See Landis, 299 U.S. at 256-58; Clinton, 520

U.S. at 707; Cherokee Nation, 124 F.3d at 1416-17; Dellinger v. Mitchell, 442 F.2d 782, 786

(D.C. Cir. 1971) (rejecting stay that would “persist[] until completion of all appellate and

remand proceedings”); United States v. Philip Morris USA Inc., 841 F. Supp. 2d 139, 141

(D.D.C. 2012) (Kessler, J.) (rejecting stay pending another case that would “take at least one or

more years to get resolved” and further review that was “lengthy and indefinite”).7

2. The Balance Of Interests Also Merits Rejection Of The Requested Stay

Regardless of the length of the stay sought by DTTC, the balance of interests merits

rejection of the stay. Under Supreme Court precedent, “the suppliant for a stay must make out

a clear case of hardship or inequity in being required to go forward if there is even a fair

possibility that the stay for which he prays would work damage to some one else.” Landis,

299 U.S. at 255 (emphasis added). Here, an additional stay would work obvious damage to the

SEC and investors by further stalling the now 20-month-old Longtop investigation.

DTTC’s statement, that “[t]here is no reason for haste in pushing ahead here,” could not

be more wrong. (Objections at 2). “If the SEC suspects that a company has violated the

7 DTTC here seeks – as it did its earlier briefs to the Magistrate Judge – a stay pending resolution of the Administrative Proceeding. However, during the January 29, 2013 hearing, DTTC limited its request to a stay pending determination only by the ALJ. March 4 Order at 8-9. But the Magistrate Judge correctly found that even DTTC’s more limited request was unjustified, as the proceedings before the ALJ would take many months and did “not have an ascertainable end date.” March 4 Order at 9; see also Belize Soc., 668 F.3d at 732 (district court exceeded proper exercise of discretion in staying case pending consideration of another case by its current tribunal). In any event, DTTC now appears to have reverted to its original gambit for a stay pending all appeals of the Administrative Proceeding, which must be rejected under Landis and this Circuit’s case law.


13

securities laws, it must be able to respond quickly: it must be able to obtain relevant

information concerning the alleged violation and to seek prompt judicial redress if necessary.”

SEC v. Dresser Indus., Inc., 628 F.2d 1368, 1377 (D.C. Cir. 1980) (en banc); see also Clinton,

520 U.S. at 707-08 (rejecting stay where “delaying trial would increase the danger of prejudice

resulting from the loss of evidence, including the inability of witnesses to recall specific facts,

or the possible death of a party.”). But a stay of this proceeding would virtually guarantee that

the SEC does not obtain documents that are critical to its ongoing Longtop investigation within

any reasonable timeframe. The Longtop investigation involves an apparently massive fraud at

a company that raised hundreds of millions of dollars from U.S. investors. See Deitch Decl. ¶¶

7-9, 12-13. The documents sought by the Subpoena are important because they may reveal

information as to DTTC’s discovery of false financial records at Longtop, and how any fraud

schemes at Longtop were able to continue for years undetected. Id. ¶ 26.

Any suggestion that the SEC is now somehow estopped from seeking prompt access to

the Longtop documents, because the SEC earlier sought a stay to facilitate negotiations with

Chinese regulators, is meritless. (Objections 1-2). Far from being motivated by delay, the

SEC sought the earlier stay in an effort to expedite the production of the Longtop documents.

Indeed, DTTC supported the stay for this purpose. See 8/7/12 Tr. at 5:5-8 (Docket No. 31)

(“We do . . . support this six-month stay. It’s important that the SEC and the CSRC have an

opportunity to negotiate the resolution, the ‘CSRC’ being the China Securities Regulatory

Commission.”). Unfortunately, those efforts concluded unsuccessfully. That does not mean,

however, that the SEC and investors now should be penalized by a stay that would freeze

efforts to advance the Longtop investigation through Subpoena enforcement.


14

DTTC’s suggestion that it would refuse to abide by this Court’s order requiring

compliance with the Subpoena (Objections at 14 n.6), also must be rejected as a reason for an

additional stay. Adoption of DTTC’s logic would perversely reward DTTC for its own

contumacious conduct. And whatever DTTC may now say about its present intentions to

produce documents, circumstances could change depending on how the Court rules on the

SEC’s Application. Chinese regulators that allegedly have instructed DTTC not to produce

documents directly to the SEC conceivably could modify this alleged instruction. See In re

Grand Jury Proceedings the Bank of N.S., 740 F.2d 817, 821 (11th Cir. 1984) (although bank

moved to quash subpoena based on assertion that compliance would violate Bahamian secrecy

laws, following compliance order but before sanctions took effect, Attorney General of

Bahamas issued order allowing bank to produce requested documents). Or, alternatively,

DTTC might change its professed assessment of possible penalties under Chinese law and

produce the documents regardless of what the China regulators have said. In short,

notwithstanding DTTC’s current stance toward the Subpoena, there remains a “fair possibility”

that a stay “would work damage to” the SEC and investors, by dramatically lowering the odds

that that the SEC will ever get the Longtop documents.

Finally, as noted, DTTC cannot claim any serious hardship or inequity in going forward

with this proceeding. See March 4 Order at 10. “[B]eing required to defend a suit if a stay is

vacated . . . does not constitute a clear case of hardship or inequity within the meaning of


15

Landis.” Dependable Highway Exp., Inc. v. Navigators Ins. Co., 498 F.3d 1059, 1066 (9th Cir.

2007) (internal quotation omitted).8 DTTC is not being treated unfairly compared to the other

respondent audit firms in the Administrative Proceeding, because, among other reasons, DTTC

can point to no comparable circumstances in which another China-based firm’s U.S. counsel

agreed to accept service of an administrative subpoena. Moreover, this action does not unfairly

prejudice DTTC. This action involves a different investigation and different documents, and

seeks quite different relief than the Administrative Proceeding under different legal standards.

Whatever “profession-wide” resolution the Administrative Proceeding obtains, it will not result

in a production of the Longtop documents.9

3. The Magistrate Judge’s Assessment Of Potential Judicial Efficiency Was Not Contrary To Law Or Clearly Erroneous

DTTC argues that because the Magistrate Judge allegedly “misappl[ied] . . . the legal

standard that governs subpoena enforcement actions in which the recipient would be required

to violate foreign law,” she allegedly erred in examining “the nature and scope of overlap

between this action” and the Administrative Proceeding. (Objections at 12). However, the

8 DTTC’s contention that the Magistrate Judge improperly assessed “the balance of interests between the parties” based on an improper legal standard is a non-sequitur. (Objections at 12). To the extent the Magistrate Judge misstated the legal standard (which she did not), this could only cause “hardship” to DTTC by requiring it to produce documents; this is a merits point and has nothing to do with whether the Magistrate Judge properly denied the stay. 9 Case precedents involving parallel civil and criminal proceedings further reinforce the inadequacy of DTTC’s complaint here about being required to litigate in two forums. “In the absence of substantial prejudice to the rights of the parties involved, such parallel proceedings are unobjectionable under our jurisprudence.” Dresser, 628 F.2d at 1374; see also Gordon v. FDIC, 427 F.2d 578, 580 (D.C. Cir. 1970) (“It would stultify enforcement of federal law to require a governmental (regulatory) agency invariably to choose either to forgo recommendation of criminal prosecution once it seeks civil relief, or to defer civil proceedings pending the ultimate outcome of a criminal trial.” (quoting United States v. Kordel, 397 U.S. 1 (1970)). A continued stay of this subpoena proceeding would “stultify enforcement” of the securities laws by the SEC, by unduly narrowing its options for seeking different relief in different forums.


16

Magistrate Judge did not misstate the legal standard. The March 4 Order (at 5-6) stated, in

relevant part, “This court has a limited role in a proceeding to enforce an administrative

subpoena: ‘it is sufficient if the inquiry is within the authority of the agency, the demand is not

too indefinite and the information sought is reasonably relevant.’” (quoting Texaco, 555 F.2d

at 871-72 (quoting United States v. Morton Salt Co., 338 U.S. 632 (1950))); see also March 4

Order at 6 (“the scope of issues which may be litigated in an enforcement proceeding must be

narrow. . .”). These statements were wholly consistent with seven decades of judicial

precedent, much of which the Magistrate Judge cited in her ruling. See March 4 Order at 6

(citing authorities); see also Okla. Press Publ’g Co. v. Walling, 327 U.S. 186, 209 (1946);

Endicott Johnson, 317 U.S. at 509.

DTTC contends that the Magistrate erred by not also referencing various factors, some

drawn from the Restatement on Foreign Relations Law, that prior courts have considered in

determining whether to require the production of documents from a foreign jurisdiction that

allegedly restricted such production (“foreign law factors”). This contention fails. The

Magistrate Judge concluded that the legal questions raised in the Administrative Proceeding

were “not material to this court’s determination of whether another document request [i.e., the

Subpoena], invoking different statutory authority, is enforceable.” March 4 Order at 8. The

presence or absence of foreign-law factors was irrelevant to this conclusion. First, this

subpoena enforcement action indisputably does not raise the question whether Respondent’s

conduct constitutes, or could constitute, a “willful refusal” to comply with a document request

under Section 106 of Sarbanes-Oxley. Second, even assuming for the sake of argument that

the “willful refusal” issue could be analogized to the questions this Court must decide in this

case, as the Magistrate Judge correctly found, the “willful refusal” issue could not be


17

“pertinent” at this stage of the action where this Court has not yet ordered compliance with the

Subpoena. March 4 Order at 7-8. Third, the ALJ in the Administrative Proceeding

indisputably will not consider the validity or enforceability of any subpoena issued under the

Commission’s authority provided at 15 U.S.C. § 77s(c) or § 78u(b), as this Court may do in

this case. Fourth, the two proceedings seek very different forms of relief, reflecting different

regulatory objectives. It cannot be disputed that, “[i]n this matter, Petitioner seeks to compel

compliance with a subpoena in order to obtain documents, whereas in the administrative

proceeding, Petitioner contemplates disciplinary sanctions.” March 4 Order at 8.10

Finally, any alleged “overlap” among the issues to be resolved in the proceedings is

speculative at best. There is no predicate fact or issue of law that must be decided in the

Administrative Proceeding, in order for this Court to issue a merits ruling on the SEC’s

Application. Nor does DTTC contend that the Commission has any exclusive expertise on the

issues raised here – indeed, DTTC argues in the Administrative Proceeding that the SEC’s

claims there first should be heard in federal court. See Objections at 7. More fatal still, the

foreign law factors that DTTC contends are important to this Court’s inquiry are irrelevant to

the ALJ’s analysis of whether the audit firms conduct amounts to a “willful refusal” under

Section 106 of Sarbanes-Oxley. The ALJ’s analysis will require only the narrow

10 If this Court were to find DTTC in contempt, the Court could consider imposing a daily fine on DTTC to encourage future compliance. See Bank of N.S., 740 F.2d at 820. By contrast, the SEC instituted the Administrative Proceeding “essentially to protect the integrity of its own processes.” Touche Ross & Co. v. SEC, 609 F.2d 570, 581 (2d Cir. 1979). In that Proceeding, the purpose of any remedial relief would be “not to punish, but to protect the public from future” improper conduct by professionals who practice before the Commission. Rubin, Release No. 295, 2005 WL 2180440, at *19 (RGM Sept. 8, 2005) (Initial Decision) (citing McCurdy v. SEC, 396 F.3d 1258,1264 (D.C. Cir. 2005); Johnson v. SEC, 87 F.3d 484, 490 (D.C. Cir. 1996)). Thus, the ALJ would consider factors relevant to whether respondents should be censured or barred from appearing and practicing before the Commission.


18

determination of whether the audit firms were cognizant of their refusal to produce the

requested documents. The limited nature of this inquiry is compelled by the fact that “willful”

means “knowing,” as courts and the Commission repeatedly have defined the term under the

securities laws. See, e.g., Mathis v. SEC, 671 F.3d 210, 217 (2d Cir. 2012) (concluding

“willfully” as used in Exchange Act “means intentionally committing the act which constitutes

the violation” (internal quotation omitted)); Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir.

2000) (same).

Thus, contrary to DTTC’s contentions here, the straightforward willfulness inquiry will

not require the ALJ to consider the alleged restrictions on production imposed by Chinese law

or any of the other foreign law factors – or, for that matter, whether the audit firms have acted

in good faith in failing to produce the requested documents, despite having consciously availed

themselves of U.S. markets. The Division of Enforcement made this point clear in a recent

filing in the Administrative Proceeding.11 While DTTC apparently contests this view, the

scope of the “willful refusal” issue under Sarbanes-Oxley is a question of first impression for

the Commission. It is highly speculative to assume that the ALJ will reject the Division’s

position and undertake to address the much broader “enforceability” question as formulated by

DTTC. And regardless of the ALJ’s decision on this point, either party might appeal such

decision to the full Commission and, after that, to the D.C. Circuit. Given what may well be

years of additional uncertainty on the “willful refusal” issue – and, hence, on the extent of any

11 See Division of Enforcement’s Consolidated Opposition To Respondents’ Motions For Summary Disposition As To Certain Threshold Issues, at 3, In the Matter of BDO China Dahua CPA Co., Ltd., SEC Admin. Proc. File Nos. 3-14872, 3-15116 (filed Feb. 22, 2013) (“[I]f and when [the willful refusal] question is addressed, it will require only the narrow determination of whether Respondents were in fact cognizant of their refusal to produce the requested documents.”).


19

alleged “overlap” between this action and the Administrative Proceeding – the Magistrate

Judge’s denial of the stay is not contrary to law or clearly erroneous. There is no compelling

reason to unwind that ruling and inject into this proceeding the further delay that DTTC seeks.

B. The Magistrate Judge Did Not Err By Holding A Motions Hearing On March 13, 2013

Although DTTC objects to the Magistrate Judge’s decision to hold a motions hearing

on the merits of the SEC’s Application on March 13, 2013, without first allowing DTTC

“limited discovery, supplemental declarations and briefing, and an opportunity to request an

evidentiary hearing” (Objections at 14), these objections are now moot. DTTC already

presented these same arguments to the Magistrate Judge in its Continuance Motion, which the

Magistrate Judge denied in a minute order. Thereafter the Magistrate Judge held the motions

hearing as planned, during which the parties presented extensive argument on the merits of the

Application. At this juncture, there is no reason to create further delay by halting the

Magistrate Judge’s consideration of this case.

In any event, the Magistrate Judge’s decision to move forward with the motions hearing

was not contrary to law or clearly erroneous. Because this decision was discretionary in

nature, the “clearly erroneous” standard applies. See Am. Ctr., 794 F. Supp. 2d at 129. “Under

that deferential standard, a magistrate judge’s . . . discretionary decisions must be affirmed

unless, ‘although there is evidence to support them, the reviewing court on the entire evidence

is left with the definite and firm conviction that a mistake has been committed.’” Id. (quoting

Federal Savs. & Loan Ins. Corp. v. Commonwealth Land Title Ins. Co., 130 F.R.D. 507, 508

(D.D.C. 1990)). DTTC’s objections cannot be sustained under this standard.


20

1. This Subpoena-Enforcement Action Is A Summary One

Although DTTC faults the Magistrate Judge for characterizing this proceeding as

“summary” (Objections at 3, 18), the Magistrate Judge was exactly correct. It is well-

established that subpoena-enforcement actions commenced by application, such as this one, are

summary in nature and must be “conducted in a prompt and simple manner.” U.S. v. Hubbard,

650 F.2d 293, 310-11 n. 66 (D.C. Cir. 1980) (internal quotation omitted); SEC v. Sprecher, 594

F.2d 317, 320 (2d Cir. 1979) (holding that SEC could enforce investigatory subpoenas in

summary proceedings “upon application” to a district court). As the Supreme Court has

recognized, “[t]he very purpose of summary” proceedings is to avoid procedures required for

full-blown litigation; summary proceedings “may be conducted without formal pleadings, on

short notice, without summons and complaints, generally on affidavits, and sometimes even ex

parte.” New Hampshire Fire Ins. Co. v. Scanlon, 362 U.S. 404, 406 (1960)); SEC v.

McCarthy, 322 F.3d 650, 655 (9th Cir. 2003) (same). Thus, “[d]epending on the circumstances

of the case, [an] adversary proceeding [for enforcement of administrative subpoena] may take

the form of an evidentiary hearing, oral arguments without the taking of evidence, or, as is

doubtless the appropriate course in many applications for enforcement orders, consideration

based on the papers submitted by the parties to the court.” FTC v. Atl. Richfield Co., 567 F.2d

96, 106 n. 22 (D.C. Cir. 1977) (emphasis added). It was well within the discretion of the


21

Magistrate Judge to hold a motions hearing on the SEC’s Application under these precedents.12

2. DTTC Voluntarily Chose Not To Seek Leave To File A Sur-reply

Any argument by DTTC that it was denied an opportunity to file an additional brief in

response the SEC’s December 3, 2012 filing is meritless. DTTC had over three months in

which to prepare a sur-reply to this filing, and it could have sought leave to submit such a sur-

reply promptly after the Court’s March 4 Order. The same is true of any additional expert

declarations it wished to submit. DTTC declined to take these steps. DTTC’s statement to the

Magistrate Judge that it planned to file an additional merits brief at some future time did not

justify a continuance of the motions hearing, where it already had ample opportunity to file

such a brief.

3. DTTC Has Not Identified A “Special Circumstance” Justifying Discovery

DTTC’s stated desire to take discovery similarly did not justify further delay of the

motions hearing. “Because subpoena enforcement proceedings are generally summary in

nature and must be expedited, discovery is not usually permitted.” SEC v. Lavin, 111 F.3d 921,

926 (D.C. Cir. 1997); see also Dresser, 628 F.2d at 1388 (noting that “district courts must be

cautious in granting such discovery rights, lest they transform subpoena enforcement

12 DTTC’s selective quotation from United States v. McCarthy, 514 F.2d 368, 373 (3d Cir. 1975), in purported support for the contention that “an evidentiary hearing ordinarily ‘will be required’” in the circumstances of this case, is unavailing. (Objections at 15). Unlike this proceeding which was commenced by the SEC’s filing of an application, United States v. McCarthy involved the very different context of enforcement of an IRS summons, in which the Federal Rules of Civil Procedure presumptively apply. See 514 F.2d at 372 & n.4; contrast Sprecher, 594 F.2d at 320 (concluding federal rules do not apply to summary proceedings to enforce SEC subpoenas). Moreover, even in the context of an IRS summons, the court made clear that “not every summons enforcement proceeding will require an evidentiary hearing” and certain “matter[s] can be decided on the pleadings.” Id. at 373. Nothing in United States v. McCarthy demonstrates that the Magistrate Judge has erred by not scheduling an evidentiary hearing to date in this case.


22

proceedings into exhaustive inquisitions into the practices of the regulatory agencies”). The

Commission recognizes that, in such proceedings, “when the circumstances indicate that

further information is necessary for the courts to discharge their duty, discovery may be

available.” Lavin, 111 F.3d at 926 (internal quotation omitted). Here, however, DTTC points

to no such special circumstance.

In its April 2011 Merits Opposition, DTTC argued that it should not be forced to

comply with the Subpoena because, it claimed, the SEC has alternative means to obtain the

subpoenaed documents. See DTTC Merits Opp. at 37-38. DTTC also contended that it was

entitled to discovery regarding any requests by the SEC to the CSRC for access to the Longtop

workpapers. See id.at 13 n.9. But in its December 3, 2012 filing, the Commission submitted

two declarations from the SEC’s Office of International Affairs (“OIA”), totaling 30 pages,

that provided numerous details about the SEC’s requests for assistance to the CSRC regarding

audit workpapers (including the Longtop workpapers) and other documents over the prior

several years. (Docket Nos. 38-1 through 38-5). These declarations unequivocally established

that the Commission had not obtained the Longtop workpapers through alternative means, and

that it presently does not have those documents.

These declarations comprehensively addressed the purported factual issues that DTTC

raised in its Merits Opposition – whether the SEC had tried to obtain or could obtain the audit

workpapers through international sharing mechanisms – and obviated any purported need for

DTTC to take discovery in this summary proceeding. Nevertheless, in the spirit of

compromise, the SEC stated in a footnote of its December 3, 2012 Merits Reply (Docket No.

38), in relevant part:

DTTC purports to identify topics on which discovery is allegedly needed here. In light of the facts set forth in these declarations, we respectfully


23

submit that DTTC’s discovery requests are, for the most part, moot. However, to the extent DTTC has specific requests for further information, the SEC will make good-faith efforts to consider them in advance of any hearing ordered by the Court on the present briefs.

SEC Merits Reply at 13 n. 4. But in the three-plus months after the SEC made this overture,

DTTC did not make any specific requests for further information in this proceeding. Thus,

there was nothing for the SEC to consider. Tellingly, even in its March 6, 2013 Continuance

Motion, DTTC failed to identify what, if any, discovery it needed, much less explain, as

required, how such unidentified information was necessary for the Court to “discharge its

duty,” Lavin, 111 F.3d at 926. Only in its reply brief in support of its Continuance Motion and

in its present objections, both filed on March 11, 2013 – two days before scheduled motions

hearing – did DTTC purport to identify supposedly necessary discovery. Then as now,

DTTC’s belated efforts fall far short of its required showing.

a. DTTC’s Proposed Expert Discovery Is Unnecessary

The SEC’s December 3, 2012 submission of Professor Clarke’s declaration addressing

certain contentions of DTTC’s supposed experts with respect to Chinese law was neither “late-

breaking” nor inconsistent with the SEC’s statements in this proceeding or the Administrative

Proceeding. (Objections at 16-17).13 DTTC does not specify the additional information that it

13 Professor Clarke opined: (1) that the Chinese-law provisions cited by DTTC did not require DTTC to notify and receive pre-approval from the CSRC or China’s Ministry of Finance upon receipt of the Subpoena and prior to producing the requested documents to the SEC; and (2) DTTC could not be subject to criminal liability under Chinese law relating to archives for producing Longtop audit workpapers that do not contain state secrets. Declaration of Donald Clarke ¶¶ 8, 9. Neither opinion is inconsistent with the SEC’s acknowledgement in its Reply Brief that (i) “the CSRC may now take the position that at direct production of workpapers by DTTC to the SEC would contravene the CSRC’s instruction to DTTC, after DTTC voluntarily consulted with the CSRC regarding its obligations under the Subpoena,” and (ii) given the course of events, the Chinese government now “could take some form of punitive action against DTTC if it chose to comply with the Subpoena.” SEC Merits Reply at 15-16 (emphasis added).


24

allegedly needs from Professor Clarke. Furthermore, because the Court can enforce the

Subpoena without even addressing the different views on Chinese law contained in the

declarations,14 and because any determination of Chinese law by the Court “must be treated as

a ruling on a question of law,” Fed. R. Civ. P. 44.1, it is not “necessary” for DTTC to conduct

discovery regarding Professor Clarke’s opinions, or to make “additional evidentiary

submissions.”

b. The SEC-CSRC Correspondence Can Provide DTTC With No Basis For Resisting Enforcement Of The Subpoena

The December 3, 2012, declarations submitted by the SEC’s OIA include the following

dispositive facts: (1) the Commission has asked the CSRC to assist in providing the Longtop

workpapers to the Commission, and (2) as of now, the Commission has not received them.

Declaration of Alberto Arevalo ¶¶54-56, 62-64 (Docket No. 38-5) (“Arevalo Decl.”). DTTC

does not dispute these facts. For this reason alone, discovery surrounding these facts is

unnecessary. Further, any efforts by DTTC to gather additional information about relations

between the SEC and the CSRC (or any other foreign regulator) cannot change these

14 As the SEC explained during the March 13, 2013 hearing, the Court can and should order DTTC to comply with the Subpoena regardless of what DTTC contends are the prohibitions imposed by Chinese law, because, among other reasons: (1) the United States’ interest in enforcing the securities laws clearly outweighs China’s interest in secrecy; (2) at present, the SEC has no alternative means for obtaining all of the documents sought by the Subpoena; (3) DTTC, having availed itself of U.S. markets with full knowledge of U.S. rules requiring that it respond to information requests, cannot show that it has acted in good faith in relying on asserted Chinese law prohibitions; and (4) DTTC indisputably has not shown that any of the requested documents in fact contain state secrets protected from disclosure under Chinese law. See also SEC Merits Reply at 16-24 (discussing balancing of Restatement factors); SEC’s Initial Merits Brief, at 14-22 (same) (Document 1-1). That said, DTTC’s claims about Chinese law are exaggerated and speculative. The CSRC has not issued a written “directive” to DTTC specifically requiring CSRC approval before DTTC produces documents to the SEC, and it is not at all clear that sanctions, if any, that might be imposed on DTTC for producing documents would be “severe.” See SEC Merits Reply at 14-16 & notes 6-8


25

undisputed facts, or that the CSRC to date has failed to provide any meaningful assistance with

respect to audit workpapers generally. See id. ¶¶4, 56, 59, 64.

Nevertheless, DTTC now argues that it should be permitted to review correspondence

between the SEC and the CSRC referenced in the OIA declarations, on the alleged ground that

such correspondence “could be highly relevant to the ‘competing interests’ of China and the

United States that are a factor under the multi-factor balancing test that must be applied in this

proceeding.” (Objections at 17). But there is no reason to expect that any of this

correspondence will shed light on, let alone establish, China’s alleged “competing interest” in

prohibiting DTTC from producing the Longtop audit workpapers, ostensibly to protect “state

secrets” or “archives.” The OIA declarations do not address this issue at all; rather, they

address the CSRC’s inability or unwillingness to produce the desired documents – without

reference to restrictions, if any, that may be imposed on direct production by an audit firm.

The other “competing interest” at stake is the interest of the SEC and investors in advancing

the Longtop investigation, but DTTC already has conceded the legitimacy of this interest. See

DTTC Opp. at 35 (“DTTC does not dispute that the SEC has an interest in obtaining the

subpoenaed documents in connection with its investigations.”). DTTC’s failure to identify any

factual issues that materially could affect this Court’s merits determination wholly undermines

its request for discovery of the SEC-CSRC correspondence.15

c. Discovery Of The Reasons For The SEC’s Failed Negotiations With The CSRC Also Cannot Provide A Basis For Resisting Enforcement Of The Subpoena

15 In addition, some or all of the SEC-CSRC correspondence is confidential and subject to privileges, including the law enforcement investigatory privilege and a privilege concerning international communications between foreign regulators pursuant to a memorandum of understanding. See Sections 24(d) and (f) of the Exchange Act, 15 U.S.C. §§ 78x(d), (f).


26

DTTC argues that it should be permitted to discover the “terms and conditions” on

which the CSRC purported to offer to produce the Longtop workpapers. (Objections at 17).

But any such discovery cannot alter the dispositive and undisputed fact that the CSRC to date

has not provided the SEC with the requested documents. In any event, the OIA declarations

more than sufficiently describe these terms and conditions. As these declarations explain, the

CSRC’s position changed significantly over time, but at various points the CSRC indicated that

it would deliver some of the requested information subject to the following caveats, among

others: (1) the SEC would have to agree to a “Letter of Consent” that would preclude the SEC

from using the information in any legal action or for any related purpose, without the CSRC’s

advance written authorization; (2) the CSRC would produce only an unspecified portion of the

requested documents; and (3) the CSRC would exercise its own judgment as to which

documents were relevant to the SEC’s investigations. Arevalo Decl. ¶¶37, 62; see also

Declaration of Ethiopis Tafara ¶19. These and other conditions were plainly unacceptable to

the SEC. Arevalo Decl. ¶¶39-41. Not only would these conditions have precluded the SEC

from reviewing all potentially relevant documents, but they were contrary to international

protocols to which both the United States and China were signatories, id. ¶40, and risked

rendering the documents useless for their primary intended purpose – i.e., for use in an SEC

enforcement action. Discovery designed to second-guess the SEC’s judgment on these issues

is plainly unnecessary for the Court to discharge its duty on whether the Subpoena to DTTC

should be enforced.

4. The Magistrate Judge Provided DTTC With An Opportunity To Request An Evidentiary Hearing

Although DTTC appears to contend that it was denied an opportunity to request an

evidentiary hearing, this is incorrect. DTTC was provided such an opportunity at the March


27

13, 2013 motions hearing. Indeed, DTTC could have asked to present witnesses at that very

hearing, but it did not do so.16 In any event, the Magistrate Judge committed no error by

holding the motions hearing on the merits, without also expressly scheduling an evidentiary

hearing. See N.H. Fire Ins, 362 U.S. at 406; Atl. Richfield, 567 F.2d at 106 n. 22.

5. The Parties Should Not Be Required To Re-Brief The Case To The Magistrate Judge

Although DTTC repeats its contention from its earlier briefs that the SEC’s filing of its

merits reply brief with supporting declarations on December 3, 2012 was “procedurally

improper” (Objections at 3), this contention is without merit. So too is DTTC’s assertion that

the SEC’s re-filing of its Application on the same date triggered an opportunity for DTTC to

re-brief the case. (Objections at 6-7 n.3). The Magistrate Judge properly ignored these

arguments, which directly contradicted the Court’s prior orders and discussion with the parties

and defied common sense. The Magistrate Judge’s determination during the January 29, 2012

hearing (addressing the stay issue) that the SEC’s Application had been “fully briefed” was

correct. See 1/29/13 Tr. at 2:8-16 (Docket No. 48). 17

When the Magistrate Judge granted the SEC’s unopposed motion for a stay during the

August 7, 2012, hearing, the Court indicated – and DTTC appeared to agree – that the SEC

16 On March 8, 2013, the undersigned counsel and counsel for DTTC called the chambers of the Magistrate Judge to inquire about the scope of the planned motions hearing, including, specifically, whether the Magistrate Judge expected to hear from live witnesses. The information provided by the chambers’ representative did not foreclose either party from asking permission to present witnesses at the hearing. 17 In its earlier papers, DTTC suggested that the parties were required to completely re-brief the case. (DTTC Merits Opp. at 5 n.4). DTTC now appears to have moderated its position and says it needs only “supplemental briefing.” (Objections at 6-7 n.3). In any event, as explained above, DTTC already has had ample opportunity to seek leave to file a supplemental brief.


28

would not be required to re-litigate the case in the event it had to proceed with enforcement of

the Subpoena. The Magistrate Judge indicated that she would deny pending motions without

prejudice for case management purposes, 8/7/12 Tr. at 7:4-6 (Docket No. 31); however, she

emphasized this was not equivalent to dismissal of the SEC’s action, 8/7/12 Tr. at 5:13-17

(noting the “import of an order denying the motion without prejudice is not tantamount to a

dismissal of the case”). The Court also made clear, with the apparent agreement of DTTC’s

counsel, that, in the event litigation resumed, the SEC could simply “renew” its Application,

and the parties would not have to start the case over again.

MR. LANPHER: But again, Your Honor, the matter is, and perhaps there is a way to clarify this, but certainly our understanding is that denying the SEC’s underlying motion would be tantamount to dismissing the action because that is the only – that is the application that is pending before this Court, that is the application that has initiated the entire proceedings, and so for it to be denied, we would then be back at square one. We would have to file a new application, re-serve it on the Respondent, re-apply for an order to show cause --

THE COURT: May I assume that the Respondent would not object to any request to simply renew the motion, should it develop that the parties’ negotiations are unsuccessful?

MR. WARDEN: We would not object to that, Your Honor, and –

THE COURT: Very well.

. . .

I have already assured you that the case will not be dismissed. If it is the case that the Respondent does not object or will not object to any request to renew the motion, should the negotiations prove unsuccessful, I see no reason why you cannot work out language which will accomplish that, and that will permit the Court, with your consent, to deny the motions without prejudice.

8/7/12 Tr. at 6:9-7:17 (emphasis added). Nothing in this colloquy suggested that, upon

resumption of the litigation, the SEC would need the Court’s permission to complete briefing


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on its Application, or that the parties otherwise would be required or entitled to re-brief the

case.

The Order entered by the Court on August 9, 2012, similarly reflects that the case could

resume where it left off upon termination of the stay. This Order “denied without prejudice”

the “Motion for an Order Requiring Compliance with a Subpoena filed by Petitioner Securities

and Exchange Commission” (identified in the Order as “Document Number 1, Part 2). The

Order also stated:

This subpoena enforcement action remains pending but stayed in accordance with this Court’s August 7, 2012 Minute Order. This Order shall not impact any of the prior orders issued in this case. Accordingly, either of the above-referenced motions may be re-filed at any time, including prior to January 18, 2013, if accompanied by a motion to terminate the stay.

August 9, 2012 Order (Docket Nos. 32, 33) (emphasis added). Thus, the SEC was authorized

to “re-file” or “renew” its Application “at any time,” without triggering a re-briefing

requirement. DTTC has not pointed to any reason why the SEC should have been further

delayed – or should be further delayed now – in seeking to enforce the Subpoena through a

requirement that the parties file additional briefs on issues that DTTC already has had ample

opportunity to address. See SEC’s Opposition to Motion To Extend The Stay, at 25-26

(Docket No. 45) (summarizing parties’ prior briefing).


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CONCLUSION

For the reasons set forth above, DTTC’s Objections To Magistrate Judge’s March 4,

2013 Order should be overruled and denied.

Dated: Washington, D.C. Respectfully submitted, March 28, 2013 /s/ David Mendel David Mendel (D.C. Bar #470796) Assistant Chief Litigation Counsel U.S. Securities and Exchange

Commission – Enforcement Division 100 F Street, NE Washington, DC 20549 (202) 551-4418 (phone) (202) 772-9362 (fax) [email protected]

Of Counsel: ANTONIA CHION New York Bar Attorney Registration No. 1873405 LISA WEINSTEIN DEITCH California Bar No. 137492 HELAINE SCHWARTZ New York Bar Attorney Registration No. 1917046



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CERTIFICATE OF SERVICE

I hereby certify that on March 28, 2013, I served, via email, a copy of the foregoing

Securities and Exchange Commission’s Memorandum of Points and Authorities In Opposition

To Objections to Magistrate Judge’s March 4, 2013 Order on counsel for the Respondent:

Michael D. Warden Sidley Austin LLP 1501 K Street, NW Washington, DC 20005 (202) 736-8000 [email protected] Gary F. Bendinger, pro hac vice Sidley Austin LLP 787 Seventh Avenue New York, NY 10019 (212) 839-5300 [email protected] Miles N. Ruthberg Jamie L. Wine 885 Third Avenue New York, NY 10022-4834 (212) 906-1200 [email protected] [email protected]

Dated: March 28, 2013

/s/ David Mendel David Mendel






Sec v DTTC SEC Memo Dock 55 3-28-13

Documents

Transcript of Sec v DTTC SEC Memo Dock 55 3-28-13