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FESHBACH v. SEC

April 23, 1997

MATTHEW FESHBACH, ET AL., Plaintiffs,
v.
SECURITIES AND EXCHANGE COMMISSION, Defendant.



The opinion of the court was delivered by: ILLSTON

ORDER PARTIALLY GRANTING AND PARTIALLY DENYING CROSS-MOTIONS FOR SUMMARY JUDGMENT

 On April 11, 1997, the Court heard argument on plaintiffs' and defendant's cross-motions for summary judgment. Having considered the arguments of counsel and the papers submitted, the Court hereby GRANTS in part and DENIES in part plaintiffs' and defendant's motions for summary judgment.

 BACKGROUND

 On December 13, 1995, plaintiffs Matthew Feshbach, Joseph Feshbach, and Kurt Feshbach ("the Feshbachs") filed this action under the Freedom of Information Act ("FOIA"), 5 U.S.C. § 552(a) et seq., seeking to enjoin defendant Securities and Exchange Commission ("Commission") from withholding agency records related to the Commission's investigation of the Feshbachs and their business; Stockbridge Partners, Inc. ("Stockbridge").

 In late 1989, the Commission's San Francisco Branch Office conducted an examination of Stockbridge, which was at the time a broker-dealer registered with the Commission, and issued an examination report on January 19, 1990. Decl. of Richard A. Castro ("Castro Decl.") at P 9. From June 28, 1990 to July 13, 1990, the National Association of Securities Dealers, Inc. ("NASD") conducted an examination of Stockbridge, which was then a member of the NASD. Id. at P 10. The NASD issued an examination report on August 24, 1990 and issued two letters of caution to Stockbridge for, among other actions, failing to maintain the minimum net capital of $ 25,000, having inadequate supervisory procedures, and conducting a securities business for clients residing in states in which the company was not registered. Id. The Commission's San Francisco Branch Office conducted a second examination of Stockbridge, beginning July 12, 1990, to determine whether Stockbridge was trading securities on material, non-public information in violation of federal securities laws. Id. at P 11. Based on information obtained from its Summer 1990 examination of Stockbridge, the Commission subsequently initiated an informal investigation (i.e., "Matter Under Inquiry") and formal investigation of Stockbridge. *fn1" See In the Matter of Feshbach Brothers, File No, LA-619, and In the Matter of Stockbridge Partners, Inc., File No. HO-2473.

 In November 1992 and August 1994, the Feshbachs submitted FOIA requests to the Commission, requesting the production of any and all records, files, notes, or other information in the custody or possession of the Commission that concerned or related to the Feshbachs. In letters dated February 15, 1995, May 9, 1995, and August 2, 1995, the Commission granted the Feshbachs access to a number of documents pursuant to their FOIA requests and denied access to other documents which it claimed were exempt from disclosure under the statute. The Feshbachs subsequently filed an administrative appeal and on December 13, 1995 filed this action, seeking disclosure of the documents claimed to be exempt by the Commission.

 On February 28, 1996, the Feshbachs filed a motion to compel the Commission to produce a Vaughn index, *fn2" which the Court granted on April 3, 1996. The SEC produced the index to plaintiffs on May 3, 1996. On June 18, 1996, the Feshbachs filed a motion for production of a revised Vaughn index, which the Court granted on August 19, 1996. The Commission produced its revised Vaughn index thirty days later.

 The Commission and Feshbachs now move separately for summary judgment. At issue is the applicability of a number of FOIA exemptions to the facts of the instant case.

 LEGAL STANDARD

 The Federal Rules of Civil Procedure provide for summary adjudication when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c).

 A party seeking summary judgment bears the initial burden of informing the court of the basis for its motion and of identifying those portions of the pleadings and discovery responses which demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986). When the moving party will have the burden of proof on an issue at trial, the moving party must affirmatively demonstrate that no reasonable trier of fact could find other than for the moving party. In contrast, a moving party who will not have the burden of proof on an issue at trial can prevail merely by pointing out that there is an absence of evidence to support the nonmoving party's case. Id.

 If the moving party meets its initial burden, the nonmoving party must then set forth, by affidavit or as otherwise provided in Rule 56, "'specific facts showing that there is a genuine issue for trial.'" Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986) (quoting Fed. R. Civ. P. 56(e)) (emphasis added).

 In judging evidence at the summary judgment stage, the Court does not make credibility determinations or weigh conflicting evidence and draws all inferences in the light most favorable to the nonmoving party. T.W. Electric Service, Inc. v. Pacific Electric Contractors Ass'n, 809 F.2d 626 at 630-31. The evidence presented by the parties must be admissible. Fed. R. Civ. P. 56(e). Conclusory, speculative testimony in affidavits and moving papers is insufficient to raise genuine issues of fact and defeat summary judgment. See Falls Riverway Realty, Inc. v. Niagara Falls, 754 F.2d 49 (2nd Cir. 1985); Thornhill Pub. Co., Inc. v. GTE Corp., 594 F.2d 730, 738 (9th Cir. 1979). Hearsay statements found in affidavits are inadmissible. See, e.g., Fong v. American Airlines, Inc., 626 F.2d 759, 762-63 (9th Cir. 1980).

 Summary judgment is proper in a FOIA case if the defendant establishes that it has fully discharged its obligations under FOIA. Hayden v. National Sec. Agency/Central Sec. Service, 197 U.S. App. D.C. 224, 608 F.2d 1381, 1387 (D.C. Cir. 1979), cert. denied, 446 U.S. 937 (1980). The agency has the burden of demonstrating that the material is exempt from disclosure. Alyeska Pipeline Service Co. v. U.S. E.P.A., 272 U.S. App. D.C. 355, 856 F.2d 309, 311 (D.C. Cir. 1988). The agency may meet this burden by submitting a declaration that identifies the documents at issue and explains why the documents fall into the exemption categories. King v. U.S. Dept. of Justice, 265 U.S. App. D.C. 62, 830 F.2d 210 (D.C. Cir. 1987). If the declaration fairly describes the contents of the material withheld, adequately states the grounds for non-disclosure, and if the grounds are reasonable and consistent with applicable law, the district court should uphold the agency's position as long as there is no reason to question the good faith of the agency. Barney v. I.R.S., 618 F.2d 1268, 1272 (8th Cir. 1980); Lewis v. I.R.S., 823 F.2d 375, 379 (9th Cir. 1987).

 DISCUSSION

 The Commission contends that it is authorized to withhold documents related to its investigation of the Feshbach brothers and Stockbridge pursuant to the following FOIA exemptions:

 
* Exemption 2 (internal personnel rules and practices of an agency),
 
* Exemption 4 (trade secrets; commercial or financial information that is privileged or confidential),
 
* Exemption 5 (attorney work product privilege, attorney-client privilege, and deliberative process privilege),
 
* Exemption 7 (law enforcement records or information), and
 
* Exemption 8 (reports of an agency responsible for regulating or supervising financial institutions).

 The Commission has moved for summary judgment with respect to documents withheld pursuant to each of these five exemptions. The Feshbachs have moved for summary judgment with respect to documents withheld pursuant to Exemptions 2, 5, 7, and 8 and have requested in the alternative that further discovery be permitted pursuant to Federal Rule of Civil Procedure 56(f). *fn3" The Feshbachs do not oppose summary judgment with respect to documents withheld pursuant to Exemption 4. As such, summary judgment will be granted in favor of the Commission as to documents withheld pursuant to Exemption 4. The remaining exemptions will be discussed in turn. *fn4"

 I. Exemption 8

 Under Exemption 8, matters may be withheld where they are "contained in or related to examination, operating, or condition reports prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of financial institutions". 5 U.S.C. § 552(b)(8). This exemption is broad and all-inclusive and "provides absolute protection regardless of the circumstances underlying the regulatory agency's receipt or preparation of examination, operating or condition reports." Gregory v. Federal Deposit Ins. Corp., 203 U.S. App. D.C. 314, 631 F.2d 896, 898 (D.C. Cir. 1980).

 The parties dispute whether Stockbridge, a broker-dealer, is a "financial institution" within the meaning of Exemption 8. The Feshbachs rely on M.A. Schapiro & Co. v. S.E.C., 339 F. Supp. 467 (D.D.C. 1972), in which the district court adopted a narrow definition of "financial institutions" and held that documents pertaining to off-board trading problems "arguably [did] not concern financial institutions" for purposes of Exemption 8. Id. at 470. However, in Mermelstein v. S.E.C., 629 F. Supp. 672 (D.D.C. 1986), the same district court noted that Schapiro was no longer good law. Mermelstein, 629 F. Supp. at 674 ("The Court concludes that Congress has never acceded to the Schapiro court's restrictive census of 'financial institutions' for purposes of FOIA's Exemption 8 ....").

 In particular, courts have considered the legislative history of the Sunshine Act, a statute in para materia with the FOIA, to determine the meaning of "financial institutions". *fn5" For purposes of the Sunshine Act, "financial institutions" is defined as follows in the legislative history:

 
The term "financial institutions" is intended to include banks, savings and loan associations, credit unions, brokers and dealers in securities or commodities, exchanges dealing in securities or commodities, such as the New York Stock Exchange, investment companies, investment advisors, self-regulatory organizations subject to 15 U.S.C. § 78(s), and institutional managers as defined in 15 U.S.C. § 78m(f).

 S. Rep. No. 354, 94th Cong., 1st Sess. 24 (1975) (emphasis added). Because FOIA and the Sunshine Act are statutes in para materia, courts have referred to the legislative history of the Sunshine Act in interpreting the meaning of "financial institutions" for purposes of FOIA. See Mermelstein, 629 F. Supp. at 674-75 (security exchange is "financial institution" for purposes of the Sunshine Act and FOIA Exemption 8); Berliner Zisser Walter & Gallegos, P.C. v. S.E.C., No. C-95-D-4, slip op. at 8-9 (D. Colo. Mar. 4, 1997) (investment advisor is "financial institution" for purposes of FOIA Exemption 8); Parsons v. S.E.C., No. C-2-96-001 (S.D. Ohio Sept. 6, 1996) (report generated by NASD for the SEC relating to an examination of Parson's Securities, Inc. was properly withheld under Exemption 8).

 Following the logic of these cases, the Court holds that the term "financial institutions" encompasses brokers and dealers of securities or commodities as well as self-regulatory organizations, such as the NASD. The Commission is exempt from disclosing reports related to the examinations and investigations of the Feshbachs by the Commission and the NASD. The Commission's motion ...


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