Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—DCKan: SEC Ordered to Provide Information on Reimbursements for Officials' Travel, (Feb 22, 2013)

By Rodney F. Tonkovic, J.D.

The SEC was ordered to respond to a motion to compel and produce after a magistrate judge found that the requested information was relevant to the issue of scienter. The Commission alleged that the defendant, Steven M. Kovzan, was involved with the preparation and signing of public SEC filings for his employer that were materially false and misleading because they failed to disclose as income certain perquisites received by the company's CEO. (SEC v. Kovzan, February 21, 2013, Sebelius, G.).

Motion to compel. Kovzan sought a motion to compel the SEC to respond to requests for admission and production of information regarding the SEC's practice of allowing high-level officials to reside in locations of their choice while the SEC reimburses these individuals for their travel. This, Kovzan argued, was analogous to one of the perquisites at issue: commuting expenses from the CEO's home in Wyoming to company headquarters in Kansas. The SEC objected to the requests on the grounds of relevance, the deliberative-process privilege, and on the basis of the Privacy Act.

Relevance. The court first found that the information was relevant because the SEC’s "arguably analogous practices could shed light on what is a proper commuting expense versus a business travel expense." Kovzan argued that the information was relevant to the issue of scienter and the definition of commuting expenses, and the court noted that in the 10th Circuit, a court may take into account industry practice or standard when determining scienter. The court agreed with Kovzan's explanation that the SEC's practices may be relevant because the Commission's proxy rules and regulations do not have a specialized definition of commuting nor do they address how to distinguish commuting expenses from business travel expenses. The court stated that this does not mean that the information will ultimately be admissible or that the district court or jury would find that it relevant to the issues at hand.

Deliberative process privilege. The SEC also asserted the deliberative process privilege, but the court overruled this objection. According to the court, the SEC was unable to support its objections because it had not conducted a search for the responsive documents and thus failed to provide any specific information about them, if they in fact exist. Additionally, the SEC failed to show that the requested documents were the sort of advisory opinions, recommendations and deliberations that typically fall within the scope of the deliberative process privilege.

Finally, the court rejected the SEC's contention that the requested information was subject to the Privacy Act. The court stated that in the 10th Circuit, the Privacy Act section at issue, 5 U.S.C. Section 522a, "does not state a claim of privilege."

While the motion to compel was granted, the court found that the SEC's position was substantially justified and concluded that the parties would bear their own attorney fees and expenses.

This is case no. 11-2017-JWL.

Attorneys: Daniel J. Maher, David S. Mendel and Natalie E. Shioji for SEC; Jeffrey S. Kruske (Office of the Kansas Securities Commissioner) for SEC. Stephen L. Hill , Jr. (Husch Blackwell, LLP) for Stephen M. Kovzan.

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