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SEC v. GULF & WESTERN INDUS.

July 23, 1981

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
GULF & WESTERN INDUSTRIES, INC., Charles G. Bluhdorn, Don F. Gaston, Defendants



The opinion of the court was delivered by: PARKER

MEMORANDUM OPINION

This opinion is concerned with troublesome and important questions relating to a long-recognized and established doctrine, the attorney-client privilege.

 The questions arise from charges that the Securities & Exchange Commission (Commission or SEC) deliberately set upon and breached the privilege during the course of a three-year investigation of the financial affairs of Gulf & Western Industries, Inc. (Gulf & Western). The investigation was followed by a civil complaint filed against that company and two of its top corporate officials, Charles Bluhdorn and Don Gaston. The three defendants were charged in a 60-page complaint *fn1" with a wide range of violations of federal securities laws, including false and misleading financial reporting and disclosures to the Commission and to shareholders, and various other fraudulent courses of conduct. *fn2"

 In response to the complaint, the propriety of the Commission's investigation was initially challenged by the assertion of several affirmative defenses. Earlier in the proceeding, a Commission motion to strike certain of the defenses was granted. However, the Court deferred a final decision on an affirmative defense alleging two gross improprieties during the agency investigation, *fn3" and allowed the defendants to pursue discovery in the challenged areas. Following discovery the defendants also filed a motion to dismiss the complaint.

 The claimed improprieties were (1) that the Commission solicited and extracted confidential and privileged information from Joel Dolkart, Gulf & Western's outside general counsel, and (2) that the Commission deliberately leaked information about its investigation to the press the New York Times and aired the matter in the public media, thus punishing the defendants and stripping them of their due process rights.

 The Court has considered the additional legal memoranda of counsel, their oral arguments, the relevant portions of the deposition testimony, and the entire record. The defendants have not sustained their burden. The asserted affirmative defense is lacking in support, both factually and legally. Accordingly, the Commission's renewed motion to strike the affirmative defense is granted and the Gulf & Western motion to dismiss the complaint is denied.

 I.

 BACKGROUND

 A.

 Joel Dolkart served as outside general counsel to Gulf & Western for sixteen years. During the time relevant to this proceeding, he also wore several other hats, serving as a Gulf & Western corporate director, secretary and a member of its pension advisory committee. As a partner in the New York-based law firm of Simpson Thacher & Bartlett, his attention and time were devoted primarily to Gulf & Western affairs.

 In 1974 Simpson Thacher commenced an investigation of suspicious and questionable withdrawals by Dolkart from the law firm's financial account. Subsequently, he was accused of siphoning off for his own use more than 2.5 million dollars of fees paid by Gulf & Western to his law firm and a further half million dollars from the corporation. The embezzlements were immediately reported to the district attorney for New York County, New York. In late 1974, a New York County grand jury charged Dolkart in an 89-count indictment with multiple counts of grand larceny, criminal possession of a forged instrument, forgery, falsifying business records, and state income tax fraud.

 Dolkart's counsel filed a series of pretrial motions including a motion to dismiss. When that motion was denied, his counsel then engaged in plea agreement discussions with the district attorney. According to the New York County district attorney:

 
Dolkart claimed to have concrete information about serious misconduct committed by officers of prominent corporations. Since most of the alleged misconduct fell within the jurisdiction of the United States Securities and Exchange Commission, the District Attorney's Office contacted the S.E.C. and learned that there was intense interest in obtaining information about Dolkart. Because of this interest, and also because of the District Attorney's own realistic appreciation that investigations into corporate crime can rarely be successful without information from insiders like Dolkart, the District Attorney did enter into discussions with Dolkart's counsel. *fn4"

 A written plea agreement provided that Dolkart would cooperate with the county prosecutors and the Securities & Exchange Commission on subjects and matters about which he had knowledge or information. *fn5" If he fully cooperated, the prosecutor would recommend that his sentence be reduced to a term of probation without any incarceration. After pleading guilty to one count of the indictment, Dolkart was provisionally sentenced to an indeterminate sentence with a maximum of three years incarceration. Execution of sentence was stayed to allow his cooperation.

 During the period June 1976 to June 1977, Dolkart talked with SEC staff members about various Gulf & Western transactions and affairs. Staff notes indicated that SEC personnel met with Dolkart for approximately eleven days over that period. Before the scheduled resentencing, the Commission submitted a letter explaining Dolkart's cooperation and an affidavit from Dolkart setting forth matters covering alleged improper corporate transactions. *fn6" At the resentencing, the trial court refused to modify the sentence claiming that to do so was not in the public interest.

 The sentence was appealed; the case was reversed and remanded with instructions to reduce the sentence to a term of probation. The appeals court held that the trial judge abused his discretion by not adequately considering Dolkart's extensive cooperation with the authorities or the fact that he had accomplished restitution of the stolen money. On remand, Dolkart was given a five-year term of probation by a different trial judge. The Commission did not take a position on his sentencing at either stage of the court proceedings.

 The defendants claim that the Commission "pursued" Dolkart and affirmatively induced him to breach the attorney-client privilege, thus obtaining an insider's view of Gulf & Western that only its principal lawyer could provide. The plaintiff argues that Dolkart cooperated in accordance with a judicially-approved agreement and that the Commission's staff, Dolkart and his attorney were ever-sensitive to and complied with the requirements of the attorney-client privilege.

 B.

 On July 24, 25 and 26, 1977, the New York Times ran a three-part series on the alleged violations committed by Gulf & Western. The articles, authored by investigative reporters Seymour Hersh and Jeff Gerth, contained detailed information about the Commission's "confidential" investigation of Gulf & Western and reported information that Dolkart had secretly provided to that agency. The sources of the information were identified as Gulf & Western officials and government sources. Although the Commission had been investigating Gulf & Western for 18 months when the articles were published, the investigation was classified "non-public" and was to be kept confidential until the complaint was filed.

 When the SEC staff was informed that news articles would appear attributing information to "government officials" and "government sources", they requested that the reporters provide specific disclaimers in the articles explaining that the information was not obtained from the Commission. Commission members claim that the reporters represented to them that the sources were not within the SEC. However, no disclaimer statement was published.

 During their depositions, the Commission staff members denied leaking information to the press. Several did admit having various conversations and meetings with the two reporters. The staff members insisted, however, that they received information from the reporters and never gave any "non-public" information in return. In fact, the Commission maintains that the staff had a responsibility, and was instructed, to learn what they could from members of the press. After the articles appeared, Gulf & Western's counsel wrote to the Commission protesting the apparent leaks. The Commission replied and called the accusations unfounded. Defendants claimed that the SEC staff leaked the stories to the press as an attempt to summarily penalize the company and that such actions were ...


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