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DIRECTOR OF THE OFFICE OF THRIFT SUPERVISION v. ER

March 3, 1992

DIRECTOR OF THE OFFICE OF THRIFT SUPERVISION, Petitioner,
v.
ERNST & YOUNG, Respondent.



The opinion of the court was delivered by: ROYCE C. LAMBERTH

 This case comes before the court upon a petition by the Director of the Office of Thrift Supervision ("OTS") for an order requiring Ernst & Young to show cause why it should not be required to comply with an administrative subpoena duces tecum served upon Ernst & Young, and for an order requiring the production of certain records and documents as set forth in that subpoena. For the following reasons, OTS's petition shall be granted and the subpoena shall be enforced.

 I. FACTS

 On May 15, 1991, OTS authorized formal examination and investigation proceedings of the professional services provided to 23 financial institutions by Ernst & Young. Petitioner's Petition for an Order to Show Cause and for Summary Enforcement of Administrative Subpoena ("petition"), exhibit 1. On June 11, 1991, OTS issued a subpoena for the production of books, records, papers, documents and other tangible things in connection with the services that Ernst & Young provided these financial institutions. Id. at exhibit 2. This subpoena required the production of a wide variety of documents including, but not limited to, those that refer or relate to: Ernst & Young's engagement with each designated financial institution; the designated institutions' financial statements; the designated financial institutions' tax returns, those that refer or relate to auditing, accounting, reporting or internal control issues regarding the designated institutions; regulatory issues; all personnel files concerning individuals who performed work in connection with any designated institution; accounting, training and other types of manuals; Ernst & Young's peer reviews; various internal reviews by Ernst & Young; and "other documents bearing the name of any Designated Institution, or any subsidiaries, related entities, or affiliated individuals thereof, not previously mentioned in this subpoena." Id.

 On June 20, 1991, Ernst & Young moved to quash the subpoena for "many reasons," including:

 1. The OTS is without authority to subpoena much of the material that has been requested.

 2. There is no authority for the OTS to conduct an investigation of Ernst & Young.

 3. The subpoena is overly broad, burdensome and seeks materials which are neither relevant nor material to any legitimate OTS inquiry.

 4. Portions of the subpoena are vague and ambiguous making compliance, even if the subpoena were valid, difficult if not impossible.

 Id. at exhibit 4.

 On June 28, 1991, OTS opposed Ernst & Young's motion to quash the subpoena. Id., exhibit 5. On September 12, 1991, the Senior Deputy Chief Counsel of OTS denied Ernst & Young's motion and directed Ernst & Young to comply with the subpoena. Id. at exhibit 6. To date, Ernst & Young has refused to comply with the subpoena, and on December 30, 1991, OTS filed this petition for an order to show cause and for summary enforcement of its subpoena. On January 3, 1992, the court ordered Ernst & Young to show cause why it should not be ordered by this court to obey the subpoena served upon it by OTS.

 Ernst & Young, in its opposition to the petition, described the subpoena as a "breathtakingly expansive demand" and asserted that: (1) OTS lacks authority to subpoena documents relating to pre-FIRREA conduct; (2) even if OTS has the authority to enforce this subpoena it should be required to take reasonable steps to reduce the burden and cost that the subpoena imposes on Ernst & Young; (3) OTS's demand for several categories of documents is unduly burdensome and bears no reasonable relation to the agency's investigation; and (4) the court should prohibit the OTS from disclosing confidential information to other government agencies and private persons or require it to provide ten days' notice before disclosure.

 II. DISCUSSION

 A. The Issue Presented

 This case was originally assigned to another judge on this court, but because a related case, Resolution Trust Corporation v. Ernst & Young, Misc. No. 91-398 (D.D.C. Jan. 29, 1992), was assigned to the undersigned judge, Ernst & Young moved to transfer this case to the undersigned judge. Ernst & Young asserted that OTS's petition for enforcement of this subpoena is substantially related to the petition for enforcement of seven administrative subpoenas duces tecum filed by the Resolution Trust Corporation ("RTC") in Misc. No. 91-398 because both agencies demanded similar materials and because Ernst & Young would raise many of the same objections. OTS did not object to this motion, and on January 22, 1992, the present case was transferred to the undersigned judge.

 In Misc. No. 91-398, Ernst & Young raised the same objections to the RTC's subpoenas as it raises in this case with the exception of its claim that OTS lacks statutory authority to subpoena this information. In Misc. No. 91-398, the parties reached agreement on most of the issues concerning the production of documents. See Stipulated Order of January 29, 1992. This court, in Misc. No. 91-398, then granted the RTC's petition for summary enforcement of seven administrative subpoenas with the following conditions:

 1. Petitioner shall not share any of the information produced pursuant to this order with the Office of Thrift Supervision . . . until 10 days after this court rules on Office of Thrift Supervision v. Ernst & Young, Misc. No. 91-401.

 2. Respondent shall not be required to produce any [of its own] tax returns

 3. Respondent shall not be required to produce any [of its own] financial statements with the exception of those pertaining to respondent's fiscal year which ended September 30, 1991. Respondent shall produce this information within 10 days or move for a stay pending appeal.

 4. Respondent shall not be required to produce liability insurance policies with the exception of those now in effect or those that would provide coverage for prior acts. Respondent shall produce this information within 10 days or move for a stay pending appeal.

 5. Regarding personnel files, the court is satisfied that the presence of a criminal statute which prohibits, among other things, the theft or conversion of other records, bar disciplinary procedures and the agency's regulatory procedures will provide sufficient protection for respondent.

 Resolution Trust Corporation v. Ernst & Young, Misc. No. 91-398 (D.D.C. Jan. 29, 1992).

 Accordingly, the only issue that the court need address at this time is whether OTS has the authority to subpoena documents relating to pre-FIRREA conduct. If OTS has such authority, then its petition for enforcement shall be granted and the court shall allow the parties the opportunity to agree to conditions regarding the scope and implementation of the subpoena. The court will thereafter resolve any remaining disputes regarding scope or conditions of compliance.

 B. Arguments

 Prior to the enactment of FIRREA, the Federal Home Loan Bank Board ("the FHLBB") was primarily responsible for regulating savings and loan associations. After experiencing significant losses in the thrift and banking industries in the 1980's, Congress enacted the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). See Daniel B. Gail & Joseph H. Norton, A Decade's Journey From "Deregulation" to "Supervisory Regulation": The Financial Institutions Reform, Recovery, and Enforcement Act of 1989, 45 Bus. Law. 1103, 1105 (1990). FIRREA was an attempt by Congress to remedy the regulatory failures that had occurred in the 1980's, and was designed to enable the government to both "clean up" the failed institutions and properly regulate financial institutions in the future. See id. Among other things, FIRREA created OTS to be responsible "for the examination, safe and sound operation, and regulation of savings associations." 12 U.S.C. § 1463 (a) (1991 Supp.)

 Ernst & Young asserts that one of the primary purposes of FIRREA was to expand the supervisory and enforcement powers of the agencies that are charged with regulating financial institutions. Ernst & Young alleges that FIRREA expanded this regulatory authority by giving OTS the power, for the first time, to regulate professionals or independent contractors that are associated with financial institutions, such as accountants, if they knowingly or recklessly engage in misconduct that harms an insured institution.

 In essence, Ernst & Young puts forth three arguments to support their claim the OTS does not have the authority to subpoena information that was produced before FIRREA's enactment. First, Ernst & Young alleges that the FHLBB, OTS's predecessor, never had the authority to investigate and regulate accountants and thus this power was never passed on to OTS. Second, Ernst & Young asserts that even if the FHLBB had the authority to investigate and regulate accountants under pre-FIRREA law, OTS does not because the pre-FIRREA statutes were repealed by FIRREA. Third, Ernst & Young ...


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