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ADAIR v. ROSE LAW FIRM

November 16, 1994

JOHN J. ADAIR, INSPECTOR GENERAL OF THE RESOLUTION TRUST CORPORATION, Petitioner,
v.
ROSE LAW FIRM, A PROFESSIONAL ASSOCIATION, Respondent.



The opinion of the court was delivered by: PAUL L. FRIEDMAN

 I. BACKGROUND

 In response to the savings and loan imbroglio, Congress created the Resolution Trust Corporation in the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). 12 U.S.C. §§ 1441a(b), 1811 et seq. The RTC acts as receiver for failed thrifts and succeeds to the entirety of each association's rights, assets and obligations. 12 U.S.C. §§ 1821 (d)(2)(A), (B). *fn1" FIRREA requires the RTC to maximize the net present value of thrift assets, minimize the impact of its transactions on local real estate and financial markets, make efficient use of government funds and minimize any loss from resolution of cases. 12 U.S.C. § 1441a(b)(3)(C). To facilitate the completion of the RTC's duties, FIRREA authorizes the RTC to contract with private law firms and others in the private sector to obtain services. 12 U.S.C. § 1441a(b)(10)(A).

 Since 1989, the Rose Law Firm has entered several legal service agreements with the Federal Deposit Insurance Corporation and the RTC to provide them with legal services with respect to a number of failed thrift institutions; and it continues to represent the RTC. Declaration of John J. Adair, RTC Inspector General ("Adair Decl.") P 4; Declaration of Clark W. Blight, Assistant Inspector General for Investigation ("Blight Decl.") P 5; Second Affidavit of Ronald M. Clark, chief operating officer of Rose ("Clark Aff.") PP 4, 5. These service agreements, as well as retainer letters, FDIC and RTC guidelines and policies, and RTC regulations, 12 C.F.R. Part 1606, imposed obligations on Rose to disclose, and to certify that it had disclosed, all actual or potential conflicts of interest to the FDIC and the RTC. Blight Decl. P 6. *fn2" Rose certified that it had found no conflicts of interest that had not already been waived. Adair Decl. P 4; Blight Decl. P 6.

 In addition to retaining Rose for other engagements, the FDIC retained the firm to represent the interests of the FDIC and later the RTC as conservator of Madison Guaranty Savings and Loan Association in litigation against Frost & Company, an accounting firm. Adair Decl. P 5. Clark Aff. P 6. In 1993, allegations surfaced that Rose had not disclosed actual or potential conflicts in this matter. Adair Decl. P 5; Blight Decl. P 7; Clark Aff. P 7. The RTC's Office of Contractor Oversight and Surveillance ("OCOS") reviewed the allegations and issued a report on February 8, 1994. The FDIC Legal Division also issued a report regarding conflict of interest issues on February 17, 1994. Adair Decl. P 6; Blight Decl. P 8.

 During a hearing before the Senate Committee on Banking, Housing and Urban Affairs on February 24, 1994, certain Senators criticized the FDIC and RTC reports and requested that the Inspector General of the RTC conduct an independent investigation of the matters addressed by the OCOS report. Adair Decl. P 7; Blight Decl. P 9. On March 2, 1994, John E. Ryan, Deputy CEO of the RTC, sent a formal request to the Inspector General of the RTC to conduct such an investigation. Adair Decl. P 8; Blight Decl. P 10.

 The IG immediately initiated an investigation of the Rose Law Firm to determine whether Rose had failed to disclose to the FDIC and later the RTC any actual or potential conflicts of interest on matters for which it was retained by the FDIC or the RTC; whether any such failures violated any laws, regulations, agreements, guidelines or policies; and whether the FDIC and the RTC properly conducted their review of any such conflicts. Adair Decl. PP 9-10; Blight Decl. P 11. Under the Inspector General Act, the IG must report his findings and recommendations to the head of the RTC, to the Congress and, if he believes there has been a violation of criminal law, to the Attorney General. 5 U.S.C. App. 3 §§ 4(d), 5.

 As a first step in its investigation, the IG sought to identify conflicts of interest by reviewing and comparing the identities of Rose's clients against the records of the RTC and of the failed institutions for which Rose provided legal services. Adair Decl. P 11; Blight Decl. P 13. On April 18, 1994, the IG issued a subpoena duces tecum to the Rose Law Firm for information regarding the firm's clients. The subpoena demanded the production of

 
any documents listing the names of any individual, partnership, corporation, association or other person or entity to whom the Rose Law Firm . . . provided legal services at any time or from time to time during the period from January 1, 1985 through April 15, 1994. The documents to be produced may consist of a single list, or multiple lists, identifying clients during such period.

 Rose failed to produce the documents requested, and the IG petitioned this Court to enforce its subpoena.

 On September 8, 1994, Respondent moved the Court to transfer the case to the United States District Court for the Eastern District of Arkansas. Rose argued that an evidentiary hearing was required to determine whether the subpoena was too burdensome and whether the IG issued the subpoena for an improper purpose. Rose claimed that the witnesses and documents regarding those issues are located in Little Rock and urged the Court to transfer the case there for the convenience of the parties and witnesses. Rose's burdensomeness argument was based on its conviction that it would have to produce all documents containing client names to satisfy the subpoena. This argument was undermined when the IG assured Rose that it could respond to the subpoena by producing a client list or lists and no other documents.

 The Court denied Respondent's motion to transfer. It noted that a subpoena enforcement action is a summary proceeding and found that Respondent had failed to prove that "extraordinary circumstances" existed that would justify an evidentiary hearing. See FTC v. Invention Submission Corp., 296 U.S. App. D.C. 124, 965 F.2d 1086, 1091 (D.C. Cir. 1992), cert. denied, 122 L. Ed. 2d 654, 113 S. Ct. 1255 (1993). The Court concluded that Rose could use affidavits rather than the testimony of witnesses to address the issue of burdensomeness. The Court also rejected Rose's argument that improper political pressure from members of Congress induced the IG to initiate the investigation that led to the issuance of the subpoena. The Court found that Rose had failed to make the required threshold showing that members of Congress exerted undue influence or control over the IG's investigation that caused the IG to initiate the investigation or issue the subpoena in bad faith or for improper purposes. See FTC v. Invention Submission Corp., 965 F.2d at 1091; United States v. Aero Mayflower Transit Co., Inc., 265 U.S. App. D.C. 383, 831 F.2d 1142, 1145-47 (D.C. Cir. 1987).

 On October 7, 1994, Petitioner and Respondent entered into a Memorandum of Understanding that describes how the Rose Law Firm may comply with the subpoena by providing client lists and no other documents. Appendix A. The Memorandum specifies the client lists that Rose will provide if the Court enforces the subpoena. As a result, Respondent has abandoned its burdensomeness argument and has submitted no affidavits regarding the onerousness of complying with the subpoena.

 In opposing the IG's petition, the Rose Law Firm argues that the Inspector General's subpoena exceeds his statutory authority. Rose also argues that if the Court enforces the subpoena, the Court should grant its motion for a protective order, which would more closely control the IG's use of the subpoenaed information than the Confidentiality Undertaking the IG has offered.

 A. The Subpoena Was Within The Authority Of The Inspector General

 In enforcing an administrative subpoena, the Court's role is limited to determining whether the subpoena is issued for a lawful purpose within the statutory authority of the agency that has issued it, whether the demand is sufficiently definite and not unduly burdensome, and whether the subpoena seeks information reasonably relevant to the agency's investigation. RTC v. Walde, 18 F.3d 943, 946 (D.C. Cir. 1994); Linde Thomson Langworthy Kohn & Van Dyke, P.C. v. RTC, 303 U.S. App. D.C. 316, 5 F.3d 1508, 1513 (D.C. Cir. 1993); FTC v. Invention Submission Corp., 965 F.2d at 1089. Rose does not oppose the IG's subpoena on the grounds that it seeks irrelevant information, that it is indefinite or that it is unduly burdensome. Respondent does assert, however, that the IG's investigation exceeds his statutory authority. *fn3"

 Rose argues that the Inspector General Act, by its language and legislative history, limits Inspectors General to investigating only the internal operations of federal departments and agencies. It maintains that the IG's investigation should be limited in its scope to determining whether the RTC properly conducted its review of any conflicts of interest and should not extend to a de novo review of any potential or actual conflicts that Rose may have had that were not considered by the OCOS. The Court disagrees.

 The Inspector General Act grants Inspectors General authority to conduct investigations and audits:

 
It shall be the duty and responsibility of each Inspector General . . . to conduct, supervise, and coordinate audits and investigations relating to the programs and operations of [the agency].

 5 U.S.C. App. 3 § 4(a)(1). Respondent argues that "relating to the programs and operations of" the agency is limiting language that restricts the IG to internal investigations of the agency's own conduct. The Court does not accept this construction of the statute and finds the "relating to" language a broad grant of authority rather than a limitation. This language is expansive enough to extend the IG's authority beyond investigations of the agency itself to investigations of individuals and entities outside the agency involved with an agency's programs. Furthermore, other sections of the Inspector General Act clarify, if clarification is needed, that the IG's authority extends to conducting audits and investigations of programs that the agency finances, including investigations into alleged fraud, abuse and waste by government contractors and other recipients of government funds in connection with those programs.

 Section 2 of the Inspector General Act states that the purpose for the creation of independent offices of Inspectors General in various agencies was to provide "independent and objective units . . . to conduct and supervise audits and investigations relating to the programs and operations of" such agencies and "to provide leadership and coordination and recommend policies for activities designed . . . to prevent and detect fraud and abuse in, such programs and operations . . . ." 5 U.S.C. App. 3 § 2. Sections 4(a)(2) through 4(a)(5) grant to Inspectors General the responsibility for conducting reviews and making recommendations regarding fraud, abuse and waste in programs administered or financed by the agency. 5 U.S.C. App. 3 §§ 4a(2)-(a)(5). Section 5 requires the IG to prepare reports regarding its activities, including its findings regarding fraud, abuse and waste in programs of the agency. 5 U.S.C. App. 3 § 5.

 It is obvious that the IG could not fulfill many of its responsibilities under sections 4(a)(2) through 4(a)(5) and section 5 of the Act, as well as under section 4(a)(1), without investigating fraud, abuse and waste by both the agency administering and financing the program and the participants in the program. The "relating to" language of Section 4(a)(1) is extremely broad, and it is given context by these other sections of the Act. The Court therefore finds that the investigatory authority granted by section 4(a)(1) necessarily extends to investigations of fraud, waste and abuse by government contractors and other recipients of government funds under or relating to programs of a Department or agency.

 The legislative history of the Act also makes plain that Congress intended the IG's investigatory authority to extend to the investigation of recipients of government funding as well as to government agencies themselves. Congress enacted the Inspector General Act in part because of revelations of significant corruption and waste in the operations of the federal government and among government contractors, government grantees and other recipients of federal funds. S. Rep. No. 1071, 95th Cong., 2d Sess. 4 (1978), reprinted in 1978 U.S.C.C.A.N. 2676, 2679, 2683. In justifying the need for subpoena power, the Senate Report stated that Inspectors General are to investigate both an agency's "internal operations and its federally-funded programs" and that the IG should identify "perpetrators of programmatic fraud." 1978 U.S.C.C.A.N. at 2702. The Senate Report also stated:

 
Subpoena power is absolutely essential to the discharge of the Inspector and Auditor General's functions. There are literally thousands of institutions in the country which are somehow involved in the receipt of funds from Federal programs. Without the power necessary to conduct a comprehensive audit of these entities, the Inspector and Auditor General could have no serious impact on the way federal funds are expended. . . .
 
The committee does not believe that the Inspector and Auditor General will have to resort very often to the use of subpoenas. There are substantial incentives for institutions that are involved with the Federal Government to comply with requests by an Inspector and Auditor General. In any case, however, knowing that the Inspector and Auditor General has recourse to subpoena power should encourage prompt and thorough cooperation with his audits and investigations.

 1978 U.S.C.C.A.N. at 2709. See also United States v. Areo Mayflower Transit Co., Inc., 831 F.2d at 1145.

 Representative Levitas, one of the co-sponsors of the Act, explained the IG's intended role:

 
The Offices of Inspector General would not be a new "layer of bureaucracy" to plague the public. They would deal exclusively with the internal operations of the departments and agencies. Their public contact would only be for the beneficial and needed purpose of receiving complaints about problems with agency administration and in the investigation of fraud and abuse by those persons who are misusing or stealing taxpayer dollars.

 124 Cong. Rec. 10,405 (1978) (emphasis added). As the co-sponsor of the Act, Representative Levitas's remarks "are an authoritative guide to the statute's construction." North Haven Board of Education v. Bell, 456 U.S. 512, 526-27, 72 L. Ed. 2d 299, 102 S. Ct. 1912 (1982). Representative Levitas's statement and the Senate Report demonstrate that Congress understood the Act to give the Inspectors General the authority to investigate recipients of federal funds, such as government contractors, who may have misused or stolen the funds through fraud, abuse or waste.

 Petitioner responds that sections 8G(b) and 9(a)(2) do not limit the IG's authority established under the earlier sections of the Act. The IG maintains that these sections are directed at the agency heads who are given authority to transfer certain functions to the IG, but are expressly prohibited from transferring to the IG the responsibility for operating the programs entrusted to the agency. The sections do not impose a reciprocal limitation on the IG that circumscribes his authority to investigate fraud, abuse and waste in programs of the agency. Respondent's reading of the Act is strained and is inconsistent with the language, legislative history and overall scheme of the statute. The Court therefore agrees with Petitioner.

 The Court is not persuaded to the contrary by the decision in Burlington Northern R.R. v. Office of Inspector General, Railroad Retirement Board, 983 F.2d 631, 643 (5th Cir. 1993), on which Rose relies. *fn4" The court in Burlington Northern concluded that Congress intended that "Inspectors General should not be allowed to conduct 'program operating responsibilities' of an agency," that "the Inspector General has an oversight rather than a direct role in investigations conducted pursuant to regulatory statutes" and that "he may investigate the Department's conduct of regulatory ...


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