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BOARD OF GOVERNORS v. INTERFINANCIAL SERV.

June 20, 2000

IN THE MATTER OF AN APPLICATION TO ENFORCE ADMINISTRATIVE SUBPOENA OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, APPLICANT,
V.
INTERFINANCIAL SERVICES, LTD. AN INDIRECT SUBSIDIARY OF GRUPO FINANCIERO INTERACCIONES, S.A. C/O ABE WILSON LAREDO NATIONAL BANCSHARES, INC. 600 SAN BERNARDO AVE. LAREDO, TX 78042 RESPONDENT.



The opinion of the court was delivered by: Lamberth, District Judge.

MEMORANDUM OPINION

This matter comes before the court upon a petition by the Board of Governors of the Federal Reserve System (the "Board") for an order requiring Interfinancial Services, Ltd. ("Interfinancial") to show cause why it should not be required to comply with a subpoena duces tecum issued by an Administrative Judge in connection with a pending Board enforcement proceeding. Additionally, the Board requests an order compelling Interfinancial to produce all documents named in the subpoena within seven days of the Order's issuance. For the following reasons, the Board's petition shall be granted and the subpoena shall be enforced.

I. FACTS

Laredo National Bancshares ("LNB") is a registered bank holding company under the Bank Holding Company Act ("BHC Act"), 12 U.S.C. § 1841 et seq. In July 1991, Carlos Hank Rhon purchased a controlling interest in LNB. Under the Change in Bank Control Act, 12 U.S.C. § 1817, Rhon filed a Notice of Change in Bank Control, which the Board ultimately approved in December 1991 after securing various commitments from Rhon. One of these commitments required Rhon to seek Board approval prior to assuming control over more than 25% of LNB's stock.

In October 1993, Incus Co. Ltd. ("Incus"), a bank holding company controlled by Rhon, sought to obtain a large block of LNB's outstanding voting shares. On October 13, 1993, pursuant to Rhon's December 1991 commitment, Rhon and Incus filed another Notice of Change in Bank Control. Relying on certain representations from Rhon, the Board approved the Notice in January 1994.

On December 16, 1997, the Board issued a Notice of Charges alleging that Rhon and Incus had reneged on prior commitments to the Board and were guilty of violating the BHC Act, the Change in Bank Control Act, and other federal laws. Under the Board's Rules of Practice, 12 C.F.R. § 263.26, the matter was assigned to Administrative Law Judge Arthur L. Shipe. After Rhon and Incus requested a full hearing, the Board's Enforcement Counsel ("EC") requested that Judge Shipe issue a subpoena duces tecum to Interfinancial Services, Ltd. ("Interfinancial"), a subsidiary of a Mexican brokerage firm controlled by Rhon and incorporated under the laws of the British Virgin Islands.

On October 6, 1999, Interfinancial moved to quash the subpoena duces tecum, contending that the documents named in the subpoena were irrelevant to the pending inquiry and that compliance with the subpoena would violate Mexican financial privacy laws. Judge Shipe rejected these arguments and denied the motion to quash on December 8, 1999. Subsequently, counsel for Interfinancial agreed to produce the requested documents. However, as of February 4, 2000, Interfinancial had yet to fully comply with the subpoena.

The Board applied for an Order to Show Cause on February 9, 2000. On March 8, 2000, this court issued the requested Order to Show Cause, and a hearing was held on March 17, 2000. This court today grants the Board's motion and requires respondent to fully comply with the subpoena duces tecum.

II. DISCUSSION

A. Issues Presented

1. Mexican Privacy Law

Respondent asserts that the subpoena duces tecum requires Interfinancial to release sensitive account and transaction information in violation of Mexican law. To support its position, respondent submitted an opinion from a Mexican law firm citing the "Secrecy in the Securities Market" principle codified in Article 25 of the Mexican Securities Market Act: "Brokerage Houses cannot give information on the transactions they undertake or those in which they participate, except for information requested by the client . . . or his legal representatives."

This court finds that the Securities Secrecy principle does not preclude the release of the subpoenaed documents. Article 8 of the Mexican Securities Market Act states that "[t]he Ministry of Finance and Public Credit shall be the competent organization to interpret the provisions of this Law, and, through general rules, to provide everything with respect to its application." Availing themselves of this discretion, on September 7, 1999 the Undersecretary of Finance and Public Credit of Mexico issued the following ruling: "Mexican securities brokerage firms . . . should carry out their operations subject to the foreign legislation applicable to them . . . International Services, Ltd. is not subject to the legal regime set forth in Article 25 of the Securities Market Law, nor are its operations a subject matter of such law." See exhibits A-B to Enforcement Counsel's Opposition to Motion to Quash, Attachment E. The Administrative Judge determined that the ...


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