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U.S. Securities and Exchange Commission v. Karroum

United States District Court, District of Columbia

December 9, 2015

U.S. SECURITIES AND EXCHANGE COMMISSION, Movant,
v.
STEVE H. KARROUM, et al., Respondent.

MEMORANDUM OPINION AND ORDER

JAMES E. BOASBERG United States District Judge

When Respondent Steve H. Karroum resisted an administrative subpoena issued by the Securities and Exchange Commission, which is investigating him and his company for potential securities violations, the SEC brought this miscellaneous action for enforcement. After the parties were unable to resolve whether certain emails should be produced, Magistrate Judge Deborah Robinson, to whom the case had been referred, approved the SEC’s proposed protocol. Karroum objects and asks this Court to reverse that holding. Believing it correct, the Court will overrule his objections.

I. Background

In November 2014, the SEC issued a formal order authorizing Commission staff to investigate and take testimony related to the activities of FX & Beyond Corporation. See SEC Response (ECF No. 26) at 2. The SEC sought to determine “whether persons or entities have violated or are violating the registration, antifraud, and broker-dealer registration provisions of the federal securities laws . . . .” Id. Included in the SEC’s gaze was Karroum, the company’s president, whose activities the SEC is examining to uncover whether he may have engaged in a Ponzi-type or other scheme to defraud investors or misappropriate their funds. See id. To this end, SEC staff served Karroum with a properly issued subpoena on January 14, 2015. See Application for Order to Show Cause and for Order Requiring Compliance with Subpoenas (ECF No. 1) at 1-2. The subpoena required Karroum to produce, within several weeks’ time, “documents, computers or other materials related to his investment, business, and financial activities” and to testify before SEC investigators. See id. at 2-3.

After effecting service, SEC staff made repeated efforts to contact Karroum regarding compliance with the terms of the subpoena, but he at first did not return their calls, and then later, through his attorney, repeatedly sought to push back the testimony date, all while failing to provide the required documents. See Response at 3. Karroum eventually turned over some documents, but did not relinquish any email communications with investors - as required by the subpoena - and he parried attempts by the SEC to set a date for testimony. See id. at 3-4.

By May of this year, while Karroum’s attorney said he had “no further responsive documents, ” the SEC maintained that Karroum still had not complied with the subpoena regarding the production of his emails. See id. at 4. Following the old proverb, “If at first you don’t succeed, try, try, try again, ” the SEC did try, try again to get Karroum to comply, this time by filing this miscellaneous action for an Application for Order. See Response at 4. Eventually, “Karroum’s counsel acknowledged that he had emails responsive to the SEC’s subpoena that Karroum had not yet produced, ” id. at 5, but after producing approximately 1, 200 emails, the SEC contended that “Karroum’s email production had multiple, obvious deficiencies.” Id. After several status conferences before Magistrate Judge Robinson, Karroum produced an additional 384 emails, but the SEC nonetheless requested relief from the Court when it determined that the supplemental production “cast doubt on the adequacy of Karroum’s search.” Id. at 7.

The Magistrate Judge then ordered the parties to propose a production protocol, and when they were unable to reach agreement, she held a hearing on how to ensure proper production of all relevant emails. See id. at 8. Karroum’s requests included that the SEC pay for a third-party vendor to conduct the email search, that the Commission remove certain proposed search terms, and that Karroum retain the right to withhold certain emails, which he could submit to the Magistrate Judge for in camera review before producing them. See id. Magistrate Judge Robinson rejected these requests, instead issuing an Order adopting the SEC’s proposed protocol, which specified that Karroum must consent to having his Internet Service Provider (ISP) turn over his emails to the SEC. See id. at 9. Karroum now objects to that Order, which he has asked this Court to vacate. See Objections to Magistrate Judge’s Order (ECF No. 25) at 7.

II. Analysis

Karroum’s objections rest on four independent grounds: A) the emails held by his ISP are protected by his Fourth Amendment right of privacy from unreasonable searches and seizures; B) the ordered protocol will reveal some emails that are protected by the marital-communications privilege; C) the order unlawfully commands the ISP to produce the emails without having received a properly served subpoena; and D) the order does not allow Karroum a meaningful opportunity to assert additional privileges after review, particularly his Fifth Amendment privilege. See Obj., ¶ 8. The Court separately addresses each objection, ultimately concluding that none holds water.

Before turning to these objections, the Court briefly notes that the SEC in its Response argues that Karroum has waived all four of them by failing to present any of them adequately before the Magistrate Judge. See Response at 12. Because the Court finds the objections fall short on their merits, it need not resolve this waiver question.

A. Fourth Amendment Rights

Karroum first contends that the Fourth Amendment’s prohibition on unreasonable searches and seizures protects “information entrusted to communications intermediaries but intended to remain private and free from inspection, ” which he argues covers his email communications stored by his ISP. See Obj., ¶ 12 (citation and internal quotations omitted). The SEC’s request, however, does not turn on whether Karroum waived his right to privacy in storing his emails with the ISP. The Commission’s subpoena, on the contrary, has from the beginning required that Karroum himself turn over the emails in question, and the D.C. Circuit has long held that administrative subpoenas targeting the respondent’s own documents constitute reasonable searches. See Sec. & Exch. Comm’n v. Arthur Young & Co., 584 F.2d 1018, 1023-24 (D.C. Cir. 1978). In this Circuit, searches stemming from investigations “into possible infringements of the securities laws or implementing regulations” are not “unreasonable” since “[t]he Commission’s subpoena power is coextensive with its investigative power; by statute it may require the production of any (document) which the Commission deems relevant or material to the inquiry [as long as] the Commission’s interest in the documents demanded . . . [is not] untoward.” Id at 1024-25. Of course, such subpoenas must be “sufficiently limited in scope” to satisfy the Fourth Amendment’s reasonability requirement. See See v. City of Seattle, 387 U.S. 541, 544 (1967).

Here, the SEC seeks Karroum’s email communications pursuant to a valid subpoena issued under 15 U.S.C. §§ 78u and 77t in conjunction with the ongoing investigation of FX & Beyond Corporation. See Memorandum of Points and Authorities in Support of Application (ECF No. 1) at 7. Its investigation follows evidence suggesting that the company and Karroum “have received at least $3.9 million from investors, purportedly to invest in foreign exchange transactions, and have offered investors guaranteed returns of up to 30%.” Id. at 2. Further evidence suggests that they have used some of these funds to make Ponzi payments to other investors. See id. at 2-3. All the while, neither FX & Beyond nor Karroum has registered with the SEC as a broker nor filed any registration statement concerning the investment offering. See id. In this context, it is entirely appropriate for the SEC to seek Karroum’s communications with investors, including via email, and “the Commission has made sufficient showing of the relevancy of these ...


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