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Stein v. U.S. Securities and Exchange Commission

United States District Court, District of Columbia

July 24, 2017



          JOHN D. BATES United States District Judge

         Before the Court are [10] and [11] cross-motions for summary judgment in this Freedom of Information Act (FOIA) case. Plaintiff Mitchell Stein is the subject of both a criminal and a civil judgment entered against him related to various fraud and securities violations. He seeks records developed in the civil enforcement action brought against him by defendant Securities and Exchange Commission (SEC). For the reasons that follow, Stein's motion will be denied, and the SEC's motion will be granted in part and denied in part.

         I. BACKGROUND

         In 2011, the SEC filed a civil enforcement action against Heart Tronics, Inc., a medical device manufacturing company, naming Stein and several other individuals and corporate officers associated with the company as co-defendants. See Donnelly Decl. [ECF No. 10-2] ¶ 14; see also Complaint, SEC v. Heart Tronics, Inc., et al., No. 8:11-1962 JVS (ANx) (C.D. Cal.) [ECF No. 1]. Stein was the purported outside counsel to the company, and his wife, Tracey Hampton-Stein, was the majority shareholder. The SEC alleged that Stein and his co-defendants engaged in a series of fraudulent schemes, masterminded by Stein, to drive up the price of Heart Tronics stock, including repeatedly creating false sales orders and including these in Heart Tronics' SEC filings, and issuing false press releases and other public broadcasts. Donnelly Decl. ¶ 14. Meanwhile, Stein continuously directed the sale of his and Hampton-Stein's Heart Tronics stock, netting more than $5.8 million in profit. Id. Stein was convicted in 2013 on charges of securities fraud, mail fraud, wire fraud, conspiracy to commit mail and wire fraud, and conspiracy to obstruct justice. Id. ¶ 16. In 2015, the district court in the Heart Tronics case entered judgment against Stein based on the collateral estoppel effect of his related criminal conviction. See id. ¶ 15; see also Judgment, SEC v. Heart Tronics, Inc. et al., No. 8:11-1962 JVS (ANx) (C.D. Cal.) [ECF No. 277]. His criminal conviction was affirmed in January 2017 by the Eleventh Circuit, although his sentence was vacated and that case remanded to the Southern District of Florida for resentencing. See United States v. Stein, 846 F.3d 1135, 1156 (11th Cir. 2017). His appeal of the judgment entered against him in the Heart Tronics case, which was stayed during the appeal of the criminal case, is still ongoing in the Ninth Circuit. See Gov't Supp. Br. [ECF No. 19] at 2-3; see also Mar. 3, 2017 Clerk Order, SEC v. Heart Tronics, Inc., et al., No. 15-155506 (9th Cir.) [ECF No. 35] (lifting stay).

         Stein submitted a FOIA request to the SEC in March 2015, seeking two categories of documents: all documents and information described in the privilege log prepared by the SEC in the Heart Tronics case, and all documents and information relating to the SEC's investigation into individuals named Yossi Keret, Tony Nony/Nonoy, Avi Cohen, Ari Cohen, and Marina Orita. See Compl., [ECF No. 1] Ex. B. Stein was accused of inventing several of the names in the latter category for use in false purchase orders. The SEC responded in June 2015, withholding the privilege log records under FOIA Exemption 7(A), which permits the withholding of records that may interfere with law enforcement activities. See Compl., Ex. D at 1; see also 5 U.S.C. § 552(b)(7)(A). The SEC also asserted that other exemptions may apply, and reserved the right to raise those exemptions when Exemption 7(A) was no longer applicable. Compl., Ex D. at 1. With respect to the second category of documents, the SEC did not discuss these in its response, except to conclude in a footnote that “to the extent the records [Stein was] seeking . . . exist” they had either already been made available to Stein in the Heart Tronics litigation, or were included in the privilege log category of documents. Id. at n.1.

         Stein filed an administrative appeal of the SEC's decision, insisting that the agency turn over “all of the requested documents, ” and arguing that Exemption 7(A) did not apply because the civil and criminal actions against him had concluded. Compl., Ex. E at 1-2. The SEC's Office of General Counsel (OGC) responded, concluding that the FOIA officer had correctly withheld the requested records under Exemption 7(A), because claims brought against Stein's co-defendants in the Heart Tronics case were still proceeding, and because Stein had appealed the civil judgment against him to the Ninth Circuit. See Gov't Mot. for Summ. J., Ex. 2 [ECF No. 10-3] at 1-2. Therefore, the OGC concluded that release of the records could still interfere with ongoing enforcement proceedings. Id. at 2.

         Stein filed this suit in September 2015, bringing claims under both FOIA and the Privacy Act, 5 U.S.C. § 552a, seeking the production of all records responsive to his request. Both parties have moved for summary judgment.


         Summary judgment is appropriate where “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). Evidence is construed in the light most favorable to the non-moving party; however, factual assertions made in the moving party's declarations may be accepted as true unless the opposing party submits affidavits, declarations, or documentary evidence to the contrary. See, e.g., Sample v. Bureau of Prisons, 466 F.3d 1086, 1087 (D.C. Cir. 2006); Neal v. Kelly, 963 F.2d 453, 456 (D.C. Cir. 1992).

         “FOIA cases typically and appropriately are decided on motions for summary judgment.” Georgacarakos v. FBI, 908 F.Supp.2d 176, 180 (D.D.C. 2012) (internal quotation marks omitted) (quoting Defenders of Wildlife v. U.S. Border Patrol, 623 F.Supp.2d 83, 87 (D.D.C. 2009)). FOIA provides a “‘statutory right of public access to documents and records' held by federal agencies.” Citizens for Responsibility & Ethics in Wash. (CREW) v. U.S. Dep't of Justice, 602 F.Supp.2d 121, 123 (D.D.C. 2009) (quoting Pratt v. Webster, 673 F.2d 408, 413 (D.C. Cir. 1982)). As the Supreme Court has explained, FOIA is “a means for citizens to know what their Government is up to.” Nat'l Archives & Records Admin. v. Favish, 541 U.S. 157, 171-72 (2004) (internal quotation marks omitted). Thus, FOIA requires federal agencies to make their records available to the public upon request, unless the requested information falls under one of nine statutory exemptions to disclosure. See 5 U.S.C. §§ 552(a)-(b).

         District courts review de novo an agency's decision to withhold requested documents under a statutory exemption, and the agency “bears the burden of proving the applicability of claimed exemptions.” Am. Civ. Liberties Union (ACLU) v. U.S. Dep't of Defense, 628 F.3d 612, 619 (D.C. Cir. 2011); 5 U.S.C. § 552(a)(4)(B). To satisfy its burden, the agency may submit supporting declarations of responsible agency officials and, where necessary, an index of the documents withheld, known as a Vaughn index. See ACLU, 628 F.3d at 619; Vaughn v. Rosen, 484 F.2d 820, 827-28 (D.C. Cir. 1973). “If an agency's affidavit describes the justifications for withholding the information with specific detail, demonstrates that the withheld information logically falls within the claimed exemption, and is not contradicted by contrary evidence in the record or by evidence of the agency's bad faith, then summary judgment is warranted on the basis of the affidavit alone.” ACLU, 628 F.3d at 619. “Ultimately, an agency's justification for invoking a FOIA exemption is sufficient if it appears ‘logical' or ‘plausible.'” Id. (some internal quotation marks omitted) (quoting Larson v. U.S. Dep't of State, 565 F.3d 857, 862 (D.C. Cir. 2009).


         Stein raises three main issues in his motion for summary judgment and in his opposition to the government's motion for summary judgment: he challenges the adequacy of the government's search for responsive records, the agency's withholding determinations, and the agency's segregability determinations. See Stein Mot. for Summ. J. [ECF No. 11] at 10-13, 16-18; Stein Opp'n to Gov't Mot. for Summ. J. (hereinafter “Stein Opp'n”) [ECF No. 14] at 5-10. The government argues that Stein failed to exhaust his administrative remedies with respect to the second category of requested documents and with respect to his Privacy Act claims. Furthermore, in addition to claiming that the requested documents are exempt from disclosure under FOIA Exemption 7(A), the government also raises arguments under Exemptions 3, 5, 6, and 7(C). See Gov't Mot for Summ. J. [ECF No. 10-1] at 1-2; 5 U.S.C. §§ 552(b)(3), (5), (6), (7)(C). The Court will address each argument in turn.

         A. Exhaustion

         Before a plaintiff may bring an action under FOIA, he must first exhaust his administrative remedies. See Hidalgo v. FBI, 344 F.3d 1256, 1258-59 (D.C. Cir. 2003) (noting that exhaustion under FOIA is a prudential requirement). Failure to administratively appeal an adverse determination may bar judicial review of a FOIA claim. See Wilson v. U.S. Dep't of Transp., 730 F.Supp.2d 140, 150 (D.D.C. 2010) (citing Hidalgo, 344 F.3d at 1259-60). Likewise, Privacy Act claims are subject to an administrative exhaustion requirement-and exhaustion under the Privacy Act is a jurisdictional requirement. See Barouch v. U.S. Dep't of Justice, 962 F.Supp.2d 30, 67 (D.D.C. 2013) (citing cases); see also 5 U.S.C. §§ 552a(d)(1)-(3), (g)(1). “A person seeking judicial review of an agency's handling of his or her Privacy Act request must actually exhaust the available administrative remedies.” Barouch, 962 F.Supp.2d at 67 (internal quotation marks omitted) (quoting Makuch v. FBI, No. Civ. A 99-1094 RMU, 2000 WL 915640, at *4 (D.D.C. Jan. 5, 2000)).

         Stein has clearly failed to exhaust any Privacy Act claims-there is no mention of the Privacy Act in his initial request for documents or in his administrative appeal letter. See, e.g., Compl., Ex. B at 1 (“This is a request under the Freedom of Information Act (5 U.S.C. Section 552).”). Indeed, the first and only time any mention of the Privacy Act is made is in his complaint-he makes no argument with respect to the Privacy Act in his motion for summary judgment or in any of the other briefs filed here. See, e.g., Compl. at 5, 8-9.[1] Accordingly, Stein's Privacy Act claims are dismissed for failure to exhaust. See, e.g., Barouch, 962 F.Supp.2d at 67- 68 (dismissing Privacy Act claims for failure to exhaust administrative remedies); Mulhern v. Gates, 525 F.Supp.2d 174, 187 (D.D.C. 2007) (same).

         The SEC also argues that Stein has failed to exhaust his FOIA claim with respect to the second category of requested documents, those relating to various named individuals. See Compl., Ex. B at 1 (Stein's FOIA request). The SEC argues that, because Stein's appeal letter did not contest the SEC's determination that the records in the second category had either already been produced to him or were included in the privilege log, Stein failed to administratively appeal the SEC's determination with respect to this group of documents. Gov't Mot. for Summ. J. at 6.

         It is true that Stein did not specifically contest this point in his appeal letter. He disputed the SEC's withholding decision under Exemption 7(A)-which, according to the SEC, was also the exemption under which the SEC was withholding some documents related to the second document category. See Compl., Ex. D at 1 n.1. But his appeal letter also specifically demanded- twice-“all of the requested documents, ” not just documents related to the first category. See Compl., Ex. E at 1-2. The government is obligated to construe FOIA requests-and appeals- liberally, where a request is “reasonably susceptible to the broader reading.” See LaCedra v. Executive Office for U.S. Attorneys, 317 F.3d 345, 347-48 (D.C. Cir. 2003) (holding that a FOIA request should be read to seek all documents covered by a catchall). While Stein's appeal letter could have been more specific, it is reasonably apparent based on his references to all of the documents he requested that he intended to appeal the SEC's decision with respect to his entire request, not merely some portion of it. Moreover, it is unclear to the Court how, exactly, Stein was supposed to credibly contest the SEC's conclusion that the documents responsive to the second category had either already been turned over to him or were included in the privilege log, as the agency did not explain in its response letter how it reached this conclusion, and Stein did not have access to the documents listed on the privilege log or to any other documents in the SEC's possession to confirm what had been given to him. The Court therefore finds that Stein sufficiently exhausted his administrative remedies with respect to the second category of requested documents.

         B. Adequacy of the Search

         Stein also argues that the government's search for responsive records was inadequate. Where a FOIA plaintiff challenges the adequacy of an agency's search for responsive documents, the agency “must show beyond material doubt . . . that it has conducted a search reasonably calculated to uncover all relevant documents.” Morley v. CIA, 508 F.3d 1108, 1114 (D.C. Cir. 2007) (some internal quotation marks omitted) (quoting Weisberg v. U.S. Dep't of Justice, 705 F.2d 1344, 1351 (D.C. Cir. 1983)); Steinberg v. U.S. Dep't of Justice, 23 F.3d 548, 551 (D.C. Cir. 1994). The relevant question, moreover, “is not whether other responsive documents may exist, but whether the search itself was adequate.” Wilson, 730 F.Supp.2d at 149 (citing Steinberg, 23 F.3d at 551). “[T]he agency must show that it made a good faith effort to conduct a search for the requested records, using methods which can be reasonably expected to produce the information requested.” Oglesby v. U.S. Dep't of the Army, 920 F.2d 57, 68 (D.C. Cir. 1990). Summary judgment may be granted if the agency's declarations provide “sufficiently detailed information for a court to determine if the search was adequate.” Students Against Genocide v. U.S. Dep't of State, 257 F.3d 828, 838 (D.C. Cir. 2001) (internal quotation marks omitted). Stein raises a number of objections to the agency's search methods, most of which relate to the agency's search-or lack thereof-for his second category of requested documents.

         1. Search for documents responsive to Stein's first category of requests

          With respect to the privilege[2] log documents, i.e., documents responsive to Stein's first category of requests, the agency listed on the Vaughn index all of the documents identified individually on the privilege log, identified the handwritten notes and legal research that was listed categorically on the privilege log, and searched for privileged emails that were also identified categorically on the privilege log. Donnelly Decl. ¶¶ 5, 7-8, 12-13. Stein does not challenge the agency's search for either the individual documents identified on the privilege log or the handwritten notes and legal research identified on the privilege log, but he does contest the agency's search for relevant privileged emails.

         Stein objects to the search terms the agency used for identifying privileged emails that were listed categorically on the Heart Tronics privilege log. Stein Opp'n at 5-8; see also Privilege Log, Ex. B. to Stein Decl. [ECF No. 11-1] at 1. The privilege log lists two categories of documents containing privileged emails dated between May 2009 and December 19, 2011: internal SEC attorney and staff accountant emails discussing the Heart Tronics litigation (entry 1), and emails between the SEC and various other government agencies that assisted with the investigation, including attorneys at DOJ, the FBI, and the IRS (entry 4). See Privilege Log at 1; see also Donnelly Decl. ¶¶ 7-8. In gathering these emails for purposes of FOIA review, the SEC's Office of Information Technology (OIT) searched for (1) emails dated between May 3, 2009 and December 19, 2011, the period of the formal investigation; (2) sent to or from named SEC staff who were assigned to the investigation; (3) and which contained any of the following terms: Stein, Heart Tronics, Inc., Martin Carter, Willie Gault, J. Rowland Perkins, Mark Nevdahl, Ryan Rauch, Yossi Keret, Tony Nony/Nonoy, Avi Cohen, Ari Cohen, or Marina Orita, the last five names of which were identified in Stein's second category of requests. Donnelly Decl. ¶ 8.

         Stein argues that these search terms were designed to “confuse the Court and manipulate the facts” by adding names that Stein did not ask for in his FOIA request, i.e., those of his co-defendants and the SEC staff involved in the investigation. Stein Opp'n at 7. According to Stein, this is evidence of the SEC's bad faith, because it is evidence that the SEC was trying to obscure or skew the results of any search. Id. at 5-7. But Stein's objections on this point make little sense. The SEC's search terms with respect to the privileged emails were reasonably calculated to identify privileged emails noted on the Heart Tronics privilege log by identifying relevant dates (the period of the investigation), custodians (SEC attorneys and staff assigned to the investigation), and subjects of or persons of interest in the investigation (Stein, his co-defendants and other relevant names, including Yossi Keret, Tony Nony, etc.). These search terms produced 2, 715 documents, which the SEC then reviewed, concluding that 1, 800 were privileged emails categorically identified on the privilege log. Donnelly Decl. ¶¶ 8-10. There is no evidence of bad faith. The Court is therefore satisfied that the agency has fulfilled its search obligations with respect to the first category of requested documents.

         2. Search for documents responsive to the second category of requests

         With respect to the second category of documents, as the Court has already noted, the agency concluded in its FOIA response letter that documents responsive to this category had either already been made available to Stein in the Heart Tronics litigation or were included on the privilege log. Compl., Ex. D. at 1 n.1. It is clear that the SEC did not provide Stein the documents it already produced to him in the Heart Tronics case in response to his FOIA request, nor does the agency state that it ever conducted a search through its records for documents specifically responsive to Stein's second category of requests-instead, it concluded that the only documents that had not been made available to Stein in the previous litigation were those identified on the privilege log.

         Stein never directly addresses the agency's argument that it produced much of his requested information during the Heart Tronics litigation. He does, however, object generally to the agency's failure to search for documents responsive to this second category of requests. Stein also argues repeatedly that the SEC has a 200-million-file database compiled during the investigation, containing vast numbers of unprivileged documents, that the government never produced to him in either the Heart Tronics litigation or in United States v. Stein. Stein Opp'n at 3, 9, 10, 12, 16. Stein argues that the SEC's failure to search this database for documents relating to his second category of requests is additional evidence of the agency's bad faith. Id. at 3-10.

         a. Heart Tronics discovery and the SEC's open file policy

         Although the SEC maintains that Stein waived any objection to the agency's findings with respect to category two of the request, the SEC nevertheless provided the Court with information about the basis for its conclusion that documents responsive to category two were already provided to Stein in the Heart Tronics litigation or were included on the privilege log. See Gov't's Reply [ECF No. 16] at 4-6. The SEC relies on a declaration submitted by an attorney in the Heart Tronics litigation in response to Stein's motion to compel in that case, which explains the SEC's “open file” discovery policy during that investigation. Id. at 4; see also SEC Am. & Supp. Resp. to Request for Produc. of Docs., Ex. A to Gov't's Reply [ECF No. 16-1] ¶ 3; Nonaka Decl., Ex. B to Gov't's Reply [ECF No. 16-2].[3]

         According to the Nonaka declaration, the SEC produced two million pages of documents to Stein and his co-defendants during the litigation, which constituted “all subpoenas and voluntary document requests issued during the investigation, all documents produced in response to such subpoenas and requests, all investigation testimony given by any witness, and all exhibits to all testimony.” Nonaka Decl. ¶¶ 5-6. The SEC also made available for review two one-terabyte hard drives that were delivered to the SEC on behalf of Heart Tronics, and which contained data from Heart Tronics computers, as well as boxes of documents likewise delivered by Heart Tronics (the “RenewData materials”). Id. ΒΆΒΆ 7-8. The SEC received these materials from RenewData, a third party e-discovery vendor that Heart Tronics' one-time counsel, Greenberg Traurig, LLP, had contracted with on Heart Tronics' behalf to help manage the discovery process during the SEC's investigation. The SEC received the ...

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