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United States Securities and Exchange Commission v. Waymack

United States District Court, District of Columbia

February 19, 2019

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Movant,
v.
JOHN PAUL WAYMACK, Respondent.

          MEMORANDUM OPINION

          ROSEMARY M. COLLYER UNITED STATES DISTRICT JUDGE.

         John Paul Waymack is a citizen of the United States, a transplant surgeon living in Washington, D.C., and the founder, Chairman, and Chief Medical Officer of Kitov Pharmaceuticals Holdings, Ltd., a drug company headquartered in Israel and listed on the Tel Aviv Stock Exchange. The Israel Securities Authority is conducting a criminal investigation of Kitov Pharmaceuticals and has asked the United States Securities and Exchange Commission for assistance by obtaining documents and deposition testimony from Dr. Waymack here in the U.S. Because Dr. Waymack objects, the Securities and Exchange Commission has sought a court order compelling his compliance with its subpoenas.

         Dr. Waymack faces a significant difference in criminal law between the United States and Israel. He has rights under the Fifth Amendment to the U.S. Constitution to refuse to answer questions that may incriminate him; no U.S. prosecutor may later cite the silence of a defendant as indicative of guilt. In Israel, however, while a person under investigation can refuse to answer questions, his refusal may be cited as evidence of guilt. Dr. Waymack protests that the Securities and Exchange Commission cannot properly use a civil subpoena to obtain evidence for a criminal investigation or put him in this dilemma between asserting his rights in the U.S. and having it used against him in Israel.

         The Court concludes that the Securities and Exchange Commission has statutory authority to proceed as it is but that its subpoenas for documents are unreasonably broad. Therefore, it will grant the Securities and Exchange Commission's motion in part and deny it in part.

         I. FACTS

         Kitov Pharmaceuticals is a biopharmaceutical company headquartered in Israel. Its stock is traded on the Tel Aviv Stock Exchange and its American Depository Shares are listed on the NASDAQ Capital Market stock exchange. See Appl. of the SEC for an Order to Show Cause and for an Order Requiring Compliance with an Admin. Subpoena (SEC Appl.) [Dkt. 1] at 2. As a foreign private issuer, Kitov must make relevant regulatory filings with the U.S. Securities and Exchange Commission (SEC or Commission). Id. Dr. Waymack is the founder, Chairman and Chief Medical Officer of Kitov and a resident of the District of Columbia. Id. Founded in the United States, Kitov was moved to, and incorporated in, Israel after it received significant funding from Israeli investors.

         The Israel Securities Authority (ISA) is an agency of the Israel government that regulates the trade of securities in Israel and has the authority to investigate Kitov due to its location in Israel and its listing on the Tel Aviv Stock Exchange.[1] Id. In March 2017, the ISA requested assistance from the Commission in procuring documents and testimony from Kitov and related persons located in the United States.[2] Id. “On June 13, 2017, pursuant to Section 21(a)(2) of the Exchange Act, 15 U.S.C. § 78u(a)(2), the Commission issued an Order Directing Private Investigation and Designating Officers to Take Testimony in an investigation captioned In the Matter of Kitov Pharmaceuticals Holdings, Ltd. (the “Formal Order”).” Id. at 4. The Formal Order described the SEC's authority to issue subpoenas for testimony and documents to Dr. Waymack and Kitov in aid of the ISA's investigation. Id.

         On June 15, 2017, the Commission served a subpoena on Dr. Waymack, requiring him to produce certain documents by June 30, 2017, and to appear for testimony on September 12, 2017. Id. The subpoena was properly served on Dr. Waymack. Id. In response to the June 2017 subpoena, Dr. Waymack sought more time to comply and contested the potential volume of responsive documents at issue. Id. at 4-5. Counsel for Dr. Waymack also indicated Dr. Waymack was considering asserting his Fifth Amendment right against self-incrimination and refusing to testify. Id. at 5.

         After prolonged negotiations, on January 23, 2018, Dr. Waymack indicated that he “would neither produce documents nor appear for testimony.” Id.; see also Ex. A-6, Dr. Waymack's Resp. in Opp'n to the Commission's Appl. (Waymack Opp'n) [Dkt. 5], Jan. 23, 2018 Letter from Dr. Waymack's Counsel to SEC (Waymack Jan. 2018 Letter) [Dkt. 5-7]. This denial was based on Dr. Waymack's belief that the ISA is attempting to use the SEC process to obtain legally certain of his documents that the ISA had unlawfully seized through an improperly-executed search warrant in Israel. See Waymack Jan. 2018 Letter at 1. Dr. Waymack contends that the ISA had a warrant when it conducted a search at Kitov headquarters in Israel but that its agents exceeded the authority of the warrant by collecting documents and emails from Dr. Waymack that were maintained by Google on servers outside of Israel. Waymack Opp'n at 4-7. Specifically, Dr. Waymack states that his email account, which is exclusively based in the United States, was accessed and frozen by the ISA for weeks. See Id. at 5. Dr. Waymack informed the SEC that Kitov is challenging the validity of that aspect of the search with the Attorney General of Israel, but that no decision has been reached. See Waymack Jan. 2018 Letter at 1.

         On July 23, 2018, the SEC served Dr. Waymack with a second subpoena for documents and testimony. See SEC Appl. at 5-6; see also Ex. A-9, Waymack Opp'n, SEC Am. Subpoena [Dkt. 5-10]. Dr. Waymack again refused to testify or provide documents, objecting to the “ISA's investigative misconduct, ” “significant legal and constitutional concerns within the United States, ” and the overbreadth of the proposed search terms. Ex. A-10, Waymack Opp'n, Aug. 3, 2018 Letter from Dr. Waymack's Counsel to SEC (Waymack Aug. 2018 Letter) [Dkt. 5-11] at 1-2. The SEC and Dr. Waymack's counsel continued to meet and confer in an attempt to resolve the dispute until September 14, 2018, when both parties filed motions to either compel or quash the outstanding subpoenas. See SEC Appl.; Mot. to Quash Am. Subpoena, Waymack v. SEC, No. 18-mc-110 (D.D.C. Sept. 14, 2018), ECF No. 1. The Court consolidated the cases in miscellaneous case number 18-mc-128 and the motion has been fully briefed.[3] The Court heard oral argument from the parties on February 12, 2019.

         II. LEGAL STANDARDS

         A. Jurisdiction

         This Court has jurisdiction under § 21(c) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78a et seq. (Exchange Act), which authorizes the Commission to sue to enforce a subpoena in the jurisdiction in which an investigation is proceeding or the subpoenaed-individual resides. See 15 U.S.C. § 78u(c). The investigation is being carried out in the District of Columbia and Dr. Waymack is a resident of the District of Columbia.

         B. Motion to Compel

         Section 21(a)(2) of the Exchange Act gives the Commission the authority to assist foreign securities agencies:

On request from a foreign securities authority, the Commission may provide assistance in accordance with this paragraph if the requesting authority states that the requesting authority is conducting an investigation which it deems necessary to determine whether any person has violated, is violating, or is about to violate any laws or rules relating to securities matters that the requesting authority administers or enforces.

15 U.S.C. § 78u(a)(2). The Commission may provide such assistance “without regard to whether the facts stated in the request would also constitute a violation of the laws of the United States.” Id. Section 21(b) of the Exchange Act provides the Commission ...


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