Sec. & Exch. Comm'n v. Conway

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SECURITIES AND EXCHANGE COMMISSION, Petitioner, v. BRUCE CONWAY, ELIZABETH CONWAY, and MERRITT CONWAY, Respondents.

Miscellaneous Action No. 22-mc-00212-DDD-KAS

United States District Court, D. Colorado

September 19, 2024

RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE

Kathryn A. Starnella United States Magistrate Judge

This matter is before the Court on Petitioner's Application for Order to Show Cause and for Order Compelling Compliance with Administrative Subpoena [#1] (the “Application”). The Application [#1] has been referred to the undersigned for a Recommendation pursuant to 28 U.S.C. § 636(b)(1)(B), Fed.R.Civ.P 72(b)(1), and D.C.COLO.LCivR 72.1(c)(3).^[1]See [#6] Reassigning Magistrate Judge [#11]. On initial review of the Application [#1], the Magistrate Judge previously assigned to this matter issued an Order to Show Cause [#7] directing Respondents to show cause in writing why the Court should not require compliance with Petitioner's administrative subpoenas. Respondents filed a Response [#8] to the Order to Show Cause [#7], in opposition to the Application [#1], and Petitioner filed a Reply [#9]. The Court has reviewed the briefs, the entire case file, and the applicable law. For the reasons stated below, the Court RECOMMENDS that the Order to Show Cause [#7] be MADE ABSOLUTE and that the Application [#1] be GRANTED.

I. Background

Petitioner is investigating whether Respondent Bruce Conway illegally traded securities based on material nonpublic information. Application [#1] at 1. Before the stock markets opened on August 24, 2020, Cancer Genetics announced a merger with StemoniX, Inc., a privately held company. Id. at 3. Shortly before the merger's announcement, Respondent Bruce Conway “began purchasing CGIX stock, and the [Securities and Exchange Commission (“SEC”)] has reason to believe that, at the time of his purchases, [Respondent Bruce] Conway may have been in possession of material nonpublic information concerning Cancer Genetics' merger with StemoniX.” Id.

On June 15, 2021, Petitioner issued a Formal Order, authorizing employees of the SEC to investigate Respondent Bruce Conway, pursuant to Sections 21(a) and (b) of the Securities Exchange Act of 1934 (“Exchange Act”). Formal Order [#1-3]; see also Decl. of Michael Hoke (“Hoke Decl.”) [#1-2] ¶ 4. The Formal Order was approved by “the Associate Regional Director in charge of the SEC's enforcement program in Denver and was ratified by the Director of Enforcement.” Hoke Decl. [#1-2] ¶ 4; see also Formal Order [#1-3] at 3. Additionally, the Formal Order designates specific SEC staff as officers authorized to, among other things, subpoena witnesses, take evidence for purposes of the investigation, and require production of documents and other materials. Formal Order [#1-3] at 3. As part of the formal investigation, Senior Counsel at the SEC issued subpoenas to Respondent Bruce Conway and his wife and daughter, Respondents Elizabeth and Merritt Conway. Hoke Decl. [#1-2] ¶¶ 1, 14, 21.

On March 16, 2022, and July 8, 2022, the SEC served subpoenas “seeking documents from [Respondent Bruce] Conway related to, among other things, his knowledge of and communications concerning Cancer Genetics and StemoniX, any agreement not to trade on his knowledge about the companies' potential merger, his trading in CGIX securities in his own account, and trusts and accounts held for the benefit of others in which the SEC staff believe [Respondent Bruce] Conway may have traded or directed trading in CGIX securities.” Application [#1] at 4; see also Hoke Decl. [#1-2] ¶¶ 14, 21; Subpoenas [#1-6, #1-11]. Also on July 8, 2022, SEC staff served subpoenas seeking documents from Respondents Elizabeth Conway and Merritt Conway concerning trading in CGIX securities in their accounts, among other things. Subpoenas [#1-12, #1-13].

Respondent Bruce Conway produced some documents in response to the subpoenas. Reply [#9] at 24-25; Hoke Supp. Decl. [#9-1] ¶ 7 (declaring that, “[f]rom April 2 to April 7, 2022,” Mr. Conway sent twenty-two emails “providing information or producing documents in response to the Commission's subpoena”; the “emails generally attached a single screen shot or document . . . related to StemoniX or trading by Mr. Conway in CGIX”). Mr. Conway also produced a list of accounts with Fidelity, Charles Schwab, and UBS over which he had had direct or indirect control. Hoke Supp. Decl. [#9- 1] ¶ 8. The listed accounts included eight of the twelve brokerage accounts identified in one of the SEC's document subpoenas. Id. Respondent Conway expressed an intent to produce more documents as he located them, and he followed through. Id. (declaring that Mr. Conway stated, “I sent some emails that don't total up. I'm sorry, it's a very cumbersome manual process. I'll keep at it .... Work in Progress.'”); id. ¶ 9 (describing additional information produced about the subject brokerage accounts); id. ¶ 11 (describing trade confirmations received from Respondent Conway, which reflected “purchases and sales of CGIX stock” and which identified “ten of the twelve account numbers listed” in the July 8, 2022 subpoena).

Additionally, after the first subpoena was issued, Respondent Bruce Conway “admitted to having traded in CGIX securities across various accounts while in possession of information that CGIX would be acquired by StemoniX.” Reply [#9] at 23. Specifically, during a March 18, 2022 phone call with a senior SEC staff attorney and despite being advised that no direct consequence will arise from declining to answer questions and that the SEC routinely shares information with law enforcement agencies Bruce Conway “confirmed . . . that he knew that Cancer Genetics was StemoniX's merger target at the time he purchased CGIZ stock.” Hoke Supp. Decl. [#9-1] ¶ 3. Further, during an April 4, 2022 phone call with the same senior SEC staff attorney and after being reminded that he need not produce information and that SEC routinely shares information with law enforcement agencies Bruce Conway offered to check his family members' stock trading accounts for any CGIX stock transaction facilitated by them. Id. ¶ 4. On another phone call two days later, Bruce Conway advised the same senior SEC staff attorney that he emailed that attorney “certain single-day trade confirmations for CGIX for his personal trading account at Fidelity” and confirmed that “he had directed the CGIX trading in his IRA account and [in his family members' trust accounts] for which he acted as trustee or otherwise had trading authority.” Id. ¶ 5; see also id. ¶ 6.

Further, Respondent Bruce Conway was served with a subpoena for testimony on June 27, 2022. Application [#1] at 4; see [#1-9].^[2]The subpoena “required [Respondent Bruce] Conway to appear for testimony at the [SEC's] Denver Regional Office on July 22, 2022.” Application [#1] at 4. “Two days before [Respondent Bruce] Conway's scheduled testimony, and three months after receiving a copy of the Formal Order, the Conways' counsel sent a letter refusing to comply with the subpoenas.” Id. at 5. Respondents' counsel noted concerns with the constitutionality of the issuance and enforcement of the Formal Order. Id. Petitioner responded to such concerns, assuring counsel that the Formal Order was constitutional and requesting “confirmation from the Conways' counsel by August 10, 2022, that their clients would comply with the subpoenas.” Id. Petitioner did not receive a response and subsequently filed this action. Id. Petitioner requests that the Court order enforcement of the five administrative subpoenas served to Respondents Bruce, Elizabeth, and Merritt Conway. See [#1-6, #1-9, #1-11, #1-12, #1-13]. All Respondents have asserted their Fifth Amendment rights against self-incrimination and have not produced any additional requested documentation. Response [#8] at 4.

II. Legal Standard

“Federal securities law authorizes the SEC to seek an order from [a district court] requiring compliance with a subpoena in a summary proceeding.” SEC v. Harman Wright Grp., LLC, No. 18-mc-00190-CMA, 2018 WL 6102758, at *2 (D. Colo. Nov. 21, 2018) (citing 15 U.S.C. § 78u(e); Fed.R.Civ.P. 81(a)(5)). “Courts enforce administrative agency investigative subpoenas if (1) the agency's ‘investigation will be conducted pursuant to a legitimate purpose,' (2) the subpoena seeks information that ‘may be relevant to the purpose,' (3) ‘the information sought is not already within the [agency's] possession,' and (4) all ‘administrative steps required . . . have been followed.'” Id. (quoting United States v. Powell, 379 U.S. 48, 57-58 (1964)). “The agency's burden in meeting this test is a ‘slight one,' and ‘[t]he requisite showing is generally made by affidavit of the agent who issued the summons and who is seeking enforcement.'” SEC v. Kimmel, No. 19-mc-00113-CMA, 2020 WL 2800813, at *2 (D. Colo. May 29, 2020) (quoting United States v. Balanced Fin. Mgmt., Inc., 769 F.2d 1440, 1443 (10th Cir. 1985)). “Once this prima facie showing has been met, the respondent has the burden to establish the subpoena is unreasonable.” U.S. SEC v. TKO Farms, Inc., No. 2:21-cv-00216-HCN-CMR, 2021 WL 6284396, at *2 (D. Utah May 6, 2021) (citing Solis v. CSG Workforce Partners LLC, No. 2:11-CV-903-TC, 2012 WL 1379310, at *2 (D. Utah Apr. 20, 2012)).

III. Analysis

A. Enforcement of the Administrative Subpoenas

Petitioner argues that “(1) the investigation will be conducted pursuant to a legitimate purpose; (2) the subpoenas seek information that may be relevant to that purpose; (3) the information sought is not already in the SEC's possession; and (4) all required administrative steps have been followed.” Application [#1] at 6. Respondents do not contest that Petitioner has met its burden regarding the requisite...