The US District Court for the District of Kansas recently ordered the Securities and Exchange Commission to produce certain non-public, internal documents to defendant in a civil enforcement action.
The SEC brought various securities fraud claims against defendant Stephen Kovzan alleging, among other things, that he was involved with the preparing and signing public SEC filings for his employer, NIC Inc. (NIC), that were materially false and misleading because they did not disclose as income certain prerequisites received by NIC’s chief executive officer.
Defendant moved to compel the SEC to produce documents concerning the Commission’s interpretive guidance regarding Item 402 of Regulation S-K, which provides detailed instructions for the disclosure of executive compensation in reports filed with the SEC. In response to defendant’s motion to compel, the SEC argued that it had produced numerous pubic documents relating to Item 402, including hundreds of comment letters, public interpretive guidance, no-action letters and legal interpretations by the Commission in the context of administrative proceedings. The SEC, however, refused to undertake a search of its staff for other responsive documents, including internal SEC documents and third-party communications relating to Item 402.
A Magistrate Judge denied defendant’s motion to compel and held that the requested documents were not relevant to any claim or defense in the case. Defendant then moved the District Court to review the decision, arguing that the documents were relevant to the issues of scienter, fair notice and the appropriateness of the injunctive relief requested. The District Court granted defendant’s motion for review of the Magistrate’s Order and directed the SEC to produce the requested documents. The Court concluded that production of the requested non-public documents by the SEC may lead to admissible information relevant to each of the issues raised by defendant.
Finally, the SEC argued that the additional responsive documents would fall within the deliberative process privilege. The District Court however, ruled that because the SEC had not yet conducted the relevant search, it could not credibly make a determination regarding privilege. While the Court agreed with the SEC that internal documents concerning the SEC’s final decisions may be privileged, the Court nonetheless refused to issue a “blanket exemption” for the documents.
SEC v. Kovzan, No. 11-2017-JWL (D. Kan. Oct. 10, 2012).