10th Circuit: Protective Orders Precluded Sharing Information Obtained in SEC Action with IRS

A 10th Circuit panel found that the U.S. Attorney's Office improperly disclosed confidential information to the IRS in violation of two protective orders. These orders were entered to safeguard personal financial information provided to a receiver in an SEC enforcement action by the victim of a securities fraud scheme. The IRS then obtained the information from the U.S. Attorney in the course of an investigation into possible tax avoidance by the investors in the scheme. (SEC v. Merrill Scott & Associates)

Dr. Richard Gerber invested money with Merrill Scott & Associates under a nominee arrangement promising large tax savings. The SEC subsequently sued Merrill Scott for securities fraud. A receiver in the SEC took charge of Dr. Gerber's assets. In order to recover these assets, Dr. Gerber agreed to provide certain personal and confidential financial information to the receiver. The district court entered two protective orders to safeguard the confidentiality of this information, which found its way into the hands of the IRS.

The initial protective order provided that all confidential information supplied by Dr. Gerber, including documents and deposition testimony, would be used solely for the purpose of litigating the SEC action and related litigation commenced by the receiver or the SEC, and for no other purpose, including “any other legal proceedings.” The order did provide, however, that it could be disclosed to the U.S. Attorney. The second protective order included similar language that it would be “used solely for purposes directly related to this action.”

After obtaining the confidential information from the U.S. Attorney's office, the IRS issued a number of third-party administrative summonses to banks, law firms, and brokerages concerning Dr. Gerber’s tax liability. In response, Dr. Gerber filed a motion with the district court for return of all documents allegedly disseminated in violation of the protective orders. In ruling against Dr. Gerber, the district court relied in part on the SEC’s alleged “statutory and regulatory obligation” to share information with other governmental law enforcement agencies.

The 10th Circuit rejected this conclusion as an abuse of discretion. While the alleged obligation was reflected in the plain language of the orders permitting sharing of information with specified agencies for limited purposes, the court found that "it will not support the nearly unlimited construction placed on it by the government. The assertion of a law enforcement purpose is insufficient, without more, to justify actions in derogation of a valid protective order."

The statutory provisions allowing the SEC to share information, including Securities Act Section 20(b) and Exchange Act Sections 21(d)(1) and 24(c) are permissive rather than mandatory, noted the court. The permissive nature of the SEC’s ability to share information did not provide an extrinsic limit on the SEC’s ability to enter into binding protective orders. "The SEC can certainly make a discretionary decision to forego its opportunity to share documents with others, including law enforcement agencies," stated the 10th Circuit.

Arguments that the U.S. Attorney could not be bound by the orders because it was not a party to the proceedings also failed. While in general a non-party is not bound by a protective order, the court stated that these orders clearly contemplated that the U.S. Attorney would only receive the information in question pursuant to their terms. As stated by the court, "we therefore cannot accept the government’s argument that would permit it unlimited use of the confidential information simply by passing it through the U.S. Attorney.

The panel also observed that a showing of extraordinary or unusual circumstances is generally necessary in order to permit the government to benefit from access to confidential information provided pursuant to a protective order. The government failed to identify the presence of such unusual or extraordinary circumstances in this case, concluded the court.

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