« Securities and Exchange Commission: Proposed Rules for Security-Based Swaps | Main | Torian v. Craig: Individual Injury Allows Shareholders to Sue Directly »

Tabet v. U.S. SEC: Husband and Wife’s Personal Bank Accounts are Fair Game for Investigation

In Tabet v. U.S. SEC, No. 12cv1596-IEG, 2012 WL 3205581 (S.D. Cal Aug. 6, 2012), the United States District Court in the Southern District of California issued an order denying Paul and Jenifer Tabet’s (“Movants”) Motion seeking to challenge two subpoenas for personal bank records under the Right to Financial Privacy Act of 1978. 

On February 7, 2012, the U.S. Securities and Exchange Commission (“SEC”) issued a formal order  of investigation into whether persons had made “false and misleading statements to investors, or otherwise engaging in fraudulent conduct, in connection with the offer and sale of pre-initial public offering ("pre-IPO") shares of Facebook, Inc.” 

The SEC submitted a proffer stating that it had “obtained evidence that Movants may have been involved in the alleged violations.”  The SEC stated that it was investigating whether “Movant Paul Tabet, and others, unlawfully offered and sold interests in Ventures Trust II, LLC and related "Ventures Trust" entities and “whether Movants misused investor money for personal purposes.” 

As part of the investigation, the SEC on June 14, 2012, issued two subpoenas to Bank of America for the personal bank account records of the Tabets.  On June 28, 2012, Movants moved to quash the subpoenas.  Movants argued that the subpoenas were overbroad, oppressive, lacked particularity, and amounted to a warrantless search under the Fourth Amendment.  Paul Tabet argued that the SEC failed to comply with the Right to Financial Privacy Act (RFPA) because one or more of the Movants did not receive notice of the subpoenas.

Under the RFPA, a bank may disclose a customer’s personal information to a government agency via an administrative subpoena.  In ruling on the appropriateness of the subpoenas, the court had to determine that the “Movants are customers whose financial records are being sought” the subpoenas were legitimate, and the bank records were relevant to the law enforcement action.  It was uncontested that the bank records belonged to Paul and Jenifer Tabet and that the SEC’s subpoenas were part of a legitimate law enforcement action. 

To no avail, the Movants contested the relevancy of the bank records that dated back to 2009. First, the SEC provided evidence that the subpoenas were relevant because the investigation related back to 2010, despite the fact that the Formal Order only referred to the 2012 Facebook IPO. The court ruled that the SEC may investigate events dating back to when the alleged scheme started. 

Second, the court reasoned that once a person is connected to apparent illicit conduct, it is relevant to search the person’s personal bank account for further evidence.  

Third, the subpoenas did not lack particularity because both subpoenas provided specific bank accounts and time periods.  The Supreme Court previously held that bank customers have no legitimate expectation of privacy in their bank records; therefore, Movants’ argument that the subpoenas violated the Fourth Amendment lacked merit.  The court denied Paul and Jenifer Tabet’s motion to quash the subpoenas of their personal bank records.

On September 11, 2012, the district court affirmed Magistrate Judge David Bartick’s decision to deny the Tabets’ motion to quash the administrative subpoenas.  The district court reviewed the magistrate’s non-dispositive ruling de novo.  The court “must deny a customer challenge to a subpoena if the government establishes the relevance of the subpoenaed documents to a legitimate law enforcement inquiry.”  The Tabets possibly violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and the bank records sought are relevant because they will help determine the Tabets’ culpability and extent of involvement.  Administrative subpoenas are subject to a broad relevancy standard and the district court affirmed the magistrate judge’s denial of the motion accordingly.

The primary materials for this case may be found on the DU Corporate Governance website.

Reader Comments

There are no comments for this journal entry. To create a new comment, use the form below.

PostPost a New Comment

Enter your information below to add a new comment.

My response is on my own website »
Author Email (optional):
Author URL (optional):
All HTML will be escaped. Hyperlinks will be created for URLs automatically.