U.S. Securities and Exchange Commission v. Karroum

• Court: District Court, District of Columbia
• Decided: December 9, 2015
• Docket: Misc. No. 2015-0590
• Status: Published

Opinion

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

U.S. SECURITIES AND EXCHANGE COMMISSION,

Movant, v. Misc. Action No. 15-590 (JEB/DAR)

STEVE H. KARROUM, et al.,

Respondent.

MEMORANDUM OPINION AND ORDER

When Respondent Steve H. Karroum resisted an administrative subpoena issued by the

Securities and Exchange Commission, which is investigating him and his company for potential

securities violations, the SEC brought this miscellaneous action for enforcement. After the

parties were unable to resolve whether certain emails should be produced, Magistrate Judge

Deborah Robinson, to whom the case had been referred, approved the SEC’s proposed protocol.

Karroum objects and asks this Court to reverse that holding. Believing it correct, the Court will

overrule his objections.

I. Background

In November 2014, the SEC issued a formal order authorizing Commission staff to

investigate and take testimony related to the activities of FX & Beyond Corporation. See SEC

Response (ECF No. 26) at 2. The SEC sought to determine “whether persons or entities have

violated or are violating the registration, antifraud, and broker-dealer registration provisions of

the federal securities laws . . . .” Id. Included in the SEC’s gaze was Karroum, the company’s

president, whose activities the SEC is examining to uncover whether he may have engaged in a

1 Ponzi-type or other scheme to defraud investors or misappropriate their funds. See id. To this

end, SEC staff served Karroum with a properly issued subpoena on January 14, 2015. See

Application for Order to Show Cause and for Order Requiring Compliance with Subpoenas

(ECF No. 1) at 1-2. The subpoena required Karroum to produce, within several weeks’ time,

“documents, computers or other materials related to his investment, business, and financial

activities” and to testify before SEC investigators. See id. at 2-3.

After effecting service, SEC staff made repeated efforts to contact Karroum regarding

compliance with the terms of the subpoena, but he at first did not return their calls, and then

later, through his attorney, repeatedly sought to push back the testimony date, all while failing to

provide the required documents. See Response at 3. Karroum eventually turned over some

documents, but did not relinquish any email communications with investors — as required by the

subpoena — and he parried attempts by the SEC to set a date for testimony. See id. at 3-4.

By May of this year, while Karroum’s attorney said he had “no further responsive

documents,” the SEC maintained that Karroum still had not complied with the subpoena

regarding the production of his emails. See id. at 4. Following the old proverb, “If at first you

don’t succeed, try, try, try again,” the SEC did try, try again to get Karroum to comply, this time

by filing this miscellaneous action for an Application for Order. See Response at 4. Eventually,

“Karroum’s counsel acknowledged that he had emails responsive to the SEC’s subpoena that

Karroum had not yet produced,” id. at 5, but after producing approximately 1,200 emails, the

SEC contended that “Karroum’s email production had multiple, obvious deficiencies.” Id. After

several status conferences before Magistrate Judge Robinson, Karroum produced an additional

384 emails, but the SEC nonetheless requested relief from the Court when it determined that the

supplemental production “cast doubt on the adequacy of Karroum’s search.” Id. at 7.

2 The Magistrate Judge then ordered the parties to propose a production protocol, and when

they were unable to reach agreement, she held a hearing on how to ensure proper production of

all relevant emails. See id. at 8. Karroum’s requests included that the SEC pay for a third-party

vendor to conduct the email search, that the Commission remove certain proposed search terms,

and that Karroum retain the right to withhold certain emails, which he could submit to the

Magistrate Judge for in camera review before producing them. See id. Magistrate Judge

Robinson rejected these requests, instead issuing an Order adopting the SEC’s proposed

protocol, which specified that Karroum must consent to having his Internet Service Provider

(ISP) turn over his emails to the SEC. See id. at 9. Karroum now objects to that Order, which he

has asked this Court to vacate. See Objections to Magistrate Judge’s Order (ECF No. 25) at 7.

II. Analysis

Karroum’s objections rest on four independent grounds: A) the emails held by his ISP are

protected by his Fourth Amendment right of privacy from unreasonable searches and seizures;

B) the ordered protocol will reveal some emails that are protected by the marital-

communications privilege; C) the order unlawfully commands the ISP to produce the emails

without having received a properly served subpoena; and D) the order does not allow Karroum a

meaningful opportunity to assert additional privileges after review, particularly his Fifth

Amendment privilege. See Obj., ¶ 8. The Court separately addresses each objection, ultimately

concluding that none holds water.

Before turning to these objections, the Court briefly notes that the SEC in its Response

argues that Karroum has waived all four of them by failing to present any of them adequately

before the Magistrate Judge. See Response at 12. Because the Court finds the objections fall

short on their merits, it need not resolve this waiver question.

3 A. Fourth Amendment Rights

Karroum first contends that the Fourth Amendment’s prohibition on unreasonable

searches and seizures protects “information entrusted to communications intermediaries but

intended to remain private and free from inspection,” which he argues covers his email

communications stored by his ISP. See Obj., ¶ 12 (citation and internal quotations omitted).

The SEC’s request, however, does not turn on whether Karroum waived his right to privacy in

storing his emails with the ISP. The Commission’s subpoena, on the contrary, has from the

beginning required that Karroum himself turn over the emails in question, and the D.C. Circuit

has long held that administrative subpoenas targeting the respondent’s own documents constitute

reasonable searches. See Sec. & Exch. Comm’n v. Arthur Young & Co., 584 F.2d 1018, 1023-

24 (D.C. Cir. 1978). In this Circuit, searches stemming from investigations “into possible

infringements of the securities laws or implementing regulations” are not “unreasonable” since

“[t]he Commission’s subpoena power is coextensive with its investigative power; by statute it

may require the production of any (document) which the Commission deems relevant or material

to the inquiry [as long as] the Commission’s interest in the documents demanded . . . [is not]

untoward.” Id at 1024-25. Of course, such subpoenas must be “sufficiently limited in scope” to

satisfy the Fourth Amendment’s reasonability requirement. See See v. City of Seattle, 387 U.S.

541, 544 (1967).

Here, the SEC seeks Karroum’s email communications pursuant to a valid subpoena

issued under 15 U.S.C. §§ 78u and 77t in conjunction with the ongoing investigation of FX &

Beyond Corporation. See Memorandum of Points and Authorities in Support of Application

(ECF No. 1) at 7. Its investigation follows evidence suggesting that the company and Karroum

“have received at least $3.9 million from investors, purportedly to invest in foreign exchange

4 transactions, and have offered investors guaranteed returns of up to 30%.” Id. at 2. Further

evidence suggests that they have used some of these funds to make Ponzi payments to other

investors. See id. at 2-3. All the while, neither FX & Beyond nor Karroum has registered with

the SEC as a broker nor filed any registration statement concerning the investment offering. See

id. In this context, it is entirely appropriate for the SEC to seek Karroum’s communications with

investors, including via email, and “the Commission has made sufficient showing of the

relevancy of these materials to justify the Court’s enforcement of the subpoena.” Arthur Young

& Co., 584 F.2d at 1028. Because the SEC’s scope is properly limited, the Court finds no Fourth

Amendment violation resulting from the Magistrate Judge’s Order.

B. Marital Privilege

Karroum’s second argument to evade the subpoena is that certain searches in the ordered

protocol include keywords that are likely to yield emails protected under the marital-

communications privilege. See Obj., ¶ 15 (citing United States v. Hamilton, 701 F.3d 404 (4th

Cir. 2012)). The SEC’s search protocol indeed includes keywords such as “Albouhairy” and

“Bouhairi,” which Karroum alleges are related to his wife, Sahar Albouhairy. See id.

Unfortunately for Karroum, while Hamilton acknowledged the existence of the marital privilege,

that case actually held that emails sent “through [the defendant’s] work email account” would

not be covered under the privilege. See 701 F.3d at 407. Furthermore, Hamilton — the only

case Karroum cites for this proposition — makes clear only that the marital privilege “‘hold[s]

their confidences immune from proof in court,’” not that the privilege entirely thwarts an

administrative or law-enforcement investigation. See id. (quoting Wolfie v. United States, 291

U.S. 7, 16 (1934)) (emphasis added).

5 In any event, resolving the contours of the marital privilege is unnecessary here because

the SEC’s protocol includes a “privilege review team” of attorneys unrelated to the investigation

who will ensure that “communications between Karroum and his wife . . . will be removed from

the production . . . .” Response at 15. The SEC avers that it must search for emails containing

the words “Bouhairi” and/or “Albouhairy” because its investigation has found that Karroum is

associated with a Lebanese company, 3S S.A.R.L., which has associates named “Bouhairi” and

which is located in a building called the “Al-Bouhairy” building. Id. at 15. Given the

Commission’s reasonable interest in emails incorporating these terms and the protocol’s plan to

screen any email communications between Karroum and his wife, the Magistrate Judge’s Order

does not encroach on Karroum’s marital privilege, however far such privilege may extend at this

non-testimonial stage in the proceedings.

C. Authority re: ISP

Respondent next maintains that the Magistrate Judge lacks the authority to order the ISP

to produce his emails. See Obj., ¶¶ 17-18. This, Karroum contends, is because the SEC has not

yet served a third-party subpoena on Register.com, the ISP that acts as a conduit for his emails.

See id., ¶ 19. The SEC counters that it has already communicated with the ISP, which has stated

that it will produce his emails if it receives his signed and notarized consent form. See Response

at 16; Decl. of Stephen T. Kaiser, ¶ 9. Although the Court questions whether Karroum even has

standing to raise a challenge on behalf of his ISP, the Magistrate Judge’s Order instructed that he

was first to “deliver to [the SEC] a signed and notarized consent form . . . for the release of his

emails from his internet service provider to [the SEC].” Order at 1. As such, her Order to the

ISP was conditioned on receipt of that consent form, see id., and so the Court certainly has the

authority to order Karroum to sign such a form.

6 D. Preservation of Privileges

Karroum’s last-ditch position is that the Order insufficiently protects his ability to raise

other privileges, in part because the parties have not yet agreed on a “set of privilege terms” —

and Karroum is doubtful that they will. See Obj., ¶¶ 22-26. The SEC explains that it will

safeguard his attorney-client and marital privileges by including any emails between Karroum

and one of his attorneys or his spouse in the list of emails to be screened by a team of attorneys

not associated with the investigation. See Response at 16; Order at 2. The Court finds this

proposed course of action wholly appropriate in balancing Karroum’s right to assert these

privileges against the SEC’s statutory subpoena authority and interest in conducting its

investigation.

The only other possible privilege Karroum specifically raises is a “Fifth Amendment

right[] against self-incrimination.” Obj., ¶ 26. Yet as the SEC rightly retorts, all of his emails

are “‘pre-existing, voluntarily prepared documents,’” which are not covered by the Fifth

Amendment. See Response at 17 (quoting United States v. Hubbell, 167 F.3d 552, 567-69 (D.C.

Cir. 1999), aff’d, 530 U.S. 27 (2000)). “The Fifth Amendment does not independently proscribe

the compelled production of every sort of incriminating evidence but applies only when the

accused is compelled to make a Testimonial Communication that is incriminating.” Fisher v.

United States, 425 U.S. 391, 408 (1976). The Court in Fisher noted that a subpoena requiring

production of documents “does not compel oral testimony,” nor would it “compel the [recipient]

to restate, repeat, or affirm the truth of the contents of the documents sought.” Id. at 409. While

the Court noted that the act of production can have “communicative aspects of its own,” when

the individual has acknowledged the existence of the documents already — and knowledge of

7 those documents exists independent of him — his production of such documents is not

testimonial in nature. See id. at 410.

Finally, Karroum raises an additional possible violation of the Fifth Amendment by

speculating that the SEC might transmit evidence acquired under the Magistrate Judge’s Order to

the Federal Bureau of Investigation, thus allowing the Department of Justice to bypass a federal

grand jury. See Obj., ¶ 27. Problematically for Karroum, the sole case he cites for the

proposition that such activity is unlawful, United States v. Stringer, 408 F. Supp. 2d 1083 (D. Or.

2006), was overturned on appeal. See United States v. Stringer, 535 F.3d 929 (9th Cir. 2008).

Karroum’s position is further weakened by the fact that the Stringer appellate court held that

when the SEC begins its civil investigation first, before a possible subsequent criminal

prosecution, this “tends to negate any likelihood that the government began the civil

investigation in bad faith, as, for example, in order to obtain evidence for a criminal

prosecution.” Id. at 939. Further, that court was looking at the propriety of dismissing criminal

indictments, not the enforcement of an administrative subpoena in a civil proceeding. Should

Karroum later find himself the target of federal criminal prosecution, he is of course free to raise

these arguments again in those proceedings.

In summary, the Court finds that Karroum’s attorney-client and marital privileges will be

properly protected by means of the privilege-review procedure, and that the production protocol

ordered by the Magistrate Judge does not infringe on his Fifth Amendment rights.

III. Conclusion

The SEC has repeatedly sought Karroum’s compliance with its subpoena, and as this

Court has now rejected his objections to its enforcement, the SEC will at last have its way. The

8 Court, accordingly, ORDERS that Respondent’s objections to Magistrate Judge Robinson’s [23]

Order are OVERRULED.

/s/ James E. Boasberg JAMES E. BOASBERG United States District Judge Date: December 9, 2015