FDIC v. Belcher, No. 19-31023 (5th Cir. Oct. 26, 2020) (Stewart, Clement, Costa) (Costa, J., dissenting)
In 2013, Ernst & Young (EY) audited the financial statements of First NBC Bank Holding Company (the Holding Company). The Holding Company’s only asset was the Bank. When the Bank began struggling financially, the Public Company Accounting Oversight Board (PCAOB) launched an investigation into EY’s audits.
As part of its investigation, the PCAOB deposed several EY auditors, including Belcher. EY believed the transcripts of those depositions were confidential and privileged under 15 U.S.C § 7215(b)(5)(A).
When the Bank failed, the Louisiana Office of Financial Institutions appointed the FDIC as the Bank’s receiver. In this capacity, the FDIC launched its own investigation into EY’s audits of the Holding Company. Eventually FDIC sought to hold EY liable for losses resulting from the Bank’s failure.
As part of its investigation, the FDIC asked the PCAOB for the transcripts from Belcher’s deposition. The PCAOB obliged. After reviewing the transcript, the FDIC decided it wanted to depose Belcher itself, so it served him with a pre-suit administrative subpoena.
EY’s lawyers believed that the transcripts of Belcher's deposition before the PCAOB were confidential and privileged under federal law and that the FDIC’s lawyers had committed a legal violation and an ethical breach in seeking and obtaining the transcripts from the PCAOB. As a result, they advised Belcher not to comply with FDIC's subpoena. When Belcher followed that advice, the FDIC responded by filing a complaint against Belcher in federal district court seeking to enforce its administrative subpoena under 12 U.S.C. § 1818(n).
The district court granted the FDIC’s motion to enforce the subpoena, holding that Belcher’s rights under federal law were not violated when the PCAOB shared transcripts of his deposition testimony with the FDIC. The court reasoned that even though the transcripts were confidential and privileged under 15 U.S.C. § 7215(b)(5)(A), the FDIC, in its capacity as the Bank’s receiver, was entitled to receive the documents as “the appropriate Federal functional regulator” of the Bank under 15 U.S.C. § 7215(b)(5)(B)(ii)(II).
Belcher immediately appealed and moved to stay the district court’s order pending the outcome of the Fifth Circuit's review. The district court denied his request for a stay, and Belcher sat for the deposition before the Fifth Circuit could address his appeal. The panel majority concluded the case wasn't moot, however, because the district court could still fashion some form of relief in the event of a remand. The panel didn't go into detail about what that relief might look like, noting only that, if nothing else, the district court could strike Belcher's deposition testimony before the FDIC.
Moving to the merits, the panel majority emphasized that this case presented an issue of first impression: Whether the FDIC, in its capacity as the Bank's receiver, was the "appropriate Federal functional regulator" under 15 U.S.C. § 7215(b)(5)(B)(ii)(II) such that PCAOB was free to share with it Belcher's otherwise-confidential deposition transcripts. Some background on the relevant statutes is necessary to understand the panel majority's reasoning.
15 U.S.C. § 7215(b)(5)(A) makes "all documents and information prepared or received by or specifically for the [PCAOB] ... in connection with an investigation under this section" confidential and privileged. The parties agreed that Belcher's deposition transcripts were confidential and privileged under that statute because they were prepared by the PCAOB in connection with an investigation under § 7215. The case turned on the applicability of an exception to that rule.
The relevant exception appears in § 7215(b)(5)(B)(ii)(II), which provides, in relevant part:
Without the loss of its status as confidential and privileged in the hands of the [PCAOB], all information referred to in subparagraph (A) may— . . .
(ii) in the discretion of the [PCAOB], when determined by the [PCAOB] to be necessary to accomplish the purposes of this Act or to protect investors, be made available to— . . .
(II) the appropriate Federal functional regulator (as defined in section 6809 of this title), other than the [Securities and Exchange] Commission, and the Director of the Federal Housing Finance Agency, with respect to an audit report for an institution subject to the jurisdiction of such regulator[.]
(emph. added). Section 6809(2), in turn, defines "Federal functional regulator to mean
(A) the Board of Governors of the Federal Reserve System; (B) the Office of the Comptroller of the Currency; (C) the Board of Directors of the Federal Deposit Insurance Corporation; (D) the Director of the Office of Thrift Supervision; (E) the National Credit Union Administration Board; and (F) the Securities and Exchange Commission.
FDIC argued that EY's audit reports were "for" the Holding Company and the Bank. See 15 U.S.C. § 7215(b)(5)(B)(ii)(II) (keying in on the "appropriate Federal functional regulator ... with respect to an audit report for an institution subject to the jurisdiction of such regulator." (emph. added)). It reasoned that the Holding Company engaged EY to complete the audit reports, but the Bank later submitted the same reports to FDIC to comply with certain reporting requirements. Because the reports were "for" multiple entities, FDIC contended that, under the circumstances, the statute permitted multiple Federal functional regulators. The parties agreed that the Federal Reserve System was the appropriate Federal functional regulator for the Holding company, and FDIC insisted it was the appropriate Federal functional regulator for the Bank.
The panel majority was unpersuaded. Judge Stewart, writing for himself and Judge Clement, explained that "[a]ssuming an audit report could be 'for' multiple entities, the FDIC is not the 'appropriate' Federal functional regulator here." That was so, he reasoned, because the FDIC was acting in its capacity as the Bank’s receiver--not its regulator--when it acquired the transcripts from the PCAOB.
Accordingly, the PCAOB lacked authority under 15 U.S.C. § 7215(b)(5)(B) to share the transcripts of Belcher’s deposition with the FDIC. "Because the district court’s judgment rested on a contrary interpretation of the applicable statutory language," the Fifth Circuit vacated the judgment enforcing the FDIC’s administrative subpoena and remanded the case to the district court.
Judge Costa dissented. To him, this "strange appeal .... seem[ed] moot." It was "a limited action to enforce a deposition subpoena. That deposition has taken place. What more can be done?" He therefore "would not [have] decide[d] the difficult statutory questions about whether the PCOAB should have turned over these documents." As he put it: "the appeal of an order requiring a deposition is moot once the deposition is over."