FINAL ENFORCEMENT DECISION ISSUED BY THE BOARD OF GOVERNORS.

In the Matter of
Incus Co., Ltd.
Tortola, British Virgin Islands and
Carlos Hank Rhon
An Institution-Affiliated Party of
Incus Co., Ltd., and
Laredo National Bancshares
Laredo, Texas

Docket Nos. 98-038-B-FHC, 98-038-B-I, 98-038-CMP-FHC, 98-038-CMP-I, 98-038-E-I

Determination on Requests for Interlocutory Review

Before the Board are three requests tot interlocutory review filed jointly by Incus Co., Ltd. and Carlos Hank Rhon, the respondents in the above-captioned action (collectively, "Respondents"). The first request challenges the administrative law judge's order striking certain affirmative defenses advanced by Respondents. The second and third requests involve three discovery rulings made by the administrative law judge (the "ALJ") relating to the scope of discovery and the assertion of privilege by Board Enforcement Counsel ("Enforcement Counsel").

Requests for interlocutory review of orders of an ALJ are governed by section 263.28 of the Board's Rules of Practice for Hearings, 12C.F.R. [sections] 263.28 ("Rule 28"). Under that rule, the Board "may exercise interlocutory review" of an ALJ order if the Board finds that at least one of four circumstances exists:

(1) The ruling involves a controlling question of law or policy as to which substantial grounds exist for a difference of opinion;

(2) Immediate review of the ruling may materially advance the ultimate termination of the proceeding;

(3) Subsequent modification of the ruling at the conclusion of the proceeding would be an inadequate remedy; or

(4) Subsequent modification of the ruling would cause unusual delay or expense.

12 C.F.R. [sections] 263.28(b). These provisions are similar to 28 U.S.C. [sections] 1292(b), which sets forth the circumstances under which federal appellate courts may exercise jurisdiction over interlocutory appeals. Accordingly, the Board has previously observed that "`[w]hile section 1292(b) and case law governing interlocutory review in civil proceedings are not binding in this administrative proceeding, they provide useful guidance to the [agencies] in deciding procedural issues' such as the one presented here." In re Clifford & Altman, No. 92-080-E-II, Order on Respondents' Motion for Interlocutory Review of Administrative Law Judge's Order (Part 1), August 21, 1996, ("Clifford & Altman I"), slip op. at 32, quoting In the Matter of David L. Paul, Order No. OTS AP 92-92, 1992 OTS DD LEXIS 90, *8 (1992).

In Clifford & Altman I, the Board noted that interlocutory review is discretionary, and that the scope within which such discretion should be exercised is extremely narrow. Clifford & Altman I, slip op. at 33, citing US. v. Ivory, 29 F. 3d 1307, 1311 (8th Cir. 1994), cert. denied, 116 S. Ct. 963 (1996). This limitation reflects a strong and longstanding policy against piecemeal appeals before a final judgment. Switzerland Cheese Ass'n, Inc. v. E. Horne's Market, Inc., 385 U.S. 23, 24-25 (1966). "[T]here has been a firm congressional policy against interlocutory or `piecemeal' appeals and courts have consistently given effect to that policy." Abney v. U.S., 431 U.S. 651, 656 (1976). Therefore, while Section 1292(b) and Rule 28 contemplate "discretionary" interlocutory review, the exercise of that discretion should be viewed in the context of an overriding federal policy against piecemeal review of litigation before the entry of a final judgment.

Accordingly, while a finding of one of the four circumstances identified in Rule 28 is a necessary precondition to interlocutory review by the Board, it is not alone sufficient to require such review. Rather, the Board will exercise its discretion to grant interlocutory review where at least one of the prerequisites is met, using all of the prerequisites as guideposts in the exercise of that discretion. Accord, In re Henderson, OTS Order No. AP 96-23, 1996 OTS DD LEXIS 12 at *7 (applying identical regulation). The movant has the burden of persuading the Board that "exceptional circumstances justify a departure from the basic policy" of postponing all review until the conclusion of the case. Coopers & Lybrand v. Livesay, 437 U.S. 463, 475 (1978).

For the reasons set forth below, the Board determines that Respondents have failed to meet that burden, and denies their requests for interlocutory review.

A. Order Striking Certain Affirmative Defenses

In their respective answers to the Notice of Charges, the Respondents interposed a number of affirmative defenses including three affirmative defenses based upon alleged misconduct by Enforcement Counsel in the investigation that preceded filing the Notice of Charges. Specifically, the Respondents contend that during the investigation Enforcement Counsel "denied [Respondents their] right to effective assistance of counsel under the Sixth Amendment to the United States Constitution" and invaded and violated Respondents' attorney-client relationship by interviewing the attorneys who served as Respondents' lawyers in various transactions that formed the basis of the Notice. Respondents also claim that these actions constituted abuse of process. See Affirmative Defenses Two, Six and Fourteen (Hank Rhon) and Six, Nine, and Fourteen (Incus).(1) By order dated August 4, 1999, the ALJ struck the three affirmative defenses. Order on Motion to Strike Affirmative Defenses, August 4, 1999 (the "August 4 Order").

Several courts have held that orders striking an affirmative defense, and closely analogous orders denying summary judgment on the basis of an affirmative defense, are not appealable prior to final resolution of the case. County of Hennepin v. Aetna Cas. & Sur. Co., 587 F.2d 945 (8th Cir. 1978); Pedraza v. Shell Oil Co., 942 F.2d 48, 55 (1st Cir. 1991); Freeman v. Kohl & Vick Machine Works, 673 F.2d 196, 200 (7th Cir. 1982); Smith v. Benedict, 279 F. 2d 211 (7th Cir. 1960); Flynn & Emrich Co. v. Greenwood, 242 F.2d 737 (4th Cir.), cert. denied, 353 U.S. 976 (1957); Libbey-Owens-Ford Glass Co. v. Sylvania Industrial Corp., 154 F.2d 814 (2d Cir.), cert. denied, 328 U.S. 859 (1946). While Respondents have cited to a number of cases in which appellate courts have decided appeals of such orders, those cases do not appear to have considered the matter of their jurisdiction, and are thus not persuasive authority that such orders may be appealed prior to final determination of the matter.

Moreover, Respondents have failed to establish any of the prerequisites for interlocutory review of the order striking affirmative defenses. First, and most importantly, they have identified no "controlling question of law or policy as to which substantial grounds exist for a difference of opinion." Rule 28(b)(1). In fact, they cite no case in which affirmative defenses such as those they posit here have been held to affect a respondent's liability for the types of wrongdoing with which these Respondents are charged, to negate in any manner any of the necessary elements of the charged offenses, or to justify dismissal of the action.

Respondents base their argument upon SEC v. Gulf & Western Ind., 502 F. Supp. 343 (D.D.C. 1980). In that case, the district court temporarily permitted the defendants to pursue an affirmative defense based upon alleged misconduct in the agency's investigation of their activities. The defendants there claimed that all of the information upon which the charges were based was obtained by the agency in violation of their attorney-client privilege, a claim that has not been made in this case. After limited discovery on the issue, the court ultimately granted the government's motion to strike the affirmative defense, ruling that it was "lacking in support, both factually and legally." SEC v. Gulf & Western Ind., 518 F. Supp. 675, 678 (D.D.C. 1981).

Although the district court in Gulf & Western focused its discussion on the paucity of facts supporting the defendants' allegations, its ruling provides no support for the proposition that dismissal of the action would have been required had the allegations been sustained. In the years since Gulf & Western, moreover, federal courts have determined that even in a criminal case, the government's inducement of a violation of the attorney-client privilege does not require dismissal of the action so long as privileged information is not used at trial against the defendant.(2) See, e.g., United States v. Edgar, 82 F. 3d 499, 509 (1st Cir. 1996); United States v. White, 970 F. 2d 328, 226 (7th Cir. 1992). Accordingly, there is no basis for a difference of opinion on this issue in the context of civil administrative charges.(3)

Similarly, Respondents have made no showing that their allegations amount to a viable affirmative defense under the Sixth Amendment to the United States Constitution.(4) Indeed, perhaps in recognition of the fact that the Sixth Amendment applies only to criminal prosecutions, Hannah v. Larche, 363 U.S. 420, 440 n.16 (1960), Respondents now merely allege that Enforcement Counsel's investigatory techniques "impaired the effectiveness" of their attorney-client relationship with their former counsel. Joint Request for Interlocutory Review, August 18, 1999, at 12. Again, nothing they cite suggests that substantial grounds exist for a difference of opinion on whether such a claim states a valid affirmative defense. Respondents currently are represented by counsel who are presumably well able to present their defense. No suggestion of interference with that relationship has been made. Enforcement Counsel's alleged interactions with Respondents' former counsel do not implicate any rights of Respondents that would vitiate the charges against them.

Finally, Respondents have also failed to establish any of the remaining prerequisites for interlocutory review with respect to the August 4 Order. Respondents claim that their stricken affirmative defenses will materially advance the termination of these proceedings by permitting them to obtain discovery that will lead to a motion for summary disposition. But as they have provided no legal authority to suggest that their claims, if substantiated, would provide a basis for summary disposition, this argument fails. Moreover, the Board has already rejected the argument that avoidance of unnecessary litigation is enough to warrant interlocutory review of a pretrial order. Clifford & Altman I, slip op. at 36, citing United States v. Taylor, 881 F.2d 840, 843-44 (9th Cir. 1989), Laurel Lines S.R.L. v. Chasser, 490 U.S. 495, 499 (1989).

The Board also rejects Respondents' claim that termination of the proceedings will be materially advanced because the charges against them are based upon "inaccurate and incomplete information" provided by Respondents' former attorneys during the investigation. Joint Reply, September 9, 1999, at 6. Even if Respondents could establish that the attorney-client privilege was breached in providing this information, that would not establish that the information itself was in fact inaccurate or incomplete. At the hearing in this matter, the Respondents will have the opportunity to present any evidence refuting or supplementing in an exculpatory manner the evidence of wrongdoing introduced by Enforcement Counsel. Exploration of the manner in which Enforcement Counsel obtained the information it presents will not advance the resolution of this matter, but would be a needless diversion. See In the Matter of Northwest Indiana Bancshares, Inc., Docket No. 89-001-CMP 11-17 (September 7, 1990), slip op. at 9-10 (personal motives of examiner who identified violations are irrelevant where documentary evidence substantiates charges), aff'd sub nom., Stanley v. Board of Governors, 940 F. 2d 267 (7th Cir. 1991); Towe v. Board of Governors, 1999 U.S. App. LEXIS 3078 *9 (9th Cir. 1999) (same).

Respondents have also failed to establish that subsequent modification of the ruling at issue would be an "inadequate remedy" or would "cause unusual delay or expense." Unlike a defense based on double jeopardy, where "`the legal and practical value of the right asserted would be destroyed if not vindicated before trial,'" Clifford & Altman I at 33 (quoting United States v. Ivory, 29 F. 3d 1307, 1311 (8th Cir. 1994)), there is nothing legally inadequate about a subsequent order reversing the ALJ on the issue of these asserted affirmative defenses. Nor would such a reversal result in unusual delay or expense beyond that inherent in any post-trial appeal. Indeed, the issues raised in the stricken defenses are ancillary to the factual record that must be developed and presented at hearing. If at the conclusion of the hearing in these proceedings the Board were to remand the matter for fuller exploration of these issues, the remand would be a limited one, and would not, as Respondents contend, require an entirely new trial.(5)

For these reasons, the Board finds that Respondents have failed to establish any of the necessary prerequisites for interlocutory review. Accordingly, the request for interlocutory review of the August 4 Order is denied.

B. Discovery Orders

Following the issuance of the Notice of Charges, Respondents propounded a 92-item request for production of documents. Enforcement Counsel, while producing over 30 boxes of documents, moved to limit the scope of certain requests and to strike others. The ALJ granted the motion in part by Order of August 12, 1999. In an Order dated September 10, 1999, the ALJ granted Enforcement Counsel's motion to strike Respondents' Second Request for Production of Documents. Finally, in an Order dated September 13, 1999, the ALJ denied Respondents' motion to compel disclosure of documents as to which Enforcement Counsel had claimed a variety of privileges. Respondents seek interlocutory review, in whole or in part, of these three orders.

Discovery orders rarely satisfy the requirements for interlocutory review. Church of Scientology of California v. United States, 506 U.S. 9, 18 n.11 (1992). First, a discovery ruling "is committed to the [trial judge's] discretion, and an allegation of abuse does not create a legal issue." White v. Nix, 43 F. 3d 374, 376 (8th Cir. 1994); accord, North Carolina Assoc. of Black Lawyers v. North Carolina Board of Law Examiners, 538 F. 2d 547, 548-49 (4th Cir. 1976); Atlantic City Electric Co. v. A.B. Chance Co., 313 F.2d 431, 434 (2d Cir. 1963).(6) Second, as the Board has previously stated,

   such orders cannot be said to be "controlling" because it is impossible to
   know whether and to what extent they might control the outcome of the
   proceeding absent the holding of the hearing, a ruling in the context of
   that hearing, and the issuance of a recommended decision. "If the final
   decision is favorable to [Respondents], they [the discovery orders] may
   never become the subject of an appeal. For these reasons and others,
   discovery orders are not usually appealable until the litigation has
   finally ended."

In the Matter of Clifford & Altman, Order On Respondents' Motion for Interlocutory Review of Administrative law Judge's Order, February 14, 1997, slip op. at 6, quoting McKesson Corp. v. Islamic Republic of Iran, 52 F. 3d 346, 353 (D.C. Cir. 1995), cert. denied, 116 S. Ct. 704 (1996); accord In the Matter of Pharaoh, No. 91-037-E- II, Order Denying Motion for Interlocutory Review, September 12, 1995, at 3 (order excluding evidence from the hearing does not involve a controlling question of law or policy).(7)

For the reasons stated below, the Board finds that Respondents have not met their burden under Rule 28 to justify interlocutory review of any of the challenged discovery orders.

1. August 12 Order

Respondents seek interlocutory review of three aspects of the August 12 Order. First, they assert that the ALJ erred in striking, in the absence of evidence making out a prima facie case of discrimination, their requests for documents relevant to their affirmative defense that the Board has treated them in a discriminatory manner relative to others who allegedly violated similar provisions of law.(8) Second, they argue that they should be entitled to information relating to the operations of Laredo National Bankshares, Inc. and its subsidiaries, Laredo National Bank and South Texas National Bank, because this information assertedly establishes their good faith, a matter relevant to the determination of the amount of any penalty ultimately assessed. Third, they challenge that part of the August 12 Order that limited their access to information regarding Enforcement Counsel's contact with other government agencies during the investigation to information regarding only those contacts relating to the Notice of Charges.

Respondents have failed to make any of the showings required by Rule 28 to justify interlocutory review with respect to any of these issues. Even if it could be said that the issue of Respondents' right to discovery on a selective prosecution claim absent a primafacie showing of discrimination was a "controlling question of law or policy" -- and we do not believe that it is--Respondents have not established that "substantial grounds exist for a difference of opinion" on that question.(9) Enforcement Counsel has pointed out that criminal defendants alleging discriminatory prosecution must come forward with evidence of discriminatory treatment before obtaining discovery on the issue. United States v. Armstrong, 517 U.S. 456 (1996). Respondents have provided no basis for their argument that in the civil enforcement context they should be permitted discovery with a lesser showing, and have thus failed to establish that "substantial grounds" exist for a "difference of opinion" on this issue.(10) Respondents have similarly failed to establish that interlocutory review of this issue would advance the ultimate termination of the proceeding or that later modification would be an inadequate remedy or cause unusual delay or expense. As discussed above, these kinds of errors, if established, can be corrected upon review of the ALJ's recommended decision.

Respondents' arguments with respect to the ALJ's limitation on discovery of documents relating to the operations of Laredo National Bankshares and its subsidiaries, and with respect to Enforcement Counsel's contacts with other government agencies, do not bear extended discussion. Respondents have not established that either of these rulings involved a controlling question of law, or that reversal of these rulings would materially advance the termination of this case. The documents relating to Laredo National Bankshares and its subsidiaries relate solely to the factor of Respondents' "good faith" that might mitigate any civil money penalty ultimately assessed after a hearing, 12 U.S.C. [sections] 1818(i)(2)(G). These documents thus would not tend to advance the termination of this case at all, since they would be irrelevant prior to the conclusion of the hearing. Respondents' stated purpose in seeking to expand discovery into Enforcement Counsel's contacts with other agencies is "so that Respondents may properly serve subpoenas on these agencies," but the ALJ has already required Enforcement Counsel to identify agencies with which Board staff had contact about the Notice of Charges, so additional discovery is unnecessary for that purpose. Nor do Respondents establish any other basis to justify interlocutory review of these discovery orders.

2. September 10 Order

With respect to the September 10 Order, Respondents challenge the ALJ's denial of access to documents pertaining to an individual who apparently provided information to the Federal Reserve concerning Respondents and who may have sparked the investigation that led to the Notice of Charges, but who will not be called as a witness by Enforcement Counsel.(11) Again, Respondents have failed to establish any of the requisite factors for interlocutory review on the issue of their access to this material. The question at the hearing will be whether the charges in the Notice are established by substantial evidence in the record; thus, information bearing on that issue is of "material relevance to the merits of the pending action" and a proper subject of discovery. 12 C.F.R. [sections] 263.24(b). Such documents were sought and provided in connection with Respondents' initial document request. The source of the Board's interest in Respondents' activities is simply irrelevant to whether the charges can be sustained. [See In the Matter of Northwest Indiana Bancshares, supra; Towe v. Board of Governors, supra].

3. September 13 Order

Finally, Respondents seek interlocutory review of the ALJ's determination in the September 13 Order that approved the manner in which Enforcement Counsel invoked various privileges to withhold a number of documents. This is a typical discovery matter that is appropriately dealt with at the conclusion of a case and not through interlocutory review. Respondents have suggested no reason why resolution of this issue now would materially advance the ultimate termination of this case, or why subsequent modification would be an inadequate remedy or cause unusual delay or expense. Nor can the manner in which the privileges were asserted be considered a "controlling" question of law in these enforcement proceedings.

For these reasons, Respondents' requests for interlocutory review of the Orders of August 12, September 10, and September 13, 1999, are denied.

So ordered, this 10th day of January, 2000.

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

JENNIFER J. JOHNSON Secretary of the Board

(1.) In addition, Respondents asserted that the allegedly unprecedented size and scope of the penalties sought violate "the standard of fair and equitable treatment of foreign investors under both United States and international law." Affirmative Defense Eight (Hank Rhon) and Eleven (Incus). The ALJ ruled that "these claims to the extent asserted under international law are not cognizable in this proceeding." August 4 Order at 5. Respondents are free to make any legal arguments they choose in their papers, and have suggested no way in which the course of this case could be affected by reinstituting the stricken portion of this affirmative defense. Nor have they cited the Board to any precept of international law that imposes a stricter standard of fair and equitable treatment for foreign investors than imposed under United States law. Their request with respect to this portion of the Order is therefore denied.

(2.) The Board expresses no view on the propriety of Enforcement Counsel's investigatory contacts with Respondents' former counsel.

(3.) The Board also expresses no view on the question whether information obtained from Respondents' former counsel must be excluded at the hearing if it is found that the former counsel breached the attorney-client privilege by providing that information, except to note that Respondents have asserted as another affirmative defense that they "relied in good faith on the legal advice of experienced and knowledgeable regulatory counsel in connection with the matters charged." Affirmative Defense Twelve (Hank Rhon and Incus). To the extent this defense is pursued, it may well result in a waiver of whatever attorney-client privilege Respondents assert with regard to the subject matter of the investigatory interviews of their former counsel. See, e.g., Ideal Electronics Security Co. v. Int'l Fidelity Ins. Co., 129 F. 3d 143, 151-52 (D.C. Cir. 1997). The existence of this affirmative defense, and its effect on the privilege issue, is one more reason why review of the ALJ's present ruling would be inappropriate at this juncture.

(4.) Respondents do not separately support with argument or citation their claim that Enforcement Counsel's actions amounted to an "abuse of process."

(5.) Moreover, Respondents claim that the evidence that supports their stricken affirmative defenses also supports their other affirmative defenses. Joint Request, August 18, 1999, at 16. To the extent this is the case, no additional hearing would be necessary at all on a remand to consider the stricken affirmative defenses.

(6.) The Board generally defers to the discovery rulings of administrative law judges, in the same way that district court judges are accorded wide discretion in dealing with such matters. See In the Matter of Greenberg, OCC Docket No. AA-EC-90-45 (Board decision dated October 28, 1991), aff'd, 968 F. 2d 164 (2d Cir. 1992).

(7.) One exception to this general rule involves orders requiring; the production of purportedly privileged information, given the difficulty of vindicating the rights involved in withholding privileged information once disclosed. The Board's Rules include a provision precluding the ALJ from requiring production of documents withheld on grounds of privilege if the party withholding the documents has indicated its intent to move for interlocutory review. 12 C.F.R. [sections] 263.25(g). None of the orders involved in the present requests required production of assertedly privileged material.

(8.) The documents sought in this connection included, inter alia, all minutes of Board meetings in which foreign ownership of United States banks or bank holding companies was referred to; all policy statements, memoranda, advisory opinions, or other writings that refer to the criteria employed by the Board in considering merger applications; and all documents that identity any Order of Investigation, or relate to any ruling or order, involving allegations of violations of the statutory and regulatory provisions at issue in this case.

(9.) The Board rejects Respondents' alternative assertion that they have met their burden of showing a prima facie case of discriminatory treatment. Their evidence in this regard consists of an affidavit by their counsel, which recounts that he has interviewed unnamed "potential witnesses" who "are familiar" with a named individual who allegedly claimed to these potential witnesses that he had been retained by the Federal Reserve Bank of New York in connection with an application filed by Respondent Hank Rhon. According to the affidavit, this individual allegedly told these potential witnesses that "there was no way the Federal Reserve Board would allow Carlos Hank Rhon or any other Mexican to control an institution the size of LNB." Affidavit of John M. Dowd in Support of Respondents' Joint Opposition to Enforcement Counsel's Motion to Strike Respondents' Second Joint Request for Production of Documents, dated August 17, 1999. This is double hearsay at least, and provides no probative evidence whatever concerning any discriminatory motive in initiating the charges against the Respondents here.

(10.) Respondents merely cite to the general discovery provision in the Board's Rules permitting discovery of documents having "material relevance to the merits of the pending action." 12 C.F.R. [sections] 263.24(b). This standard is considerably more limited than the analogous provision in Rule 26(b) of the Federal Rules of Civil Procedure permitting discovery of information "relevant to the subject matter involved in the pending action." See 61 Federal Register 20,338, 20,340 (1996). Accordingly, recitation of this standard does not advance Respondents' position that the Rules permit discovery on an unsubstantiated charge of discriminatory prosecution. Indeed, it is far from obvious that such a charge has any "relevance to the merits of the pending action," a phrase that deliberately focuses on the particular charges brought against the respondents in a given case.

(11.) The documents sought included all documents that relate to any communication between this individual and Board employees; all documents that relate to this individual's communications with anyone concerning the Respondents; and this individual's personnel file.