May 26, 2022

SEC can’t get insider-trading defendants’ phone passwords

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passwordBy P.J. D’Annunzio, From The Legal Intelligencer

The smartphone passwords of two former Capital One data analysts accused of insider trading will remain a secret to the U.S. Securities and Exchange Commission, a federal judge has ruled in a case one securities lawyer said covered rarely-trodden ground.

The SEC sought the smartphone passwords of defendants Bonan Huang and Nan Huang because it believed the devices, owned by Capital One, contained unidentified banking documents that could be used as evidence. Capital One instructed its employees to keep their phone passwords secret and not keep records of their passwords for security reasons.

According to the opinion by U.S. District Judge Mark Kearney of the Eastern District of Pennsylvania, the SEC argued that because the defendants are former employees of Capital One, they are the corporate custodians of the records the SEC sought, and therefore can’t invoke the Fifth Amendment right against self-incrimination by refusing to disclose their passwords.

However, Kearney said the defendants’ personal passwords did not count as corporate records. Because what the SEC was seeking were the defendants’ “thought processes” and not actually business records, Kearney said Bonan Huang and Nan Huang could assert their Fifth Amendment rights.

“Since the passcodes to defendants’ work-issued smartphones are not corporate records, the act of producing their personal passcodes is testimonial in nature and defendants properly invoke their Fifth Amendment privilege,” Kearney said.

Washington, D.C.-based securities fraud defense attorney Solomon Wisenberg, who was not involved in the litigation, said the case is a unique one for an insider trading matter because it deals with the issue of electronic passwords.

While many securities fraud cases involve arguments over what is considered a corporate record, few have thus far focused so centrally on applying those arguments to passwords.

Wisenberg noted Kearney had to analyze the parties’ arguments based on the non-smartphone-related cases they cited. This is because, Wisenberg said, there simply isn’t the body of case law to deal with password-related issues at this point.

Wisenberg also noted that while the defendants have the right to not tell the SEC their passwords, because they are considered thought processes in that context, the SEC could subpoena them for any records of their passwords.

“If they wrote the passwords down, then they would probably have to produce it,” Wisenberg said.

However, one of the Huangs’ attorneys, New York-based Gregory Morvillo, said that circumstance is a complete hypothetical.

“If the SEC wants to subpoena them for records that don’t exist they can try,” Morvillo said.

David Axelrod, who represented the SEC in Philadelphia, did not return a call seeking comment.

As for whether the SEC could ask the defendants for their passwords in court, Morvillo said, “If they were to take the stand, they would waive their Fifth Amendment rights, and the SEC would be able to ask them any question relevant to the proceedings. But that assumes they will take the stand.”

Morvillo added, “We are a long way from making those kinds of decisions.”

One case the SEC relied upon was the 1974 U.S. Supreme Court holding in Bellis v. United States. In that case, the high court implemented the “collective entity” doctrine applied to a defendant who invoked the Fifth Amendment to avoid presenting records of a dissolved law firm partnership to a grand jury.

“The doctrine prevents an individual from ‘rely[ing] upon the privilege to avoid producing records of a collective entity which are in his possession in a representative capacity, even if these records might incriminate him personally,'” Kearney said.

The SEC also pointed to the 1988 Supreme Court case of Braswell v. United States, where the court again utilized the collective entity doctrine.

The defendants pointed to more recent cases, Kearney said, such as the 2012 case of In re Grand Jury Subpoena Duces Tecum Dated March 25, 2011, in which the U.S. Court of Appeals for the Eleventh Circuit found a defendant accused of possessing child pornography could assert his Fifth Amendment privilege to avoid decrypting a hard drive.

“In reaching this conclusion, the court of appeals did not focus on whether the privilege applies to underlying documents but on whether the act of decryption and production were testimonial,” Kearney said.

In Bonan Huang and Nan Huang’s case, Kearney said the SEC focused on the contents of the documents allegedly contained on the device, claiming without cited evidence that the records it sought were on the phones.

“By relying on the corporate records cases of Bellis and Braswell, the SEC would have us focus on the nature of the documents allegedly contained in the phone rather than what they have requested, which are passcodes to the phones,” Kearney said. “Here, the SEC seeks to compel production of the passcodes which require intrusion into the knowledge of defendants and no one else. There is no evidence the bank assigned defendants passcodes to their phones or kept track of defendants’ passcodes. To the contrary, the bank asked employees not to keep records of their passwords for safety reasons.”

P.J. D’Annunzio can be contacted at 215-557-2315 or [email protected] Follow him on Twitter @PJDannunzioTLI.

(Copies of the seven-page opinion in SEC v. Huang, PICS No. 15-1475, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.)

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