Case 3:13-mc-00116-RNC Document 13 Filed 10/01/13 Page 1 of 8

UNITED STATES DISTRICT COURT DISTRICT OF CONNECTICUT

-----------------------------------------------------------------X UNITED STATES OF AMERICA, Petitioner, vs. CLAYTON HOLDINGS, LLC, Respondent No. 3:13-mc-00116 Chatigny, J. Martinez, M.J.

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UNITED STATES REPLY MEMORANDUM

The United States of America (United States) respectfully submits this memorandum in further support of its motion to compel respondent Clayton Holdings, LLC (Clayton) to produce documents pursuant to the United States administrative subpoena, and in reply to Claytons opposition to the United States motion. A. Due Diligence Reports Since service of the subpoena on Clayton almost three months ago, Clayton has produced no documents in response to the United States subpoena. Clayton notes that it was ready more than two months ago, on August 14, 2013, to begin the two week process of producing due diligence reports to the United States. (Clayton Opposition at p. 10). Yet, more than two months later, Clayton has produced not one. Given Claytons acquiescence to the production of some of

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the due diligence reports sought, the United States respectfully asks that this Court order Clayton to immediately produce the due diligence reports. 1. The Subpoena is Not Overbroad or Burdensome, Given the Nature of the Investigation. Clayton objects to the subpoena as overbroad and argues that its obligation to produce due diligence reports be restricted to its clients who are actually under investigation. (Clayton Opposition at p. 15). The request for all residential mortgage-backed securities related due diligence reports is not overbroad and should be enforced. The United States FIRREA subpoena, which calls for documents, including due diligence reports from 2005-2007, is tailored to the scope of the United States investigation. This investigation is necessarily as extensive, as it is intended to address a key cause of the nations 2008 financial crisis -- the meltdown of residential mortgage-backed securities (RMBS). During the relevant time period, Clayton was in the business of performing due diligence services for clients who were working on the issuance of RMBS. (Clayton Opposition at pp. 11-12). Accordingly, Clayton has documents critical to the United States investigation. Indeed, any due diligence reports produced by Clayton for a client pertaining to a residential mortgage-backed security are within the clearly defined scope of the United States investigation and should be produced. A complaint of overbreadth or burdensomeness by a subpoenaed entity is not sufficient to block a subpoena where the governments inquiry is a necessarily comprehensive one, that is, one that is necessary for the agency to achieve its purposes. Federal Trade Commission v. Texaco, 555 F.2d 862, 882 (D.C. Cir., 1977). In Texaco, in response to a national energy crisis, the United States, through the Federal Trade Commission (FTC), initiated an investigation into a rapid decline in reported natural gas reserves. Texaco, 555 F.2d at 866. After some degree of
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voluntary cooperation by natural gas producers with the FTC, the FTC issued a comprehensive subpoena duces tecum to eleven different natural gas producers. Id. at 868-869. In refusing to limit some provisions of the subpoena, the Court of Appeals for the D.C. Circuit noted that some burden on subpoenaed parties was to be expected and was necessary in furtherance of the federal agencys legitimate inquiry, as well as in the public interest. Id. Moreover, the Court noted that the breadth of a subpoena is sometimes unavoidable, because it is directly related to the magnitude of the subpoenaed entitys business operation as well as the nature of the investigation. Id. The question of a subpoenas permissible scope is not determined in the abstract, but rather, in relation to the nature, purposes and scope of the governments inquiry. In re Subpoena Duces Tecum, 228 F.3d 341, 350 (4th Cir. 2000) (quoting Oklahoma Press Publishing Co. v. Walling, 327 U.S. 186, 209 (1946)). Clayton states that it provided due diligence services for 193 clients who issued residential mortgage-backed securities between 2005 and 2007. (Clayton Opposition at p. 15). In this case, the United States has issued its FIRREA subpoena to investigate abuses in the residential mortgage-backed securities market that helped precipitate the 2008 financial crisis. Given the scope of the United States investigation and its uncontested authority to field such an investigation and issue the subpoena in question under FIRREA, (see Clayton Opposition at p. 14), the Court should reject Claytons claim that the United States request for due diligence reports is overbroad and burdensome. Clayton further argues that the subpoena is overbroad and burdensome because it would allegedly require the production of approximately 1.2 Terabytes of data. Clayton Opposition at p. 5. This argument fails because the United States is prepared to shoulder the burden of production. Moreover, the question of breadth and burden cannot turn on volume alone. If

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volume of material were to govern the issue, the government would somehow have to ascertain the precise extent of evidence before it even obtained evidence. Yet administrative subpoenas are available to the government for the very purpose of enabling the government to determine what evidence exists. In re Subpoena Duces Tecum, 228 F.3d at 351. Thus, by their nature.

Administrative subpoenas, including FIRREA subpoenas, may be broad, and in the absence of a showing that compliance threatens to unduly disrupt or seriously hinder a businesss normal operations, a court will not modify the subpoena. See United States v. Firestone, 455 F.Supp 1072, 1083-1084 (D.D.C., 1978) (citations omitted). 2. Accommodations by the United States As a condition to maintaining an argument that an investigative subpoena is overly broad and oppressive, a respondent must be able to point to reasonable efforts on their part to reach an accommodation with the government. In re Subpoena Duces Tecum, 228 F.3d at 351 (citing United States v. Morton Salt Co., 338 U.S. 632, 653 (1950)). Rather than attempting to reach a mutually acceptable means of production for the due diligence reports, Clayton seeks to redefine and narrow the United States investigation and substitute its own judgment for that of the United States as to what the United States should investigate. This procrustean solution, which would impede the United States investigation, should be rejected. 1 With respect to Claytons claim concerning the CLAS database, Clayton has not established that production of the database would be unduly burdensome. Rather than submitting affidavits of its information technology personnel, Clayton has produced a lawyers affidavit and a lawyers unsworn statement to support its contention that its CLAS database in use in 20052007 is too difficult to resurrect for production to the United States. (See Clayton Opposition Clayton further ignores the fact that the United States has made a significant accommodation, in that it has agreed to hold five of the eight subpoena requests in abeyance (Requests 4-8), while production pursuant to the remaining three requests (Requests 1-3) is obtained and reviewed.
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Exhibits 4 and 5). Because Clayton has not met its burden, it should be directed to produce the databases as subpoenaed. At a minimum, the Court should direct Clayton to make a knowledgeable information technology employee available for interview by the United States, so the United States may determine the nature and accessibility of Claytons databases, and the ability to mirror such databases should it be necessary. Moreover, Clayton should be required to preserve the CLAS database for the purposes of further discovery. In addition, regardless of whether the Court directs Clayton to produce the CLAS database, based on Claytons representation that the due diligence reports contain significant data responsive to subpoena Requests 1 and 2 (Clayton Opposition at p. 23 and at Exhibit 4 to same), Clayton should be required to immediately produce all due diligence reports related to RMBS in its possession. B. E-Mail and Messages Must Be Searched And Produced By A Cooperative Key Word Filter. Contrary to Claytons submissions, the United States does not seek the entirety of the contents of Claytons servers (Clayton Opposition at p. 16), or indeed, all of Claytons communications concerning all its clients (Clayton Opposition at p. 20), but instead, only emails concerning its provision of due diligence services related to residential mortgage-backed securities. The United States offer to mirror Claytons server and to perform the e-mail searches itself was merely an offer to reduce Claytons costs in responding to the subpoena, to avoid hindering its business operations and to speed the production process. More importantly, the lengthy, time-consuming review envisioned by Clayton of a unilateral search by Clayton of each of the tens of millions of pages of e-mails to determine if they are privileged or unresponsiveor unrelated to the provision of due diligence services prior to production to the United States (Clayton Opposition at p. 21) is simply no longer
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countenanced by federal courts in the era of electronic discovery. Rather than such a preproduction review by Clayton, the principles underlying the Sedona Conference Cooperation Proclamation 2 require a cooperative effort between parties to formulate a search methodology for electronically stored information (ESI) that will best produce responsive documents. See William A. Gross Const. Associates, Inc. v. American Mfrs. Mut. Ins. Co., 256 F.R.D. 134, 135136 (S.D.N.Y. 2009) (noting that key word searching is a recognized method to winnow relevant documents from large repositories, but that use of the technique must be cooperative between counsel, so that the design of search terms will result in sufficiently complete production of responsive emails or other ESI); see also In re Seroquel Products Liability Litigation, 244 F.R.D. 650, 662 (M.D. Florida 2007) (rejecting unilateral efforts to produce relevant documents, and noting that cooperation between the parties must be used to formulate key word searches for ESI.) Contrary to Claytons view (Clayton Opposition at p. 11; p. 21), the subpoena request for e-mail can be readily complied with by applying a reasonable, mutually acceptable set of filters to the body of communications. This would enable the production of documents most likely to be responsive to the request. Thus, word filters could comprise, in part, of the names of those companies which engaged Clayton to perform due diligence reviews for mortgage-backed securities, together with the names of Claytons contacts at the companies, and Claytons own personnel working on such projects. Similarly, privileged documents could be isolated by applying an agreed upon set of filters for documents likely to be privileged (containing for example, the names of lawyers and law firms utilized by Clayton). Moreover, any inadvertently
The Sedona Conference is a non-profit organization of attorneys, judges and experts that has prepared principals and commentary to advance the law concerning electronic discovery in a collaborative, just and reasoned fashion, and which has gained the endorsement of numerous state and federal judges. See The Sedona Conference Cooperation Proclamation, https://thesedonaconference.org/cooperation-proclamation (last visited September 27, 2013). 6
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produced privileged document, or document not relevant to the United States investigation would be returned to Clayton without waiver of any privileges, pursuant to Federal Rule of Evidence 502(e). To support its argument that Clayton should not be required to produce a body of e-mail in response to the United States investigative subpoena, Clayton cites inapplicable case law concerning discovery in civil litigation. (Clayton Opposition at p. 21, citing Tucker v. AIG, 281 F.R.D. 85, 93-95 (D.Conn. 2012)). Clayton ignores the significant distinction between the rules governing civil discovery and the case law concerning investigative subpoenas. Law enforcement agencies, including the United States Department of Justice, have a statutory right to determine that corporate behavior comports with the law. Morton Salt, 338 U.S. at 652-653. The United States has exercised this unique right, pursuant to FIRREA, 12 U.S.C. 1833a(g)(1), which authorizes the United States to seek the production of those documents which the Attorney General deems relevant or material to the inquiry into residential mortgage backed securities. See 12 U.S.C. 1833a(g)(1). As noted above, at pp. 3-4, the United States is enforcing an investigative subpoena, to discover and procure evidence of whether there was sufficient wrongdoing in the mortgagebacked securities business between 2005-2007 to make a charges or complaints. The subpoena, of necessity, is broad. While the subpoena requests many documents from a three year period of time, on their face the requests are not disproportionate to the end sought by the investigation. See Adamowicz v. United States, 531 F.3d 151, 157-158 (2d Cir. 2008) (holding that a subpoena which required all documents created in a specific time period concerning specific business relationships and multiple other items was not overbroad, because they were relevant to matters at issue in the investigation.)

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CONCLUSION For the reasons stated, this Court should compel Clayton to comply with the United States subpoena.

Respectfully submitted, DEIRDRE M. DALY United States Attorney District of Connecticut By: /s/ John B. Hughes Assistant U.S. Attorney (No. 05289) 157 Church Street, 25th Floor New Haven, CT 06510 (203) 821-3700 Edward K. Newman (EN 9670) Assistant U.S. Attorney Eastern District of New York 271 Cadman Plaza East Brooklyn, N.Y. 11201 (718) 254-6069

CERTIFICATION

I hereby certify that on October 1, 2013, a copy of the foregoing was filed electronically and served by mail on anyone unable to accept electronic filing. Notice of this filing will be sent by e-mail to all parties by operation of the Court=s electronic filing system or by mail to anyone unable to accept electronic filing as indicated on the Notice of Electronic Filing. Parties may access this filing through the Court=s CM/ECF System. /s/ John B. Hughes JOHN B. HUGHES CHIEF, CIVIL DIVISION
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