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A.G. Edwards, Inc. v. Secretary of State

June 27, 2002


Appeal from the Circuit Court of St. Clair County. No. 00-MR-117 Honorable John M. Goodwin, Jr., Judge, presiding.

The opinion of the court was delivered by: Presiding Justice Maag

A.G. Edwards, Inc. (A.G. Edwards), Robert D. Maurer, Brent A. Wilhelm, and Gary W. Hency (collectively petitioners) filed a motion to quash the subpoenas duces tecum directed against them by the Secretary of State, the Department of Securities of the State of Illinois (respondent). The subpoenas, issued May 5, 2000, as part of a routine audit of A.G. Edwards' Waterloo, Illinois, office, sought personal banking information from Maurer, Wilhelm, and Hency. Respondent filed a motion to enforce the subpoenas on June 1, 2000. The circuit court held a hearing and on July 25, 2000, sustained the motion to quash the subpoenas. Respondent filed a timely notice of appeal.

The relevant facts are as follows. A.G. Edwards is the parent corporation of A.G. Edwards & Sons, Inc., a broker/dealer. A.G. Edwards maintains an office located in Waterloo, Illinois, for the purposes of conducting a securities business and providing investment services. The Waterloo office is a satellite office of A.G. Edwards' Belleville branch office. A.G. Edwards employs Maurer, Wilhelm, and Hency as salespersons.

On May 5, 2000, each petitioner received a subpoena duces tecum issued by respondent pursuant to the Illinois Securities Law of 1953 (Securities Law) (815 ILCS 5/1 et seq. (West 2000)), directing A.G. Edwards' Waterloo office to produce specified bank records for "any and all bank accounts in which A.G. Edwards & Sons, Inc.[,] commission checks are deposited" for Maurer, Wilhelm, and Hency (salespersons).

Specifically, respondent sought copies of all bank statements, copies of all check registers, copies of all canceled checks, and copies of all deposit slips for the salespersons for the previous two years, commencing May 4, 1998. The subpoenas required petitioners to produce personal financial information at respondent's office in Chicago, Illinois, within four days of the service of the subpoenas. Respondent agreed that some of these accounts were held with the individual salesperson's respective spouse. Additionally, respondent admitted that it had no reason to believe that the individual salespersons had engaged in any improper conduct. The personal banking information that respondent had subpoenaed was requested as a routine audit.

Petitioners filed a motion to quash the subpoenas. Petitioners alleged that the subpoenas were so broad and invasive "as to constitute an invasion of the *** brokers' [salespersons'] fundamental rights of privacy." Additionally, petitioners claimed that respondent had not demonstrated any cause or justification for such a pervasive invasion of privacy.

On May 17, 2000, petitioners submitted the affidavit of Brian Underwood, director of compliance for A.G. Edwards & Sons, Inc. Underwood's affidavit stated that he had been employed with A.G. Edwards & Sons, Inc., since 1984 and that his job responsibilities have been exclusively with respect to litigation and compliance functions. Underwood stated that due to his work experience, he had become familiar with the practices of the Securities and Exchange Commission, the National Association of Securities Dealers Regulation, Inc., the various exchanges of which A.G. Edwards & Sons, Inc., is a member, and the state regulatory agencies responsible for monitoring the activities of broker/dealers such as A.G. Edwards & Sons, Inc. Underwood claimed as follows: "During my 16½ years in the securities industry, I am not aware of a single instance in which any regulatory organization has requested the personal financial records of any Edwards' broker [salesperson] as part of a routine audit or investigation, other than the *** respondent's request that is the subject of the motion to quash." Additionally, Underwood stated that before this particular request was made, respondent had never requested the personal financial records of any A.G. Edwards Illinois broker as a part of a routine audit.

A.G. Edwards filed a response to the subpoena on May 30, 2000. It stated, "[N]either A.G. Edwards, Inc.[,] nor A.G. Edwards & Sons, Inc.[,] have [sic] in their [sic] possession, custody, or control any of the documents requested in the subpoena." Further, it claimed, "[Neither A.G. Edwards nor A.G. Edwards & Sons, Inc., has] any obligation under the laws, rules, or regulations of the State of Illinois, any self-regulatory organization, the Securities Exchange Commission, or the National Association of Securities Dealers Regulation, Inc.[,] to maintain records pertaining to the personal bank accounts of any of its employees."

On June 1, 2000, respondent filed a motion to enforce the subpoenas, a response to the motion to quash, and a supporting memorandum. Respondent argued that section 11(D)(1) of the Securities Law (815 ILCS 5/11(D)(1) (West 2000)) authorized it to issue subpoenas during an audit if the information is relevant and that the requested records were relevant to the audit of the Waterloo office. Respondent further argued that section 11(D)(1) allows it to require the production of any books and records for audit purposes.

Petitioners filed a memorandum in opposition to respondent's motion to enforce the subpoenas. They argued that the Securities Law was unconstitutional as applied to them, thereby violating their rights to privacy and due process. Petitioners claimed that they had a right of privacy in their bank records and that the subpoenas were an unreasonable invasion of that right. Additionally, petitioners contended that the administrative investigation in the instant case was arbitrary, in excess of statutory authority, and undertaken for an improper purpose. Thus, petitioners claimed that it was a violation of due process. Petitioners also claimed that respondent did not have the authority to subpoena the personal bank records because the information was not relevant to discovering any violations.

The court conducted a hearing on July 12, 2000. Susan LaRussa, an auditor for respondent, testified that she audited A.G. Edwards' Waterloo office on May 4 and May 5, 2000. Although the salespersons and Robert Vaught, the compliance officer for the area, gave her most of the books and records that she requested, she was told that she would not be able to review the salespersons' personal bank records. LaRussa stated that individual checking account information was subpoenaed because A.G. Edwards' Waterloo satellite office did not maintain a business account.

LaRussa testified that all revenue received by the Waterloo office was deposited into a "sweep account." Each night, the money deposited into the sweep account was transferred into an account maintained by A.G. Edwards' main office in St. Louis, Missouri. Each salesperson then received a commission check or a paycheck from A.G. Edwards that was made payable to the individual salesperson. Each salesperson stated that he deposited his check into his personal checking account. LaRussa admitted that she did not attempt to obtain any information from the St. Louis office or the sweep account. She also agreed that she was not denied access to the Waterloo office sweep account or the records in St. Louis. Instead, LaRussa stated that if the salespersons wanted to avoid divulging personal banking information, they should have created a business account. LaRussa claimed that she needed the personal banking information in order to determine who the salespersons were making their checks out to. She claimed that because the checks from A.G. Edwards are considered security commission checks, respondent has the authority to look at the account that the commission check is deposited into because it is security-related. When reviewing personal checking accounts, LaRussa looks for "repetitious names [and] entities that checks have been made out to." She stated that she looks for unregistered securities or "selling away." LaRussa explained that "selling away" occurs when a salesperson is registered with one broker/dealer and "selling away" another broker/dealer's products.

LaRussa explained that "selling away" is illegal. She stated that salespersons can only sell the products that they are registered to sell with their broker/dealer. When reviewing personal checking accounts, LaRussa is also looking for instances where the personal checking account is made out in the broker/dealer's name. For example, if a check is printed in the name of ABC Company in care of the salesperson's name, the salesperson can deposit the check into his personal checking account because that is the name that is printed on his personal checking account. LaRussa stated that this type of account is not allowed because the salesperson can deposit the check into his personal checking account.

Kirby Kitner, senior auditor for respondent, testified that he had worked for respondent since April 1989. Kitner stated that his primary duty is to oversee field auditors. Kitner explained that he attempts to keep the auditors consistent in their application, reviews, and examinations. He reviews the auditors' findings and discusses potential action that respondent might take. Since 1996, respondent's audit policy has included reviewing bank records used directly or indirectly in the operation of the office. This included any account into which a commission check or paycheck was deposited. If the business has an operating account, respondent would not ...

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