Securities And Exchange Commission v. GLR Capital Management, LLC et al

Filing 108

ORDER by Judge Lucy H. Koh in case 5:12-cv-02663-LHK; denying (25) Motion to Dismiss without prejudice; granting (34) Motion to Stay; granting (42) Motion to Stay in case 5:13-cv-01290-LHK (lhklc3, COURT STAFF) (Filed on 7/24/2013)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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United States District Court
For the Northern District of California

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SAN JOSE DIVISION

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LYNN BRIDGES, et al.,

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Plaintiffs,

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v.
JOHN A. GERINGER, et al.,

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Defendants.

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Case No.: 13-CV-01290-LHK
Related Case No.: 12-CV-02663-LHK
ORDER GRANTING MOTION TO
STAY; ORDER DENYING SANTA
CRUZ COUNTY BANK’S MOTION TO
DISMISS

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Plaintiffs bring this action to recover substantial monetary losses resulting from

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Defendants’ alleged Ponzi scheme. See Compl. ¶ 1, ECF No. 1. Presently before the Court is a

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motion to stay this action for six months filed by Defendants John Geringer, Christopher Luck, and

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Keith Rode. Plaintiffs and Defendant Santa Cruz County Bank (the “Bank”) oppose the motion.

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Having reviewed the parties’ submissions and the relevant law, the Court GRANTS the Motion to

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Stay, including all deadlines and discovery, subject to exceptions for limited discovery on a case-

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by-case basis pursuant to joint stipulation of the parties or where good cause is shown.

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I.

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BACKGROUND
Plaintiffs in this case (the “Instant Action”) are a subset of the victims of alleged crimes

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perpetrated by John Geringer, Christopher Luck, and Keith Rode (the “GLR Defendants”), who are

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currently the subject of a criminal prosecution pending before this Court. See United States v.

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Geringer, No. 12-00888 (N.D. Cal. filed Dec. 20, 2012) (the “Criminal Action”). Along with the

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Case No. 13-CV-01290-LHK
Related Case No. 12-CV-02663-LHK
ORDER GRANTING MOTION TO STAY; ORDER DENYING SANTA CRUZ COUNTY BANK’S MOTION TO
DISMISS

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GLR Defendants, Plaintiffs bring the Instant Action against the Santa Cruz County Bank (the

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“Bank”) as a result of the alleged conduct of its former Vice President, Chuck Maffia. The GLR

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Defendants are also the subject of an SEC civil enforcement action (the “SEC Action”) that is

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similarly before this Court as a result of GLR Defendants’ alleged misconduct. See SEC v. GLR

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Capital Mgmt., LLC, No. 12-02663 (N.D. Cal. filed May 24, 2012). The Bank is not, however, a

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defendant in either the SEC Action or the Criminal Action.
In all three actions, all of which the Court related,1 the GLR Defendants stand accused of

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misrepresenting the performance and strategy of their investment fund, the GLR Growth Fund, as

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United States District Court
For the Northern District of California

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well as concealing their fraud through a Ponzi scheme. See Compl. ¶¶ 1-4; SEC Action Compl.

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¶¶ 1-3; Criminal Action Indictment (“Indict.”) ¶¶ 14-21. In total, the GLR Defendants are alleged

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to have raised over $60 million dollars as part of their alleged scheme. See Indict. ¶ 19; SEC

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Action Compl. ¶ 1. Approximately $5.1 million of which is alleged to have originated with

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Plaintiffs of the Instant Action. See Compl. ¶ 2.

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In the Instant Action, Plaintiffs raise five claims. Two of the causes of action—conspiracy

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to commit fraud and violations of Section 12(a)(2) of the Securities Act, 15 U.S.C. § 771(a)(2)—

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are brought against both the GLR Defendants and the Bank. See Compl. ¶¶ 86-94, 114-126. The

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remaining three causes of action—aiding and abetting fraud, aiding and abetting breach of

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fiduciary duty, and negligent misrepresentation—are brought only against the Bank. See id. ¶¶ 70-

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85, 95-117. The GLR Defendants have each filed Answers invoking the Fifth Amendment for

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nearly every assertion in the Complaint. See ECF Nos. 10-11, 14.

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On February 13, 2013, the Court stayed the SEC Action for six months pursuant to a

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stipulation between the GLR Defendants and the SEC. See SEC Action, ECF No. 73. On June 10,

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2013, the GLR Defendants filed a Motion for a Stay in the Instant Action for six months from the

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entry of the Court’s Order. See Mot. Stay (“Mot.”), ECF No. 34. After the Instant Action was

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reassigned to the undersigned judge on June 14, 2013, see ECF No. 39, the GLR Defendants re-

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See Order Relating Bridges v. Geringer to the SEC Action, ECF No. 38; see also SEC Action,
ECF No. 53 (relating the Criminal Action to the SEC Action), ECF No. 97 (relating the SEC
Action to the Instant Action).
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Case No. 13-CV-01290-LHK
Related Case No. 12-CV-02663-LHK
ORDER GRANTING MOTION TO STAY; ORDER DENYING SANTA CRUZ COUNTY BANK’S MOTION TO
DISMISS

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filed their Motion for Stay, see ECF No. 42. Both Plaintiffs and the Bank filed oppositions. See

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Bank Opp’n, ECF No. 44; Pl.’s Opp’n, ECF No. 46.

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II.

LEGAL STANDARD
The Constitution does not ordinarily require a stay of civil proceedings pending the

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outcome of parallel criminal proceedings. See Fed. Sav. & Loan Ins. Corp. v. Molinaro, 889 F.2d

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899, 902 (9th Cir. 1989). “In the absence of substantial prejudice to the rights of the parties

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involved, such parallel proceedings are unobjectionable under our jurisprudence.” SEC v. Dresser

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Indus., Inc., 628 F.2d 1368, 1374 (D.C. Cir. 1980). Nonetheless, a court may exercise its

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United States District Court
For the Northern District of California

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discretion to stay civil proceedings when the interests of justice seem to require such action. See

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Keating v. Office of Thrift Supervision, 45 F.3d 322, 324 (9th Cir. 1995).
“A court must decide whether to stay civil proceedings in the face of parallel proceedings in

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light of the particular circumstances and competing interests involved in the case.” Molinaro, 889

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F.2d at 902 (citation omitted). In determining whether to stay civil proceedings, a court should

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first consider “the extent to which the defendant’s Fifth Amendment rights are implicated.”

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Keating, 45 F.3d at 324 (quoting Molinaro, 889 F.2d at 902). However, “[a] defendant has no

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absolute right not to be forced to choose between testifying in a civil matter and asserting his Fifth

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Amendment privilege.” Keating, 45 F. 3d at 326. Thus while the extent to which a defendant’s

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Fifth Amendment rights are implicated is a “significant factor” to be considered, it is “only one

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consideration to be weighed against others.” Id. (citation omitted).

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Additional factors that a court should generally consider when deciding whether to stay a
civil proceeding in the face of parallel proceedings include:
(1) the interests of the plaintiffs in proceeding expeditiously with this litigation or
any particular aspect of it, and the potential prejudice to plaintiffs of a delay; (2) the
burden which any particular aspect of the proceedings may impose on defendants;
(3) the convenience of the court in the management of its cases, and the efficient use
of judicial resources; (4) the interests of persons not parties to the civil litigation;
and (5) the interest of the public in the pending civil and criminal litigation.
Keating, 45 F.3d at 325.

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Case No. 13-CV-01290-LHK
Related Case No. 12-CV-02663-LHK
ORDER GRANTING MOTION TO STAY; ORDER DENYING SANTA CRUZ COUNTY BANK’S MOTION TO
DISMISS

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Nonetheless, other than cases involving bad faith or malice on the part of the government,
“the strongest case for deferring civil proceedings until after completion of criminal proceedings is

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where a party under indictment for a serious offense is required to defend a civil or administrative

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action involving the same matter.” Dresser, 628 F.2d at 1375-76. In such a case, allowing the

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civil action to proceed may undermine the defendant’s Fifth Amendment privilege, expand

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criminal discovery beyond the limits of Federal Rule of Criminal Procedure 16(b), expose the

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defense strategy to the prosecution before the criminal trial, or cause other prejudice. Id. at 1376.

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Accordingly, where the civil proceeding wholly or substantially overlaps with the criminal

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United States District Court
For the Northern District of California

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proceeding, a court may be justified in staying the civil case, deferring civil discovery, or taking

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other protective measures. Id.

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III.

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DISCUSSION
The GLR Defendants request a stay in the Instant Action due to pending discovery and

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litigation in the Criminal Action, and to align with the stay in the SEC Action. See Mot., ECF No.

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34, at 2; ECF No. 42, at 2. Plaintiffs oppose this motion, contending that the Court is not required

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to stay a civil case that is parallel to a criminal action, and that Plaintiffs will suffer prejudice if the

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action is stayed because they “need immediate discovery to identify and trace Defendants’ assets.”

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See Pl.s’ Opp’n at 5. Additionally, Plaintiffs argue that this action must proceed expeditiously

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because a number of the plaintiffs lost substantial sums of money and are over 65 years of age. Id.

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Defendant Santa Cruz County Bank opposes this motion as well because “[t]he pendency of this

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civil action does not rise to the level of a deprivation of due process as to [the GLR Defendants],

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and the GLR Defendants’ rights may be protected pending resolution of the Criminal Action

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against them by assertion of the Fifth Amendment in this civil action.” Bank Opp’n at 1. The

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Bank further argues that a stay is not warranted in the interests of judicial economy because the

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Bank’s Motion to Dismiss may be dispositive of some of Plaintiffs’ claims, and the issues to be

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resolved in the instant case are distinguishable from the issues in the SEC and Criminal Actions.

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See id. at 5.

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Case No. 13-CV-01290-LHK
Related Case No. 12-CV-02663-LHK
ORDER GRANTING MOTION TO STAY; ORDER DENYING SANTA CRUZ COUNTY BANK’S MOTION TO
DISMISS

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Broadly speaking, the Court has the following three options: (1) allow the case to proceed

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in its entirety as requested by Plaintiffs and the Bank; (2) stay the matter entirely for six onths as

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requested by the GLR Defendants; or (3) allow the case to proceed in part as the case relates to the

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Bank. For the reasons set forth below, the Court finds that, to preserve the GLR Defendants’ Fifth

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Amendment rights and in the interests of judicial economy for all parties to this action as well as

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the Court, the Instant Action should be stayed in its entirety for six months. However, the Court

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will permit limited discovery on a case-by-case basis subject to certain restrictions. See infra Part

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III.D.

United States District Court
For the Northern District of California

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A.

The Court’s Order in SEC v. Alexander

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At the outset, the Court notes that it addressed a similar motion to stay in SEC v. Alexander,

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No. 10-04535, 2010 WL 5388000 (N.D. Cal. Dec. 22, 2010), in which the defendants were also the

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subject of a civil enforcement action by the SEC and a parallel criminal proceeding for their role in

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an alleged scheme to defraud investors. After weighing the interests presented by a particular

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defendant’s assertion of his Fifth Amendment privilege and other Keating factors, the Court

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concluded that a stay was warranted. See id. at *7.2

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In determining that the Alexander civil enforcement action should be stayed, the Court

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emphasized the fact that a stay was unlikely to seriously prejudice the interests of the SEC, non-

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party investors, and the public. First, the Court noted that ongoing SEC and criminal investigations

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“alleviated concerns that investors might be further harmed . . . by defendants.” Id. Second, the

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Court found that “the public interest [was] largely served by the parallel criminal proceeding[,] and

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the significant overlap between the civil and criminal proceedings mitigate[d] concerns that

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evidence might become unavailable while the case is stayed.” Id. Furthermore, the Court found

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that “the burden on [Swanson, one of the defendants] [wa]s serious and not easily avoided. His

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Fifth Amendment rights appear to be implicated by nearly every aspect of the civil proceeding.”

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The Bank characterizes Alexander as having only stayed the case as to one defendant (Swanson).
See Bank Opp’n at 4. However, when another defendant in that case, Alexander, filed her own
motion to stay, the Court denied it as moot, reasoning that it had already “stay[ed] all discovery,
including the Answers and initial disclosures of all Defendants.” Alexander, No. 10-04535 (N.D.
Cal. Dec. 29, 2010) (order denying as moot motion to stay).
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Case No. 13-CV-01290-LHK
Related Case No. 12-CV-02663-LHK
ORDER GRANTING MOTION TO STAY; ORDER DENYING SANTA CRUZ COUNTY BANK’S MOTION TO
DISMISS

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Indeed, without granting the motion to stay, the defendant “[would have been] forced to choose

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between preserving his privilege against self-incrimination, thereby subjecting himself to a one-

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sided discovery process and adverse inferences drawn from his invocation of the Fifth Amendment,

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and waiving the privilege in order to mount a vigorous defense in the civil case.” Id. Accordingly,

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the Court concluded that a stay was warranted.3

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B.

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The reasoning that motivated this Court in Alexander applies with nearly equal force in this

Staying the Case to the Extent it Involves the GLR Defendants

case. Though any concerns about the government expanding discovery in a parallel civil action

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United States District Court
For the Northern District of California

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beyond the scope of what is permissible under Federal Rule of Criminal Procedure 16(b) are not

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present in this particular case because the government is not party to the Instant Action, Fifth

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Amendment concerns, considered together with the Keating factors, weigh in favor of staying the

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case.

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Given the substantial overlap between the Criminal Action and the Instant Action, the GLR

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Defendants find themselves in the same position as the defendants in Alexander: “choos[ing]

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between preserving [their] privilege against self-incrimination, thereby subjecting [themselves] to a

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one-sided discovery process and adverse inferences drawn from [their] invocation of the Fifth

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Amendment, and waiving the privilege in order to mount a vigorous defense in the civil case.”

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Alexander, 2010 WL 5388000, at *7. Forcing the GLR Defendants to make such a choice

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impinges on their Fifth Amendment rights.

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None of the other Keating factors to be considered outweigh preserving the GLR

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Defendants’ Fifth Amendment rights. As in Alexander, the criminal and SEC investigations

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prevent the GLR Defendants from causing further harm. Additionally, the public interest and the

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interests of individuals who both are and are not parties to this litigation—including other potential

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The Court did permit limited discovery where there was a risk of losing evidence, for instance in
taking depositions of elderly or seriously ill witnesses. Alexander, 2010 WL 5388000, at *7.
Discovery was allowed to proceed if good cause was shown or by stipulation of the parties on a
case-by-case basis. Id.
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Case No. 13-CV-01290-LHK
Related Case No. 12-CV-02663-LHK
ORDER GRANTING MOTION TO STAY; ORDER DENYING SANTA CRUZ COUNTY BANK’S MOTION TO
DISMISS

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victims of the GLR Defendants’ alleged crimes—are served by the SEC and Criminal Actions.

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Moreover, the interest of judicial economy, as explained infra Part III.C, favors staying the case.

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Accordingly, the Court finds that this Instant Action should not proceed to the extent it
involves the GLR Defendants.
C.

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Given that the Court finds that the Instant Action should not proceed to the extent it

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involves the GLR Defendants, this case cannot, at minimum, proceed beyond deciding the Bank’s

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Motion to Dismiss. All five of Plaintiffs’ claims in this case pertain to the Bank, and resolution of

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United States District Court
For the Northern District of California

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each claim will require an inquiry into the allegations against the GLR Defendants. For instance,

Staying the Case In Its Entirety, Including as to the Bank

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the Court cannot determine if the Bank aided and abetted the GLR Defendants without establishing

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what the GLR Defendants did. Proceeding beyond deciding the Motion to Dismiss would

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therefore implicate the GLR Defendants’ Fifth Amendment rights.

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Whether to proceed in deciding the Bank’s Motion to Dismiss is a closer question.

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Considering the relevant factors, the interest of judicial economy tips the balance in favor of

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staying this case in its entirety. On the one hand, the Fifth Amendment rights of the GLR

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Defendants would not be implicated as the Court’s analysis would be confined to the Complaint.

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Additionally, the Bank “wants to have this case promptly resolved on its Motion to Dismiss,” Bank

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Opp’n at 3, as do the Plaintiffs, if possible. On the other hand, the case cannot, as previously

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discussed, move beyond deciding the Bank’s pending Motion to Dismiss. For the reasons set forth

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below, deciding the Bank’s Motion to Dismiss at this time is not a good use of the parties’ or the

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Court’s resources.

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First and foremost, resolution of the Criminal Action will likely impact the substance of the

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Instant Action. Information uncovered in the Criminal Action may narrow or expand the scope of

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the claims and defenses in the Instant Action, may cause Plaintiffs to amend their complaint to

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allege new or different factual allegations and claims, and may cause the Bank to amend its Motion

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to Dismiss. Thus, proceeding with the Bank’s Motion to Dismiss at this time may create

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unnecessary rounds of motion practice.

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Case No. 13-CV-01290-LHK
Related Case No. 12-CV-02663-LHK
ORDER GRANTING MOTION TO STAY; ORDER DENYING SANTA CRUZ COUNTY BANK’S MOTION TO
DISMISS

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Moreover, if the Court were to deny the Bank’s pending Motion to Dismiss, the case would
then be stayed. If the Court were to grant the Motion to Dismiss, it would likely be dismissed

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without prejudice, so that Plaintiffs could then amend their complaint in order to cure any

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deficiencies. Once the Plaintiffs amended their complaint, the Bank might file another motion to

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dismiss, as is common practice for civil defendants. If the subsequent motion to dismiss was

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denied, the case would be stayed pending resolution of the Criminal Action, barring changed

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circumstances. Only if the subsequent motion to dismiss were granted with prejudice, would the

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Bank be free from this litigation. However, this would likely happen—if at all—many months into

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United States District Court
For the Northern District of California

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the future, and almost certainly beyond the six-month stay the Court issues here. Moreover, as

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discussed above, information uncovered in the Criminal Action may well impact the substance of

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the complaint and the subsequent motion to dismiss in the instant case, so proceeding now is

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improvident.

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Additionally, the Bank presents no reason why staying the case in its entirety would cause it

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to experience significant prejudice. Rather, the Bank would merely need to wait until the stay is

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lifted to bring all of its motions and raise its defenses with the benefit of information uncovered in

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the Criminal Action.

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Given that: (1) the resolution of the Criminal Action may facilitate a more efficient

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resolution of the Instant Action, (2) proceeding now may create unnecessary rounds of motion

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practice, and (3) the final resolution of Plaintiffs’ claims against the Bank is likely well over six

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months away even if this Court were to rule on the pending Motion to Dismiss in the Bank’s favor,

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the Court finds that the Instant Action should be stayed in its entirety for the next six months. The

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Court therefore GRANTS the GLR Defendants’ Motion to Stay.

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D.

Mitigating Potential Prejudice

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The Court agrees with both Plaintiffs and the Bank that the passage of time may imperil

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evidence gathering, especially with regard to elderly witnesses. See Pl.s’ Opp’n at 5-6 (describing

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Plaintiffs older than 65 and their need for this case to proceed); Bank Opp’n at 3-4 (noting that

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evidence related to Plaintiffs’ allegations of oral misrepresentations are particularly time-sensitive

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Case No. 13-CV-01290-LHK
Related Case No. 12-CV-02663-LHK
ORDER GRANTING MOTION TO STAY; ORDER DENYING SANTA CRUZ COUNTY BANK’S MOTION TO
DISMISS

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due to reliance on witnesses’ memories). In Alexander, this Court found that “delay associated

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with a stay may affect the availability of witnesses and documents or the quality of testimony.” Id.,

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2010 WL 5388000, at *4 (citing Dresser, 628 F.2d at 1377). Thus, as mentioned supra, Part III.A,

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the Court permitted limited discovery where there was a risk of losing evidence, for instance in

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taking depositions of elderly or seriously ill witnesses. Id. at *7. Discovery was allowed to

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proceed if good cause was shown or by stipulation of the parties on a case-by-case basis. Id.

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As in Alexander, the Court will permit discovery in the Instant Action on a case-by-case
basis pursuant to joint stipulation of the parties or where good cause is shown.

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United States District Court
For the Northern District of California

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IV.

CONCLUSION

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For the foregoing reasons, the Court GRANTS GLR Defendants’ Motion to Stay the Instant

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Action for six months. Discovery, however, may proceed on a case-by-case basis pursuant to joint

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stipulation of the parties or where good cause is shown. In addition, the parties may file a joint

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status report with the Court should any material changes occur that, from the perspective of the

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parties, warrant lifting the stay. Further, the parties shall file a joint status report six months after

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the issuance of this Order detailing whether the parties believe that the stay should be continued or

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lifted.

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The Bank has also moved to dismiss the Complaint as it pertains to claims made against the

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Bank. ECF No. 25. That motion is currently pending and a hearing on the motion is set for July

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25, 2013. In light of this Order, the Court hereby DENIES without prejudice Defendant Santa

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Cruz County Bank’s Motion to Dismiss and VACATES the July 25, 2013 hearing.

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The Clerk shall administratively close the file.
IT IS SO ORDERED.

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Dated: July 24, 2013

_________________________________
LUCY H. KOH
United States District Judge

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Case No. 13-CV-01290-LHK
Related Case No. 12-CV-02663-LHK
ORDER GRANTING MOTION TO STAY; ORDER DENYING SANTA CRUZ COUNTY BANK’S MOTION TO
DISMISS