Porrazzo et al v. United States Securities and Exchange Commission

Filing 9

ORDER DENYING MOTION FOR ORDER PURSUANT TO CUSTOMER CHALLENGE PROVISIONS OF THE RIGHT TO FINANCIAL PRIVACY ACT OF 1978 re 1 Motion to Quash. Signed by JUDGE LESLIE E. KOBAYASHI on 04/02/2018. Edward Michael Por razzo and Marianne Veronika Sandors Motion for Order Pursuant to Customer Challenge Provisions of the Right to Financial Privacy Act of 1978, filed March 21, 2018, is HEREBY DENIED in its entirety. The denial is WITHOUT PREJUDICE to the filing of other RFPA motions challenging future SEC subpoenas. (eps, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
EDWARD MICHAEL PORRAZZO and
MARIANNE VERONIKA SANDOR,

)
)
)
)
Plaintiffs,
)
vs.
)
)
UNITED STATES SECURITIES AND )
)
EXCHANGE COMMISSION
)
)
Defendant.
_____________________________ )

MC 18-00106 LEK-KSC

ORDER DENYING MOTION FOR ORDER PURSUANT TO CUSTOMER CHALLENGE
PROVISIONS OF THE RIGHT TO FINANCIAL PRIVACY ACT OF 1978
Before the Court is pro se Movants Edward Michael
Porrazzo and Marianne Veronika Sandor’s (“Movants”) Motion for
Order Pursuant to Customer Challenge Provisions of the Right to
Financial Privacy Act of 1978 (“Motion”), filed on March 21,
2018.

[Dkt. no. 1.]

Respondent Securities and Exchange

Commission (“SEC”) filed its Verified Response to Motion to Quash
or Modify Administrative Subpoena (“Verified Response”) on
March 27, 2018, and Movants filed their reply on April 2, 2018.
[Dkt. nos. 3, 8.]

The Court finds this matter suitable for

disposition without a hearing pursuant to Rule LR7.2(d) of the
Local Rules of Practice of the United States District Court for
the District of Hawai`i (“Local Rules”).
denied for the reasons set forth below.

The Motion is hereby

BACKGROUND
Movants are a husband and wife who have, or previously
had, accounts with Bank of America in Delaware (“BOA”), Wells
Fargo Bank in Arizona (“Wells Fargo”), Chase Bank in Indiana
(“Chase”), and First Hawaiian Bank in Hawai`i (“FHB” and
collectively, “the Financial Institutions”).

In SEC

Matter LA-4895 regarding Moddha Interactive Inc. (“Moddha”), the
SEC has served a subpoena on each of the Financial Institutions
for Movants’ financial records (“Subpoenas”).

[Motion at 2.1]

According to the SEC, Movants are Moddha’s principals,
and Moddha is a Hawai`i corporation that has been offering or
selling securities since at least July 2012.
at 1-2.2]

[Verified Response

Moddha describes itself as “a worldwide Positive Media

and Technology Corporation that is uniquely positioned to profit
from consumer product sales, subscription services; including
vast licensing dollars with its proprietary hardware, software

1

The Motion does not have page numbers. All citations to
the Motion in this Order refer to the page numbers assigned by
the district court’s electronic case filing system. Although not
labeled as such, the first page appears to be the Motion page and
pages 2-5 appear to a memorandum in support.
2

Submitted with the Verified Response, pursuant to 12
U.S.C. § 3410(b), is the Verification of Jasmine M. Starr (“Starr
Verification”). [Dkt. no. 3-1.] Jasmine Starr is a SEC senior
counsel with the Division of Enforcement. Because she is one of
the attorneys designated as an officer on the Moddha
investigation, she is familiar with the facts of the
investigation and certifies the facts in the Verified Response
are true and correct. [Starr Verification at ¶¶ 1-2.]
2

and original content in diverse global industries.”

[Starr

Verification, Exh. 2 (Moddha’s Confidential Private Offering
Memorandum (“Offering Memo”)) at 5.]
registered with the SEC.

Moddha’s securities are not

The SEC asserts it “has cause to

believe that since January 2017, Moddha has potentially raised at
least $780,000 in funds from 8 investors who were likely provided
the company’s [Offering Memo] in the course of their decision to
invest.”

[Verified Response at 3.]
Movants ask this Court to quash or modify the Subpoenas

pursuant to the Right to Financial Privacy Act of 1978 (“RFPA”),
12 U.S.C. § 3401, et seq., on the ground that the records sought
in the Subpoenas are not relevant to the law enforcement inquiry
described in the Customer Notice Movants received on March 16,
2018, even if the inquiry is legitimate.

[Motion at 2-3.]

According to Movants, even though they did not receive the
Subpoenas until March 16, the SEC served them on the Financial
Institutions on or about March 5, 2018.

One of the Financial

Institutions informed Movants it was providing their personal
account records.

Movants state this occurred before they had

notice of the Subpoenas and an opportunity to respond.

[Id. at

4-5.]
Movants state the letter accompanying the Subpoenas
described SEC Matter LA-4895 as “a non-public, fact-finding
inquiry.”

[Id. at 3.]

The investigation was launched based on a

3

complaint the SEC received against Moddha.

Movants state they

“are reasonably informed” the complaint was made by a
“disgruntled shareholder” of Moddha, who also filed a civil case
against Moddha “for an unpaid loan he solicited from the Company
with Usurious interest.”

[Id.]

Movants contend the disgruntled

shareholder’s complaint is meritless.

[Reply at 7.]

According to Movants, the Subpoenas cover their
personal financial records, many of which are not related to the
fact-finding investigation regarding Moddha.

Movants acknowledge

their personal financial records could be said to contain some
information that “touches a matter under the SEC’s Fact-Finding
investigation,” but Movants argue the scope of the Subpoenas is
excessive for the investigation, which is at an “initial, early
stage.”

[Motion at 3.]

Movants argue the $1,000.00 minimum

threshold in the Subpoenas is insufficient to eliminate
transactions irrelevant to the investigation.

They contend

courts routinely quash similar subpoenas as overbroad,
unnecessarily intrusive, and a violation of the RFPA,
particularly where there has been no prior showing of wrongdoing.

Moreover, the broad scope of the Subpoenas is unnecessary

because Moddha is fully cooperating with the investigation, and
there are other reasonable alternatives to obtain relevant
information.

[Id. at 3-4.]

Movants also contend the current

Moddha investigation is improper because they and Moddha have

4

already been cleared of wrong-doing in SEC Case Number SEU-204046.

[Reply at 8.]
Movants ask this Court to: 1) quash or modify the

Subpoenas; and 2) order that the records already provided by the
Financial Institutions pursuant to the Subpoenas be returned.

If

this Court declines to quash or modify the Subpoenas, Movants ask
this Court to stay their enforcement pending appeal because
Movants have “shown and can show a likelihood of success on the
merits.”

[Motion at 5.]
The SEC states the Subpoenas were issued after it

discovered a substantial amount of investor funds Moddha raised
were transferred to Movants’ personal accounts.
Response at 1.]

[Verified

The SEC submitted its Order Directing Private

Investigation and Designating Officers to Take Testimony
(“Investigation Order”), which the SEC states was issued on
January 31, 2018.
at 2.]

[Starr Verification, Exh. 1; Verified Response

The SEC also submitted copies of the subpoena and a

transmittal letter to Chase (“Chase Subpoena”), BOA (“BOA
Subpoena”), and FHB (“FHB Subpoena”).
Exhs. 3.1, 3.2, 3.3.]

[Starr Verification,

The SEC did not submit a copy of the

subpoena served on Wells Fargo (“Wells Fargo Subpoena”) because
the SEC contends the Motion does not challenge it.
Response at 5 n.2.]

5

[Verified

According to the SEC, Moddha has a corporate banking
account at BOA, and Movants are the only signatories.

Based on

the investigation to date, the SEC states:
Based on a preliminary analysis account records in
2017 and early 2018, about $780,000 in investor
funds was apparently deposited to its corporate
account in that time. It appears, however, that
more than $121,000 of corporate funds were
converted for movants’ personal use, in the form
of transfers to Porrazzo and Sandor, and travel,
meals, and shopping expenses (e.g., purchases at
retailers like Liquor Barn, Costco, Lowe’s, and
Target that have no evident corporate purpose).
[Id. at 3-4.]

Further, Movants have admitted: using the

corporate account for personal expenses and using personal
accounts to pay corporate expenses; intermingling funds from the
corporate account with their personal accounts; using one ledger
to record personal account transactions and corporate
transactions; and receiving loans from Moddha.

[Id. at 4.]

The

Offering Memo contains a section describing how the proceeds from
the offering would be used.

The section does not disclose that

invested funds could be used for Movants’ personal purposes.
[Offering Memo at 52-53.]
The SEC asserts the Chase Subpoena, BOA Subpoena, and
FHB Subpoena were issued regarding Movants’ personal accounts “to
obtain additional information on, among other things, whether
movants were engaging in a misappropriation of investor funds in
violation of the representations made by Moddha’s [Offering
Memo], and where investor funds might currently be located,
6

should disgorgement be ordered against Moddha and its principals
at some later date.”

[Verified Response at 4-5.]

The SEC states

customer notice about those Subpoenas were provided to Movants,
pursuant to the RFPA, by certified mail on the date they were
issued.

Further, the Subpoenas were provided to Movants’ counsel

by email.

[Id.]
STANDARD
Under the Right to Financial Privacy Act
(“RFPA”), 12 U.S.C. § 3401 et seq., a financial
institution may disclose a customer’s financial
records if such records are properly requested by
a governmental authority via an administrative
subpoena or judicial subpoena. 12 U.S.C.
§ 3402(2) and (4). If a customer objects to the
disclosure of their records, the customer must
file a motion to quash the subpoena that includes
an affidavit or sworn statement, and timely serve
the government entity with the motion. 12 U.S.C.
§ 3410(a);[3] see also S.E.C. v. Jerry T. O’Brien,

3

Section 3410(a) states, in relevant part:
Within ten days of service or within fourteen days
of mailing of a subpena, summons, or formal
written request, a customer may file a motion to
quash an administrative summons or judicial
subpena, or an application to enjoin a Government
authority from obtaining financial records
pursuant to a formal written request, with copies
served upon the Government authority. A motion to
quash a judicial subpena shall be filed in the
court which issued the subpena. A motion to quash
an administrative summons or an application to
enjoin a Government authority from obtaining
records pursuant to a formal written request shall
be filed in the appropriate United States district
court. Such motion or application shall contain
an affidavit or sworn statement
(continued...)
7

Inc., 467 U.S. 735, 745, 104 S. Ct. 2720, 81 L.
Ed. 2d 615 (1984) (noting that “[a] customers’s
ability to challenge a subpoena [under the RFPA]
is cabined by strict procedural requirements”).
If the Court orders the government entity to
respond to the motion to quash, the government
must filed a sworn response. § 3410(b).
In ruling on the motion, the Court relies on
the parties’ sworn statements and any additional
proceedings the Court finds appropriate.
§ 3410(b). The Court must deny the motion to
quash if either the applicant is not a customer
whose financial records are being requested or
“there is a demonstrable reason to believe that
the law enforcement inquiry is legitimate and a
reasonable belief that the records sought are
relevant to that inquiry.” § 3410(c); Rodriguez
v. Fed. Sav. and Loan Ins. Corp., 712 F. Supp.
159, 162 (N.D. Cal. 1989). The government entity
has the ultimate burden of showing that the
records sought are relevant to a legitimate law
enforcement inquiry. In re Blunden, 896 F. Supp.
996, 999 (C.D. Cal. 1995) (quoting Collins v.
Commodity Futures Trading Comm., 737 F. Supp.
1467, 1480 (N.D. Ill. 1990). “For purposes of an
administrative subpoena, the notion of relevancy
is a broad one.” Sandsend Fin. Consultants, Ltd.
v. Fed. Home Loan Bank Bd., 878 F.2d 875, 882 (5th
Cir. 1989). Subpoenaed information is relevant if
it “touches a matter under investigation.” Id.
See also United States v. Wilson, 571 F. Supp.
1417, 142 (S.D.N.Y. 1983) (“the RFPA requires only

3

(...continued)
(1) stating that the applicant is a customer
of the financial institution from which
financial records pertaining to him have been
sought; and
(2) stating the applicant’s reasons for
believing that the financial records sought
are not relevant to the legitimate law
enforcement inquiry stated by the Government
authority in its notice, or that there has
not been substantial compliance with the
provisions of this chapter.
8

that financial information be relevant to a
‘legitimate law enforcement inquiry,’ and not
relevant in a narrow, evidentiary sense.”); S.E.C.
v. Nicita, 2007 WL 1704585, *3 n.4 (S.D. Cal.
June 13, 2007). An administrative agency with
statutory authority to engage in investigative and
accusatory duties may “investigate merely on
suspicion that the law is being violated, or even
just because it wants assurance that it is not.”
U.S. v. Morton Salt Co., 338 U.S. 632, 642-42, 70
S. Ct. 357, 94 L. Ed. 401 (1950).
Tabet v. U.S. S.E.C., No. 12cv1596–IEG (DHB), 2012 WL 3205581, at
*2 (S.D. Cal. Aug. 6, 2012) (some alterations in Tabet).4

“Under

this standard, a “declaration of [a] government official
attesting to [the] commencement of investigation . . . [is]
sufficient to establish [that the] law enforcement inquiry is
legitimate, and records are relevant.”

Tabet, 2012 WL 3986656,

at *1 (some alterations in Tabet) (some citations omitted)

4

2012 WL 3205581 is the magistrate judge’s order denying
the Tabets’ RFPA motion, which was affirmed by the district court
after denial of the Tabets’ objections. 2012 WL 3986656
(Sept. 11, 2012). Movants argue, under Tabet, there is no “Rush
to Rule” on their Motion because “the original documents” in
Tabet were filed on February 7, 2012, and the court’s “definitive
ruling” was not issued until September 11, 2012. [Reply at 2.]
Movants are mistaken. In Tabet, the SEC’s formal order of
investigation was issued on February 7, 2012, but the Tabets did
not file their RFPA motion until June 28, 2012. The SEC filed
its verified response on July 30, 2012, and the magistrate judge
denied the Tabet’s motion on August 6, 2012, i.e. within seven
days after the SEC filed its verified response. Tabet, 2012 WL
3205581, at *1. The district judge’s order affirming the
magistrate judge’s order in Tabet, 2012 WL 3986656, does not
excuse this Court from complying with the § 3410(b) requirement
to rule on an RFPA motion to quash within seven days after the
government files a response.
9

(quoting Rosiere v. U.S. S.E.C., No. 2:09CV01975JCMPAL, 2010 WL
489526, at *3 (D. Nev. Feb. 5, 2010)).
DISCUSSION
I.

Preliminary Issues
A.

Timeliness of the Motion
Under the RFPA, the government agency seeking to

subpoena a customer’s financial records must mail a copy of the
subpoena with a notice to the customer.

12 U.S.C. § 3405(2).

A

customer must file a motion to quash or modify a subpoena
“[w]ithin ten days of service or within fourteen days of mailing”
the subpoena.

§ 3410(a).

Although the Subpoenas are dated March 5, 2018, and the
SEC states the customer notice was mailed to Movants on the same
date, Movants state they only received the notice on March 16,
2018.

[Verified Response at 4-5; Motion at 2.]

The Motion was

filed on March 21, 2018, which was more than fourteen days after
the mailing of the notice.

However, this district court has

stated: Ҥ 3410 requires customers to file their motion to quash
within ten days of receiving in-hand service or within fourteen
days of the date notice was mailed to the customer.”

Turner v.

United States, 881 F. Supp. 449, 451 (D. Hawai`i 1995).

Because

Movants did not receive in-hand service of the customer notice
until March 16, 2018, the Motion is timely because Movants filed
the Motion within ten days of March 16.
10

B.

Scope of the Motion
Although the memorandum in support of the Motion

challenges the Subpoenas collectively, the Motion page itself
states Movants’ “financial records are held by, Bank of America,
First Hawaiian Bank and Chase Bank.”

[Motion at 1.]

page does not refer to the Wells Fargo Subpoena.

The Motion

The Court

therefore construes the Motion as only contesting the BOA
Subpoena, FHB Subpoena, and Chase Subpoena (“Contested
Subpoenas”).
Even if Movants mistakenly omitted the Wells Fargo
Subpoena from the Motion page and intended to challenge all four
Subpoenas, the analysis set forth below would also apply to the
Wells Fargo Subpoena.

The Motion would also be denied as to the

Wells Fargo Subpoena, if it were properly before this Court.
II.

Movants’ Challenge to the Contested Subpoenas
The BOA Subpoena requests documents, from January 1,

2014 to the present, for “any account in the name of
Marianne Veronika Sandor, also known as Veronika Sandor.”

[Starr

Verification, Exh. 3.1 at 6 (defining the “Relevant Period”), 8
(describing the “Documents to be Produced”).5]

The Chase

Subpoena requests documents, from January 1, 2014 to the present,

5

Each of the Contested Subpoenas consists of multiple parts
that are not consecutively paginated. All citations to any of
the Contested Subpoenas refer to the page numbers assigned in the
district court’s electronic case filing system.
11

for “any account in the name of Edward Michael Porrazzo, also
known as Edward Porrazzo.”
(same).]

[Starr Verification, Exh. 3.2 at 6, 8

The FHB Subpoena requests documents, from January 1,

2014 to the present, for “any account in the name of
Marianne Veronika Sandor, also known as Veronika Sandor.”

[Starr

Verification, Exh. 3.3 at 6, 8 (same).]
Movants are the “customers” whose records are sought in
the Contested Subpoenas.

See 12 U.S.C. § 3401(5) (“‘customer’

means any person or authorized representative of that person who
utilized or is utilizing any service of a financial institution,
or for whom a financial institution is acting or has acted as a
fiduciary, in relation to an account maintained in the person’s
name”).

This Court must therefore determine whether: “there is

. . . a demonstrable reason to believe that the law enforcement
inquiry is legitimate and a reasonable belief that the records
sought are relevant to that inquiry”; and whether “there has
. . . been substantial compliance with the provisions of this
chapter.”

See § 3410(c).
Movants contend the Contested Subpoenas are overbroad,

but that is not the standard for whether a subpoena should be
quashed or modified under the RFPA.
Consultants, 878 F.2d at 882.

See Sandsend Fin.

Moreover, Movants have not

established the Contested Subpoenas are overbroad.

Although

Movants also argue the Contested Subpoenas are unnecessary

12

because Moddha has been cooperating with the investigation, they
have not identified any specific evidence Moddha has produced to
the SEC that would render the Contested Subpoenas entirely
unnecessary.

Movants have agreed to be interviewed by the SEC on

April 19 and 20, 2018, but that fact does not render the
Contested Subpoenas improper in light of the nature of the
alleged securities violations.

Further, the SEC represents

review of the records sought in the Contested Subpoenas is
necessary for it to prepare to interview Movants.
Response at 1.]

[Verified

Movants have apparently provided the SEC with

statements that all investor funds have been applied pursuant to
the disclosures in the Offer Memo, and were placed in Moddha’s
business account with BOA.

[Reply at 6.]

However, the SEC is

not required to accept Movants’ statements without the
opportunity to confirm them through examination of the records
referenced in the Contested Subpoenas.

Also rejected are

Movants’ arguments that the Moddha investigation is not
legitimate and, even if legitimate, the Contested Subpoenas are
not relevant to the investigation merely because the
investigation is in its early stages.

Movants have also failed

to support their argument that the instant investigation is
duplicative of Case Number SEU-204-046.
Based on the verified statements and exhibits submitted
by the SEC, this Court finds, at this time: there is “a

13

demonstrable reason to believe” the SEC’s investigation of
Moddha’s potential securities violations is legitimate; and there
is “a reasonable belief” the records sought in the Contested
Subpoenas are relevant to the SEC’s investigation because of the
evidence Movants used monies from Moddha investors for personal
purposes, contrary to statements in the Offering Memo about how
the invested funds would be used.
Finally, as to the issue of whether there has been
substantial compliance with the RFPA, the only issue of
non-compliance raised in the Motion is Movants’ allegation the
SEC failed to give them timely notice of the Contested Subpoenas.
The RFPA requires a government agency issuing a subpoena for a
customer’s financial records to serve a copy of the subpoena on
the customer or mail it to the customer’s last known address “on
or before the date on which the subpena . . . was served on the
financial institution together with” the required notice.
§ 3405(2).

The SEC asserts it mailed the Contested Subpoenas and

the required notice to Movants, by certified mail, on March 5,
2018 – the day the SEC issued the Contested Subpoenas.

The SEC

therefore timely provided Movants with the Contested Subpoenas
and the required notice.

This Court conclude that, in issuing

the Contested Subpoenas, the SEC has substantially complied with
RFPA’s provisions.

14

The Motion is denied because, at this time, there is: a
demonstrable reason to believe the SEC’s investigation of Moddha
is legitimate; a reasonable belief the records sought in the
Contested Subpoenas are relevant to the investigation; and
substantial compliance with the RFPA’s provisions.

The denial of

the Motion is without prejudice to the filing of other RFPA
motions challenging future SEC subpoenas.
III. Stay Pending Appeal
Movants also ask this Court to stay the enforcement of
the Contested Subpoenas until the resolution of Movants’
anticipated appeal.

[Motion at 5.]

As one district court has

stated:
The RFPA explicitly states that a court
decision denying a motion to quash a subpoena
under the statute “shall not be deemed a final
order and no interlocutory appeal may be taken
therefrom by the customer.” 12 U.S.C. 3410(d).
See Daly v. United States of America, 51 F.3d 285,
285 (10th Cir. 1995). “Instead, the customer only
may appeal as part of the final order in any
subsequent legal proceeding brought by the
government authority based on the subpoenaed
records, or within thirty days of notification by
the government authority that it does not intend
to take further legal action.” Id. (citing 12
U.S.C. 3410(d)). See also [S.E.C. v.] Jerry T.
O’Brien. Inc., 467 U.S. [735,] 745, 104 S. Ct.
2720 [(1984)] (stating that a customer moving to
quash a subpoena “cannot appeal an adverse
determination until the Government has completed
its investigation”).

15

Exch. Point LLC v. U.S. S.E.C., 100 F. Supp. 2d 172, 177
(S.D.N.Y. 1999).

Because Movants cannot appeal the instant Order

at this time, they cannot obtain a stay pending appeal.
Even if this Court considered Movants’ request for a
stay pursuant to this Court’s inherent powers, see In re Taggart,
CIVIL ACTION NO. 15-mc-255, 2016 WL 3902939, at *1 (E.D. Pa.
July 19, 2016) (utilizing inherent powers analysis to a motion
for stay pending appeal of an order denying RFPA motion), this
Court would deny Movants’ request for a stay.

The Motion does

not establish the relevant interests weigh in favor of granting a
stay pending Movants’ anticipated appeal.

See, e.g., Hawai`i v.

Trump, 233 F. Supp. 3d 850, 853 (D. Hawai`i 2017) (listing
competing interests that must be weighed in considering a request
for a stay pursuant to the district court’s inherent powers).
Movants’ request to stay the enforcement of the
Contested Subpoenas pending their anticipated appeal of this
Order is therefore denied.
CONCLUSION
On the basis of the foregoing, Edward Michael Porrazzo
and Marianne Veronika Sandor’s Motion for Order Pursuant to
Customer Challenge Provisions of the Right to Financial Privacy
Act of 1978, filed March 21, 2018, is HEREBY DENIED in its
entirety.

The denial is WITHOUT PREJUDICE to the filing of other

RFPA motions challenging future SEC subpoenas.

16

IT IS SO ORDERED.
DATED AT HONOLULU, HAWAII, April 2, 2018.

/s/ Leslie E. Kobayashi
Leslie E. Kobayashi
United States District Judge

EDWARD MICHAEL PORRAZZO, ET AL. VS. UNITED STATES SECURITIES &
EXCHANGE COMMISSION; MC 18-00106 LEK-KSC; ORDER DENYING MOTION
FOR ORDER PURSUANT TO CUSTOMER CHALLENGE PROVISIONS OF THE RIGHT
TO FINANCIAL PRIVACY ACT OF 1978

17