Crypto Traders Management, LLC, et al. v. United States Securities and Exchange Commission
Filing
8
MEMORANDUM DECISION AND ORDER - Plaintiffs Motion for Order Pursuant to Customer Challenge Provisions of the Right to Financial Privacy Act 1978 (Dkt. 1 ) isDENIED and the SEC may enforce the subpoena. Signed by Judge B. Lynn Winmill. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by (jd)
Case 1:20-mc-00335-BLW Document 8 Filed 02/11/21 Page 1 of 6
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO
CRYPTO TRADERS
MANAGEMENT, LLC, a dissolved
Idaho limited liability company; and
SHAWN CUTTING, an individual,
Case No. 1:20-mc-00335-BLW
MEMORANDUM DECISION
AND ORDER
Plaintiffs,
v.
UNITED STATES SECURITIES
AND EXCHANGE COMMISSION,
Defendant.
INTRODUCTION
Pending before the Court is Plaintiffs’ Motion for Order Pursuant to
Customer Challenge Provisions of the Right to Financial Privacy Act of 1978.
(Dkt. 1). The Court has determined that oral argument will not significantly assist
the decisional process; therefore, the matter will be resolved without a hearing. The
MEMORANDUM DECISION AND ORDER - 1
Case 1:20-mc-00335-BLW Document 8 Filed 02/11/21 Page 2 of 6
motion is fully briefed and at issue. For the reasons explained below, the Court will
deny the motion and enforce the subpoena.
BACKGROUND
On November 19, 2020, Defendant United States Securities and Exchange
Commission (SEC) issued a subpoena to Glacier Bank seeking documents related
to Cutting’s bank account and financial transactions in accordance with the Right
to Financial Privacy Act of 1978. 12 U.S.C. §§ 3401 et seq. SEC sought these
documents pursuant to an initial order of investigation issued on October 1, 2020,
captioned, “Order Directing Private Investigation and Designating Officers to Take
Testimony in the Matter of Crypto Traders Management, LLC.” (See Def.’s Resp.,
Dkt. 5 at 2). SEC issued the subpoena in connection with a law enforcement
inquiry into whether CTM may have purchased, sold or offered for sale securities
in violation of the antifraud, securities registration, and broker-dealer registration
provisions of securities laws. The SEC has obtained evidence that Cutting may
have been running an illegal investment scheme. There is also evidence that
suggests Cutting has misappropriated money invested with CTM.
On December 4, 2020, Cutting and CTM filed a motion to quash SEC’s
subpoenas to Glacier Bank on the basis that the subpoena is not relevant to the
investigation and that it seeks confidential information.
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LEGAL STANDARD
Under the Right to Financial Privacy Act of 1978 (RFPA), 12 U.S.C.
§§ 3401-22 a customer may file a motion to quash a subpoena. There are two
grounds on which a customer may challenge the release of his financial records:
(1) that the government has not met the RFPA requirements; or (2) that the
financial records sought are not relevant to a legitimate law enforcement inquiry.
12 U.S.C. §§ 3410(a)(1)-(2). The RFPA requires that all customer motions to
quash contain an affidavit or sworn statement stating reasons 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. The applicant must file an objection
within ten days of service or within fourteen days of mailing. 12 U.S.C.
§ 3410(a)(2).
The Government may obtain financial records pursuant to an administrative
subpoena only if: (1) “the records sought are relevant to a legitimate law
enforcement inquiry; and (2) “a copy of the subpoena or summons has been served
upon the customer or mailed to his last known address on or before the date on
which the subpoena or summons was served on the financial institution” together
with a notice stating “with reasonable specificity the nature of the law enforcement
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inquiry.” 12 U.S.C. § 3405.
ANALYSIS
CTM and Cutting move to quash the subpoena under the Right to Financial
Privacy Act of 1978. Cutting does not argue that SEC failed to comply with
RFRA’s procedural requirements, or that the SEC’s inquiry is not a legitimate law
enforcement inquiry. Cutting asserts only that the records are not relevant to the
law enforcement inquiry stated in the Customer Notice provided by SEC.
A.
Eligibility to Challenge the Subpoena
The first issue before the Court is whether Cutting or CTM have standing to
challenge the subpoena under the RFPA. The SEC argues that CTM is statutorily
barred from challenging the subpoena. Only a customer may bring a challenge to a
subpoena under the RFPA. 12 U.S.C. § 3410(a). A customer is defined as “any
person or authorized representative of that person who utilized or is utilizing any
service of a financial institution.” 12 U.S.C. § 3401(5). A person is defined as “an
individual or a partnership of five or fewer individuals.” 12 U.S.C. § 3401(4).
There is no dispute that Cutting is a customer and may challenge the subpoena
under the RFPA. However, as a limited liability company, CTM does not qualify
as a customer and cannot challenge the subpoena. Exchange Point LLC v. U.S.
S.E.C., 100 F.Supp.2d 172, 176 (S.D.N.Y. 1999).
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B.
Reasonable Belief that the Records Sought Are Relevant to the
Law Enforcement Inquiry
Next, the Court must determine whether the records sought are relevant to
the SEC’s legitimate law enforcement inquiry. The Court must deny the motion to
quash if there is “a reasonable belief that the records sought are relevant” to a
legitimate law enforcement inquiry. 12 U.S.C. § 3140(c). “[I]f the material sought
by the subpoena “touches on a matter under investigation, an administrative
subpoena will survive a challenge that the material is not relevant.” Han v.
Securities and Exchange Commission, MC 19-68 PSG (AFMX), 2019 WL
4543099, at *2 (C.D. Cal. July 10, 2019).
Here, the SEC is investigating possible securities fraud violations committed
by Cutting and CTM. The SEC has obtained evidence that suggest Cutting moved
funds invested with CTM among several bank accounts—including personal
accounts. The records sought may provide information regarding the amount of
money raised by Cutting and CTM, and what happened to investors’ money. The
records may also identify other persons or entities involved in the scheme and
potential victims of the scheme that are not yet known. Additionally, the records
may help the SEC trace the proceeds from the transactions under investigation for
possible disgorgement. Thus, the Court finds that the records sought by SEC are
relevant to a legitimate law enforcement inquiry and there is no basis to quash the
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subpoena.
ORDER
IT IS ORDERED that:
1.
Plaintiff’s Motion for Order Pursuant to Customer Challenge
Provisions of the Right to Financial Privacy Act 1978 (Dkt. 1) is
DENIED and the SEC may enforce the subpoena.
DATED: February 11, 2021
_________________________
B. Lynn Winmill
U.S. District Court Judge
MEMORANDUM DECISION AND ORDER - 6
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