SECURITIES AND EXCHANGE COMMISSION v. LIBERTY et al
Filing
73
ORDER ON DEFENDANT'S FOURTH MOTION TO STAY CIVIL PROCEEDINGS granting #53 Motion to Stay. By JUDGE JON D. LEVY. (mtm)
UNITED STATES DISTRICT COURT
DISTRICT OF MAINE
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
v.
MICHAEL A. LIBERTY, et al.,
Defendants.
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No. 2:18-cv-00139-JDL
ORDER ON DEFENDANTS’ FOURTH MOTION
TO STAY CIVIL PROCEEDINGS
All of the Defendants, except for Defendant George Marcus, have jointly moved
for a fourth stay of this civil litigation which would stay the case until the conclusion
of the pending criminal proceedings against Defendants Michael A. Liberty and Paul
Hess. ECF Nos. 53, 54, 71. Plaintiff Securities and Exchange Commission (the
“SEC”) opposes the Motion. ECF No. 55. For the reasons that follow, the Motion is
GRANTED.
I. BACKGROUND
The SEC filed its complaint in March 2018, asserting claims arising out of an
alleged fraudulent securities scheme. See ECF No. 1. The named Defendants are
Michael A. Liberty, Mozido Invesco, LLC, Family Mobile, LLC, BRTMDO, LLC,
Brentwood Financial, LLC, TL Holdings Group, LLC, Brittany Liberty, Paul Hess,
Richard Liberty, George Marcus, and Xanadu Partners, LLC. The complaint alleges
that the Defendants tricked investors into believing that they were funding startup
technology companies, including a company named Mozido, when the investors were
in fact investing in shell companies without active business operations. Id. ¶¶ 1-4.
The complaint alleges that the Defendants enriched themselves with their investors’
money. Id. ¶ 1.
In July 2018, the Defendants moved for a stay of the case pending an ongoing
grand jury investigation into conduct related to the SEC’s allegations and targeting
certain of the Defendants. See ECF No. 38. The Court granted the motion and
ordered the case stayed until October 16, 2018, finding that the ongoing grand jury
investigation could implicate the Fifth Amendment rights of at least some of the
Defendants. See ECF No. 40. The stay was later extended to December 10, 2018, see
ECF No. 44, and then again to February 28, 2019, see ECF No. 50, upon subsequent
requests by the Defendants that were not opposed by the SEC. See ECF Nos. 43, 47.
The two orders continuing the initial stay authorized the parties to conduct thirdparty documentary discovery so long as all discovery requests were served on all
parties. ECF Nos. 44, 50.
On February 27, 2019, a criminal indictment was returned against Defendants
Michael Liberty and Paul Hess containing allegations of wire fraud and securities
fraud that overlap with the SEC’s civil allegations. See United States v. Liberty, et
al., No. 2:19-cr-00030-GZS, ECF No. 1. The indictment alleges that Liberty and Hess,
“with the help of others, solicited individuals to invest in various shell companies that
[Liberty] controlled . . . on the basis that their investments would be passed on to
fund the business operations of a company named Mozido.” Id. ¶¶ 1-2, 7. All of the
Defendants in this civil action—except for Defendant George Marcus, see ECF No.
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71—have moved for the Court to again extend the stay of this proceeding until the
criminal case against Liberty and Hess is concluded. See ECF Nos. 53, 54.
II. LEGAL ANALYSIS
“[T]he power to stay proceedings is incidental to the power inherent in every
court to control the disposition of the causes on its docket with economy of time and
effort for itself, for counsel, and for litigants.” Hewlett-Packard Co. v. Berg, 61 F.3d
101, 105 (1st Cir. 1995) (quoting Landis v. North Amer. Co., 299 U.S. 248, 254 (1936)).
The “power to stay civil proceedings in deference to parallel criminal proceedings
should be invoked when the interests of justice counsel in favor of such a course.”
Microfinancial, Inc. v. Premier Holidays Int’l, Inc., 385 F.3d 72, 78 (1st Cir. 2004).
This determination is “situation-specific” and requires the balancing of “competing
interests.” Id. The First Circuit has identified seven factors that typically bear on
the analysis:
(i) the interests of the civil plaintiff in proceeding expeditiously with the
civil litigation, including the avoidance of any prejudice to the plaintiff
should a delay transpire; (ii) the hardship to the defendant, including
the burden placed upon him should the cases go forward in tandem; (iii)
the convenience of both the civil and criminal courts; (iv) the interests
of third parties; . . . (v) the public interest[;] . . . (vi) the good faith of the
litigants (or the absence of it) and (vii) the status of the cases.
Id.
The SEC is “charged with the function of protecting the investing public,”
S.E.C. v. Am. Trailer Rentals Co., 379 U.S. 594, 604 (1965), and therefore has a
“substantial interest in the timely resolution of this proceeding.” S.E.C. v. TelexFree,
Inc., 52 F. Supp. 3d 349, 353 (D. Mass. 2014). However, “[t]he strongest case for
granting a stay is where a party under criminal indictment is required to defend a
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civil proceeding involving the same matter.” Volmar Distribs., Inc. v. N.Y. Post Co.,
152 F.R.D. 36, 39 (S.D.N.Y. 1993). Such is the case here.
The subjects of the civil and criminal matters are sufficiently similar to risk
prejudice to Liberty and Hess, as criminal defendants, should the two proceedings
proceed simultaneously. The stay of a civil proceeding pending the completion of a
closely connected criminal case is necessary where there is “substantial overlap
between the subject matter of the two proceedings.” See S.E.C. v. Desai, 672 F. App’x
201, 205 (3d Cir. 2016). In such a situation, “[a] stay can protect a civil defendant
from facing the difficult choice between being prejudiced in the civil litigation, if the
defendant asserts his or her Fifth Amendment privilege, or from being prejudiced in
the criminal litigation if he or she waives that privilege in the civil litigation.” Louis
Vuitton Malletier S.A. v. LY USA, Inc., 676 F.3d 83, 97 (2d Cir. 2012).
Here, the criminal proceeding against Liberty and Hess is moving apace and
is currently scheduled to be ready for trial in May of 2020. See Liberty et al., No. 2:19cr-00030-GZS, ECF No. 80. Thus, it is likely that a stay of this proceeding tied to the
conclusion of the criminal trial will not exceed 12 months and, therefore, will not
substantially prejudice the SEC and the interests it asserts. See Trs. of Plumbers &
Pipefitters Nat’l Pension Fund v. Transworld Mech., Inc., 886 F. Supp. 1134, 1139
(S.D.N.Y. 1995) (“A stay of a civil case is most appropriate where a party to the civil
case has already been indicted for the same conduct . . . [because] the prejudice to the
plaintiffs in the civil case is reduced since the criminal case will likely be quickly
resolved due to Speedy Trial Act considerations.”).
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A stay will also promote the public interest and conserve judicial resources.
See Marquis v. F.D.I.C., 965 F.2d 1148, 1154 (1st Cir. 1992) (“[F]ederal district courts
possess the inherent power to stay pending litigation when the efficacious
management of court dockets reasonably requires such intervention.”).
“The
conviction of a civil defendant as a result of the entry of a plea or following a trial can
contribute significantly to the narrowing of issues in dispute in the overlapping civil
cases and promote settlement of civil litigation not only by that defendant but also by
co-defendants who do not face criminal charges.” In re Worldcom, Inc. Sec. Litig., No.
02 Civ. 3288 (DLC), 2002 WL 31729501, at *8 (S.D.N.Y. Dec. 5, 2002); see also Javier
H. v. Garcia-Botello, 218 F.R.D. 72, 75 (W.D.N.Y. 2003) (“By proceeding first with the
criminal prosecution, the Court makes efficient use of judicial time and resources by
insuring that common issues of fact will be resolved and subsequent civil discovery
will proceed unobstructed by concerns regarding self-incrimination.”).
This case also implicates issues of testimonial privilege that weigh in favor of
granting a stay.
Defendant Brittany Liberty is married to Defendant Michael
Liberty, and she is therefore able to assert the spousal privilege and refuse to testify
against her husband in the criminal case. See Trammel v. United States, 445 U.S.
40, 53 (1980) (“[T]he witness-spouse . . . has a privilege to refuse to testify adversely
[against his or her spouse]; the witness may be neither compelled to testify nor
foreclosed from testifying.”). In addition, various parties may assert the attorneyclient privilege concerning the testimony of Defendant George Marcus, Michael
Liberty’s former lawyer. Deciding questions related to these privileges in this civil
proceeding, before they have been addressed in the criminal proceeding, creates a
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risk of inconsistent outcomes because the rulings in this civil proceeding will not be
binding in the criminal proceeding. Having these questions decided first in the
criminal proceeding could conserve judicial resources because the decision may
narrow the questions presented in this proceeding. See Parker v. Dawson, No. 06CV-6191 (JFB)(WDW), 2007 WL 2462677, at *6 (E.D.N.Y. Aug. 27, 2007) (“[T]he
resolution of the criminal case may increase prospects for settlement of the civil case
. . . [d]ue to differences in the standards of proof between civil suits and criminal
prosecutions which may result in the criminal disposition having a collateral estoppel
or res judicata effect on some or all of the overlapping issues.”) (quoting Milton
Pollack, Parallel Civil and Criminal Proceedings, 129 F.R.D. 201, 204 (1990))
(internal quotation marks omitted). As explained in TelexFree:
A stay would also conserve judicial resources and narrow the issues to
be resolved in the event that criminal convictions are obtained. Under
such a scenario, defendants would be estopped from re-litigating issues
decided against them. This will undoubtedly expedite resolution of the
civil action once the stay is lifted, even with respect to the individual
defendants in the civil case who are not criminal defendants.
52 F. Supp. 3d at 353. In addition, as determined in TelexFree, “[a] stay in the civil
enforcement proceeding will allow defendants to avoid substantial litigation costs
while the criminal proceeding is pending.” Id.
Given these considerations, this action will be stayed pending the conclusion
of the criminal prosecution of Michael A. Liberty and Paul Hess.
III. CONCLUSION
The Defendants’ Fourth Motion to Stay Civil Proceedings (ECF No. 53, joined
by ECF No. 54) is GRANTED. All proceedings in this civil action are STAYED
pending resolution of the parallel criminal proceedings against Defendants Michael
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A. Liberty and Paul Hess in Case No. 2:19-cr-00030-GZS, provided, however, that the
parties are authorized to conduct third-party written discovery in accordance with
the Court’s prior orders. See ECF Nos. 44, 50. The parties are ORDERED to file a
status report with respect to the progress of the criminal case on or before January 1,
2020, and every three months thereafter.
SO ORDERED.
Dated this 8th day of August, 2019.
/s/ JON D. LEVY
CHIEF U.S. DISTRICT JUDGE
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