Securities and Exchange Commisison v. Pentagon Capital Management PLC et al
Filing
251
AMENDED OPINION re: 245 MOTION for Attorney Fees and expenses or, in the alternative, to withdraw as counsel for defendant Lewis Chester filed by Lewis Chester. Based upon the conclusions set forth above, the Pepper Hamilton's motion to modify the restraining notice with respect to the relevant fees is granted and payment of Seyfarth Shaw's fee is approved. (Signed by Judge Robert W. Sweet on 10/29/2013) (rsh)
1'\
USDCSDNY
DOCUMENT
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
ELEC1'RONKJJ t'!,
-X
08 C
. 3324 (RWS)
-againstAMENDED OPINION
PENTAGON CAPITAL MANAGEMENT PLC and
LEWIS CHESTER,
Defendants,
-andPENTAGON SPECIAL PURPOSE FUND, LTD.,
Relief De
----------X
A P PEA RAN C E S:
SECURITIES AND EXCHANGE COMMISSION
New York Regional
fice
3 World Financial Center, Suite 400
New York, NY 10281
By:
Paul G. Gizzi,
Christopher J. Dunnigan, E
John C. Lehmann Jr., Esq.
PEPPER HAMILTON LLP
lton Square
600 Fourteenth Street, N.W.
Washington, DC 20005-20004
Frank C. Razzano, Esq.
Ivan B. Knauer, Esq.
Matthew D. Foster, Esq.
1
r ALLD ..
DOC IF:
I.
Dl~fE FILEV:-'-(),'7:-f
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,
I
\3
Sweet, D.J.
Pepper Hamilton LLP ("
De
Pentagon
r Hamilton"), counsel for
tal Management PLC ("PCM"), and Seyfarth
Shaw LLP ("Seyfarth Shaw"), counsel
Lewis Chester, have
moved to modify the restraining notice issued by the
Securities and Exchange Commiss
re
("SEC") to allow for
the alternat
ive fees and expenses or,
withdraw.
Based on the conclusions set forth
motion to modify
Shaw's motion for
aintiff
restraining notice is
, to
low,
PCM's
and Seyfarth
yment of outstanding legal
s is grant
Prior Proceedings
Prior proceedings and the facts in this action are
cribed in
opinions of
February 10, 2009 grant
is court,
February 14, 2012
judgment in
r of the SEC.
See SEC v.
F. Supp. 2d
2012 WL 479576 (S.D.N.Y.
ry 14, 2012); SEC v. Penta
612 F. Supp. 2d 241 (S.D.N.Y. 2009).
summary of t
procedural
A brief
ckground relevant to the instant
motion follows:
2
On March 28, 2012, this Court entered a Final Judgment
of over $98.6 million against
Defendant.
appeal.
Defendants and Relief
ril 25, 2012, Defendants filed a notice of
On
This Court denied a subsequent motion by the Defendant
s Chester ("Chester"), PCM, and Pentagon Special Purpose
Fund, Ltd. ("PSP
supers
) for a stay of execution without posting a
s bond in accordance with
of Civil Procedure.
e 62 of t
Federal Rules
ster and PCM, but not PSPF, made a
motion to the Second Circu
2012, the Second Circuit deni
for
same reI
the motion.
On May 23,
f.
(Dunnigan Decl., Ex.
1) .
On June 7, 2012, the SEC served a restraining notice
pursuant to New York C
il Practice Law and Rules
§
5222 on
Chester, PCM and PSPF, as well as post-judgment document
sts.
On June 12, 2012,
to PCM and PSPF.
On June 13, 2012, the SEC propounded
interrogatories to Chester.
served on
SEC propounded interrogatories
These discovery re
sts were
r Hamilton, counsel for PCM, Chester, and PSPF.
On June 28, 2012, after service of the restra
interrogatories, PCM filed
ng notice and
administration in the Uni
Kingdom (Def. Memo at 3).
3
On
y 5, 2012, Squire Sanders (UK) LLP, the U.K.
counsel for the Administrators, sent letters to both Pepper
Letter"), the Admi
"Pepper
the first letter
lton and the SEC.
lton
strators agreed to let Pepper Hamilton ke
a flat fee paid to it on February 17, 2012, and agreed to
underwrite
However, the Admi
the Second Circu
Pepper
sts.
es for Chester and PCM's appeal to
tional
strator instructed
lton not to respond to the pending discovery
(Knauer Decl., Ex. 1, pgs. 2-3).
In
Administrators' second letter (
"SEC
Letter"), the Administrators informed the SEC that "Pentagon has
entered administration because
is insolvent and there are
limited
in the administration estate to enable the
Company to be invo
in the Post-Judgment Proceedings."
ve
(Dunnigan Decl. Ex. 5, pg. 3).
the SEC that
The Administrators also informed
viewed the SEC's
States
sed judgment
as unenforceable outside the United States unless it was
domesticat
in the U.K.
On July 5, 2012, Pepper Hamilton sent a letter to this
Court asking to be rei
as counsel for PCM
4
PSPF.
On
July 9, 2012, counsel for
letter to
Administrators sent a furt
r Hamilton, stat
25, 2012, Pepper
that PCM would no longer
(Knauer Decl. Ex. 1).
for any of PSPF's legal costs.
ef
ct of
cont
y
On July
lton's request to withdraw was denied.
After the Court denied
withdraw, counsel
r
the
r Hami
ies corresponded
on's motion to
rding
SEC's restraining notice on Pepper Hamilton's
ng representation of its clients.
counsel proposed
On August 21, 2012,
following:
• Pepper Hamilton can continue to draw down
flat
while representing the administrators for PCM and
Chester in the
1 to
Second
rcuit;
•
r Hami on can
the administrators for PCM
the reasonable expenses incurred incident to the
appeal; and
•
r Hami on can
rge the administrators for an
hourly basis
the
es and expenses incurred in
representing the administrators for PCM in the post
judgment discovery process in the Southern District of
New York.
This amount is in ially capped at $25,000
and, if necessary,
r Hamilton would] be in
contact with [the SEC] when the
lIs reach[ed] this
amount so that [they cou ] agree on another capped
amount.
Hamilton's Exhibit A ("Ex. A"), E-mail from M. Foster to
C.
Dunnigan (Aug. 27, 2012).)
indicat
that it
The SEC responded the same day,
ed to
three requests, "reserving the
5
SEC's right to take a different position at a later time .
• N
(Ex. 8, E-mail from C. Dunnigan to M. Foster (Aug. 27,
2012).)
The parties' agreement allowed
cont
to receive payment for its work
appeal and for PCM in post-Judgment p
Court, without any substantive I
r Hamilton to
r PCM and Chester on
ngs in this
tation on the legal
representation aside from the monetary cap on the post-Judgment
resentation.
On July 10, 2012,
with Seyfarth Shaw.
On
ster replaced Pepper Hamilton
y 12, 2012, the SEC agreed to allow
Seyfarth Shaw to incur legal
s up to $25,000 on behalf of
Chester to deal with post j
discovery without violating
the restraining notice.
On August 8, 2013,
vacating and remanding in part
decision, affirming in
the Court's ruling.
See SEC v. Penta
Ct. 1216 (2013)
et
------------------~----~------~~--~----~--
al., 725 F.3d 279, 287 (2d
light of the
Second Circuit issued its
r. 2013)
Court's decision in Gabelli v.
133 S
h regard to the imposition of jo
several liability of the penalty upon Defendants) .
Hamilton sought the SEC's
In
(Vacating penalty awa
and
r
rmission to receive a new retainer
6
from PCM from which the attorneys would draw down for payment of
s incurred
preparing and filing a petition on PCM and
Chester's behalf for rehearing en banc, and to cha
PCM's
administrators for reasonable expenses incurred in the
preparation and fili
of such
ition.
The SEC denied both
requests as violating the restraining notice.
The SEC stated
that it,
(would] view any payments for attorneys' fees other
than t
reasonable costs to provide the pending
request
discovery as violating the restra ing
notice. For
pending discovery, [
SEC requested
that Pepper Hamilton] please provide an estimate of
what it [would] cost to provide
discovery. [The
SEC also stated
would] need to review the
statement(s) before any payment [wa]s made. And to be
clear, [the SEC] note[d] that t
cost of any possib
objection to
pending requests will not
permitted - only the costs of providing the requested
discovery [would the SEC] view as not violating the
restra ing notice.
(Ex. E., E-mail from P. Gizzi to M. Foster (Sep. 6, 2013).) On
S
ember 4, 2013,
SEC again requested from Pepper Hamilton
an estimate of how much in fees would be necessary to respond to
the SEC's August 9 discovery requests.
To date,
Pepper Hamilton
has not provided an estimate of its post-judgment fees.
On September 4, 2013, Paul Gizzi ("Gizzi") of t
Commission communicated bye-mail that the SEC would object to
the payment of any attorneys'
fees by Chester other than limited
7
fees to respond to t
Commission.
'JI 3.)
scovery requests issued by
most recent
(Seyfarth Shaw, Notice of Motion, "Shaw Mem.";
rth Shaw, counsel for Chester, has accumulat
Se
$32,000 in legal fees to date, which is $7,000 in excess of the
SEC's al
ted amount, and seeks an additional $3,000 to deal
with outstanding document production issues.
2013, Seyfarth Shaw notified
it was owed this $7,000
sentation of Chester in connection with t
for the
and
zzi t
On September 6,
scovery responses.
by Chester personally.
appeal
Seyfarth Shaw is currently being paid
Bye-mail on
ember 6, 2013, t
SEC
agreed that Seyfarth Shaw may be paid an additional $3,000 to
complete document discovery and to represent Chester at
sition.
s
The SEC has refused to agree to the payment of
$7,000 in excess of the previously agreed-upon $25,000. 1
On September 13, 2013, Pepper Hamilton moved for an
order either modifying the restra
Hamilton to
ing notice to allow Pepper
sent PCM in the en banc and potential
subsequent certiorari petitions and without 1
tat ion in t
post-judgment discovery requests, or alternatively granting
Pepper
lton leave to withdraw as counsel for PCM.
On
1 It is unclear which,
if any, counsel wi 1 represent Chester ~n the District
Court.
8
Sept
r 17, 2013, Seyfarth Shaw
pa
of the outstanding legal
allowed to
r an order to permit
es or in the alternative that
thdraw as counsel.
Both motions were heard
16, 2013.
marked fully submitted on Oct
The Applicable Standard
A.
CPLR §
40
Under CPLR § 5240, a Court "may at any t
own initiative or the motion of any interested
such notice as it may require, rna
conditioning,
enforcement
omnibus section empowering t
an order
§
5240.
ng, limiting,
use of any
"CPLR 5240 is an
court to exercise broad powers
over the use of enforcement procedures."
Paz v.
This section further "authorizes
preclusion of any enforcement procedure ot
Island
------~~~~--~~
R.R., 661 N.Y.S.2d 20, 22 (N.Y. App. Div. 2d
in Arti
rson, and upon
ating, extending or modifying
edure." NY CLS CPLR
, on its
't1997).
fication or
rwise provi
for
e 52," including CPLR 5222 restraining notice.
in v. Altman
No.
Civ. 8106, 1997 U.S. Dist. LEXIS
11413, *9 10 (S.D.N.Y. Aug. 7, 1997) ; see also Cruz v. TO Bank,
9
N.A., 711 F.3d 261, 269-70 (2d Cir. 2013)
(CPLR 5240 is a "broad
sm for relief").
B. Local Civil Rule 1.4
Local Civil Rule 1.4, an "attorney who has appeared as
attorney of record for a party may be relieved or displaced only
by order of the Court and may not
leave of the Court granted by
from a case without
t
r."
Local Civ. R. 1.4.
an order may be granted only upon a
otherwise satisfactory reasons
and the posture of t
case.
considers two issues in
te
ng of
ng by affidavit or
withdrawal or displacement
"
Id.
Thus, a court
ing a motion to withdraw as
counsel, "the reasons for wi
withdrawal on the t
"Such
1 and the impact of the
proceeding."
Karimian v. T
Equities, Inc., No 10-3773 (AKH) (JCF), 2012 WL 1900092, at *2
(S.D.N.Y. May 11, 2011).
In making
s dete
nation, it is well-settled t
discretion in deciding a motion
court has "cons
withdrawal of counsel."
Id.;
r
a v. N.Y.C. Trans
No. 00-3262, 2002 WL 59423, at *1 (S.D.N.Y. Jan. 16, 2002).
considering a mot
the "protrac
a
In
leave to withdraw, a court may consider
history of the litigation" when deciding whether
10
or not to permit counsel to withdraw.
Te
SEC v. Great American
Inc. , No. 07 -1 0 694, 2009 WL 4885153 , at * 5
--------~~~~-----
(S.D.N.Y. Dec. 15, 2009).
withdrawal bas
In add
ion, courts
on non-payment.
ve allowed
See Promotica of America, Inc.
v. Johnson Grossfield, Inc., No. 98-7414, 2000 WL 424184, at *1
(S.D.N.Y. April 18, 2000)
("It is well-settled t
Court to grant counsel's motion
of fees is a valid basis for t
."); Emile v. Browner, No. 95-3836, 1996 WL
to withdraw.
724715, at *1
(S.D.N.Y. Dec. 17, 1996)
pay legal fees,
attorney,
down,
nonpayment
("When a client
Is to
Is to communicate or cooperate with the
and the attorney-client relationship has broken
se are more than
ficient reasons for counsel to be
relieved.") .
The Motion to Modify the Restraining Notice to Allow Specified
Counsel Fees is Granted
r Hamilton has sought the modification of the
notice under CPLR
restrain
ion,
5240 with respect to attorney
senting PCM in any further appellate
fees to permit
lit
§
luding fil
an en banc rehear
petition,
filing a petition for Supreme Court review, and in the postjudgment proceedi
these
be
this court.
Preventing payment of
s, according Pepper Hamilton, unjustly allows the SEC
11
to use the restraining not
to dictate the rights and best
interests of PCM, and prevents PCM from having a
opportunity to pursue appellate
1 and fair
and to protect its rights
in the post judgment proceedings.
The SEC does not
spute that its position seeks to
preclude PCM from pursuing
r appellate
ew or
adequately responding to the post-judgment document requests.
SEC
(1 )
sists
review would
5222 does not create a statuto
and (3) CPLR §
futile;
CPLR §
exemption for attorney
40 does not create any substant
the judgment debtor or any
(2)
Si
rights
rd party and as such cannot be
used to modify the restraining notice.
(SEC Memorandum
Opposition, "Sec. 0pp."i at 3-5.)
The SEC is correct both that CPLR § 5240 does not
rights and that CPLR
create substant
statutory exemption
attorney fees.
§
5222 does not allow a
This
s not, however,
prevent district courts from modifying restraining notices
rsuant to CPLR
Whi
§
5240 to prevent harsh or unjust results.
CPLR § 5240 is a New York state procedural rule,
ral
Rule of Civil Procedure 69 provides that "[t]he procedure on
execution [of a
ral judgment for money damages]-and in
12
proceedings supplementary to and in aid of judgment or
execution-must accord with the procedure of the state where the
court is located."
AXA Versiche
Ins. Co., 2013 WL 1790719, at *3 (S.D.N.Y. Apr. 22, 2013).
Restraining notices relating to underlying judgments have
found to be "unquestionabl[y] supplementary to and in aid of
judgment or execution" and as such within
District Courts.
Id.; see also Karaha Bodas Co., LLC. v.
Perusahaan
______________________
(2d Cir. 2002)
rest
purview of
~
______
~
k Dan Gas Dumi
______
~
ra, 313 F.3d 70
_ _ _ _ _ _ _ _ _ _ _ _ __ L_ __
(upholding a district order's modi
ning notice pursuant to CPLR
§
cation of a
5240).
held in this Circuit that "[j]uri
It has
ction
to hear ancillary disputes relating to execution and enforcement
of judgments is an inherent
the underl
case.
of a court's jurisdiction over
As the Second Circuit recently reiterated,
'[p]rocess subsequent to judgment is as essential to
ju
sdict
as process antecedent to judgment, else the
judicial power would be incomplete and entirely inadequate to
the purposes
EM Ltd. v.
r
wh
it was conferred by the constitution."
--------------~------------~-------
2012)
, 695 F.3d 201, 208
(2d Cir.
(quoting Riggs v. Johnson Cnty., 73 U.S. 166 (1867)).
Modifying the restraining notice at issue under CPLR
13
§
5240 to
prevent unjust results is likewise within this Court's
discretion.
The Second Circuit decision in
Assocs. De
ned Contribution Pension Plan, 666 F.3d 68, 78 (2d
Cir. 2011), upon which the SEC reI
In _ _
Mi
~L-
s, is not to the contrary.
the defendant moved under CPLR
__
§
5240 to set aside
the judgment of a district court until the defendant had been
paid by a third
rty debtor.
The court held that CPLR
§
5240
was a "state procedural rule" that provided no substantive
rights and therefore had no relevance to the federal proceeding
or its judgment.
This does not, though, prevent parties Ii
Pepper Hamilton and the defendants in AXA Ve
AG and
----------------~~-Karaha Bodas Co., LLC., from using CPLR
mechanism
§
5240 as a procedural
through which to vindicate certa
ghts restrained
by supplemental notices issued under NY CPLR
§
5222.
See
--~----~
AXA Versicherung AG, 2013 WL 1790719, at *3; Karaha Bodas Co.,
LLC., 313 F.3d at 72.
Indeed, in both AXA Versiche
Karaha Bodas Co., the distr
under CPLR
the part
§
5240 to modi
s constitutional
t courts used their
AG and
scretion
restraining notices, not based on
ghts or statutorily exempt
categories, but as a procedural mechanism to prevent unjust
results from the notices issued under CPLR
14
§
5222.
S
--.~----~
AXA Versiche
----------------~---
, 2013 WL 1790719, at *3 (modifying
restraining notice to allow defendant to
ndicate its property
to the interest rate embedded in the
rights with re
Bodas Co., 313 F.3d at 80
judgment); Ka
(modifying a
to account for only a percentage of t
restraining not
ously mandated). The fact that attorney
amount
CPLR
a statutorily exempted category
§
s are not
5222 or t
is no constitutional right to counsel in a civil
does
not
a district court from modifying a restraini
in
s discretion under CPLR § 5240 to prevent unjust results.
Indeed, CPLR
§
5240 explicitly
time, on its own initiat
person,
modif
, regulating, ext
the use of any en
an order
or
procedure." NY CLS CPLR
----------~~------------
Div. 2d Dep't 1997)
§
, 661 N.Y.S.2d 20, 22
("CPLR 5240 is an omnibus section
the court to exercise broad powers over t
en
at any
motion of any interested
upon such notice as it may require, rna
5240; see also
(N.Y.
s that a Court
or
denying, limiting, condition
notice
use of
rcement procedures.") .
The SEC has cit
Potter v. MacLean,
904 n.Y.S.2d 551,
553 (App. Div. 3rd Dep't 2010) as holding that New York law does
not recognize the
of a judgment debtor to use non-exempt
15
(SEC Opp. at 4.)
funds to pay counsel.
de
However, in Potter, the
had an outstanding maintenance obligation to his
family of $33,000, but was pursuing a divorce action for which
an outstanding
he
collection unit,
11 to his attorneys for $15,000.
cause of his owed maintenance
See id.
s divorce act
notices could
court held
on the
se
I
served
representing the defendant
a restraining notice on the atto
in
The
t restraining
's attorneys and that
held for the purpose of retaining an atto
were not
luded in the statutory list of money and property exempt from
restraint.
impact
Id.
s]
court stat
that it was not "unmindful of
ision [mi
retain counsel," but noted
have on de
a party in a matrimonial
proceeding does not have a constitutional ri
In so deciding,
's ability to
to counsel.
court clarified that it reached this
conclusion not to vacate the restraining notice "solely upon
factual circumstances presented" and the "
parent's duty to provide chi
Id.
support for
sis placed upon a
s or her chi
ren."
The court further explained that it reached this conclusion
"specifical
violated his
[based on
ct that de
hard] will
igation to provide financial support for
children" and did not cite
broader
553-54.
16
ral rule.
lly
s
Id. at
The court in Potter chose to exercise its discretion
not to alter the restraining notice, and noting that it was not
required to do so because the right in question was not a
constitutionally protected right does not bar this court's
discretion in light of the
sented.
ffer
factual circumstances
Here, PCM cannot pursue
her appellate review
ss it has the ability to appoint and compensate counsel.
is well-established that a corporat
in a c
1 act
See Jones v. N
722 F.2d 20, 22 (2d Cir. 1983)
cannot represent
It
self
.,
ra Frontier Tran
(stating that "it is e
ished
that a corporation, which is an artificial entity that can only
act through agents, cannot proceed pro se."); see also
Brandstein v. Wh
Inc., 20 F. Supp. 369, 370 (S.D.N.Y.
--------------------------~~.-----
1937)
(noting that "[wJhile a corporation is a legal entity, it
is also an artif
ial one, existing only in the contemplation of
the law; it can do no act, except through its agents.").
counsel is not a constitutionally protected right
case, perhaps regrettably (see Sweet,
in the Trial Court
The Rabbi's Beard
(Dec. 1997)), the SEC's posit
Though
a civil
Justice
42 THE RECORD 915, 924
seeks to prevent PCM from
pursuing its administrator's wishes in continuing appellate
litigation and would deprive Pepper Hami
17
of its independence
in its post judgment representation.
SEC has
Although
contended that it would be a "waste" or "needless"
r PCM to
pursue a continued litigation it is not the arbiter what is in
the
st interest of the PCM estate, which is the responsibility
of PCM's administrators and counsel.
CPLR § 5240 provides
discretion to modify enforcement procedures to prevent ha
unfair results.
specific factual circumstances presented
here would result in injustice if PCM were
pursuing appel
and
uded from
relief and adequately responding to the SEC's
post judgment discovery requests.
As such, the restraining
notice will be modified to allow Pepper Hamilton to represent
PCM
the en bane rehearing and petitions, and without
limitation in the
st-judgment discovery issues. 2
As this Court has already determined, the amount and
lling arrangements of fees is to be resolved by PCM,
administrators and Pepper
lton.
See SEC v. Pent
tal
2012 WL 3065981, at *3 (S.D.N.Y. July 25, 2012).
With respect to the $7,000 at issue
connection with the
resentation of
th Seyfarth Shaw in
ster, in view of the
ior agreements between the SEC and Chester,
is appropr
te
2 Because
Hamilton has
requested to withdraw as an alternative to
COITcpensation, the issue of withdrawal i
rendered moot
this opinion and
will not be addressed.
18
that the $7,000 in outstanding legal fees
Se
rth Shaw.
paid by Chester to
3
Conclusion
Bas
upon the conclusions set forth above, the Pepper
Hamilton's motion to modify the restraining notice with respect
to the relevant
s is granted and payment of Seyfarth Shaw's
es is approved.
It is so ordered.
New York, NY
October
2012
J.f,
U.S.D.J.
Shaw's notice of motion has incorporated
HaIl'.ilton's
memorandum of law but does not address the issue of continuing appellate
This Court reodified the
litigation with respect to Chester individually.
to PCl": in part
notice in the interests of justice with
because PCM, as a corporation, could not proceed with
without an attorney.
See
722 F.2d
20, 22 (2d Cir. 1983) (stat
that a corporation,
which is an artificial entity that can only act through agent , cannot
pro se.
Chester as an individual faces no such restriction, and
may proceed pro se. As such, the Court does not exercise its discretion to
modify the restraining notice to allow Chester as an individual to pay
counsel fees for further
e review at this time.
ff
).
19
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