Securities and Exchange Commission v. Gruss

Filing 36

OPINION re: #102199 23 MOTION For An Order Pursuant To 28 U.S.C. Sec. 1292(b) Certifying A Question For An Immediate Appeal. filed by Perry A. Gruss. Based on the conclusions set forth above, the motion for immediate appeal is denied. (Signed by Judge Robert W. Sweet on 8/9/2012) (djc) Modified on 8/15/2012 (jab).

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

-- --- --------- --- --

-x

SECURITIES AND EXCHANGE COMMISSION,
11 Civ. 2420

Plaintiff,

OPINION

-against
PERRY A. GRUSS,
Defendant.

- --- --

-- --- --- -x

A P PEA RAN C E S:
Attorneys for Plaintiff
SECURITIES & EXCHANGE COMMISSION

3 World Financial Center, Room 4300

New York, NY 10281

By: Todd D. Brody, Esq.

Att

for Defendant

USDCSDNY
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BLBCTR';.\~!r', r'·.... ,

DORSEY & WHITNEY LLP
250 Park Avenue

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Thomas O. Gorman, Esq.
Cecilie H. MacIntyre, Esq.

1

Sweet, D.J.

Defendant Perry Gruss ("Gruss" or the "Defendant") has
moved pursuant to 28 U.S.C.

§

1292(b) to certify a question from

this Court's May 9, 2012 opinion (the "May 9 Opinion")

for an

immediate appeal.

Based upon the conclusions set forth below, the motion
is denied.

I. Prior Proceedings

The facts underlying this action are set out in this
Court's May 9 Opinion, SEC v. Gruss,
WL 1659142

-- F. Supp. 2d. ---, 2012

(S.D.N.Y. 2012), familiarity with which is assumed.

Brief

stated, the plaintiff U.S. Securities and

Exchange Commission (the "SEC" or the "Plaintiff") filed its
initial complaint against Gruss on April 8, 2011 seeking
enforcement of the Investment Advisers Act of 1940 (the "IAA"),
15 U.S.C.

§

80b-6.

On June 10, 2011, the SEC amended its

complaint (the "Complaint"), adding factual allegations after
2

being served Gruss' motion to dismiss.

The Compl

nt sets forth

a claim for relief against Gruss consisting of four separate
alleged frauds, charged as aiding and abetting violations of
Sections 206(1) and (2)

the 1AA.

On July 15, 2011, invoking Rules 12(b) (6), 8(a) and
9(b) of the Federal Rules of Civil Procedure, Gruss moved to
dismiss the Complaint based on the Supreme Court's opinion in
Morrison v. National Australia Bank, Ltd.,
Ct. 2869, 177 L. Ed. 2d 535 (2010).

-- u.S.

--, 130 S.

Gruss' motion to dismiss

was denied on May 9, 2012.

On May 17, 2012, Gruss moved to certify for immediate
appeal a question raised by the May 9 Opinion.
Gruss framed the question as:

Specifically,

Whether Section 206 of the 1AA

has extraterritorial reach when the advisory client that is the
object of the fraud is outside the u.S. and subject to a foreign
securities regulatory regime.

The instant motion was heard and marked fully
submitted on June 13, 2012.

II.

The Applicable Standard
3

The requirements for interlocutory review are governed
by 28 U.S.C. § 1292(b).

Section 1292 grants the dist

ct court

discretion to certify an order for interlocutory appeal if the
order (1)

"involves a controlling question of law,"

(2)

"there

is sUbstantial ground for difference of opinion," and (3)

"an

immediate appeal from the order may materially advance the
ultimate termination of the litigation."

crite

§

1292(b).

a for certifying a question under

"are conjunctive, not disjunctive.
provide

28 U.S.C.

§

1292(b)

'The federal scheme does not

an immediate appeal solely on the ground that such

an appeal may advance the proceedings in the district court.'"
Ahrenholz v. Rd. of Trs. of the Univ. of Ill., 219 F.3d 674, 676
(7th Cir. 2000)

(quoting Harriscom Svenska AR v. Harris

947 F.2d 627, 631 (2d Cir. 1991)).
AL., MOORE'S FEDERAL PRACTICE,
practice

§

203.31[1]

(3d ed. 2008)

("[I]n

teria as a unitary

isions granting and discussing

interlocutory appeals under 28 U.S.C.
all three

I

See also 19 JAMES WM. MOORE, ET

courts treat the statutory

requirement, and the

•

§

1292{b) uniformly cite

the elements as being present in any parti

case. ") .

4

ar

"Moreover

l

these criteria supply only the minimum

standard that movants must meet ll and "[d]istrict court judges
have broad discretion to deny certification even where the
statutory criteria are met.
8427{LBS}1

1I

Bishop v. Best BUYI No. 08­

2011 WL 4011449 1 at *12 {S.D.N.Y. Sept. 8 1 2011}

(citations omitted) i see also Nat/l Asbestos Workers Med. Fund
_v___P_h i_l,'----"'--M_o_r_r_i__'_sl 71 F. Supp. 2d 139 / 162
.
__
_

(E.D.N.Y. 1999)

("The

legislative history, congressional design and case law indicate
that district court judges retain unfettered discretion to deny
certification of an order for interlocutory appeal even where
the three legislative criteria of section 1292(b) appear to be

met.

lI

}

•

In addition l the district court must consider the
efficiency of both the dist

ct court and the appellate court.

See Inre Lloyd Am. Trust Fund Litig., No.
458739 1 at *4

96-1262 (RWS)

1

1997 WL

("the benefit to the district court of avoiding

unnecessary trial must be weighed against the inefficiency of
having the Court of Appeals hear multiple appeals in the same

case.

lI

)

i

see also Harriscom l 947 F.2d at 631

("it does not

normally advance the interests of sound judicial administration
or efficiency to have piecemeal appeals that require two (or
more) three judge panels to familiarize themselves with a given
5

having the trial judge l who sits alone and is

case l instead

intimately familiar with

whole case l

In part and that portion is

the case if he or she has
overturned

sit a portion of

lowing the adjudication

whole case.

lI

)

•

III. The Motion Fails to Meet the Minimum Threshold for an
Interlocutory Appeal

In applying the

§

1292(b) standard l courts have
ion of lawl must refer to a 'pure l

maintained that "the '
question of law that

reviewing court 'could decide quickly

and clearly without having to study the record.

III

Worldcom l Inc' l No. M 47 (HB)

1

(S.D.N.Y. June 23 1 2003)
77)).

I

2003 WL 21498904

In re
at *10

(quoting Ahrenholzi 219 F.3d at 676­

In addition l "[i]n determining whether a controlling

question of law exists the district court should consider
whether:
in

reversal

the district courtls opinion could result

smissal of the action; reversal of the district courtls

opinion

s

I

even though not resulting

ficantly af

dismissal, could

the conduct of the action; or, the

certified issue has precedential value for a I
cases.
567

1

Lauro

1I

Primavera Familiensti

570 (S.D.N.Y. 2001)
I

{citing

921 F.2d 21, 24-25 (2d

number of

n l 139 F. Supp. 2d
~K~l~~~_f_e~r _v _
_ _ .~S~.~N~.~C~.~A~c~h==i_l~l~e

r.1990)).
6

In support

his motion, Gruss argues that "the issue

for certification is both a controlling question of law and has
precedential value
7).

a large number of cases."

(Def. Memo at

He maintains that any appeal in this case will be decided

based on pure

1

subject exclus

questions and that the Offshore Fund was
to the laws of a fore

securities

regulatory regime, which, he alleges, the SEC previously
acknowledged.

(Def. Reply at 2)

(stating that "there is no

s that are criti

dispute about
certification

to the issue for

the Offshore Fund is a Cayman Island fund

regulated by that jurisdiction. ").
Gruss argues

To support his contention,

the SEC presents facts that try to "shift the

focus from

controlling issue of law presented for

certificat

by Gruss to one cent

effects test

ected by Morrison

on the old conduct and
a test which did involve a

exercise that would not be appropriate for

fact
consideration.

II

(Id.).

Thus, according to Gruss, the facts

alleged by the SEC apply only to show potential fraudulent
conduct

the U.S. and has no

ication to the issue of

whether a complaint alleging
offshore fund regulated by a
of act

the victim of the fraud is an
ign government states a cause

based on § 206 under Morrison.
7

(rd.

at 3).

As noted by the SEC and the May 9 Opinion, however,
the statutory regime and the operative documents for the
Offshore Fund will raise factual issues.

For example, while the

Offshore Fund's Offering Memoranda stated that it was a foreign
entity governed by foreign law, the Complaint alleges that the
actual "operational and
Fund were all made.
for

stment decisions for the Offshore
in DBZCO's New York office such that

I intents and purposes, the Offshore Fund was based in New

York. "

(Compl. , 20).

Thus, in order to address

s issue,

among others addressed in the May 9 Opinion, relating to the
SEC's argument that the Offshore Fund was for Morrison purposes,
a domestic entity, the circuit court would have to review and
analyze the record.

Gruss dismisses the SEC's presented facts as
"irrelevant" and as a "red herring."

(Def. Reply at 2)

However, just because the alleged facts may be applicable
towards the conduct and ef

s test, does not render the same

facts inapplicable towards determining whether the victim of the
fraud is an
regime.

fshore fund subject to a foreign regulatory

Thus, the proposed question here cannot be based on

purely legal questions but instead raises several factual
8

issues, rendering certification inappropriate.
Ci

See Brown v.

of Oneonta, 858 F. Supp. 340, 349 (N.D.N.Y.

1994)

("Since

this determination, although a legal issue, is essentially fact
based

nature, int

ocutory appeal is inappropriate.") .

Gruss has also not demonstrated that "the resolution
the question for certification may have precedential effect
in numerous cases across the country .

[and] could impact

numerous on-going non-public SEC investigations as well as cases
pending
8).

district courts across the country."

(Def. Memo at

Without any quantification of how many pending cases could

be impacted by the May 9 Opinion, Gruss' statement is merely
speculat

Askin, 139 F. SUpp. 2d at 573 ("Even assuming

arguendo that the DLJ's dramatic characterization of this
Court's ruling were correct

I

it is rather speculative to say

that the ruling has precedent

value for a large number of

cases when those cases have yet to be brought.II).

Moreover,

Section 929P(b) of the Dodd Frank Act allows the SEC to commence
civil actions extraterritorially in certain cases.

While the

May 9 Opinion may impact on cases concerning pre-Dodd-Frank
conduct, it will have no impact on the cases brought with
respect to current violative conduct.

Taken together, there are

insufficient grounds to support Gruss' assertion that the
9

question for certification has precedential effect in numerous
cases across the

u.s.

In addition, even accepting that the May 9 Opinion
addressed a question of first impression, that "standing alone,
is insufficient to demonstrate a substantial ground for
difference of opinion."

In re Flor, 79 F.3d 281, 284

(2d Cir.

1996); see also Williston v. Eggleston, 410 F. Supp. 2d 274, 277
(S.D.N.Y. 2006)

(finding that the fact that "simply because a

question of law has not been authoritatively addressed" "by
either the Supreme Court or the Second Circuit .

does not

make the question grounds for substantial difference of
opinion.").

Nor does the fact that "the parties themselves

disagree as to the interpretation of persuasive authority
constitute 'a difference of opinion' sufficient to warrant
certification."

Id.

(citation omitted) .

Instead, in order to

determine whether there is substantial ground for difference of
opinion, the Court "must analyze the strength of the arguments
in opposition to the challenged ruling, and determine whether
there is 'substantial doubt' that the district court's order was
correct."

In re Methyl Tertiary Butyl Ether Prods. Litig., 399

F. Supp. 2d 320, 322-23

(S.D.N.Y. 2005)

omitted) .
10

(internal citations

Gruss

ans to advance four points on appeal, in which

believes exists a substantial basis for a difference of
opinion, including:

(1) that Morrison should be read broader
presumption against

than its facts to conclude that
extraterritorial ef

appl

to the instant case;

protection of

the focus of Section 206 of the lAA is
client and not the investor;

(2) that

(3) where the location of the

alleged violations took place; and (4) the number of U.S.
shareholders in the Offshore Fund and the impact

Section

929P(b) of the Dodd-Frank Act's passage.

These four points mostly repeat arguments made in
Gruss' motion to dismiss and essent

ly highlight his

disagreement with the May 9 Opinion.

Gruss' claim that

Court's reasoning or rul
not demonstrate a substanti

was incorrect,

"without more, does

ground for difference of opinion."

v. Jusino, No. 04-8411(RWS), 2008 WL 4566792, at * 2
(S.D.N.Y. Oct. 14, 2008); Florio v. Ci

of N.Y., No. 06­

6473 (SAS) , 2008 WL 3068247, at *1 (Aug. 5, 2008).
Additionally, at least one of Gruss' points, the location of the
conduct, cannot be resolved in a meaningful way without factsensitive

scovery.
11

The Court recognizes that there are novel and
diffi

t questions presented by the instant case.

Several

issues addressed in the May 9 Opinion require analysis of the
slative history, as

text of the IAA t probing of the IAA's I

well as the employment of various canons of statutory
interpretation to discern the Actts meaning.

However,

certification is not "intended as a vehicle to provide early
review

difficult

ings in hard cases[,]" "[n]or is it

appropriate for securing early resolution of disputes concerning
whether the trial court properly applied the law to the facts."
Ab o_r_t_l_·on ~~__ M_o_b i_l_i_z_a_t_l_·o n~_I_n_c~.__ ____~_,
___
____
s__ __
__
v_.
366

(S.D.N.Y. 1982)

552 F. Supp. 364,

(citations omitted).

Thus, even assuming

that this case of first

impression involves a controlling question of law, and assuming
that the novelty and complexi

of the issues presented by the

motion to dismiss gave rise to a substantial ground for
disagreement, Gruss cannot satisfy the
element

the Section 1292(b) test that an immediate appeal

will materi
lit

rd and most important

ly advance the ultimate termination of the

ion.

12

Gruss argues that an "immediate appeal, if successful,
would resolve all but one limited issue in this case relating
solely to the alleged fraud arising out of the purchase of the
airplane, in part, from the Onshore Fund."

(Def. Memo at 16).

In addition, the appeal would "eliminate all of the discovery
relating to the inter-fund transfers, the early payment of
management fees,

the enormous amount of resources that will be

expended by Gruss' attorneys, both in their time in formulating
a defense and in hiring experts, to unravel the complexities
surrounding the 160 alleged inter-fund transfers and the review
of over 1.9 million documents that the SEC has produced to
Gruss."

(Id.)

Gruss' assertions, however, do not prove that an
interlocutory appeal would expedite the ultimate termination of
the litigation, as "it is not enough that the interlocutory
appeal would not delay the action; it must 'advance the time for
trial or .

. shorten the time required for trial."

Anderson

Grp., LLC v. City of Saratoga Springs, No. 05-1369, 2008 WL
2064969, at *1 (N.D.N.Y. May 13, 2008).

According to the

Complaint, the inter-fund withdrawals violated the management
agreements between DBZCO and both the Offshore and Onshore Funds
under its management.

Thus, regardless of whether the immediate
13

appeal is successful, Gruss will nonetheless be required to
review the entire process by which the 160 inter-fund trans
were made and will have to incur the costs and the expenditure
of time related to defending his claim.

See Isra Fruit Ltd. v.

Co. Ltd., 804 F.2d 24, 25-26

--~------~----~~.------------

(2d Cir. 1986)

ecting an immediate appeal because even if some claims "were
eliminated at this stage of the litigation, there is scant basis
for believing that trial of the latter claims would

concluded

with any appreciable savings of time.") i In re Methyl Tertiary,
399 F. Supp. 2d at 324 (stating that "even if the Court's Order
were reversed, the litigation would not terminate because
plaintiffs would proceed on traditional causation theories.") i
In re Worldcom Sec. Litig., No. 02-3288 (DLC) , 2003 WL 22533398,
at *10 (S.D.N.Y. Nov. 7, 2003)

(noting that even if the

defendants prevailed on appeal, the litigation would continue
and "[t]he extent of the SSB Defendants' conflicts of interest
and the e

of those conflicts on SSB's role as lead

underwriter or manage would remain a significant issue in the
case. ") .

As discussed above, the instant motion does not rise
to one of the "exceptional circumstances [that would]
departure from the basic pol

justi

of postponing appellate review
14

a

until after the entry

a final judgment."

Kl
---=---­

1

921

F.2d at 25 (quoting Coopers & Lybrand v. Livesay, 437 U.S. 463,
475, 98 S. Ct. 2454
certification here

1

57 L. Ed. 2d 351 (1978)).

The

for

whether Section 206 of the IAA

extraterritorial reach when the advisory client

is the

object of the fraud is outside the U.S. and subject to a foreign
securities regulatory regime

fails to meet

1 three prongs of

the minimum threshold for an interlocutory

IV.

Conclusion

Based on the conclusions set forth above, the motion
for immediate

is denied.

It is so ordered.

New York, NY
August if, 2012

15