Securities and Exchange Commission v. Bronson et al
Filing
120
MEMORANDUM AND OPINION:For the foregoing reasons, Plaintiff SECs motion for reconsideration is granted in part and denied in part. The Court modifies its Order, (Docket No. 98), and amends the protective order, issued pursuant to Rule 26, in accordance with this Opinion and Order. The Clerk is respectfully requested to terminate the pending motion (Docket No. 105). (Signed by Judge Kenneth M. Karas on 1023/2015) (rj)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
SECURITIES AND EXCHANGE
COMMISSION.
Plaintiff;
-against-
OPINION AND ORDER
12 Civ. 6421 (KMKXJCM)
EDWARD BRONSON, E-LIONHEART
ASSOCIATES. LLC cl/b/a FAIRHILLS
CAPITAL,
Defendants,
-and
FAIRH1LLS CAPITAL, INC.,
Relief Defendant,
—
By letters dated February 25,2015 and April 3, 2015, Defendants Edward Bronson and
E-Lionhart Associates, LLC d/b/a Fairhills Capital and Relief Defendant Fairbills Capital, Inc.
(collectively, “Defendants”) and Plaintiff Securities and Exchange Commission (“Plaintiff
SEC”) presented discovery disputes pursuant to this Court’s discovery dispute order dated
February 5,2015. On July 8, 2015, the Court issued rulings on the parties’ applications
(‘Ordefl. (Docket No. 98). During a telephone conference on July 14. 2015, the parties
requested limited clarification and modification of the Order, largely ministerial in nature. The
Court also granted Plaintiff SEC leave to move for partial reconsideration of the portion of the
Order prohibiting it from disseminating or using. “for the purpose of this litigation or any other
purpose.° private documents it obtained in an inter-agcncy exchange from the Federal Bureau of
Investigation(”FBI9. By order dated October 13,2015, the Court directed the parties to submit
factual assertions ‘setting forth when Plaintiff SEC requested from the FBI a copy of the 41
Boxes (‘41 Boxes’) that the FBI obtained in executing a search warrant at Relief Defendant
Fairhills Capital, Inc.’s offices on November 15. 2012.” (Docket No. 117). The parties dutifully
responded, with Plaintiff SEC filing a Declaration of Kevin P. McGrath in Compliance with the
Court’s October 13, 2015 Order (“McGrath Compliance Dccl.”), (Docket No. 119), and
Defendants filing, an Affirmation of Benjamin 5, Fischer (“Fischer Affirm.”), (Docket No. 118).
As stated in the Memo Endorsement dated August 3, 2015, (Docket No. 113), the parties’
joint request for limited clarification and modification is granted. Furthermore, for the reasons
set forth below, Plaintiff SEC’s motion for reconsideration is granted in part and denied in part
and this Court’s Order shall be modified as set forth in this Opinion and Order.
1. BACKGROUND
Plaintiff SEC commenced this action on August 22, 2012, alleging certain violations of
Section 5 of the Securities Act of 1933 (the “Act”). (Docket No.
11).
Tn lieu of answer, on March
15, 2013, Defendants filed a motion to dismiss the action pursuant to Rule 12(b)(6) of the
Federal Rules of Civil Procedure. (Docket No. 17). The Honorable Kenneth M. Karas, United
States District Judge, denied Defendants motion on March 31, 2014. (Docket No. 21). It is not
clear whether the parties undertook any discovery up until the entry of Judge Karas’ decision.
2
However, at least as of April 11, 2014, the parties actively participated in discovery in this
action. On that date, Plaintiff SEC filed a letter pursuant to Rule 37.2 of the Local Rules of the
United States District Courts for the Southern and Eastern Districts of New York, seeking a “pre
motion discovery conference” in... connection with the parties’ request for the C.ourt to enter a
protective order in th...is action. (Docket No. 23). Judge Karas soordered the protective order on
Refers to the Complaint filed in this action on August 22, 2012.
Judge Karas’ Motion Scheduling Order dated January 8. 20]3 expressly granted a stay of any “pending deadlines
foun.d in the Federal Rul.es of Civil Procedure or i.n any applicabl.e statute,” but only up to the date of the fili.n.e of
Defendants’ motion to dismiss, (Docket No. 15 at If
April 14. 2014. (Docket No. 24). Defendants answered the Complaint on September 5. 2014.
(Docket No. 41). A Calendar Notice for a “Rule (16) conference before Judae Karas was
entered on September 24, 2014. (Docket No. 46). Although the conference did not occur as
originally scheduled. Judge Karas so-ordered a Case Management and Scheduling Order. uhich
was
entered on October 29. 2014. (Docket No. 56).
The private documents at issue in this motion for reconsideration are those seized
among
the 41 Boxes by the FBI pursuant to the execution of a search warrant at Relief Defendant
Fairhills Capital. Inc.’s offices on November 15, 2012. (McGrath Decl. at
3
¶ 2).
Plaintiff SEC
learned of the seizure and requested that the FBI share the 41 Boxes. or at least a summary of the
documents seized: the FBI agreed to forward all of the contents of the 41 Boxes. (JL); (McGrath
Compliance Dccl. at 2). The communications between Plaintiff SEC and the FBI, from which
Plaintiff SEC secured a copy of the 41 Boxes, occurred on September 29-30, 2014. (McGrath
Compliance Dccl. at 2). Defendants’ counsel recalls speaking with Plaintiff SEC’s counsel
about the 41 Boxes in late fall. (Fischer Affirm. at
¶ 4).
Plaintiff SEC performed a privilege review of the contents by creating a separate “filter
team,” after Defendants allegedly declined to perform the review. (McGrath Dccl. at
¶ 3-4).
Defendants, however, wanted to determine for themselves what documents among the 41 Boxes
were privileged or not relevant to the present civil proceedings. (See Docket No. 93) (letter
application pursuant to
this Couri s di scox cry dispute orderL Thus on Apri] 3. 20 1 5. Defendants
soupht relief from. this Court. which the Court cc.nstrued as a motion fhr a protective order
ReOrs to the Declaration ot Kex in P. OcGratli in Support ot Plaintiff Securities and Exchanoe Commissions
lotion fbr Reconsideration of the Courts Julx S 20 5 Order. Pled in this action on July 24. 2U 5 (Docbe xo.
barring PlaintilY SEC from using in this action documents within the 41 Boxes that Defendants
deem privileged or not relevant to this action. (Id). By Order dated July 8,2015. the Court
eranted Dcfendants application lbr a protective order in connection with die contents of the 41
Boxes. (Docket No. 98 at 9-1 1).
A. Ninisterial Alterations to the Order
Following a telephone conference on .July 14, 2015, the parties submitted a joint letter
dated July 30. 2015 identiRing ministerial changes to the Order. (Docket No. 110). By memo
endorsement dated August 3, 2015. the Court granted the parties’ requests. (Docket No. 113).
The changes to the Order did not alter the substance of the Court’s direction, but rather clarified
the Court’s intent with respect to the parties’ applications.
First, the Court modified the
portion of
the Order stating: Accordingly. Plaintiff SEC
shall produce responsive documents of all communications between members of the SEC Penny
Stock Task Force charged with investigating violations of Rule 504 (“SEC Task Force’) and the
individuals identified in Defendants RFPs 13 and 14.’ (Docket 98 at 5). The Order shall now be
construed to read:
Accordingly, Plaintiff SEC shall produce responsive documents of all
communications concerning Rule 504 between current and former members of the
SEC Microcap Fraud Task Force and Microcap Faud Working Group and the
individuals identified in Defendants RFP 13. Plaintiff SEC shall also produce
responsive documents of all communications between current and former
members of the SEC Microcap Fraud [ask Force and Microcap Fraud Working
Group and the individuals identified in Defendants’ REP 14
(.Dock.et No. 113 at 1),
Second. the Court modified the portion of the Order stating. “Accordingly. Plaintiff SEC
slial I identify to Defendants the states in which l)efendanis al1egedl consummated transactions
in violation of the Act, Plaintiff SEC also shall produce responsive documents of all
-4-
communications regarding Rule 504 and State Securities Registration Exemptions, as set forth in
Defindants’ RFP 17-19. between: the SEC Task Force and Delaware state regulators and the
SEC Task Force and any other State Securities Regulator for those states in which Defendants
allegedly committed violations of the Act.” (Docket 98 at 7). The Order shall now he construed
to read:
Accordingly, Plaintiff SEC shall identify to Defendants the states in which the
SEC alleges that offers were made or sales took place in connection with the
issuances of securities that the Defendants are alleged to have resold in violation
of the Act. Plaintiff SEC also shall produce responsive documents of all
conmiunications regarding Rule 504 and State Securities Registration
Exemptions, as set forth in Defendants’ RFP 17-19, between: current and former
members of the SEC Microcap Fraud Task Force and Microcap Fraud Working
Group and State Securities Regulators for those states identified by the SEC to
Defendants.
(Docket iso. 113 at 1-2).
Third. the Court modified the
portion of the
Order stating. “In order to effectuate this
protective order, and with the understanding that the information is currently stored on disks,
only SEC attorneys of record in this action maY incidentally view the information in the course
of viewing non-privileged, non-protected information contained on the same disks.” (Docket 98
at 11). The Order shall now be construed to read:
In order to effectuate this Order, only SEC attorneys of record and their
paralegals, IT. and other support staff may incidentally view the information in
the course of viewing non—privileged. non—protected infbrmation.
DoeketNo. 113 at 1, 3).
Fourth, the Court n..odii.ied the portion of t.he Order stating, “Pl.aintiff SEC .may retai.n the
4 l Boxes. hut it may not disseminate or use. for the purposes of this litication or any other
purpose. personal and pri\ate infbrmation not related to the prosecution of this civil action.
DLlendants sh ill proide to Plaintilt SEC a list of all doLuments
it
deems pLisonal and pr1atL
ii
a log, no later than July 16. 2015.” (Docket 98 at 10-11). The Order shall now be construed to
read:
Plaintiff SEC may retain the 41 Boxes. but it may not disseminate or use, for the
purposes of this litigation or any other purpose, personal and private information
not related to the prosecution of this civil action. Defendants shall provide to
Plaintiff SEC a list of all documents it deems personal and private not related to
4
the prosecution of this civil action in a log. The log shall contain sufficient
information to identify the nature of the personal and/or private information
unrelated to the prosecution of this civil action.
(Docket No. 113 at 1,3).
B. Application for Partial Reconsideration
In addition to the aforementioned changes, Plaintiff SEC also sought leave to move for
partial reconsideration of the portion of the Order preventing it from disseminating or using for
the purposes of this litigation or any other purpose, personal and private information not related
to the prosecution of this civil action.” (Docket No.98 at 10). The Court granted leave for
Plaintiff SEC to move for reconsideration on this ground, in part, because the parties did not
submit argument or case law on this point. Plaintiff SEC timely moved for partial
reconsideration, contending that the Court did not have authority to grant a protective order
pursuant to Rule 26 of the Federal Rules of Civil Procedure (“Rule 2e’) with regard to the 41
Boxes since they were obtained Independent of the judicial process or the discovery process in
this case.” (Docket Nos. I 05, 1066 at 8-11). Defendants contend that the Court had the authority
to issue a protective order pursuant to Rule 26 and its equitable powers to protect non-relevant.
‘
The partie& joint submission stated. seems. (Docket No. 110 at 3). However, the Court believes the parties
intended to write deems” and modifies its Order accordingly.
Refers
5 to Plaintiff SEC’s notice of motion, filed in this action on July 24,2015.
‘Rcfers to Plaintiff SEC’s memorandum of law in support if its motion for partial reconsideration, tiled in this
action on July 24.2015.
-6-
personal information. (Docket No. I i4 at 6 n.2, 6-10). In its reply, Plaintiff SEC avers, inter
cilia, that the Court’s equitable powers are limited to instances of wrongdoing. (Docket No. 1158
at 2-4).
11. LEGAL STANDARD
Although none of the parties discussed the rule upon which this Court should reconsider
its Order, the Court construes Plaintiff SEC’s motion for partial reconsideration as one made
pursuant to Rule 6.3 of the Local Civil Rules ofthe United States District Courts for the
Southern and Eastern District ofNew York (“Local Rule. “The decision to grant or deny
[such] motion is within the sound discretion of the.
. .
court.” Dellafave v. Access Temporaries.
Inc., No.99 Civ. 6098.2001 WL 286771, at ‘1 (S.D.N.Y. Mar. 22,2001) (alteration provided)
(citation omitted). However, it is clear that, in the Second Circuit, granting reconsideration “is
an extraordinaiy remec.y to be employed sparingly in the interests of finality and conservation of
scarce judicial resources.” Peterson v. Home Depot USA., Inc., No. 11 Civ. 5747,2014 WL
1355622. at ‘I (S.D.N.Y. Apr. 4,2014) (emphasis added) (quotation marks and citation
omitted). The moving party may not employ the motion “to start a new round of arguments” nor
“should the Court be expected to wade through lengthy papers that simply reiterate in slightly
different form the arguments already made in the party’s original papers.” Metropolitan Opera
Ass’n v. Local 100, No.00 Civ. 3613,2004 WL 1943099, at ‘2 (S.D.N.Y. Aug. 27, 2004)
(quotation marks and citation omitted). Thus. the standard for granting such motion “is strict.”
Shrader v. SV Tran.sp. Inc.. 70 F.3d 255, 257 d Cir. 1995).
Re&rs to Defendants’ opposition to PlaintitTSECs motion for partial reconsideration, tiled in this action on
August 4. 2015.
Refers
8 to Plaintiff SEC’s reply memorandum of law in further support of its motion for partial reconsideration,
filed in this action on August 10,2015.
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dotions pursuant to Local Rule 6.3 will be denied “in order to preclude repetitive
arguments on issues that have already been considered fully by the Court.’ Park South Tenants
Corp. v. 200 Cent. ParkAssocs., 754 F. Supp. 352, 354 (S.D.N.Y. 1991). a/i’d 941 F.2d 112 (2d
Cir. 1991) (citation omitted). However, courts may grant such motions: (1 ) “where the Court has
overlooked matters or controlling decisions which might have materially influenced the earlier
decision.” Id. (citation omitted), or (2) “to correct a clear error or prevent manifest injustice.”
Boart Longvear Lal v. Alliance Indus., Inc
860 F. Supp. 2d 407. 417-18 (S.D.N.Y. 2012)
(quotation marks and citation omitted). Local Rule 6.3 may not be used to reargue matters
already determined by the Court, just because the party is not happy with the original decision.
III. DISCUSSION
The basis for Plaintiff SEC’s motion is properly grounded in the permissible reasons for
reconsideration. Therefore. the Court grants Plaintiff SEC’s motion and reconsiders the portion
of its Order granting a protective order on those documents in the 41 Boxes identified by
Defendants as “personal and private information not related to the prosecution of this civil
action.” (Docket No. 113 at 1. 3). The case law, not previously before this Court, is clear that
where a party independently obtains documents before discovery in a particular action, a court
may not place limitations on its use under the auspices of Rule 26. Bridge CA. T. Scan Assocs. r.
Technicare Corp., 710 F.2d 940, 942, 944-45 (2d Cir. 1983) (reversing the entry of a protective
order. either under Rule 26 or courts’ equitable pow ers. over documents obtained prior to the
commencement of action); Funcini
.
llaiithrcchi & OoLsi. Inc.. 1 74 F.R.D. 319. 32324
(S. D.N.Y. 1997) (citations omitted) (identii\ing. inter alia. a Ninth Circuit case in which the
court held that a district court could not control discovery obtained in a separate action. hut
between the same parties as before it); Liyan He v. C ‘igna Life Ins, Co. of &ew York. No. 14 Civ.
-8-
2180. 2015 Wi. 4114523, at *4 n.5 (S.D.N.Y. .lulv 8.2015) (citing Bridge (4.T Sean Assocs.,
710 F.2d at 945).
Thus. a Rev issue before the Court is whether Plaintiff SEC obtained the 41 Boxes prior
to discovery commencing in this action, thereby remaining independent of Rule 26 protections.
Rule 26 contemplates a scope of discovery limited to “discovery regarding any nonprivileged
matter that is relevant to any party’s claim or defense
Rule 26(h)( I ). It does not impose
any limitation on the persons or entities from whom discovery is obtained. Rather. Rule 26
anticipates that parties will seek discovery from “any source.” but limits such inquiries: “A party
may not seek discovery from anx’ source before the parties have conferred as required by Rule
26(O
Rule 26(d)(1). The Federal Rules of Civil Procedure also provide a mechanism by
which a party may compel document disclosure from non-parties. Fed. R. Civ. P. 34(c): 45.
There are no limits to obtaining disclosure from cooperating non—parties. Id. pass/ni: see United
Slates v. Airam Lines (USA). Lid.. 159 F.R.D. 408. 410 (S.D.N.Y. 1994) (noting that securing
“cooperation of. . . non-parties” could “reduce costs and facilitate discovery”).
Here, there is no dispute that Plaintiff SEC obtained the 41 Boxes over two (2) years after
it commenced this action. (See Docket No. 1) (Complaint filed on August 22, 2012); (See
\lcGrath Compliance Dccl. at ¶ 2) (Plaintiff SEC initiated communications with the FBI on
September 29. 2(314. iI’om which it obtained the 41 Boxes). It also appears that Plaintiff SEC
obtained the 41 13 axes afrer the larties commenced discovery, At least by April 11. 20 I 4, the
parties had met and conferred v ith regard to a protecti e order. pursuant to Rule 26. v. hieli terms
had been agreed to by the parties and submitted to Judge Karas for consideration. (Docket No.
23). Plaintiff SEC admitted to participating in discovery at this time, expressly seeking a
Rule 26(( 1) requires panics, unless ordered otherwise. to “confer as soon as practicahle-and in an> e\ cut at
least d la> s before a schedulinu eon lerence is to he held or a chedunne order is due under Rule I bib
0
‘discovery conference.” (Id). Judge Karas so-ordered the protective order on April 14.2014.
(Docket No. 24). Defendants answered the Complaint on September 5, 2014. (Docket No.41).
In addition, just days before Plaintiff SEC contacted the FBI, on September 24,2014, Judge
Karas issued a Calendar Notice for a “Rule (16) conference.” (Docket No. 46). Again, five days
later, Plaintiff SEC communicated with the FBI on September 29.2014, which communications
prompted the voluntary exchange of the 41 Boxes. (McGrath Compliance Decl. at 2).
¶
Based on this record. the Court finds that Plaintiff SEC obtained the 41 Boxes during the
course of discovery in this action for purposes ofdiscovery in this action. Moreover, its ability
to obtain documents from the FBI, in these circumstances, is akin to obtaining information from
a cooperating non-party, who, as in the case here, voluntarily discloses information and helps
streamline the discovery process in this action. See Afram Lines (USA), Lii, 159 F.R.D. at 410
(
“cooperation of.
. .
non-parties” could “reduce costs and fbcilitate discovery”). Thus, the Court
finds that Rule 26 governs the 41 Boxes. See, e.g., Bridge CA.T Scan Assocs., 710 F.2d at 942,
944-45 (2d Cir. 1983) (reversing the entry of a protective order because the documents at issue
were obtained prior to the commencement of action).
In reconsidering its Order, the Court concludes that it properly entered a protective order,
pursuant to Rule 26, over the private documents within the 41 Boxes.’ Notwithstanding the
0
same, the Court did not intend to interfere with Plaintiff SEC’s ability to conduct business
pursuant to its authority. Accordingly, the Court modifies its protective order as follows:
“‘Because the Court concludes that it properly issued a protective order under Rule 26. it need not address its
authority under its equitable powers. In any event, the Court’s equitable power is limited to circumstances where it
must prevent a party from introducing Improperly obtained evidence; otherwise the court by allowing the
wrongdoer to utilize the information in litigation befbre it, becomes complicit in the misconduct.” Fverni, 174
F.R.D. at 324 (citations omitted). In its Order. the Court concluded that Plaintiff SEC properly obtained the 41
[B]oxes from the FB1.’ (Docket No.98 at 10) (alteration provided). Accordingly, there is no wrong to remedy.
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Plaintiff SEC may retain the 41 Boxes, but it may not disseminate or use, for the
purposes of this litigation or any other purpose, personal and private information
not related to the prosecution of this civil action. flowever, this limitation shall
not be construed to interfere and shall not interfere with Plaintiff SEC’s use
of information for law enforcement activities and to otherwise regulate,
administer and enforce the federal securities laws.” Defendants shall provide
to Plaintiff SEC a list of all documents it deems personal and private not related to
the prosecution of this civil action in a log. The log shall contain sufficient
information to identify the nature of the personal and/or private information
unrelated to the prosecution of this civil action.
IV. CONCLUSION
For the foregoing reasons, Plaintiff SEC’s motion for reconsideration is granted in part
and denied in part. The Court modifies its Order, (Docket No. 98), and amends the protective
order, issued pursuant to Rule 26, in accordance with this Opinion and Order.
The Clerk is respectfully requested to terminate the pending motion (Docket No. 105).
Dated:
October 23, 2015
White Plains, New York
SO ORDERED:
-
Z
/)J
JUDITH C. McCARTHY
United States Magistrate Judge
C onzpai c An1Lndd ConhdcntIaiIt\ OrdLr at
I a (DoLt No 96)
J
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