Securities and Exchange Commission v. Wheeler et al
Filing
35
DECISION AND ORDER denying 22 Motion to Stay. ORDERED, that Wheelers unopposed application to extend the deadline for filing an answer is granted. Defendants answer is due by October 14, 2011.Signed by Hon. Charles J. Siragusa on 10/7/11. (KAP)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NEW YORK
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
DECISION & ORDER
-vsCHRISTOPHER W HEELER,
OTCSTOCKEXCHANGE.COM and NORTH
COAST ADVISORS, INC.,
11-CV-6169-CJS
Defendants.
APPEARANCES
For Plaintiff:
Preethi Krishnamurthy, Esq.
George S. Canellos, Esq.
Christopher Michael Castano, Esq.
U.S. Securities & Exchange Commission
3 W orld Financial Center
New York, NY 10281
(212) 336-0116
For Defendant Christopher W heeler:
Steven E. Cole, Esq.
Paul L. Leclair, Esq.
Leclair Korona Giordano Cole LLP
150 State Street Suite 300
Rochester, NY 14614
(585) 327-4100
INTRODUCTION
Siragusa, J. In a civil complaint filed on January 14, 2011, the Securities and
Exchange Commission (“SEC”) alleges that Defendants engaged in a “pump-and-dump
scheme” (Compl. ¶ 1) by fraudulently promoting and selling penny stocks on his website,
OTCStockExchange.com (“website”) in a manner that violated section 17(a) and (b) of the
Securities Act of 1933, section 10(b) of the Exchange Act of 1934, and Rule 10b-5. The SEC
seeks injunctive relief against Defendants as well as disgorgement of “ill-gotten gains….”
(Compl. ¶ 6.) Though brought originally in the Southern District of New York, the matter was
transferred to this District by the Honorable George B. Daniels, District Judge, in an Order
filed on March 13, 2011. Now pending before the Court is Defendant Christopher W heeler’s
(“W heeler”) application seeking an extension of time for Defendants to file an answer, and
for a stay of the proceedings 1 in this action. (Doc. No. 22.) For the reasons stated below,
W heeler’s motion for an extension is granted, but his motion for a stay is denied.
FACTUAL BACKGROUND
The Court takes the facts from the SEC’s complaint and the affidavits submitted on
the motion. In June 2010, W heeler retained counsel after learning he was the target of a
federal criminal investigation focused on the same conduct alleged in the SEC’s action in
this case. (Tallon Decl. ¶¶ 2–3; Cole Decl. ¶¶ 3, 5.) On June 9, 2010, the United States
Attorney for the W estern District of New York commenced a civil forfeiture action 2 against
W heeler’s real and personal property and that matter is still pending before the undersigned.
United States v. The Premises and Real Property Located at 6715 Golf View Rise, Victor,
New York and 829 East Lake Road, Penn Yan, New York, No. 10-CV-6308-CJS (W .D.N.Y.
Jun. 9, 2010). W heeler’s answer in that case is due on March 26, 2012. In the forfeiture
action, the United States Attorney for the W estern District of New York alleges that since
2007, W heeler,
1
Neither OTCStockExchange.com nor North Coast Advisors, Inc., has appeared in this
action. The SEC advises in their memorandum of law that it will seek default judgments against
them at a later date. (SEC Mem. of Law, 3 n.4.)
2
There is no application to stay the civil forfeiture action, only the SEC’s action in this case,
No. 11-CV-6169.
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has fraudulently promoted and sold stocks in exchange for free shares of that
same stock, without notifying investors of this conflict of interest. W heeler
often utilized his website, www.otcstockexchange.com. to advertise and
promote stocks in direct violation of federal law and SEC regulations. W heeler
devised a scheme to commit wire fraud by fraudulently promoting stocks over
the internet, and as part of that scheme, committed violations of Title 18,
United States Code, Section 1343 (wire fraud), and Title 18, United States
Code, Section 1957 (money laundering). Furthermore, W ire Fraud, in violation
of Title 18, United States Code, Section 1343 is a 'Specified Unlawful Activity',
as that term is defined in Title 18, United States Code, Sections 1956 (c) (7)
and 1961 (1) .
(Cole Decl. Ex. A.)
The government’s investigation into W heeler’s activities began in June 2007 and
lasted until September 2008. (Tallon Decl. ¶ 9.) No criminal charges have been brought to
date (Id. ¶ 10), but W heeler’s counsel in the civil forfeiture action, Michael J. Tallon, Esq.
(“Tallon”) states in his declaration that,
in the course of my experience and practice representing clients in the
W estern District of New York, I am unaware of a matter where the Office of
the United Attorney has commenced civil forfeiture proceedings with a
criminal tax and money laundering criminal underpinning that did not result in
a criminal prosecution. Thus, it is my opinion that criminal charges will be
brought against Mr. W heeler unless a disposition involving the criminal and
civil proceedings is reached.
(Tallon Decl. ¶ 10.) Tallon expresses his concern that if a stay in this case is not granted,
W heeler will “need [to] choose between waiving or to invoking his Fifth Amendment privilege
before the criminal investigation is complete, thereby risking severe prejudice in connection
with defending himself in both matters.” (Id. ¶ 13.) Both Tallon and W heeler’s counsel for
this civil action, Steven Cole, Esq. (“Cole”), assert that allowing the SEC to obtain discovery
in this case will likely allow it “to obtain evidence and discovery beyond the limits of Federal
Rule of Criminal Procedure 16(b) and therefore prejudice Mr. W heeler’s defense in any
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criminal action.” (Id.; Cole Decl. ¶ 3.) Cole further argues that, “there is no compelling reason
to move forward with this action now which outweighs the serious prejudice to Mr. W heeler,
especially where the S.E.C. waited years to even file this case.” (Cole Decl. ¶ 3.) Cole
disputes that delaying this SEC action would prejudice the public:
In addition, a stay of this action as to Mr. W heeler will not present any risk to
the investing public. W hile Mr. W heeler disputes that the website at issue in
this case ever caused harm to the investing public, I am informed that Mr.
W heeler is not presently associated with the website.
(Cole Decl. ¶ 14.)
STANDARDS OF LAW
In Kashi v. Gratsos, 790 F.2d 1050 (2d Cir. 1986), the Second Circuit addressed the
issue of granting a stay in a civil action when a criminal prosecution is pending. There, the
district court had granted the stay sought by the criminal and civil defendant. The panel in
Kashi quoted from a District of Columbia Circuit case to note that, “the Constitution … does
not ordinarily require a stay of civil proceedings pending the outcome of criminal
proceedings.... Nevertheless, a court may decide in its discretion to stay civil proceedings
... ‘when the interests of justice seem ... to require such action....’” Kashi, 790 F.2d at 1057
(quoting SEC v. Dresser Industries, 628 F.2d 1368, 1372 (D.C. Cir. 1980) (en banc), cert.
den. sub nom Dresser Industries, Inc. v. SEC, 449 U.S. 993 (1980) (quoting United States
v. Kordel, 397 U.S. 1, 12 n. 27 (1970) (citations omitted)). “Pre-indictment requests for a stay
of civil proceedings are generally denied.” U.S. Commodity Futures Trading Com'n v. A.S.
Templeton Group, Inc., 297 F. Supp. 2d 531, 534 (E.D.N.Y. 2003). Although the Second
Circuit has not directly addressed the issue, as the Southern District observed in United
States v. District Council of New York City, 782 F. Supp. 920, 926 (S.D.N.Y. 1992), the
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weight of authority supports the proposition that district courts will rarely grant a preindictment stay:
The Second Circuit has rejected the proposition that a witness under
indictment is automatically excused from civil proceedings. [United States v.]
Simon, 373 F.2d [649] at 653 [(2d Cir. 1967)].3 In the absence of undue
prejudice or constitutional deprivation district courts have not imposed stays
even where criminal indictments are pending against a defendant in a parallel
civil suit. Paine, Webber, Jackson & Curtis Inc. v. Malon S. Andrus, Inc., 486
F. Supp. 1118, 1119 (S.D.N.Y. 1980); see Arden Way Assocs. v. Boesky, 660
F. Supp. 1494, 1496–1500 (S.D.N.Y. 1987) (civil defendant facing sentencing
in criminal proceeding). In the case of pre-indictment requests for a stay,
courts in this district “will deny a stay of the civil proceeding where no
indictment has issued.” In re Par Pharmaceutical, Inc. Securities Litigation,
133 F.R.D. 12, 14 (S.D.N.Y. 1990); see S.E.C. v. Gilbert, 79 F.R.D. 683, 686
(S.D.N.Y. 1978) and United States v. Sloan, 388 F. Supp. 1062, 1064
(S.D.N.Y. 1975); see also Waldbaum v. Worldvision Enterprises, Inc., 84
F.R.D. 95, 96 (S.D.N.Y. 1979) (civil plaintiff not entitled to stay); but see United
States v. Certain Real Property, 751 F. Supp. 1060, 1063 (E.D.N.Y. 1989) and
Brock v. Tolkow, 109 F.R.D. 116, 120–21 (E.D.N.Y.1985).
In In re 650 Fifth Avenue, No. 1:08-cv-10934-RJH, 2011 W L 3586169 (S.D.N.Y. Aug.
12, 2011), the Honorable Richard J. Holwell reviewed the case law regarding pre-indictment
stays, the Hobson’s choice faced by a litigant (either to testify in the civil action, or to invoke
his Fifth Amendment privilege), and the constitutionality of forcing a litigant to make that
choice. He then observed:
In fact, “[t]he dilemma recurs with sufficient regularity that a consensus has
developed on the principles to be applied by district judges in determining
motions to stay civil actions while criminal litigation is conducted.” Sterling
Nat'l Bank, 175 F. Supp. 2d at 575. Under those principles, courts in this
3
The Supreme Court granted the parties’ joint motion to vacate and in a per curiam opinion
held, “the judgments of the lower courts are vacated and the case is remanded to the United
States District Court for the Southern District of New York with instructions to dismiss the case as
moot.” Simon v. Wharton, 389 U.S. 425 (1967).
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Circuit assessing requests to stay civil proceedings consider “1) the extent to
which the issues in the criminal case overlap with those presented in the civil
case; 2) the status of the case, including whether the defendants have been
indicted; 3) the private interests of the plaintiffs in proceeding expeditiously
weighed against the prejudice to plaintiffs caused by the delay; 4) the private
interests of and burden on the defendants; 5) the interests of the courts; and
6) the public interest.” Trustees of the Plumbers and Pipefitters Nat'l Pension
Fund, 886 F. Supp. at 1139. Nevertheless, “[a] stay of the civil case ... is an
extraordinary remedy.” Id.
Id. at 2011 W L 3586169, 3.
ANALYSIS
Analyzing the factors set out above, the Court determines that the application for a
stay should be denied. “The strongest case for granting a stay is where a party under
criminal indictment is required to defend a civil proceeding involving the same matter.”
Volmar Distributors, Inc. v. New York Post Co., Inc, 152 F.R.D. 36, 39 (S.D.N.Y. 1993).
In the case before the Court, the government evidently has known about the alleged
fraudulent practices for almost four years, yet has not indicted any defendant in the subject
case. The existence of the civil forfeiture proceeding with its allegations of criminal conduct
support an argument that the government could seek an indictment, but, that it has not done
so for almost four years is indicative of the speculative nature of assuming a criminal
prosecution will happen. It is also possible that any criminal prosecution contemplated by
the United States Attorney could be resolved without indictment. (See Tallon Decl. ¶ 3 (“The
effort to resolve the matter remains a possibility and I understood that the OUSA would
further investigate the matter, and, thereafter, would discuss a possible disposition.”).) Since
W heeler has not been indicted, he is in a weaker position to argue for a stay of this civil
action.
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W heeler relies on Brock v. Tolkow, 109 F.R.D. 116, 119 (E.D.N.Y. 1985), to argue
that this first factor weighs heavily in his favor and that it is “critical, especially where both
actions are brought by the government.” (W heeler Reply Mem. of Law, 4.) In Brock, the
court wrote that, “[a] stay of civil proceedings is most likely to be granted where the civil and
criminal actions involve the same subject matter…and is even more appropriate when both
actions are brought by the government.” Brock, 109 F.R.D. at 119. In that case, however,
the court specifically found that, “[h]ere a stay of discovery would cause no serious damage
to the public interest.” Id. at 120.
Considering the interests of the SEC in proceeding expeditiously versus the prejudice
to the SEC caused by a delay should a stay be granted, and considering the private interests
of and burden on W heeler, the Court find that the SEC’s interests outweigh W heeler’s.
Fraudulent stock sales undermine the public’s confidence in the financial markets. The
SEC’s objective is to prevent fraudulent stock sales. See The Investor’s Advocate: How the
SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation
available at http://sec.gov/about/ whatwedo.shtml (last checked September 27, 2011) (“the
SEC is concerned primarily with promoting the disclosure of important market-related
information, maintaining fair dealing, and protecting against fraud.”). As the District of
Columbia Circuit pointed out in SEC v. Dresser Industries, Inc., 628 F.2d 1368 (D.C. Cir.
1980) (en banc):
Unlike the IRS, which can postpone collection of taxes for the duration of
parallel criminal proceedings without seriously injuring the public, the SEC
must often act quickly, lest the false or incomplete statements of corporations
mislead investors and infect the markets. Thus the Commission must be able
to investigate possible securities infractions and undertake civil enforcement
actions even after Justice has begun a criminal investigation. For the SEC to
stay its hand might well defeat its purpose.
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Id. at 1380. Though W heeler’s website, the vehicle through which the allegedly fraudulent
information was distributed, is not a corporation, it is an equally public source of investment
information. Although counsel avers that W heeler no longer has an interest in the defendant
website, that question remains and can only be resolved if discovery is allowed in this case.
W heeler also disputes the urgency of the SEC’s need to proceed, since it waited for
years before bringing the instant action. The SEC’s papers do not address this issue, but
during oral argument, the SEC’s counsel proffered the existence of a May 2010 email
showing that although W heeler had sold the website to Mark McKelvey (phonetic), he would
continue as a consultant. Further, the SEC’s counsel stated that the seized assets come
nowhere near the disgorgement amount sought by the SEC in this action. Accordingly, the
SEC argues that it needs discovery to determine, inter alia, W heeler’s involvement in the
website, the extent to which the website may still be disseminating false information, and to
locate W heeler’s assets.
W heeler cites to United States v. $557,933.09, No. 95-CV-3978 (JG), 1998 W L
817651 (E.D.N.Y. Mar. 2, 1998), in which the district court granted a stay of a forfeiture
action. (W heeler Mem. of Law, 5.) In that case, the court determined that,
Requiring Mercado either to answer the questions posed to him by the
government or to decline to do so and lose the seized property would
“‘undermine [his] Fifth Amendment privilege against self incrimination, expand
rights of criminal discovery beyond the limits of Federal Rule of Criminal
Procedure 16(b), expose the basis of the defense to the prosecution in
advance of criminal trial, or otherwise prejudice the case.”’
Id., 1998 W L 817651, 4 (quoting United States v. Certain Real Property, 751 F. Supp. 1060
(E.D.N.Y. 1989) (quoting SEC v. Dresser Industries, 628 F.2d 1368, 1376 (D.C. Cir. 1980)
(en banc), cert. den. sub nom Dresser Industries, Inc. v. SEC, 449 U.S. 993 (1980))). Unlike
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a forfeiture action, in which the assets could be secured, absent an injunction, the purported
fraudulent representations here will continue to induce members of the public to purchase
stock without full knowledge of the information allegedly possessed by Defendants.
Finally, the Court determines that the interests of the courts and the public interest
weigh in favor of denying the application for a stay. The Court has an interest in the prompt
disposition of civil cases. See 28 U.S.C. § 471 (1991) (establishing a requirement for the
courts to implement a plan “to facilitate deliberate adjudication of civil cases on the merits,
monitor discovery, improve litigation management, and ensure just, speedy, and inexpensive
resolutions of civil disputes.”). Moreover, as discussed above, the public interest in stopping
allegedly fraudulent stock sales is great, as is the public interest in disgorgement of allegedly
wrongfully obtained profits. This factor weighs heavily against granting a stay.
CONCLUSION
For the reasons stated above, the Court determines that the facts in this case
overlap the facts in the criminal investigation, that no defendant in this civil action has been
indicted, that the interests of the SEC in proceeding expeditiously outweigh the prejudice to
the SEC that would be caused by a delay, that the interest of the courts is in a speedy
resolution of this civil matter and that the interests of the public weigh heavily against issuing
a stay. Accordingly, it is hereby
ORDERED, that W heeler’s application to stay this action pending any criminal
prosecution is denied without prejudice; and it is further
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ORDERED, that W heeler’s unopposed application to extend the deadline for filing
an answer is granted. Defendants’ answer is due by October 14, 2011.
IT IS SO ORDERED.
Dated: October 7, 2011
Rochester, New York
ENTER:
/s/ Charles J. Siragusa
CHARLES J. SIRAGUSA
United States District Judge
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