U.S. Securities and Exchange Commission v. Abdallah et al

Filing 237

Order granting in part and denying in part Motion to intervene as a party and Motion to stay (Related Doc # 190 ). Signed by Judge Solomon Oliver, Jr on 2/2/2016.(S,SR)

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF OHIO
EASTERN DIVISION

UNITED STATES SECURITIES AND
EXCHANGE COMMISSION,
Plaintiff
v.
THOMAS ABDALLAH, et al.,
Defendants

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Case No.: 1:14 CV 1155

JUDGE SOLOMON OLIVER, JR.

ORDER

Currently pending before the court in the above-captioned case is the United States of
America’s Motion to Intervene as a Party and to Stay Proceedings. (Mot. to Intervene and
Stay, ECF No. 190.) Specifically, the United States of America, by and through the United
States Attorney’s Office for the Northern District of Ohio (“United States”), seeks to intervene
in order to stay discovery and other proceedings with respect to Defendants Thomas Abdallah,
Mark George, and Jeffrey Gainer (collectively, the “Criminal Defendants”), who also face
criminal charges related to the same underlying conduct. See United States v. Thomas
Abdallah, et al., Case No. 1:15 CR 231. While the parties in the instant matter have not
opposed the Motion, the U.S. Securities and Exchange Commission (“Plaintiff” or “SEC”) has
requested any stay be limited to allow the Receiver appointed in this matter to continue
securing and preserving the assets of the Defendants. (Mot. to Intervene & Stay 9-10, ECF No.

190.) For the following reasons, the United States’s Motion is granted in part and denied in
part.
I. FACTS AND PROCEDURAL HISTORY
Defendants Kenneth A. Grant (“Grant”) and Thomas Abdallah (“Abdallah”) are coowners of Defendant KGTA Petroleum, Ltd. (“KGTA”), which is an Ohio limited liability
company formed in 2008 as Susannah, LLC and renamed to KGTA on March 22, 2012.
(Compl. ¶¶ 23-25, ECF No. 1.) Grant and Abdallah allegedly marketed to investors that KGTA
bought crude oil and refined fuel products at discounted prices, then resold these products to
third-party purchasers at a premium, producing a substantial profit for investors. (Id. ¶ 1.) As
a result, KGTA purportedly offered astronomical returns to investors – between 2-4% per
month (or 24-48% annualized) – with no market risk. (Id. ¶ 2.)
To further encourage investment in KGTA, Grant and Adhallah assured prospective
investors that their principal and returns would flow through an escrow account monitored by
Defendant Mark M. George (“George”). (Id. ¶ 3.) Grant, Abdallah and George promised to
hold investor funds in George’s Interest on Lawyers Trust Account (“IOLTA”) and release
them only to pay invoices for the purchase of fuel. (Id. ¶ 4.) Based on these promises, KGTA
allegedly raised at least $20.73 million from selling promissory notes to investors between
October 8, 2012, and February 2014. (Id. ¶ 5.)
However, Grant and Abdallah allegedly defrauded investors by operating KGTA as a
Ponzi scheme. KGTA did not generate revenue by buying and reselling oil products and
investor funds were not held in escrow pending legitimate purchase orders. Instead, George
released investor funds straight to KGTA. Some of the funds were used to pay Grant and

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Abdallah’s personal expenses, while others were used to pay “fake returns” to investors. (Id.
¶ 6.)
Grant, Abdallah, and KGTA also allegedly violated the registration provisions of
federal securities law. They offered and sold most of KGTA’s promissory notes through
Defendants Jeffrey L. Gainer (“J. Gainer”) and Jerry A. Cicolani (“Cicolani’), who are
registered representatives with a Cleveland, Ohio-based broker-dealer. (Id. ¶ 9.) At the behest
of Abdallah and Grant, J. Gainer and Cicolani allegedly sold the KGTA promissory notes to
investors without a registration statement on file or in effect. (Id. ¶ 11.) They also hid these
transactions from their broker-dealer firm and kept the proceeds for themselves, a practice
known as “selling away.” (Id. ¶ 12.) J. Gainer and Cicolani were allegedly paid approximately
$2 million and $4 million, respectively, in fees by selling KGTA promissory notes, a fact
which they hid from investors. (Id. ¶ 13.) These fees were then “funneled” through entities
owned by Nancy Gainer (“N. Gainer”), J. Gainer’s wife, and Kelly C. Hood (“Hood”),
Cicolani’s girlfriend. (Id. ¶ 15.)
As a result of this alleged activity, the SEC commenced this civil suit (“Enforcement
Action”), on May 29, 2014, alleging various violations of the Securities and Exchange Act
against Defendants Abdallah, Grant, KGTA, George, J. Gainer, and Ciciolani (collectively,
the “Civil Defendants”) and requesting relief from Relief Defendants N. Gainer, Hood, NATG,
LLC and Turnbury Consulting Group, LLC (collectively, “Relief Defendants”). (Id. ¶ ¶ 23-32.)
On December 3, 2014, as part of the Enforcement Action, this court froze Defendants’ assets
and appointed the Receiver to conserve the existing estate pending resolution of the case. (ECF
No. 119, at 3-5.)

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On July 7, 2015, the United States filed the instant Motion to Intervene as a Party and
to Stay Proceedings. (Mot. to Intervene and Stay, ECF No. 190) The United States argues that,
since a criminal Indictment involving the same underlying conduct has been filed, it should
be allowed to intervene and stay the Enforcement Action pending the completion of the
criminal case. Such action would prevent prejudice to the parties in the parallel litigation,
resulting primarily from the wide-ranging discovery available in civil litigation. (Id. at 2, 4.)
II. LAW AND ANALYSIS
a. Intervention
The court must first consider whether the United States may intervene in the instant
civil case. The United States argues that both intervention of right and permissive intervention,
subsections (a) or (b) of Rule 24 of the Federal Rules of Civil Procedure, respectively, are
appropriate in this case. (Mot. to Intervene and Stay 3, ECF No. 190.) Because this court finds
permissive intervention proper, it need not address whether the United States may intervene
as of right pursuant to Rule 24(a)(2). Permissive intervention is governed by Rule 24(b), which
provides, in relevant part: “On timely motion, the court may permit anyone to intervene who:
. . . (B) has a claim or defense that shares with the main action a common question of law or
fact.” Fed. R. Civ. P. 24(b)(1)(B) (2015). Stated differently, “a proposed intervenor must
establish that the motion for intervention is timely and alleges at least one common question
of law or fact.” Reliastar Life Ins. Co. v. MKP Invs., 565 F. App’x 369, 374 (6th Cir. 2014)
(quoting United States v. Michigan, 424 F.3d 438, 445 (6th Cir. 2005)). Once these two
requirements have been met, the district court must “balance undue delay and prejudice to the

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original parties, if any, and any other relevant factors to determine whether, in the court’s
discretion, intervention should be allowed.” Id.
In the present case, the United States has satisfied all the requirements for permissive
intervention. First, the United States’s Motion to Intervene and Stay was timely. (Mot. to
Intervene and Stay, ECF No. 190.) While Rule 24(b) provides no precise standard, the Sixth
Circuit reviews five factors to determine timeliness:
(1) the point to which the suit has progressed; (2) the purpose for which
intervention is sought; (3) the length of time preceding the application during
which the proposed intervenors knew or should have known of their interest
in the case; (4) the prejudice to the original parties due to the proposed
intervenors’ failure to promptly intervene after they knew or reasonably should
have known of their interest in the case; and (5) the existence of unusual
circumstances militating against or in favor of intervention.
Yates v. Ortho-McNeil Pharm. Inc., 76 F. Supp. 3d 680, 689-90 (N.D. Ohio 2015) (quoting
Jansen v. City of Cincinnati, 904 F.2d 336, 340 (6th Cir. 1990)).
Here, the Motion to Intervene was filed while the SEC Enforcement Action was in its
initial stages. Very little discovery had occurred and the time for amending the pleadings had
not yet passed. (Case Management Conference Order, ECF No. 185.) There is also no
indication that the United States should have, or could have, filed its Motion earlier, given the
purpose for which intervention is sought. See Stupak–Thrall v. Glickman, 226 F.3d 467, 479
n.15 (6th Cir. 2000) (“The ‘purposes of intervention’ prong of the timeliness element normally
examines only whether the lack of an earlier motion to intervene should be excused, given the

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proposed intervenor’s purpose – for example, when the proposed intervenor seeks to intervene
late in the litigation to ensure an appeal.”). The Motion was filed only thirteen days after the
Indictment in the criminal case. (Mot. to Intervene & Stay, ECF No. 190 in Case No. 1:14 CV
1155; Indictment, ECF No. 1 in Case No. 1:15 CR 231.) As such, it is also clear that there has
been no apparent delay.
Additionally, there is no evidence that the timing of the Motion had any prejudicial
effect on the current parties. See Stotts v. Memphis Fire Dep’t, 679 F.2d 579, 592 (6th
Cir.1982) (“The prejudice inquiry is narrow: only that prejudice attributable to a movant’s
failure to act promptly may be considered. The broader factor of prejudice that may flow from
the intervention itself does not weigh in the balance.”). Finally, the court is unaware of any
unusual circumstances militating either against or in favor of intervention. Accordingly, the
court concludes that the Motion was timely filed, and neither the SEC nor the Criminal
Defendants argue to the contrary.
Next, the court finds that there are common questions of law and fact with respect to
this action and the pending criminal case. See, e.g., SEC v. HealthSouth Corp., 261 F. Supp.
2d 1298, 1326 (N.D. Ala. 2003) (finding common questions of law and fact between an SEC
civil enforcement matter and a related criminal proceeding); SEC v. Mersky, Civ–a–93–5200,
1994 WL 22305, at *2 (E.D. Pa. Jan. 25, 1994) (same). Both the criminal prosecution and the
Enforcement Action relate to, inter alia, Defendants’ alleged violations of various provisions
of the securities laws. (Compl. ¶¶ 1-17, ECF No. 1 in Case No. 1:14 CV 1155; Indictment ¶¶
1-13, ECF No. 1 in Case No. 1:15 CR 231.)

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Finally, the court also concludes that no undue prejudice will result from permitting
the United States to intervene in this action. While discovery and trial preparation will halt if
the United States is allowed to intervene and stay the case, such action may, in fact, result in
greater convenience to all the parties. It would likely reduce the burden upon the Criminal
Defendants, who would otherwise be required to defend two actions on the same claims.
Moreover, none of the parties filed a motion in opposition to the United States’ Motion to
Intervene. Thus, the court finds that the original parties’ rights will not be unduly prejudiced
by allowing the United States to intervene. Under these circumstances, the United States’s
intervention is permissible. See generally SEC v. Nicholas, 569 F. Supp. 2d 1065, 1068 (C.D.
Cal. 2008) (collecting cases and explaining that “numerous courts have allowed the United
States government to intervene in a civil case for the purpose of moving to stay discovery and
other proceedings until resolution of a related criminal case.”).
b. Stay Proceedings
The United States also moves to stay discovery in the instant case to prevent
interference with the parallel criminal proceedings. While not compelled to do so, a court may
exercise “its discretion to stay civil proceedings, postpone civil discovery, or impose protective
orders and conditions ‘when the interests of justice seem[ ] to require such action, sometimes
at the request of the prosecution, sometimes at the request of the defense.’ ” SEC v. Dresser
Indus., Inc., 628 F.2d 1368, 1375 (D.C. Cir. 1980) (quoting United States v. Kordel, 397 U.S.
1, 12 n.27 (1970)). The burden is on the party seeking the stay to show “pressing need for
delay” and “that neither the other party nor the public will suffer harm from entry of the
order.” F.T.C. v. E.M.A. Nationwide, Inc., 767 F.3d 611, 627-28 (6th Cir. 2014) (quoting Ohio

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Envtl. Council v. U.S. Dist. Ct., S. Dist. of Ohio, E. Div., 565 F.2d 393, 396 (6th Cir. 1977)).
The stay must only be entered for a certain period of time and must not “place [the] case in
limbo for years.” Ohio Envtl. Council, 565 F.2d at 396.
While there is no precise test in this Circuit for determining when a stay is appropriate,
district courts commonly consider factors such as:
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.
E.M.A. Nationwide, Inc., 767 F.3d at 627 (quoting Chao v. Fleming, 498 F.Supp.2d 1034, 1037
(W.D. Mich. 2007)).
Upon consideration of the relevant factors, the court finds the majority weigh in favor
of granting a stay in this matter. As described above, the subject matter of the criminal and
civil cases are virtually identical. (See supra Section II.a.) The cases will also likely involve
many of the same issues, witnesses, and evidence. Moreover, the criminal case is already
under way and all but one of the individual defendants have been indicted. (Indictment, ECF
No. 1 in Case No. 1:15 CR 231.) As the Sixth Circuit has observed, “[a] stay of a civil case is
most appropriate where a party to the civil case has already been indicted for the same conduct
. . . .” E.M.A. Nationwide, Inc., 767 F.3d at 628 (quoting Trs. of Plumbers & Pipefitters Nat.
Pension Fund v. Transworld Mech., 886 F. Supp. 1134, 1139 (S.D.N.Y. 1995)).

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Next, the court concludes that granting a stay serves both the SEC’s and the public’s
interests. Because the SEC enforces securities laws on behalf of the public, its interests and
that of the public are intertwined in a civil enforcement action. See Krull v. SEC, 248 F.3d 907,
915 (9th Cir. 2001) (noting that one of the key purposes of the Securities and Exchange Act
is to protect the “public interest by insuring the stability of the markets and integrity of
representation by its participants.”). And, the SEC does not object to a stay of the Enforcement
Action. (Order, ECF No. 206.) Moreover, the public interest in effective criminal prosecution
generally outweighs any existing civil interests. See Newman v. United States, No. 3:90-CV7646, 1992 WL 115191, at *1 (N.D. Ohio Jan. 10, 1992) (quoting In re Ivan F. Boesky Sec.
Litigation, 128 F.R.D. 47, 49 (S.D.N.Y.1989)).
As to the fourth factor, the Criminal Defendants have not argued that they would be
harmed if the United States’s Motion is granted. Indeed, they may benefit from first defending
against the criminal charges. Proceeding in this manner would eliminate the risk that their Fifth
Amendment privilege against self-incrimination might be undermined, that criminal discovery
might be expanded beyond the limits of Rule 16(b) of the Federal Rules of Criminal
Procedure, and that either side might otherwise be prejudiced in advance of the criminal trial.
See SEC v. Dresser Indus., Inc., 628 F.2d 1368, 1376 (D.C. Cir. 1980) In fact, defendants in
similar situations have sought to stay civil proceedings for these reasons. See, e.g., Creative
Consumer Concepts, Inc. v. Kreisler, 563 F.3d 1070, 1080-81 (explaining that defendant
moved to stay civil proceedings to avoid having to choose between testifying in civil case and
giving up Fifth Amendment rights in criminal case).

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Finally, a stay in the Enforcement Action will not unduly interfere with the court’s
management of its docket. Indeed, the resolution of the criminal proceedings may serve to
expedite the civil proceedings, avoiding the needless expense of judicial time and resources.
As another court opined when issuing a similar stay, “The conviction of a civil defendant as
a result of a plea or following a trial can contribute significantly to the narrowing of issues in
dispute in the overlapping civil case[ ] 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 *2 (S.D.N.Y. Dec. 5, 2002)
(internal citation omitted).
Given these considerations, and finding no opposition amongst the parties, the court
finds a stay appropriate in this case. However, discovery will only be stayed for ninety (90)
days from the date of this Order, after which the court will review the matter to determine
whether the stay should be lifted.
Moreover, the SEC will be permitted to continue discovery to the full extent permitted
under the Federal Rules of Civil Procedure with respect to: (1) identifying, locating,
quantifying, and recovering all assets of the Civil Defendants and Relief Defendants, whether
held by any of them or by others for the benefit of any of them; and (2) accounting for the
receipt, expenditure, and/or transfer of all funds and other assets of the Civil Defendants and
Relief Defendants, from June 1, 2010 through the present. The Receiver shall be permitted to
continue to exercise the powers and duties detailed in the court’s Order Granting Motion for
Appointment of Receiver. (ECF No. 119.)

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The court also understands from the submissions of the Parties that there will not be
opposition to future motions for a limited lifting of the stay in order that the moving party may
petition the court for attorneys’ fees, other professional fees, or living expenses. The court
further understands that this does not bind the non-moving parties to any particular position
on the merits of any such petition.
IV. CONCLUSION
For the foregoing reasons, the court hereby grants in part and denies in part the United
States’s Motion to Intervene as a Party and to Stay Proceedings. (Mot. to Intervene and Stay,
ECF No. 190.)
IT IS SO ORDERED.

/S/ SOLOMON OLIVER, JR.
CHIEF JUDGE
UNITED STATES DISTRICT COURT
February 2, 2016

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