Securities and Exchange Commission v. McCabe

Filing 47

MEMORANDUM DECISION and ORDER granting 35 Motion to Compel. Signed by Magistrate Judge Paul M. Warner on 12/30/2014. (blh)

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH
CENTRAL DIVISION
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
v.
COLIN MCCABE (dba ELITE STOCK
REPORT, THE STOCK PROFITEER, and
RESOURCE STOCK ADVISOR),
Defendant.

MEMORANDUM DECISION
AND ORDER
Case No. 2:13-cv-161-TS-PMW

District Judge Ted Stewart
Magistrate Judge Paul M. Warner

District Judge Ted Stewart referred this case to Magistrate Judge Paul M. Warner
pursuant to 28 U.S.C. § 636(b)(1)(A). 1 Before the court is the Securities and Exchange
Commission’s (“Plaintiff”) motion to compel. 2 The court has carefully reviewed the written
memoranda submitted by the parties. Pursuant to civil rule 7-1(f) of the Rules of Practice for the
United States District Court for the District of Utah, the court has concluded that oral argument is
not necessary and will determine the motion on the basis of the written memoranda. See
DUCivR 7-1(f).

1

See docket no. 36.

2

See docket no. 35.

LEGAL STANDARDS
The motion before the court relates to discovery. “The district court has broad discretion
over the control of discovery, and [the Tenth Circuit] will not set aside discovery rulings absent
an abuse of that discretion.” Sec. & Exch. Comm’n v. Merrill Scott & Assocs., Ltd., 600 F.3d
1262, 1271 (10th Cir. 2010) (quotations and citations omitted).
The general scope of discovery is governed by rule 26(b)(1) of the Federal Rules of Civil
Procedure, which provides that “[p]arties may obtain discovery regarding any nonprivileged
matter that is relevant to any party’s claim or defense. . . . For good cause, the court may order
discovery of any matter relevant to the subject matter involved in the action. Relevant
information need not be admissible at the trial if the discovery appears reasonably calculated to
lead to the discovery of admissible evidence.” Fed. R. Civ. P. 26(b)(1). The Advisory
Committee Notes for the 2000 Amendments to rule 26 direct parties and courts to “focus on the
actual claims and defenses involved in the action” in determining relevance for purposes of
discovery. Fed. R. Civ. P. 26 Advisory Committee Notes, 2000 Amendments, Subdivision (b)(1).
In In re Cooper Tire & Rubber Company, 568 F.3d 1180 (10th Cir. 2009), the Tenth
Circuit clarified that the 2000 Amendments to rule 26 “implemented a two-tiered discovery
process; the first tier being attorney-managed discovery of information relevant to any claim or
defense of a party, and the second being court-managed discovery that can include information
relevant to the subject matter of the action.” Id. at 1188. The Tenth Circuit further stated that
when a party objects that discovery goes beyond that relevant to
the claims or defenses, “the court would become involved to
determine whether the discovery is relevant to the claims or
defenses and, if not, whether good cause exists for authorizing it so
long as it is relevant to the subject matter of the action.” This
good-cause standard is intended to be flexible. When the district
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court does intervene in discovery, it has discretion in determining
what the scope of discovery should be. “[T]he actual scope of
discovery should be determined according to the reasonable needs
of the action. The court may permit broader discovery in a
particular case depending on the circumstances of the case, the
nature of the claims and defenses, and the scope of the discovery
requested.”
Id. at 1188-89 (quoting Fed. R. Civ. P. 26 Advisory Committee Notes, 2000 Amendments,
Subdivision (b)(1)) (citations and footnote omitted) (alteration in original).
ANALYSIS
Colin McCabe (“Defendant”) was a publisher of investment newsletters. Subscribers to
his newsletters paid annual fees to receive his newsletter discussing market commentary and
stock recommendations. Defendant was also occasionally paid to write and distribute paid
advertisements discussing particular stocks.
On March 5, 2013, Plaintiff brought this civil action against Defendant for various
securities law violations. Defendant responded to the complaint with a motion to dismiss.3
Following briefing and oral argument, Judge Stewart granted the motion in part and dismissed
Plaintiff’s first claim against Defendant, which alleged that Defendant made false and misleading
research claims. 4 Judge Stewart denied the motion in part as to Plaintiff’s other two claims,
which allege that Defendant did not disclose stock promotion payments to paid subscribers of his
newsletter and that Defendant made false and misleading statements concerning Guinness
Exploration (“Guinness”). 5
3

See docket no. 16.

4

See docket no. 27.

5

See id.
3

On April 25, 2014, Plaintiff served discovery requests on Defendant, which included
Interrogatory No. 1, Request for Production No. 2, and Request for Production No. 4. Those
three discovery requests are the subject of the instant motion. The court will address the requests
in turn.
I. Interrogatory No. 1
Interrogatory No. 1 seeks information about Defendant’s costs associated with his
promotional publications related to six issuers of stock that Defendant promoted for the time
period of 2009 through the first quarter of 2011. 6 Defendant objected to Interrogatory No. 1 on
the bases that it is overly broad and unduly burdensome. Subject to those objections, Defendant
produced documents reflecting the costs incurred for his paid publications concerning Guinness.
In its motion, Plaintiff argues that the information sought by Interrogatory No. 1 is
directly relevant to the issue of disgorgement and the issue of scienter on Plaintiff’s fraud claim.
In response, Defendant does not argue that Interrogatory No. 1 overly broad or unduly
burdensome. Instead, Defendant argues that his response to Interrogatory No. 1 was sufficient
because the information sought by Plaintiff relative to the stock issuers other than Guinness is
not relevant to Plaintiff’s remaining claims in this case. More specifically, Defendant contends
that he has provided information concerning his paid promotions for Guinness, which relates to
Plaintiff’s pending claim concerning Guinness. Defendant further maintains that he should not
have to provide information concerning his promotions for the other five issuers of stock because

6

Interrogatory No. 1 was not originally limited to certain issuers of stock or to a certain time
period. However, as indicated in Plaintiff’s motion, Plaintiff has now agreed to limit
Interrogatory No. 1 to six issuers of stock and to the time period of 2009 through the first quarter
of 2011.
4

that information is not relevant to Plaintiff’s other pending claim, which involves alleged false
and misleading statements made to Defendant’s newsletter subscribers, not any such statements
made in his paid promotions. Defendant also argues that the only information that is relevant to
the issue of disgorgement is the information related to Guinness and that none of the information
sought by Interrogatory No. 1 is relevant to the issue of scienter.
The court concludes that Defendant is unilaterally attempting to limit the scope of
discovery and has taken an overly narrow view of Plaintiff’s remaining claims. The court cannot
say that, under the broad scope of discovery, the information sought by Interrogatory No. 1 is not
relevant to the claims and defenses in this case.
Furthermore, even if Defendant had been able to persuade the court that the information
sought by Interrogatory No. 1 is not relevant to the claims and defenses in this case, the court
would have nevertheless concluded that good cause exists for expanding the scope of discovery
in this case to require production of the information sought by Interrogatory No. 1 because it is
information that is relevant to the subject matter of this case. See In re Cooper Tire & Rubber
Company, 568 F.3d at 1188-89. Indeed, for the reasons set forth by Plaintiff, the court concludes
that information sought by Interrogatory No. 1 is reasonably calculated to lead to the discovery
of admissible evidence concerning disgorgement and scienter.
Based on the foregoing, this portion of Plaintiff’s motion is granted. Defendant shall,
within thirty (30) days after the date of this order, provide all information responsive to
Interrogatory No. 1 for the six designated issuers of stock for the time period of 2009 through the
first quarter of 2011.

5

II. Request for Production No. 2
Request for Production No. 2 seeks copies of Defendant’s and his entities’ brokerage
account statements for the years 2009 through 2013. Defendant objected to Request for
Production No. 2, arguing that it is not seeking relevant information, is vague and ambiguous, is
unduly burdensome, and violates his rights to privacy.
In its motion, Plaintiff argues that the information sought by Request for Production No.
2 is relevant in this case because it will help to determine whether Defendant owned any of the
stocks he was promoting to his newsletter subscribers and whether he received any profits from
the sale of any relevant stock. Plaintiff contends that this information is relevant to the issue of
disgorgement and the issue of scienter. Plaintiff further argues that the request is not vague or
ambiguous, is not unduly burdensome, and does not violate Defendant’s right to privacy.
In response, Defendant argues that Request for Production No. 2 is vague and ambiguous
because it asks Defendant to produce “brokerage accounts.” Defendant also argues that whether
he owned any stocks that he recommended to subscribers is not information that is relevant
because it does not directly relate to Plaintiff’s remaining claims. Defendant contends that any
such information is “untethered” from Plaintiff’s claims.
The court first addresses Defendant’s argument concerning whether Request for
Production No. 2 is vague and ambiguous. The court concludes that said argument is without
merit. While Plaintiff could have drafted the request more artfully, it is clear based on the
briefing of the instant motion that the request is seeking brokerage account statements.
The court next addresses Defendant’s relevance argument. Again, the court concludes
that Defendant is unilaterally attempting to limit the scope of discovery and has taken an overly
6

narrow view of Plaintiff’s remaining claims. The court again notes that the scope of discovery is
broad. Under that broad scope, and for the reasons set forth by Plaintiff, the court concludes that
the information sought by Request for Production No. 2 is relevant to the claims and defenses in
this case.
Further, even if Defendant had been able to persuade the court that the information
sought by Request for Production No. 2 is not relevant to the claims and defenses in this case, the
court would have nevertheless concluded that good cause exists for expanding the scope of
discovery in this case to require production of the information sought by Request for Production
No. 2 because it is information that is relevant to the subject matter of this case. See In re
Cooper Tire & Rubber Company, 568 F.3d at 1188-89. As with Interrogatory No. 1, the court
concludes that the information sought by Request for Production No. 2 is reasonably calculated
to lead to the discovery of admissible evidence concerning disgorgement and scienter.
For these reasons, this portion of Plaintiff’s motion is granted. Defendant shall, within
thirty (30) days after the date of this order, provide all information responsive to Request for
Production No. 2. Namely, Defendant shall provide Plaintiff with copies of his and his entities’
brokerage account statements for the years 2009 through 2013. As for any privacy concerns that
Defendant may have, he may make such production subject to the protective order entered in this
case.
III. Request for Production No. 4
Request for Production No. 4 seeks copies of the tax returns of Defendant’s entities for
the years 2009 through 2013. Defendant objected to Request for Production No. 4 on the bases
of overbreadth, undue burden, privilege, and privacy.
7

In its motion, Plaintiff argues that the information on the tax returns sought should show
Defendant’s entities’ reported income from publications and stock promotion efforts, as well as
any profits from stock sales. Plaintiff again argues that such information is relevant to the issue
of disgorgement and the issue of scienter.
In response, Defendant again argues that the information on his entities’ tax returns is not
relevant to Plaintiff’s remaining claims. Relying on nonbinding authority, Defendant further
argues that, even if the information on the tax returns was relevant, tax returns are legally
protected from disclosure in discovery, absent “a compelling need for [the] information because
the information contained therein is not otherwise readily obtainable.” Trudeau v. New York
State Consumer Prot. Bd., 237 F.R.D. 325, 331 (N.D.N.Y. 2006). Defendant relies upon the
same authority for the proposition that “if the information contained in the tax return is otherwise
available from other less intrusive sources, compelled discovery of the return should be denied.”
Id. Defendant contends that he has provided bank account statements for all of his entities for
the time period in question, which provides all of the information sought by way of Request for
Production No. 4.
The court concludes that Defendant’s relevance argument fails. The court concludes, for
the reasons set forth by Plaintiff, that the information sought by Request for Production No. 4 is
relevant to the claims and defenses in this case. And, again, even if Defendant had been
successful in making his argument concerning relevance to the claims and defenses in this case,
the court would have nevertheless concluded that good cause exists for expanding the scope of
discovery in this case to require production of the information sought by Request for Production
No. 4 because it is information that is relevant to the subject matter of this case. See In re
8

Cooper Tire & Rubber Company, 568 F.3d at 1188-89. As with the previous two discovery
requests, the court concludes that the information sought by Request for Production No. 4 is
reasonably calculated to lead to the discovery of admissible evidence concerning disgorgement
and scienter.
The court turns next to Defendant’s argument concerning whether his entities’ tax returns
are legally protected from disclosure in discovery. Under the circumstances of this case, the
court concludes that they are not entitled to such protection. Defendant contends that the
information Plaintiff claims to be seeking is not ascertainable from tax returns. Defendant
further contends that the bank statements he has produced provide all of the information Plaintiff
is seeking. The court disagrees on both points. As Plaintiff has noted, the tax returns sought will
contain the exact information that Plaintiff is seeking to discover. In addition, the tax returns will
contain much more detailed financial information about Defendants’ entities than the information
that can be gleaned from bank statements. For those reasons, the court concludes that there is “a
compelling need for [the] information because the information contained therein is not otherwise
readily obtainable.” Trudeau, 237 F.R.D. at 331.
For those reasons, this portion of Plaintiff’s motion is granted. Defendant shall, within
thirty (30) days after the date of this order, provide all information responsive to Request for
Production No. 4 for the years 2009 through 2013. As for any of Defendant’s privacy concerns,
the court again notes that a protective order has been entered in this case. Defendant may make
any such production in response to Request for Production No. 4 subject to that protective order.

9

CONCLUSION AND ORDER
Based on the foregoing, Plaintiff’s motion to compel 7 is GRANTED. As detailed above,
within thirty (30) days after the date of this order, Defendant shall provide responses to
Interrogatory No. 1, Request for Production No. 2, and Request for Production No. 4. Where
applicable, Defendant may make such production subject to the protective order entered in this
case.
As a final matter, the court notes that in granting Plaintiff’s motion to compel, the court
concludes only that the information sought by Interrogatory No. 1, Request for Production No.2,
and Request for Production No. 4 is discoverable. The court renders no opinion about whether
such information will eventually be admissible. Admissibility determinations will be made by
Judge Stewart at the appropriate time in this case.
IT IS SO ORDERED.
DATED this 30th day of December, 2014.
BY THE COURT:

PAUL M. WARNER
United States Magistrate Judge

7

See docket no. 35.
10