Opinion
M18-304 (KMW).
April 9, 2008
OPINION AND ORDER
Respondent Christopher Finazzo ("Respondent") moves, pursuant to Federal Rule of Civil Procedure 62(c), for a stay of an Order, dated March 26, 2008, issued by Judge Harold Baer, Jr., ordering him to comply with an administrative subpoena issued by the Securities and Exchange Commission ("SEC"). Finazzo requests that Judge Baer's March 26, 2008 Order be stayed pending appeal of the order to the Second Circuit. The SEC opposes the motion. In accordance with the Court's Order in this case, dated April 8, 2008, and for the reasons set forth below, the motion is denied.
BACKGROUND
A more detailed description of the facts underlying this motion are set forth in Judge Baer's March 26, 2008 Order (the "March 26 Order"), familiarity with which is assumed.
On August 24, 2004, while Respondent was still employed by Aeropostale, Inc., as Chief Merchandising Officer and Executive Vice President, his estate planning lawyer, Angela Siegel, sent him an email at his work email address, attaching a Word document titled "Finazzo Family Assets" (the "Siegel email"). The Word document contained a list of Respondent's and his family's interests in various business entities, including South Bay Apparel, Inc., one of Aeropostale's largest vendors at the time.
In September 2006, Aeropostale performed an internal investigation into certain of its business expenses. In the course of the investigation, the outside investigators retained by Aeropostale found, opened, and read the Siegel email. The Siegel email was then disclosed to Aeropostale, and Respondent was subsequently terminated for cause based partially on the information contained in the Siegel email and attachment.
On November 8, 2006, and April 2, 2007, Aeropostale filed its Form 8-K and Form 10-K, respectively. (Birnbaum Decl. Exs. 1 2.) In these public disclosures, Aeropostale disclosed that Respondent had (1) concealed personal ownership interests in, and service as an officer of, entities affiliated with South Bay, (2) without authorization, executed a corporate guaranty agreement on behalf of South Bay, and (3) failed to disclose unauthorized business relationships and transactions between his immediate and extended family members and certain of Aeropostale's other vendors. (Opp'n 2-3.)
Upon learning of these disclosures, the SEC commenced a nonpublic investigation into Aeropostale (the "Aeropostale Investigation"). (Opp'n 3.) On January 10, 2008, the SEC issued an Order Directing Private Investigation and Designating Officers to Take Testimony in the Aeropostale Investigation (the "Formal Order"). (Birnbaum Decl. 4.) Pursuant to the Formal Order, the SEC issued a subpoena to Respondent on January 16, 2008, directing him to produce non-privileged documents relevant to the investigation, and calling him to testify on a certain date (the "Finazzo subpoena"). (Birnbaum Decl. Exs. 4.) Respondent communicated to the SEC that he would not comply with the Finazzo subpoena absent a court order.
On February 27, 2008, the SEC filed an order to show cause seeking enforcement of the Finazzo subpoena. (Opp'n 4.) On March 26, 2008, Judge Baer, sitting Part I, ruled in favor of the SEC, and ordered Respondent to comply with the Finazzo subpoena by April 9, 2008. (Zito Decl. Ex. A.) On April 2, 2008, Respondent filed this motion for a stay of the March 26 Order pending appeal.
DISCUSSION
Respondent moves for a stay pending appeal pursuant to Rule 62(c). Fed.R.Civ.P. 62(c) (2008). In determining whether to grant a stay under Rule 62(c), the Court must consider (1) whether the stay applicant has made a strong showing that he is likely to succeed on the merits, (2) whether the applicant will be irreparably injured absent a stay, (3) whether issuance of the stay will substantially prejudice the other parties interested in the proceeding, and (4) the public interest. In re World Trade Center Disaster Site Litia., 503 F.3d 167, 170 (2d Cir. 2007). The standard for granting a stay pending appeal is flexible, in that a weak showing on one factor may be counterbalanced by a strong showing on others. Mohammed v. Reno, 309 F.3d 95, 101 (2d Cir. 2002). However, the "burden of establishing a favorable balance of these factors is a heavy one and more commonly stay requests will be denied." Barcia v. Sitkin, No. 79 Civ. 5831, 2004 WL 691390, at *1 (S.D.N.Y. Mar. 31, 2004).
Upon consideration of the stay factors, the Court concludes that a stay of the March 26 Order pending appeal is unwarranted.
I. RESPONDENT HAS FAILED TO DEMONSTRATE A LIKELIHOOD OF SUCCESS ON THE MERITS.
With respect to the likelihood of success on the merits factor, the Second Circuit has held that "[t]he necessary `level' or `degree' of possibility of success will vary according to the court's assessment of the other [stay] factors." Mohammed, 309 F.3d at 101 (quoting Washington Metro. Area Transit Comm'n v. Holiday Tours, 559 F.2d 841, 843 (D.C. Cir. 1977)). In particular, "[t]he probability of success that must be demonstrated is inversely proportional to the amount of irreparable injury [respondent] will suffer absent the stay."Michigan Coalition of Radioactive Material Users, Inc. v. Griepentroa, 945 F.2d 150, 153 (6th Cir. 1991) (citation omitted); see also Ofosu v. McElroy, 98 F.3d 694, 703 (2d Cir. 1996) (noting that the four stay factors must be "weigh[ed]" against one another).
In this case, Respondent seeks to prevent enforcement of the Finazzo subpoena. A person seeking to prevent enforcement of an SEC subpoena bears the burden of demonstrating that the subpoena is unreasonable, issued in bad faith or for an "improper purpose," or that compliance would be "unnecessarily burdensome."RNR Enters., Inc. v. SEC, 122 F.3d 93, 97 (2d Cir. 1997) (quotingSEC v. Brigadoon Scotch Distrib. Co., 480 F.2d 1047, 1056 (2d Cir. 1973)). Here, Respondent argues that the Finazzo subpoena was issued in bad faith or for an improper purpose because it was issued pursuant to an investigation triggered by purportedly privileged information contained in the Siegel email, which was obtained and then disclosed to the SEC by Aeropostale in violation of the privilege. Although the precise issue raised by Respondent is one of first impression in the Second Circuit, the Court concludes that Respondent is unlikely to satisfy his burden of showing that the Finazzo subpoena was issued in bad faith or for an improper purpose.
In analyzing this factor, the Court assumes arquendo that the Siegel email and its contents are in fact protected by the attorney-client privilege.
In SEC v. OKC Corp., 474 F. Supp. 1031 (N.D. Tex. 1979), a case with facts similar to the instant case, respondent argued that an SEC subpoena was unenforceable because it was prepared using a privileged report that was disclosed to the SEC by another private party in violation of the privilege. The court enforced the subpoena over respondent's objections, observing that precluding the SEC from using the report would not deter future violations of the privilege. Id. at 1039. The court elaborated that because the SEC "innocently learn[ed]" of the privileged report from a private actor, the only conduct to be deterred is the disclosure of privileged information by private actors to the government. Id. However, because private actors generally do not share the government's law enforcement goals, a rule precluding "innocent" government agencies from using such information in enforcement proceedings would not deter private actors from disclosing the privileged information in violation of the privilege. Id. at 1039-40 (citing Elkins v. United States, 364 U.S. 206, 222 (1960)). Thus, the "marginal effectiveness of denying use to an innocent agency [of] reports produced not by a state [actor] but by a private citizen is not justified." Id. at 1040.
Respondent argues that SEC v. OKC Corp. is inapplicable to this case because the private actor in OKC Corp. rightfully possessed the privileged information, whereas Aeropostale wrongfully possessed the Siegel email. (Zito Decl. Ex. D at 20.) Respondent's distinction misses the point. As described above,OKC Corp. found that a rule excluding wrongfully disclosed information from enforcement proceedings would not deter private actors from disclosing that information to the government in violation of the privilege, because private actors do not share the government's interest in using that information for law enforcement purposes. OKC Corp., 474 F. Supp. at 1039. Thus, whether a private actor rightfully or wrongfully possessed the privileged material before disclosing it to the government is irrelevant — precluding the government from using the privileged material for law enforcement purposes would not deter that private actor from violating the privilege in the first instance.
In United States v. Bonnell, 483 F. Supp. 1070 (D. Minn. 1979), respondent similarly sought to resist an IRS summons on the ground that the summons was based on work product that was wrongfully disclosed to the IRS by another private party. The court rejected respondent's argument, reasoning that (1) an exclusionary rule precluding the use of fruits of work product is unwarranted in this setting because the IRS was conducting an administrative investigation, and not a criminal trial, id. at 1079-80, (2) an administrative investigation, such the one being conducted by the IRS in that case, is similar to a grand jury proceeding, and investigators in both types of proceedings have broad authority to use information derived from evidence obtained in violation of individual privacy rights, id. at 1080-81 (citingUnited States v. Calandra, 414 U.S. 338, 353-55 (1974)), and (3) precluding the IRS from using information derived from wrongfully obtained evidence would impose a substantial cost on the public interest by hampering the IRS' ability to collect relevant evidence, while only marginally advancing the goals of the work product doctrine, id. at 1081-82 (citing OKC Corp., 474 F. Supp. at 1040).
In light of this authority, and given the Court's "extremely limited" role in proceedings to enforce administrative subpoenas,RNR Enters., Inc., 122 F.3d at 96, the Court concludes that Respondent is unlikely to prove that the subpoena was issued in bad faith or for an improper purposes. Therefore, Respondent has failed to show a likelihood of success on the merits.
Respondent argues that because the merits issue presents a question of first impression in the Second Circuit, the likelihood of success on the merits factor tips in his favor. (Mem. Law 5-6.) However, the cases Respondent cites for this proposition hold only that a court may issue a stay pending appeal when it has ruled on an "admittedly difficult legal question and when the equities of the case suggest that the status quo should be maintained." Barcia, 2004 WL 691390, at *2 (emphasis added). Thus, the novelty of the legal issue on the merits is not dispositive of the likelihood of success on the merits factor.
II. RESPONDENT WOULD NOT SUFFER IRREPARABLE INJURY ABSENT A STAY OF JUDGE BAER'S ORDER PENDING APPEAL.
Respondent argues that absent the stay he would be irreparably injured because compliance with the Finazzo subpoena would (1) moot his appeal, and (2) obligate him to produce documents that he contends he has no duty to produce. Respondent's arguments are unavailing.
To the extent that Respondent is arguing that absent a stay he would be forced to produce privileged documents, this argument is flawed. (Mem. Law 3-4.) The SEC has made clear that it seeks onlynon-privileged documents in its subpoena. (Opp'n 7; Birnbaum Decl. Ex. 4.)
First, even if he is forced to comply with the Finazzo subpoena, Respondent's appeal of the March 26 Order would not be moot. See, e.g., Church of Scientology v. United States, 506 U.S. 9, 12-13 (1992) (holding that respondent forced to comply with an IRS subpoena still had the right to appeal the order ordering his compliance); FDIC v. Garner, 126 F.3d 1138, 1142 (9th Cir. 1997) (finding that appellate court may still hear appeal even though the district court refused to grant a stay pending appeal of an order enforcing compliance with administrative subpoenas, because the appellate court could compel the return of any improperly obtained documents).
Second, the compelled production of non-privileged documents in response to an administrative subpoena does not constitute irreparable injury warranting a stay pending appeal. See, e.g.,United States v. Diversified Group, Inc., No. M18-304, 2002 WL 31812701, at *1 (S.D.N.Y. Dec. 13, 2002) (finding no irreparable injury where respondent claimed he would be forced to comply with an IRS summons, because an appeals court could fashion "some form of meaningful relief" should it decide to reverse the enforcement of the summons) (quoting Church of Scientology, 506 U.S. at 12);see also United States v. Sweet, No. 80-5046, 1980 WL 4702, at *1 (5th Cir. Jan. 31, 1980) (stating that "the alleged injury is not irreparable for nothing contained herein, of course, constitutes a ruling concerning the admissibility or inadmissibility in evidence of any documents that may be produced pursuant to the summons or of any evidence that might be discovered as a result of their production"); United States v. Bright, No. 07-00311, 2008 WL 351215, at *3 (D. Haw. Feb. 7, 2008) ("The mere requirement to produce documents while an appeal is pending does not constitute sufficient harm to warrant a stay.").
Therefore, the Court finds that Respondent would not suffer irreparable injury absent a stay pending appeal.
Respondent cites a number of cases holding that the compelled production of documents constitutes irreparable injury. See, e.g., First City, Texas-Houston. N.A. v. Rafidain Bank, 131 F. Supp. 2d 540, 543 (S.D.N.Y. 2001); Providence Journal Co. v. FBI, 595 F.2d 889, 890 (1st Cir. 1979); Maine v. U.S. Dep't of Interior, No. Civ. 00-122-B-C, 2001 WL 98373 (D. Me. Feb. 5, 2001); E.E.O.C. v. Quad/Graphics, Inc., 875 F. Supp. 558, 560 (E.D. Wis. 1995). However, these cases offer only conclusory statements on the issue of irreparable injury, and do not address the persuasive analysis in the cases the Court cites above, holding that compelled disclosure pursuant to an administrative subpoena does not constitute irreparable injury for purposes of a stay pending appeal.
III. THE PREJUDICE TO THE OTHER PARTY FACTOR IS EQUIVOCAL.
The SEC contends that a stay on the March 26 Order pending appeal would prejudice their investigation because they would be precluded from obtaining and using the information requested by the Finazzo subpoena. (Opp'n 9-10.) To the extent that the requested information is essential to the continued progress of the Aeropostale Investigation, a stay of enforcement of the March 26 Order may constitute substantial prejudice to the SEC. See, e.g., United States v. Judicial Watch, Inc., 241 F. Supp. 2d 15, 18 (D.D.C. 2003) (noting that a stay of enforcement pending appeal may halt the progress of an administrative investigation, and therefore prejudice the government agency).
However, the SEC has not indicated that the requested information is in fact essential to the progress of the Aeropostale investigation, suggesting that it may be possible for the SEC to pursue its investigation without immediate access to the requested information. In that regard, mere delay in receiving the information requested does not constitute substantial prejudice. See, e.g., E.E.O.C. v. Quad/Graphics, Inc., 875 F. Supp. 558, 560 (E.D. Wis. 1995) (finding that "a delay in [a government agency's] receipt of information that it requested" does not constitute "substantial harm").
Given the uncertainty regarding the SEC's need for the requested information, the Court finds the prejudice to other parties factor equivocal.
IV. RESPONDENT HAS FAILED TO DEMONSTRATE THAT THE PUBLIC INTEREST IS BETTER SERVED BY GRANTING A STAY PENDING APPEAL.
Respondent argues that the public interest factor weighs in favor of a stay because "[t]he misappropriation of privileged information and attorneys' breaches of professional obligations in connection with such misappropriation are undeniably matters of grave public concern." (Reply 7.) However, granting a stay in this case would not advance the public's interest in the attorney-client privilege because (1) compliance with the Finazzo subpoena would not require Respondent to disclose any privileged communications, and (2) as the court in OKC Corp. reasoned, preventing an innocent government agency from using information derived from otherwise privileged communications is not an effective deterrent against future violations of the privilege,OKC Corp., 474 F. Supp. at 1039-40.
Although Respondent has failed to demonstrate that a stay pending appeal would serve the public interest, the Court observes that there is a significant public interest in allowing government agencies, like the SEC, to enforce federal securities laws. Bright, 2008 WL 351215, at *3 (observing that in actions brought by federal agencies, "the government's interest is in large part presumed to be the public interest") (citing United States v. Rural Elec. Convenience Cooperative Co., 922 F.2d 429, 440 (7th Cir. 1991)). The Court therefore finds that the public interest factor does not weigh in favor of granting the requested stay pending appeal.
* * * * *
The Court concludes that, on balance, the stay factors weigh against granting Respondent's request for a stay of the March 26 Order pending appeal. Respondent has failed to show a strong likelihood of success on the merits, that he would suffer irreparable injury absent a stay, and that the public interest favors granting a stay. Although it is unclear whether the SEC would suffer substantial prejudice upon imposition of a stay, Respondent's weak showing on the other three factors persuades the Court that a stay pending appeal is unwarranted in this case.
CONCLUSION
For the reasons set forth above, the Court finds that a stay of the March 26 Order pending appeal is unwarranted. Accordingly, Respondent's motion is denied, except that the Court hereby stays enforcement of the March 26 Order until April 15, 2008, in order to provide Respondent the opportunity to make his stay application to the Second Circuit.
SO ORDERED.