Summary
stating that where the SEC does not take a position on a Government motion for a stay, it "has not articulated an interest that requires consideration"
Summary of this case from Sec. & Exch. Comm'n v. BlaszczakOpinion
04 Civ. 3464 (VM) (JCF).
March 30, 2005
ORDER
This is an enforcement action brought by the Securities and Exchange Commission (the "SEC") against Stephen J. Treadway and Kenneth W. Corba in connection with an alleged fraudulent scheme to facilitate market timing trading activity in mutual funds whose investors had been assured that such trading would be strictly limited. The Office of the New York State Attorney General (the "OAG") now moves pursuant to Rule 24 of the Federal Rules of Civil Procedure to intervene in this action for the purpose of seeking a stay of certain depositions until the conclusion of two criminal proceedings that the OAG is prosecuting in New York State Supreme Court. For the reasons that follow, the OAG's motion to intervene is granted, and its application for a stay is granted in part and denied in part.
Background
The fraud alleged in the complaint in this action purportedly targeted a family of mutual funds known as the PIMCO Funds (sometimes referred hereafter to as the "Funds"). The prospectuses of the PIMCO Funds represented to investors that the Funds would limit market timing, that is, the frequent buying and selling of mutual fund shares in order to capitalize on inefficiencies in mutual fund pricing. (First Amended Complaint ("FAC"), ¶ 3). In conformance with that policy, the Funds monitored trading activity and prevented some investors from engaging in market timing. (FAC, ¶ 3). However, contrary to the representations made to investors generally, the Funds allegedly entered into an agreement with one preferred investor, Canary Capital Partners LLC ("Canary"), to permit it to engage in market timing trades. (FAC, ¶¶ 3, 4). In return for this special treatment, Canary made long-term investments in selected PIMCO Funds. (FAC, ¶ 4). According to the complaint, this arrangement was negotiated between Edward Stern, the principal of Canary, and the defendants Treadway and Corba, who were officers of several PIMCO entities. (FAC, ¶¶ 10, 11, 16-29). When an investigation of Canary by the SEC and state regulators uncovered the market timing scheme, the SEC initiated the instant enforcement action.
Canary's activities also led to charges relating to late trading. In order to receive the current day's price on a mutual fund share, a trade must be submitted by 4:00 p.m.; trades submitted thereafter receive the next day's share price. By trading after the cutoff on the basis of the previous day's price, an investor gets the advantage of any news affecting the market that breaks after 4:00. In contrast to market timing, late trading is illegal irrespective of whatever representations may have been made to investors.
The OAG is currently prosecuting two criminal cases in connection with Canary's late trading activities. It has indicted Theodore C. Sihpol III, a broker with Banc of America Securities, LLC ("BAS"), for permitting Canary to use BAS facilities to engage in late trading. (Letter of Harold J. Wilson dated March 17, 2005 ("Wilson Reply"), Exh. 1). Likewise, it has filed a felony complaint against Grant Seeger, Chief Executive Officer of Security Trust Corp., for similar conduct. (Letter of Alan Levine and Gus Coldebella dated March 9, 2005 ("Levine Letter"), Exh. A). The trial in People v. Sihpol is scheduled to commence on April 26, 2005, while People v. Seeger is expected to begin on September 26, 2005. (Letter of Harold J. Wilson dated March 2, 2005 ("Wilson Letter") at 2).
Edward Stern and another Canary executive, Noah Lerner, will be called by the prosecution to testify in the Sihpol and Seeger cases. (Wilson Letter at 1). They have also been subpoenaed to provide testimony in the instant enforcement action. (Wilson Reply, Exh. 5). The OAG now seeks to intervene and asks for a stay of the depositions of these witnesses in this case until they have completed their testimony in Sihpol and Seeger. The defendants, Mr. Treadway and Mr. Corba, oppose the application for a stay, while the SEC takes no position.
Discussion
A. Motion to Intervene
Rule 24(a) of the Federal Rules of Civil Procedure provides for intervention as of right when the party seeking to intervene "claims an interest relating to the property or transaction which is the subject of the action and [he] is so situated that the disposition of the action may as a practical matter impair or impede [his] ability to protect that interest." Alternatively, Rule 24(b) authorizes permissive intervention "when an applicant's claim or defense and the main action have a question of law or fact in common." In exercising its discretion under Rule 24(b), a court should "consider whether the intervention will unduly delay or prejudice the adjudication of the rights of the original parties." Fed.R.Civ.P. 24(b).
Whether couching the decision in terms of mandatory or permissive intervention or simply referring to Rule 24 without specifying the subsection on which they rely, courts in this Circuit have routinely allowed federal or state prosecutors to intervene in civil litigation in order to seek a stay of discovery. See Rosenthal v. Giuliani, No. 98 Civ. 8408, 2001 WL 121944, at *1 (S.D.N.Y. Feb. 9, 2001) (district attorney permitted to intervene); Securities and Exchange Commission v. Downe, No. 92 Civ. 4092, 1993 WL 22126, at *11-12 (S.D.N.Y. Jan. 26, 1993) (United States Attorney); Twenty First Century Corp. v. LaBianca, 801 F. Supp. 1007, 1009 (E.D.N.Y. 1992) (federal government); Board of Governors of the Federal Reserve System v. Pharaon, 140 F.R.D. 634, 638 (S.D.N.Y. 1991) (district attorney). In the instant case, the OAG plainly has an interest in the parallel criminal proceedings that may be adversely affected by events in the civil action, and the OAG's charges in the criminal cases potentially share common factual and legal issues with this case. Accordingly, the motion to intervene is granted.
B. Application for a Stay
Determining whether to issue a stay of civil proceedings requires a balancing of many factors, including:
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 the 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.In re Worldcom, Inc. Securities Litigation, Nos. 02 Civ. 3288, 02 Civ. 4816, 2002 WL 31729501, at *4 (S.D.N.Y. Dec. 5, 2002) (quoting Trustees of the Plumbers and Pipefitters National Pension Fund v. Transworld Mechanical, Inc., 886 F. Supp. 1134, 1139 (S.D.N.Y. 1995) (additional citations omitted); see also Rosenthal, 2001 WL 121944, at *2. Because these factors dictate different results with respect to the two criminal prosecutions, I will address the Sihpol and Seeger cases separately.
1. Sihpol
The defendants argue that there is no substantial relationship between this civil litigation, which is based on claims of market timing activity, and the criminal cases, which charge late trading. While they are correct that there are clear legal distinctions, there is nevertheless significant factual overlap between this case and the Sihpol prosecution. First, Count One of the indictment alleges that Mr. Sihpol facilitated market timing transactions for Canary, although it is not clear that this is actually part of the criminal activity that is charged. (Wilson Reply Letter, Exh. 1 at 1-2). More importantly, the indictment identifies as part of Mr. Sihpol's criminal conduct some of the very same transactions that form the basis for the SEC's civil claims here. (Wilson Reply Letter, Exh. 1 at 12; FAC ¶ 30). This is presumably because some of the same PIMCO transactions that are alleged to have been late trades were also part of a pattern of market timing activity: a late trade, for example, may have involved the purchase of shares that were then quickly flipped. Accordingly, this factor favors the OAG's application.
So, too, does the fact that Mr. Sihpol has been indicted. Court generally decline to stay civil proceedings when a related criminal matter is still in the investigatory stage. See Worldcom, 2002 WL 31729501, at *4; Sterling National Bank v. A-1 Hotels International, Inc., 175 F. Supp. 2d 573, 576-77 (S.D.N.Y. 2001). This is in part because there is no tension between available civil and criminal discovery until the criminal case has actually been commenced. See United States Securities and Exchange Commission v. First Jersey Securities, Inc., No. 85 Civ. 8585, 1987 WL 8655, at *3-4 (S.D.N.Y. March 26, 1987). By contrast, where, as here, formal criminal charges have been brought, there is a greater risk that limitations on criminal discovery will be circumvented by the liberal discovery permitted in civil litigation.
The interest that the SEC has in achieving an early resolution to this litigation is subsumed in the interests of the court and of the public, which will be discussed below. Otherwise, the SEC has not articulated an interest that requires consideration here.
The defendants, on the other hand, plainly have an important interest in moving to trial swiftly in this case, since the pendency of this litigation is an economic burden on them and a cloud on their careers and their personal lives. A long stay of discovery would therefore be a significant hardship to them. However, in the particular circumstances of the Sihpol case, the effect of a stay would be minimal, since Mr. Sihpol is scheduled to go to trial on April 26, 2005, and fact discovery is not scheduled to be completed in this case until May 27, 2005. Thus, any stay of the depositions of Mr. Stern and Mr. Lerner until they have testified in the Sihpol case would not delay final disposition of this action at all.
Defendants in civil actions who are also the subjects of criminal charges often cite an additional interest in favor of a stay: in the absence of a stay, they are faced with the dilemma of making potentially incriminating admissions during discovery or asserting their Fifth Amendment rights, on the basis of which the civil jury can draw an adverse inference. See Worldcom, 2002 WL 31729501, at *7; Rosenthal, 2001 WL 121944, at *2;Twenty First Century Corp., 801 F. Supp. at 1011. However, that factor is of no relevance here, since Mr. Treadway and Mr. Corba are not facing criminal charges.
"The Court shares with all parties an interest in the efficient resolution of the instant action." Worldcom, 2002 WL 31729501, at *8; see also Hicks v. City of New York, 268 F. Supp. 2d 238, 243 (E.D.N.Y. 2003). But, as indicated above, a stay until the witnesses have testified in Sihpol will not impair that interest since they could still be deposed in this action within the existing discovery schedule.
Finally, the public interest militates in favor of granting the requested stay. "[A] stay of discovery is often necessary where liberal discovery rules will allow a litigant to undermine, or gain an unfair advantage in, a potential criminal prosecution which parallels the subject matter of the civil action." Downe, 1993 WL 2226, at *12. To be sure, it is not Mr. Treadway or Mr. Mr. Corba who would reap such an advantage, since they are not defendants in any criminal proceeding. But counsel for Mr. Sihpol could certainly monitor the depositions of Mr. Stern and Mr. Lerner in this litigation and use it to the advantage of the defense in the criminal case. "[A] judge should be sensitive to the difference in rules of discovery in civil and criminal cases," Campbell v. Eastland, 307 F.2d 478, 487 (5th Cir. 1962), and "[j]udicial discretion and procedural flexibility should be utilized to prevent the rules and policies applicable to one suit from doing violence to those pertaining to another."Pharaon, 140 F.R.D. at 639 (quoting Campbell, 307 F.2d at 487). It is in the public interest, then, to prevent circumvention of the limitations on discovery in the criminal proceedings. See Securities and Exchange Commission v. Doody, 186 F. Supp. 2d 379, 381 (S.D.N.Y. 2002); Rosenthal, 2001 WL 121944, at *2; Twenty First Century Corp., 801 F. Supp. at 1010.
The relevant considerations thus tip heavily in favor of granting the OAG's application to the extent of staying the depositions of Mr. Stern and Mr. Lerner until they have testified in the Sihpol case.
2. Seeger
The same factors point to a difference result with respect to the OAG's request for a further stay until the witnesses have testified in Seeger. First, the OAG has pointed to no direct factual overlap between the civil and criminal cases as was demonstrated with respect to Sihpol. For example, it has identified no trades that are common to the criminal charges against Mr. Seeger and the allegations in this case. Second, the interests of the defendants and the Court in an expeditious resolution of this lawsuit would be impaired, since Mr. Seeger is not expected to go to trial until four months after discovery in this case is currently scheduled to end. Finally, there is no threat of harm to the public interest if the longer stay is denied. Since Mr. Stern and Mr. Lerner will presumably be subjected to exhaustive cross-examination during trial inSihpol, allowing them to be deposed in this case is unlikely to provide any additional advantage to the defense in the Seeger case. Extending a stay beyond the time that the witnesses testify in Sihpol is therefore unwarranted.
Conclusion
For the reasons set forth above, the OAG's motion to intervene is granted, and its application for a stay of the depositions of Edward Stern and Noah Lerner until they have testified in theSihpol case is granted and is otherwise denied.
SO ORDERED.