Opinion
Case No. 05-01056-CW, Consolidated with Case No. 05-1058 CW.
March 27, 2006
GODDARD LLP, BRADLEY A. PATTERSON, Esq., Irvine CA, Attorney for Plaintiffs.
KEVIN V. RYAN, United States Attorney, JAY R. WEILL, Assistant United States Attorney Chief, Tax Division, San Francisco, California, ROBERT J. HIGGINS, Trial Attorney, U.S. Department of Justice, IVAN C. DALE, Trial Attorney, U.S. Department of Justice, BART D. JEFFRESS, Trial Attorney, U.S. Department of Justice, Washington, D.C., Attorneys for Defendant.
ORDER GRANTING AS MODIFIED STIPULATION FOR STAY OF PROCEEDINGS
Pursuant to Civil L.R. 7-1(5) and 7-12, the parties hereby stipulate and agree that all proceedings in the above-captioned consolidated action shall be stayed pending completion of all matters in a related criminal prosecution, United States v. Stein, et. al. (No. S1 05 Cr 888, S.D.N.Y.).
REASONS FOR STIPULATION
1. Relevant Facts
Plaintiffs filed the present actions on March 14, 2005, seeking redetermination of adjustments that the Internal Revenue Service made to the partnership income tax returns that AWS Acquisitions, LLC (Acquisitions) and AWS Management, LLC (Management) filed for the taxable year ended December 31, 2000. Acquisitions and Management ask the Court to overturn the IRS's determinations set forth in Notices of Final Partnership Administrative Adjustment (FPAA). In the FPAAs the IRS determined, inter alia, that Acquisitions and Management and their transactions lacked economic substance, had no bona fide business purpose, and were shams.
See Compls.
See Compls. Exs. A.
See Compls. Exs. A (Explanation of Adjustments).
This proceeding is related to a criminal proceeding brought by the Office of the United States Attorney for the Southern District of New York — United States v. Stein, et. al. (No. S1 05 Cr 888, S.D.N.Y.). Although the particular transaction at issue in this case is not described in the criminal indictment, an alleged promoter of this transaction was David Greenberg, a former KPMG partner who was indicted on October 17, 2005, and who is presently a criminal defendant in the Stein case. The trial in Stein is currently set to begin on September 11, 2006. TheStein case is the largest criminal tax case ever filed by the United States and involves criminal charges against accountants and lawyers, including former leadership of KPMG, one of the largest accounting firms in the world. On August 29, 2005, KPMG admitted and accepted responsibility for violations of law with respect to its involvement in developing, promoting, selling, and implementing illegal tax shelters during the period from 1996 through 2002 and has agreed to pay $456,000,000 to the United States as a punitive fine, restitution, and penalties to the IRS stemming from its involvement with the illegal tax shelters.
See KPMG Deferred Prosecution Agreement (Ex. 1); KPMG Information (Ex. 2); KPMG Statement of Facts (Ex. 3.).
Greenberg would be an important witness in this case. He has remained in custody since his arrest in October 2005 following his indictment. On March 8, 2006, his renewed motion for bail was granted. It requires a personal recognizance bond of $25 million, secured by, inter alia, $20 million of real estate equity.United States v. Stein, et. al. (Order of March 8, 2006, No. S1 05 Cr 888, S.D.N.Y.) At the time of the filing of this stipulation, Greenberg nevertheless remains in custody.
Another likely witness in this proceeding is William Goddard, the name partner of plaintiffs' counsel. Goddard was involved with plaintiffs and Greenberg with respect to this transaction. It is believed by counsel for the Government that the "Orange County Law Firm" referenced in paragraph 58 of the superseding indictment in Stein refers to Goddard's previous law firm, Lee, Goddard Duffy.
2. Legal Authority for Staying Proceedings
It is well-settled that a court has authority to stay civil proceedings, and that a proper circumstance in which to exercise such authority is when a civil action threatens to interfere with a related criminal case. When deciding whether to stay a civil proceeding pending the outcome of a related criminal case, the United States Court of Appeals for the Ninth Circuit directs a case by case inquiry that includes consideration of the following factors: (1) the extent to which defendant's Fifth Amendment rights are implicated; (2) the plaintiff's interest in proceeding expeditiously and the potential prejudice associated with a delay; (3) the burdens that proceeding will impose upon defendant; (4) the convenience of the court in managing its docket and efficient use of resources; (5) the interest of persons not parties to the civil litigation; and (6) the interests of the public in the pending civil and criminal litigation.
See Landis v. North Am. Co., 299 U.S. 248, 254 (1936).
See United States v. Kordel, 397 U.S. 1, 12 n. 27 (1970) (citing cases); Keating v. OTS, 45 F.3d 322, 325 (9th Cir. 1995); Afro-Lecon v. United States, 820 F.2d 1198, 1202-04 (Fed. Cir. 1987); Campbell v. Eastland, 307 F.2d 478, 487 (5th Cir. 1962).
See Keating, 45 F.3d at 324-25 (citing Federal Sav. Loan Ins. Corp. v. Molinaro, 899 F.2d 899, 903 (9th Cir. 1989)).
In this case, at least four factors weigh in favor of a stay, the interests of the public, the Government, and non-party witnesses, and efficient use of Court resources. No factor weighs against a stay, as plaintiffs join the Government in this stipulation.
The interest of the public in a stay is strong. The Stein prosecution is the largest criminal tax fraud case ever prosecuted and it is alleged that the fraud generated over $11 billion in fraudulent phony tax losses. The taxpaying public has an interest in seeing these criminal charges litigated free from any interference, including from a civil case.
The Government has a significant interest in a stay. Where a civil and criminal proceeding overlap in subject matter, there is a concern that the broad scope of civil discovery may be used as an end run around the stricter rules of criminal procedure to permit an otherwise impermissible preview of the Government's criminal case. Although Greenberg is not likely to participate in this civil action pending the resolution of the criminal proceedings on Fifth Amendment grounds, the Government would be concerned that if Greenberg decided to participate in this case, his purpose would be to preview the Government's criminal case. The Government contends that similar concerns also exist with respect to William Goddard. Though not indicted, the related criminal investigation continues and any criminal case the Government might decide to bring could be placed at risk if these civil actions proceed.
See Campbell, 307 F.2d at 487-90.
If these civil proceedings continue, the Government will not be able to take the discovery required to mount an effective and vigorous defense of the present action until the criminal proceeding is completed. This is because Greenberg will likely rely on his Fifth Amendment rights to refuse to answer any questions in civil discovery. The Stein grand jury indicted Greenberg for, among other things, his alleged role in devising, marketing, and implementing allegedly illegal tax shelters. While the shelter under review in this case is not specifically mentioned in the Stein superceding indictment, Greenberg is believed by the United States to be the author and promoter of the tax shelter at issue here and Greenberg is on trial in Stein for his involvement with tax shelters that KPMG has admitted were illegal. It is likely, therefore, that Greenberg will desire to invoke his Fifth Amendment privilege against self-incrimination. In addition, Rule 6(e) of the Federal Rules of Criminal Procedure prevents Government counsel in this matter from reviewing the evidence obtained and considered by the Stein grand jury. Thus, the United States would not have an opportunity to develop its evidence through discovery of this key witness. Similarly, Goddard, who had involvement in the transactions at issue here, and whose old law firm the Government believes is mentioned in the superceding indictment, may invoke his Fifth Amendment rights to thwart the Government's civil discovery efforts out of fear of indictment by the continuing grand jury investigation. In sum, the Government would be deprived of meaningful access to the most critical fact witnesses and thereby undermined in its ability to present a defense.
The interests of non-party witnesses Greenberg and Goddard favor a stay. Where a civil and criminal proceeding overlap in subject matter, there is a concern that the broader scope of civil discovery may be used by the Government to advantage a criminal prosecution, including by undermining a criminal defendant's Fifth Amendment privileges or exposing the grounds of a criminal defendant's defense to the prosecution in advance of trial. As discussed in the preceding paragraph, it is likely that Greenberg will desire to invoke his Fifth Amendment privilege against self-incrimination. Civil discovery should not impinge upon the Fifth Amendment rights of this key witness or force him prematurely to disclose any part of the defense he intends to raise at the Stein trial. Moreover, attempts to force such discovery will likely impose additional burdens on Greenberg, such as increasing the stress already attendant to facing criminal prosecution. Similarly, civil discovery should not do likewise to Goddard, should he desire to invoke his Fifth Amendment privileges for fear of disclosing matters that would be of interest to the continuing grand jury investigation.
See Afro-Lecon, 820 F.2d at 1202-04.
A stay will also serve the interests of judicial economy. Given the related nature of the criminal case and this case, the resolution of the criminal case may narrow the issues in this case and streamline discovery with respect to Greenberg. For example, waiting until the criminal case and ongoing investigation are resolved would enable the United States' counsel here to obtain access to information developed by the grand jury, either by showing a particularized need sufficient to obtain an order of disclosure under Fed.R.Crim.P. 6(e), or by obtaining access to information which may be made public after the prosecution of the criminal case is complete. In addition, if Greenberg is convicted, the conviction may lead to a more efficient resolution of the present case.
Finally, plaintiffs here agree to a stay. Thus, no weight is to be given to plaintiffs' interest in proceeding expeditiously and any prejudice associated with delay.
THEREFORE, it is stipulated and agreed by the undersigned that all proceedings in these actions be STAYED pending the resolution of the criminal proceedings in United States v. Stein, et. al. (No. S1 05 Cr 888, S.D.N.Y.).
PURSUANT TO STIPULATION, IT IS SO ORDERED; HOWEVER, THE MOTION CUT-OFF, PRETRIAL AND TRIAL DATES WILL REMAIN ON CALENDAR UNTIL SUCH TIME AS IT IS CLEAR THEY CANNOT BE MAINTAINED.