Opinion
2:21-cv-7339-CAS (ASx)
12-27-2022
SECURITIES AND EXCHANGE COMMISSION v. SHE BEVERAGE COMPANY, INC., ET AL.
CIVIL MINUTES - GENERAL
HONORABLE CHRISTINA A. SNYDER, J.
Proceedings: (IN CHAMBERS) - MOTION FOR STAY OF CIVIL PROCEEDINGS (Dkts. 61, 62, 63, 66, filed on NOVEMBER 3, 2022, NOVEMBER 7, 2022, NOVEMBER 8, 2022)
The Court finds that the motion for stay of civil proceedings is appropriate for decision without oral argument. See Fed.R.Civ.P. 78; C.D. Cal. L.R. 715. Accordingly, the matter is hereby taken under submission.
I. INTRODUCTION & BACKGROUND
On September 14, 2021, plaintiff Securities and Exchange Commission (the “SEC”) filed a complaint in a civil enforcement action against defendants SHE Beverage Company, Inc. (“SHE Beverage”), Lupe L. Rose, Sonja F. Shelby, and Katherine E. Dirden (the “individual defendants”), alleging violations of sections 5 and 17(a) of the Securities Act of 1933, 15 U.S.C. §§ 77(e)(a), 77(e)(c), 77q(a), and section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5(a)-(c). Dkt. 1 at 3. On November 15, 2021, defendants filed an answer to plaintiff s complaint. Dkt. 13. SHE Beverage is a California company that produces beverages targeting female customers. Dkt. 1 at 2. Rose, Shelby and Dirden are principals of SHE Beverage. Id. According to the complaint, defendants perpetrated fraud by falsely representing to investors that 30% of the proceeds of the securities offered and sold by SHE Beverage would be used to purchase beverage inventory when, in fact, only 2% of such proceeds went towards the purchase of inventory; misappropriating roughly half of the offering proceeds to pay personal expenses, including cars, rent, luxury retail goods, and trips to casinos; and making false and misleading representations to investors regarding the success of the company. Id. at 2-3.
On November 3, 2022, defendant Rose filed a motion for stay of this action, requesting that the Court stay civil proceedings for a period of nine months, subject to extension. Dkt. 61. On that same day, defendant Shelby filed a joinder in Rose's motion for stay, dkt. 62, and, on November 8, 2022, defendant Dirden filed a joinder in the same, dkt. 66. On November 28, 2022, the SEC filed an opposition to the motion for stay of civil proceedings. Dkt. 70. The motion for stay of civil proceedings is presently before the Court.
Having carefully considered the parties' arguments and submissions, the Court finds and concludes as follows.
II. LEGAL STANDARD
“The Constitution does not ordinarily require a stay of civil proceedings pending the outcome of criminal proceedings.” Keating v. Office of Thrift Supervision. 45 F.3d 322, 324 (9th Cir. 1995), cert, denied, 516 U.S. 827 (1995). Parallel civil and criminal proceedings are permitted under Ninth Circuit precedent unless such proceedings substantially prejudice the rights of the parties involved. Id. “The decision whether to stay civil proceedings in the face of a parallel criminal proceeding should be made ‘in light of the particular circumstances and competing interests involved in the case.'” Id. (quoting Fed. Sav. & Loan Ins. Corp, v. Molinaro, 889 F.2d 899, 902 (9th Cir. 1989)). The party proposing a stay bears the burden of proving that a stay is warranted. Clinton v. Jones. 520 U.S. 681. 708 (1997).
A district court is vested with the discretion to stay an action based on its inherent authority to control its own docket. Landis v. N. Am. Co., 299 U.S. 248, 254 (1936). Although there is no requirement that a court stay a civil action pending the outcome of a related criminal proceeding, a court may choose to do so “when the interests of justice seem [ ] to require such action.” Keating, 45 F.3d at 324 (quotation marks omitted).
In deciding whether to grant a motion to stay civil proceedings in favor of parallel criminal proceedings, courts in the Ninth Circuit must consider the “extent to which the defendant's [F]ifth [A]mendment rights are implicated.” Id. In addition, Keating instructs that courts should consider the following five factors: (1) the interest of the plaintiff in proceeding expeditiously with the litigation, and the possibility that plaintiffs would be prejudiced by a delay; (2) the burden which the proceedings may impose on defendants; (3) the convenience of the court and the efficient use of judicial resources; (4) the interests of persons not parties to the civil litigation; and (5) the interest of the public in the civil and criminal litigations. Id. at 324-25. Thus, while the extent to which a defendant's Fifth Amendment rights are implicated is a “significant factor” to be considered, it is “only one consideration to be weighed against others.” Id. Nonetheless, other than cases involving bad faith or malice on the part of the government, “the strongest case for deferring civil proceedings until after completion of criminal proceedings is where a party under indictment for a serious offense is required to defend a civil or administrative action involving the same matter.” SEC v. Dresser Indus.. Inc.. 628 F.2d 1368, 1375-76 (D.C. Cir. 1980). In such cases, allowing the civil action to proceed may burden or implicate the assertion of defendant's Fifth Amendment privilege, expand criminal discovery beyond the limits of Federal Rule of Criminal Procedure 16(b), expose the defense strategy to the prosecution before the criminal trial, or cause other prejudice. Id. at 1376. Accordingly, where the civil proceeding wholly or substantially overlaps with the criminal proceeding, a court may be justified in staying the civil case, deferring civil discovery, or taking other protective measures. Id.
III. DISCUSSION
The individual defendants contend that a stay of the civil proceedings is appropriate because they are under criminal investigation for the same conduct that is the subject of this action. Dkt. 61 at 2.
As an initial matter, the parties dispute the likelihood that the individual defendants will be criminally prosecuted. In her motion for a stay. Rose attaches a declaration of her criminal defense counsel, Kim Savo, stating that, on October 21, 2022, Assistant United States Attorney Jeff Mitchell informed Savo that he intends to seek grand jury subpoenas for Rose in her individual and corporate capacities to obtain documents relevant to the Federal Bureau of Investigation's (“FBI”) criminal investigation into her conduct relating to the operation of SHE Beverage. Savo Decl. ¶ 3. Savo additionally states that AUSA Mitchell anticipates that he will seek an indictment within the next six months and that the FBI and U.S. Attorney's Office requested and received documents from the SEC related to this civil action in December 2021. Id. ¶¶ 4, 5.
Shelby, in joining Rose's motion for a stay, similarly attaches a declaration from her criminal defense counsel stating that AUSA Mitchell informed him that the FBI was conducting a criminal investigation related to the activities of SHE Beverage and the individual defendants, that he anticipates grand jury subpoenas seeking documents will be served on Shelby, and that he believes the U.S. Attorney's Office would determine whether to seek an indictment against Shelby within the next six months. Lichtman Decl. ¶ 2. Dirden's joinder attaches a declaration from her criminal defense counsel stating that AUS A Mitchell confirmed that Dirden is a subject of the criminal investigation. Bednarski Decl. ¶ 7.
In its opposition, the SEC contends that there is no pending criminal investigation of the individual defendants and attaches a declaration of SEC counsel stating that AUSA Mitchell subsequently explained that, while the FBI is investigating “certain corporate entities that included the individual defendants,” “none of these individuals have been elevated to ‘target' status.” Kam Decl. ¶ 5. AUSA Mitchell additionally stated that the FBI's investigation had been delayed due to a lack of cooperation with FBI subpoenas, that he was unsure of whether the FBI would be able to make a charging decision in the next six months, and that the FBI was investigating conduct “far broader than the conduct alleged in the SEC's complaint.” Id. at ¶¶ 6, 7.
While it appears to the Court that the individual defendants may be or may become the subject of a criminal investigation, the Court concludes that, regardless of the likelihood of criminal proceedings, a stay of the civil proceedings would be inappropriate at this time. Although the individual defendants may face adverse inferences in this litigation in the event that they choose to invoke their Fifth Amendment rights in this case, the other Keating factors weigh against a stay. See Keating, 45 F.3d at 324-25 (implication of Fifth Amendment rights is “only one consideration to be weighed against others”). “A defendant has no absolute right not to be forced to choose between testifying in a civil matter and asserting [her] Fifth Amendment privilege.” Id. at 26; see also Sterling Nat'l Bank v. A-l Hotels Inf 1, Inc., 175 F.Supp.2d 573, 578 n.4 (S.D.N.Y. 2011) (“[W]hat is at risk is not [defendants'] constitutional rights .. . but their strategic position in the civil case.”). Thus, while the individual defendants may be subject to adverse inferences if they invoke their Fifth Amendment privilege, this civil action may proceed at the same time as a related criminal proceeding where a stay is not otherwise appropriate. See Louis Vuitton Malletier S.A, v. LY USA. Inc., 676 F.3d 83, 103-04 (2d Cir. 2012) (affirming district court's denial of stay of civil proceedings after weighing implication of defendants' Fifth Amendment rights against “the public's interest in prompt further protection of the plaintiff' and plaintiff s “compelling interest in prompt resolution of the civil case”).
Here, the remaining Keating factors favor the SEC's position, particularly in light of the need to protect investors and enforce the securities laws. The SEC “has a strong interest in proceeding expeditiously to protect investors and remedy violations of the securities laws.” Sec. & Exch. Coinin'n v. Chen. 2016 WL 7444922, at *2 (C.D. Cal. Apr. 8, 2016) (citing Sec. & Exch. Comm'n v. Dresser Indus.. Inc., 628 F.2d 1368, 1377 (D.C. Cir. 1980)). The SEC contends that it seeks to vindicate several important interests in expeditiously proceeding to advance this case on the merits, including avoiding the risk of memories fading and evidence being lost; mitigating the effects of the delay in discovery and prosecution of this case that defendants have already caused; and the need to recover any ill-gotten gains to make investors whole in a timely manner. Dkt. 70 at 11. Specifically, the SEC points out that, since April of 2022, it has repeatedly agreed to continue discovery deadlines per defendants' requests, once to allow for settlement discussions, in which defendants then refused to engage, and twice for defendants to retain new counsel. Id. at 2. The SEC additionally contends that there is no asset freeze in place here to prevent further dissipation of investors' funds. IT at 11. The Court agrees that, for these reasons, the SEC has an interest in expeditious prosecution of the civil matter and finds that this factor weighs against granting a stay.
Further, concerns of judicial economy do not weigh in favor of a stay here, given both the uncertain timing and scope of any criminal proceeding that may or may not take place, and the delays that have already taken place in discovery and the prosecution of this case. See Chen, 2016 WL 7444922, at *2 (explaining that issuing a stay where the timing and scope of potential criminal proceedings are uncertain “would effectively thrust the Court into an indefinite state of limbo”); Gen. Elec. Co. v. Liang, 2014 WL 1089264, at *6 (C.D. Cal. Mar. 19, 2014) (finding judicial efficiency factor weighs against a stay where “no indictment has been returned and there is no way to predict when the criminal investigation [will] end.”) (internal quotation marks omitted).
Finally, the Court must consider the interests of non-parties and the general public. Keating, 45 F.3d at 324-25. The Court finds that these factors weigh against granting a stay. Investors have an interest in the timely enforcement of this civil action because defendants have allegedly misappropriated investor funds, which the SEC seeks to return. Likewise, the general public has an interest in the SEC's seeking relief for alleged fraudulent conduct. See United States v. Kordel, 397 U.S. 1,11 (1970) (“It would stultify enforcement of federal law to require a government agency . . . invariably to choose either to forego recommendation of criminal prosecution once it seeks civil relief, or to defer proceedings pending the ultimate outcome of a criminal trial.”). Defendants' conduct, in delaying prosecution of this case, has prejudiced these interests, and granting a stay would only further harm investors and the general public.
In sum, the Court finds that, on balance, the Keating considerations weigh against granting a stay of the civil proceedings against the moving defendants. Strong interests favor expeditious prosecution of this civil action. The Fifth Amendment provides an appropriate remedy to the individual defendants, allowing them to protect themselves from exposure with respect to any criminal proceeding. While invoking their rights under the Fifth Amendment may give rise to an adverse inference in this civil action, this possibility is insufficient to overcome the strong interest in the expeditious resolution of this action. See Keating. 45 F.3d at 326 (explaining that “it is permissible to conduct a civil proceeding at the same time as a related criminal proceeding,” even if “the trier of fact [draws] adverse inferences from the invocation of the Fifth Amendment in a civil proceeding”).
IV. CONCLUSION
In accordance with the foregoing, the Court DENIES defendants' motions for stay of this action.
IT IS SO ORDERED.