Opinion
98 Civ. 2320 (RPP)
November 21, 2002
Kenneth J. Guido (KG 3470), Paul A Gumagay (PG 0805), Securities and Exchange Commission Washington, DC., Attorneys for Plaintiff.
Maranda E. Fritz, New York, NY., Attorney for Defendant.
OPINION AND ORDER,
Plaintiff Securities and Exchange Commission ("SEC"), moves this court pursuant to Rule 37 of the Federal Rules of Civil Procedure (" Fed.R.Civ.P.") for an order compelling Defendant, Amolak Sehgal ("Sehgal"), to provide deposition testimony. Sehgal responds with a cross motion for a protective order permitting him to refuse to provide a deposition pursuant to Fed.R.Civ.P. 26(c).
Background
Sehgal is the father-in-law of Arjun Sekhri ("Sekhri"), a former investment banker at Salomon Smith Barney ("Salomon"). The SEC alleges that Sehgal made an excess of $90,000 in profits from making trades based on insider information received from Sekhri in the period of October 1997 to February 1998. In June of 1998 discovery in this civil action was stayed pending the outcome of a number of criminal actions filed against Sekhri, Sehgal and others.
On March 14, 2000, Sekhri pled guilty to the facts alleged in the Information in U.S. v. Sekhri, 00 Cr. 236 (RPP) (S.D.N.Y. March 14, 2000), and was sentenced to 24 months in prison. In accordance with this guilty plea, Sekhri admitted to disclosing confidential inside information to several individuals, including Co-Conspirator I. He was sentenced to 24 months in prison and was deported after his release. Moreover, as the SEC has pointed out, Sehgal admitted in his Memorandum in Opposition to Motion of SEC to Compel Discovery and in Support of Cross Motion for Protective Order that he is Co-Conspirator I. (Defendant's Opposition and Reply Memorandum ("Def. Opp. and Reply Mem.") dated August 8, 2002 at 5).
On January 28, 2001, while Sekhri was serving his prison term, the Court partially lifted the stay on discovery to permit the SEC to depose Sekhri before his deportation. On January 29, 2001, the SEC faxed a notice to Sehgal's attorneys informing them that it would be taking Sekhri's deposition on February 21, 2001. Sekhri's deposition took place as scheduled, but Sehgal's attorney chose not to attend.
On June 24, 2002, the SEC served a Fed.R.Civ.P. 30(b) notice of deposition on Sehgal. Two days before the deposition was to take place, Sehgal's counsel contacted the SEC and objected to the deposition. Sehgal's counsel also wrote to this court requesting a conference on July 9, 2002. In view of the SEC's response dated July 10, 2002, Sehgal's conference request was denied without prejudice. See July 15, 2002 Order by Robert P. Patterson, Jr., U.S.D.J. The SEC then filed its motion to compel Sehgal's deposition on July 23, 2002, and Sehgal filed his opposition motion and cross motion for a protective order on August, 8, 2002.
Analysis
1. Legal Analysis of Rules 30(b) and 26(c)
The Supreme Court has determined "that the deposition-discovery rules are to be accorded a broad and liberal treatment." Hickman v. Taylor, 67 S.Ct. 385, 392 (1947). However, "limitations inevitably arise when it can be shown that the examination is being conducted in bad faith or in such a manner as to annoy, embarrass or oppress the person subject to the inquiry." Id. Even so, protective orders preventing the taking of a deposition are rarely granted since "the notice for taking a deposition is not required to specify the subject matter of the examination, [and] the need for protection usually cannot be determined before the examination begins." 8 Charles Alan Wright, et al., Federal Practice Procedure § 2037 (2d ed. Supp. 2002) ("Fed. Practice Procedure") (citations omitted). Moreover, "the moving party can be adequately protected by making a motion under Rule 30(d) if any need for protection appears during the course of the examination." Id.
In recognition of these standards, the Second Circuit noted inInvestment Properties Int'l, Ltd. v. IOS, Ltd., 459 F.2d 705, 708 (2d Cir. 1972), that "an order to vacate a notice of taking [a deposition] is generally regarded as both unusual and unfavorable" and has stated that "the burden is upon the party seeking non-disclosure or a protective order to show good cause" for issuing such an order, Dove v. Atl. Capital Corp., 963 F.2d 15, 19 (2d Cir. 1992) (citations omitted). Furthermore, "[b]road allegations of harm, unsubstantiated by specific examples or articulated reasoning," are not sufficient to satisfy the burden.Cipollone v. Liggett Group. Inc., 785 F.2d 1108, 1121 (3d. Cir. 1986);see also Joy v. North, 692 F.2d 880, 894 (2nd Cir. 1982) (refusing a protective order where proponent's only argument in its favor were broad allegations that the disclosure of certain information would cause injury), cert. denied sub nom. Citytrust v. Joy, 460 U.S. 1051 (1983).
2. Sehgal's Arguments in Favor of a Protective Order
Sehgal has argued that this court should grant a protective order for two reasons. First, he contends that there is a dispositive question of law in the case that precludes the need for discovery. Second, he asserts that he will be prejudiced since he will not be able to depose Sekhri.
a. There is no dispositive question of law that would preclude discovery
Sehgal's first argument flows from the Supreme Court's decision inDirks v. SEC, 463 U.S. 646 (1983). Based on the Court's statement that "a tippee assumes a fiduciary duty to the shareholders of a corporation not to trade on material nonpublic information only when the insider has breached his fiduciary duty to the shareholders by disclosing the information to the tippee and the tippee knows or should know that there has been a breach," Sehgal maintains that there is a dispositive question of law that precludes the need for further discovery. Id. at 660 (emphasis added). Sehgal's dispositive question of law argument has two parts: (1) he says "the Government will not be able to demonstrate that Arjun Sekhri sought or derived any material benefit from the disclosure of information to Amolak Sehgal," (Def. Opp. and Reply Mem. at 10), and (2) Sehgal claims he did not know that Sekhri's acts "constituted a breach of any fiduciary obligation" (id. at 11).
The first part of Sehgal's argument fails because it is based on an overly narrow interpretation of the rule stated in Dirks. While Sehgal is correct in arguing that the evidence must show that Sekhri sought some personal benefit from disclosing the nonpublic information to Sehgal in order to have breached his fiduciary duty, he ignores the remainder of the Court's statement. See Dirks, 463 U.S. 646, at 663-664. While noting that the insider must seek to benefit from disclosing inside information, the Supreme Court noted that "[t]here are objective facts and circumstances that often justify [the] inference" that the insider benefitted from the disclosure. Id. at 664. For example, "[t]he elements of fiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of confidential information to a trading relative or friend." Id. (emphasis added). Thus, when Sekhri disclosed insider information to his father-in-law, Sehgal, it may be inferred that Sekhri received some personal benefit from the gift of information. Likewise, the burden of proof shifts from the SEC to Sehgal, and Sehgal must prove that his son-in-law derived no benefit from the disclosure in order to negate the inference that Sekhri benefitted from the transaction.
To support his contention that Sekhri did not necessarily derive a benefit from giving information to Sehgal, Sehgal tries to equate the circumstances in the present case with those present in United States v. Reed. 601 F. Supp. 685 (S.D.N.Y. 1985), rev'd on other grounds, United States v. Reed, 773 F.2d 477 (2d Cir 1985). However, the present case differs significantly from Reed. Most importantly, the insider in Reed was "continually depicted . . . as the victim of his son's connivance, having mistakenly relied on defendant's confidence and on the expectation that the son would not trade on the basis of the father's disclosures."Id. at 699 (citation omitted) (emphasis added). Thus, in that case, defendant met the burden of demonstrating that he received no personal benefit from disclosing the information to his son.
By contrast, at no point in this investigation has the SEC portrayed Arjun Sekhri as a victim who did not seek to gain from his actions. Quite the contrary, the SEC notes in its memoranda on this motion that Sekhri pled guilty to violating §§ 10(b) and 14(e) of the Securities Exchange Act of 1934 and spent two years in prison for his unlawful conduct. With these facts in mind, there appears to be no reason why it should not be inferred that Sekhri benefitted from disclosing insider information to his father-in-law, Sehgal, in accordance with the Supreme Court's ruling in Dirks, 463 U.S. 646.
The SEC also contends that Sehgal gave $15,000 and a new 1998 GS 400 Lexus automobile to Sekhri and that such gifts may constitute a financial benefit resulting from Sekhri's disclosure of confidential information to Sehgal. (SEC Opp. Reply Mem. at 8).
The second part of Sehgal's argument based on Dirks is that he did not know that Sekhri's acts constituted a breach of fiduciary duty. See Dirks, 463 U.S. 646, at 660. The SEC responds by positing that Sehgal's argument demonstrates the precise reason why his deposition is needed. The SEC's stated goal in deposing Sehgal is to find out (1) how much Sehgal knew about Sekhri's employment, (2) why Sehgal purchased and traded stocks in companies that were represented by Sekhri's employer or involved in negotiations with clients thereof, and (3) why he traded stock ahead of four different public announcements involving three companies. (SEC Opp. and Reply Mem. at 7).
The SEC has the right to question Sehgal because "[a] witness cannot escape examination by claiming that he has no knowledge of any relevant facts, since the party seeking to take the deposition is entitled to test his lack of knowledge." Fed. Practice Procedure § 2037. Moreover, it is clear that the facts related to the issues of whether Sekhri received a benefit from disclosing inside information to Sehgal and whether Sehgal knew that Sekhri had breached his fiduciary duty to the companies represented by his employer are unsettled. Since the parties do not agree upon all material facts, there can be no dispositive question of law that might preclude the need for further discovery in this case.
b. Granting the SEC's motion to compel Sehgal's deposition will not prejudice Sehgal
Sehgal's second assertion is that he will be prejudiced if the Court requires him to give deposition testimony. Sehgal argues that the SEC has neglected to prosecute him or to pursue discovery in this matter for four years and that information necessary for his defense is no longer available. In particular, Sehgal claims that he would need to take Sekhri's deposition, but since Sekhri has been deported, Sehgal is now unable to get Sekhri's testimony to aid his defense.
Sehgal's arguments are without merit. First, the SEC was initially unable to pursue discovery in this case because discovery in the civil proceedings was stayed based upon the pending criminal investigations of Sehgal, Sekhri and others. Only in January of 2001 was a partial lifting of the stay granted in order to permit the SEC to take Sekhri's deposition before his deportation. Then, on February 21, 2001, Sekhri was deposed by the SEC. Although the SEC gave Sehgal's counsel notice so that she could attend Sekhri's deposition, Sehgal's attorneys chose not to attend. (4th Gumagay Declaration dated August 19, 2002, Ex. A). Now, after choosing not to attend Sekhri's deposition in February 2001, Sehgal contends that he has been prejudiced because Sekhri has been deported and cannot be deposed. However, there is no evidence to support Sehgal's contention that he cannot depose Sekhri. In fact, on September 29, 2002, Arjun Sekhri wrote a letter to this court expressing a willingness to testify on Sehgal's behalf. In his letter, Sekhri states that he did not give Sehgal illegal information, and he indicates that he would like to give official testimony to help his father-in-law.
The stay on discovery was not fully lifted until November 19, 2001.
At the beginning of his deposition, Sekhri invoked his Fifth Amendment privilege against self incrimination and refused to answer any questions regarding the substantive issues involved in this case.
Given the precedent mandating liberal treatment of the discovery rules, Sehgal's arguments that he will be prejudiced are unpersuasive. Moreover, considering the willingness of Sekhri to testify, Sehgal's claims of prejudice because he cannot take Sekhri's deposition are merely "(b]road allegations of harm, unsubstantiated by specific examples or articulated reasoning" and are, therefore, insufficient to satisfy his burden of demonstrating good cause for a protective order. Cipollone, 785 F.2d at 1121 (citations omitted).
3. Sehgal's Argument that the SEC has not followed Fed.R.Civ.P. 26
In his Second Reply and Opp. Mem. dated September 17, 2002, Sehgal argues that the SEC should not be permitted to obtain his deposition because it has not fulfilled its discovery obligations under Fed.R.Civ.P. 26. Specifically, Sehgal argues that since the SEC has not sought a discovery conference under Rule 26(f), it may not seek discovery according to the provisions of Rule 26(d). (Def. Second Reply Mem. in Opp. dated September 17, 2002 at 3). Rule 26(d) states in relevant part, "a party may not seek discovery from any source before the parties have conferred as required by Rule 26(f)."
When this case was filed on April 1, 1998, the local rules for this district stated, "Federal Rules of Civil Procedure 26(a)(1) and 26(d) (first sentence only) are not operative in this District." Local Rules of the United States District Courts for the Southern and Eastern Districts of New York 26.4(a) (April 15, 1997) (repealed December 1, 2000). Therefore, the section of Rule 26(d) requiring that the SEC seek a discovery conference under Rule 26(f) before it will be permitted to depose Sehgal was inapplicable to this case under the operative local rules.
Conclusion
Sehgal has failed to fulfill his burden of showing good cause for a protective order as prescribed by relevant Supreme Court and 2nd Circuit precedent. Since there is no dispositive question of law that would preclude further discovery and since Sehgal has failed to demonstrate any actual prejudice he will suffer if he is required to give his deposition, the Court grants the SEC's motion to compel discovery, denies Sehgal's motion for a protective order and orders Sehgal to provide deposition testimony.