Summary
holding that it was unnecessary to address permissive intervention because the government could intervene as of right
Summary of this case from State v. DealOpinion
Civil Action No. 3:03-CV-2912-D.
July 20, 2004
MEMORANDUM OPINION AND ORDER
The court must decide whether to permit the United States ("government") to intervene in this civil enforcement action and whether to stay the case pending resolution of a related criminal case. For the reasons that follow, the court grants the government leave to intervene and stays the case.
I
In December 2003 plaintiff Securities and Exchange Commission ("SEC") filed this civil enforcement action against defendants Mutuals.com, Inc., Connely Dowd Management, Inc., MTT Fundcorp, Inc., Richard Sapio ("Sapio"), Eric McDonald ("McDonald"), and Michele Leftwich ("Leftwich"). In March 2004 the government filed a one-count criminal complaint against Sapio, McDonald, and Leftwich in the Southern District of New York, alleging conspiracy to commit federal securities fraud. The government moves to intervene in this action as of right under Fed.R.Civ.P. 24(a) (2) or, alternatively, permissively under Rule 24(b) (2), for the limited purpose of seeking a stay of discovery pending the disposition of the criminal case. The government also moves for a stay of discovery.
II
In deciding a motion to intervene, the court first considers whether the government is entitled to intervene as of right. Intervention as of right under Rule 24(a)(2) is appropriate if the applicant (1) files a timely application, (2) has an interest in the subject matter of the action, (3) demonstrates an impediment to protection of this interest arising from the pending action, and (4) shows inadequate protection of that interest by the existing parties to the action. Heaton v. Monogram Credit Card Bank of Ga., 297 F.3d 416, 422 (5th Cir. 2002).
First, there is no argument here that the government's motion to intervene is untimely. "The requirement of timeliness is not a tool of retribution to punish the tardy would-be intervenor, but rather a guard against prejudicing the original parties by the failure to apply sooner." John Doe No. 1 v. Glickman, 256 F.3d 371, 375 (5th Cir. 2001) (quoting Sierra Club v. Espy, 18 F.3d 1202, 1205 (5th Cir. 1994)). The SEC filed the present lawsuit in December 2003. The government filed the related criminal complaint in March 2004, and it moved to intervene in this action about two months later, in May 2004. The motion was filed before discovery commenced. Therefore, this action has not been pending long enough so that the government's intervention will prejudice the parties. Additionally, the government did not unreasonably delay filing its motion to intervene, because it could not have done so before it filed the criminal complaint. Therefore, the motion is timely.
Second, the government has an interest in the subject matter of the present action because it has a recognizable interest in preventing discovery in the civil case from being used to circumvent the more limited scope of discovery in the related criminal case. Several circuit and district courts have recognized this right. SEC v. Chestman, 861 F.2d 49, 50 (2d Cir. 1988) (per curiam); see Campbell v. Eastland, 307 F.2d 478, 487 (5th Cir. 1962); Bureerong v. Uvawas, 167 F.R.D. 83, 87 (C.D. Cal. 1996). Therefore, this court recognizes the government's interest in preserving more limited discovery to ensure successful prosecution of the criminal case.
Third, discovery in the present civil suit may impair the government's right to more limited discovery in the related criminal case because the scope of discovery in a civil case is broader than in a criminal case. Compare Fed.R.Crim.P. 15-17 with Fed.R.Civ.P. 26-37; Campbell, 307 F.2d at 487. Consequently, defendants may obtain more discovery in the instant case than they would otherwise be entitled to under the Federal Rules of Criminal Procedure. Because the events underlying the criminal and civil charges overlap, this broader discovery may impair the intended balance between the parties in the criminal case. See Campbell, 307 F.2d at 487 n. 12. Therefore, the government has demonstrated the necessary impediment to protection of its interest arising from the pending action.
Fourth, the SEC as a party in this civil case cannot adequately protect the interest of the government. The SEC must comply with discovery requests that are proper under the civil rules despite the fact that they would be improper under the more limited discovery rules that govern criminal cases. The SEC cannot adequately protect the government's interest because it does not have the same right to invoke the criminal rules that the government has. "The Government has a distinct and `discernible interest in intervening in order to prevent discovery in the civil case from being used to circumvent the more limited scope of discovery in the criminal matter.'" Bureerong, 167 F.R.D. at 86 (quoting SEC v. Chestman, 861 F.2d at 50).
Accordingly, the government's motion to intervene is granted.
Because district courts have broad discretion in granting motions to intervene permissively, permissive intervention entails a lower standard than intervention as of right. See League of United Latin Am. Citizens, Council No. 4434 v. Clements, 884 F.2d 185, 189 (5th Cir. 1989). Consequently, because the government's motion to intervene meets the higher standard, the court finds in the alternative that the lower standard for permissive intervention is also met.
III
The court now turns to the government's motion to stay discovery until the conclusion of the related criminal case.A
The SEC alleges in the civil complaint that defendants violated the Securities Act of 1933, Securities Exchange Act of 1934, and Investment Company Act of 1940. It asserts two types of deceptive practices: market timing and late trading. The related criminal complaint alleges a securities fraud conspiracy based largely on the same facts. The criminal complaint, however, does not advance allegations regarding late trading.
Defendants oppose the motion to stay discovery. First, they argue that the government cannot make a clear showing of hardship or inequality if this case is permitted to go forward while the criminal case is pending. Second, they contend the duration of the requested stay is unreasonable.
The SEC does not oppose the motion.
The court will not organize its analysis based on defendants' arguments because the factors considered in this court regarding a motion to stay are somewhat different from the ones in the District of Columbia that defendants cite. Compare Heller Healthcare Fin., Inc. v. Boyes, 2002 WL 1558337, at *2 (N.D. Tex. Jul. 15, 2002) (Fitzwater, J.) with Horn v. Dist. of Columbia, 210 F.R.D. 13, 15 (D.D.C. 2002).
B
As the Fifth Circuit has instructed, in ruling on requests for stays of the civil side of parallel civil/criminal proceedings, [j]udicial discretion and procedural flexibility should be utilized to harmonize the conflicting rules and to prevent the rules and policies applicable to one suit from doing violence to those pertaining to the other. In some situations it may be appropriate to stay the civil proceeding. In others it may be preferable for the civil suit to proceed-unstayed.United States v. Gieger Transfer Serv., Inc., 174 F.R.D. 382, 385 (S.D. Miss. 1997) (quoting Campbell v. Eastland, 307 F.2d 478, 487 (5th Cir. 1962) (citation and internal quotation marks omitted)). "Certainly, a district court may stay a civil proceeding during the pendency of a parallel criminal proceeding. Such a stay contemplates `special circumstances' and the need to avoid `substantial and irreparable prejudice.'" United States v. Little Al, 712 F.2d 133, 136 (5th Cir. 1983) (citing SEC v. First Fin. Group of Tex., Inc., 659 F.2d 660, 668 (5th Cir. Oct. 1981)).
Courts from other jurisdictions have outlined several factors that should be considered in determining whether "special circumstances" warrant a stay, 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 criminal case, including whether the defendants have been indicted; (3) the private interests of the plaintiffs in proceeding expeditiously, weighed against the prejudice to 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.Heller Healthcare Fin., Inc. v. Boyes, 2002 WL 1558337, at *2 (N.D. Tex. Jul. 15, 2002) (Fitzwater, J.) (citing Trs. of Plumbers and Pipefitters Nat'l Pension Fund v. Transworld Mech., Inc., 886 F. Supp. 1134, 1139 (S.D.N.Y. 1995) (citing Milton Pollack, Parallel Civil and Criminal Proceedings, 129 F.R.D. 201, 201-03 (1990)); Volmar Distribs., Inc. v. New York Post Co., 152 F.R.D. 36, 39 (S.D.N.Y. 1993)).
C 1
The first question to be resolved is the extent to which the issues in the parallel criminal case overlap with those in the present case. With the exception of the allegations of late trading, the subject matter of the two cases is the same. In both cases defendants are charged with violating federal securities laws through market-timing activity. Additionally, both cases are based on defendants' alleged conduct between March 2001 and September 2003. Defendants do not dispute that the issues in two cases are substantially similar. The court therefore holds that this overlap of issues weighs in favor of a stay.
2
The second factor to be considered is the status of the criminal case. "A stay of a civil case is most appropriate where a party to the civil case has already been indicted for the same conduct." Trs., 886 F. Supp. at 1139. In this case, no indictment has been returned, but a preliminary hearing was scheduled to take place on June 14, 2004. Although this factor does not support the government's motion, some courts have stayed discovery where a party in the civil case was only threatened with criminal prosecution. See Wehling v. Columbia Broad. Sys., 608 F.2d 1084, 1089 (5th Cir. 1979).
3
The court also weighs the private interests of the plaintiff in proceeding expeditiously against the prejudice that will be caused by the delay that will result from the stay. "In the context of a civil enforcement suit, the plaintiff's interest and the public interest are intertwined." SEC v. Mersky, 1994 WL 22305, at *3 (E.D. Pa. Jan. 25, 1994). Generally, a "civil plaintiff has an interest in the prompt resolution of its claims and in obtaining discovery while information is still fresh in witnesses' minds." Id. In this case, the SEC has agreed to stay the civil proceedings. Therefore, the plaintiff's-interest factor weighs in favor of a stay.
4
The court has also considered defendants' interests in opposing the stay and the burden on them that would result were the stay to be granted. Defendants argue that granting a stay will undermine traditional notions of fair play and substantial justice because the SEC has taken their depositions but they have not had an opportunity to depose the SEC's witnesses. This argument is flawed. Defendants' right to obtain pretrial discovery from government witnesses in a criminal case is limited. Under the Jencks Act, 18 U.S.C. § 3500(a), no statement of a government witness or a prospective government witness "shall be the subject of subpoena, discovery, or inspection until said witness has testified on direct examination in the trial of the case." The right to take depositions in a criminal case is also limited. See Fed.R.Crim.P. 15(a)(1). Once the stay is lifted in the civil case, defendants will have the right to obtain the depositions of SEC's witnesses. Therefore, defendants' interests will not be injured by a stay of discovery.
Additionally, defendants do not assert that it would be more difficult to defend this lawsuit after discovery resumes. In fact, the stay may only marginally impede their ability to gather the facts of the transactions involved in this lawsuit, because the government will provide them with the documents relating to the conduct alleged in the criminal complaint pursuant to Fed.R.Crim.P. 16. Witness statements and impeachment materials will likewise be provided to defendants at the time of the criminal trial. And a stay of discovery will relieve defendants of the burden of defending against civil and criminal cases simultaneously. Consequently, this factor weighs in favor of a stay.
5
The court concludes that granting a stay will not unduly interfere with the court's management of its docket. This factor does not weigh against granting the government's motion.6
Finally, the court concludes that the interests of the public weigh in favor of a stay. The Fifth Circuit has long recognized the public interest in law enforcement. See Campbell, 307 F.2d at 487. Additionally, "the public has an interest in ensuring the criminal discovery process is not subverted." Morris v. Am. Fed'n of State, County and Mun. Employees, 2001 WL 123886, at *2 (S.D.N.Y. Feb. 9, 2001).
7
Having weighed the respective factors and interests, the court finds that a temporary stay of the civil action is appropriate. Accordingly, the court stays all proceedings in this civil action pending the conclusion of the trial of the criminal case. The court has not been informed since the completion of the briefing on these motions whether defendants have been indicted. If they have not been indicted within 90 days of the date this memorandum opinion and order is filed, this stay will terminate automatically.
In view of the stay, the court will defer deciding defendants' motion to dismiss, filed February 20, 2004, and the clerk of court is directed to close the motion statistically.
* * *
For the reasons set out, the government's May 25, 2004 motions to intervene to stay proceedings and to stay proceedings are granted.SO ORDERED.