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Securities and Exchange Commission v. Liberty

United States District Court, D. Maine

August 8, 2019

MICHAEL A. LIBERTY, et al., Defendants.



         All of the Defendants, except for Defendant George Marcus, have jointly moved for a fourth stay of this civil litigation which would stay the case until the conclusion of the pending criminal proceedings against Defendants Michael A. Liberty and Paul Hess. ECF Nos. 53, 54, 71. Plaintiff Securities and Exchange Commission (the “SEC”) opposes the Motion. ECF No. 55. For the reasons that follow, the Motion is GRANTED.

         I. BACKGROUND

         The SEC filed its complaint in March 2018, asserting claims arising out of an alleged fraudulent securities scheme. See ECF No. 1. The named Defendants are Michael A. Liberty, Mozido Invesco, LLC, Family Mobile, LLC, BRTMDO, LLC, Brentwood Financial, LLC, TL Holdings Group, LLC, Brittany Liberty, Paul Hess, Richard Liberty, George Marcus, and Xanadu Partners, LLC. The complaint alleges that the Defendants tricked investors into believing that they were funding startup technology companies, including a company named Mozido, when the investors were in fact investing in shell companies without active business operations. Id. ¶¶ 1-4. The complaint alleges that the Defendants enriched themselves with their investors' money. Id. ¶ 1.

         In July 2018, the Defendants moved for a stay of the case pending an ongoing grand jury investigation into conduct related to the SEC's allegations and targeting certain of the Defendants. See ECF No. 38. The Court granted the motion and ordered the case stayed until October 16, 2018, finding that the ongoing grand jury investigation could implicate the Fifth Amendment rights of at least some of the Defendants. See ECF No. 40. The stay was later extended to December 10, 2018, see ECF No. 44, and then again to February 28, 2019, see ECF No. 50, upon subsequent requests by the Defendants that were not opposed by the SEC. See ECF Nos. 43, 47. The two orders continuing the initial stay authorized the parties to conduct third-party documentary discovery so long as all discovery requests were served on all parties. ECF Nos. 44, 50.

         On February 27, 2019, a criminal indictment was returned against Defendants Michael Liberty and Paul Hess containing allegations of wire fraud and securities fraud that overlap with the SEC's civil allegations. See United States v. Liberty, et al., No. 2:19-cr-00030-GZS, ECF No. 1. The indictment alleges that Liberty and Hess, “with the help of others, solicited individuals to invest in various shell companies that [Liberty] controlled . . . on the basis that their investments would be passed on to fund the business operations of a company named Mozido.” Id. ¶¶ 1-2, 7. All of the Defendants in this civil action-except for Defendant George Marcus, see ECF No. 71-have moved for the Court to again extend the stay of this proceeding until the criminal case against Liberty and Hess is concluded. See ECF Nos. 53, 54.


         “[T]he power to stay proceedings is incidental to the power inherent in every court to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants.” Hewlett-Packard Co. v. Berg, 61 F.3d 101, 105 (1st Cir. 1995) (quoting Landis v. North Amer. Co., 299 U.S. 248, 254 (1936)). The “power to stay civil proceedings in deference to parallel criminal proceedings should be invoked when the interests of justice counsel in favor of such a course.” Microfinancial, Inc. v. Premier Holidays Int'l, Inc., 385 F.3d 72, 78 (1st Cir. 2004). This determination is “situation-specific” and requires the balancing of “competing interests.” Id. The First Circuit has identified seven factors that typically bear on the analysis:

(i) the interests of the civil plaintiff in proceeding expeditiously with the civil litigation, including the avoidance of any prejudice to the plaintiff should a delay transpire; (ii) the hardship to the defendant, including the burden placed upon him should the cases go forward in tandem; (iii) the convenience of both the civil and criminal courts; (iv) the interests of third parties; . . . (v) the public interest[;] . . . (vi) the good faith of the litigants (or the absence of it) and (vii) the status of the cases.


         The SEC is “charged with the function of protecting the investing public, ” S.E.C. v. Am. Trailer Rentals Co., 379 U.S. 594, 604 (1965), and therefore has a “substantial interest in the timely resolution of this proceeding.” S.E.C. v. Telex Free, Inc., 52 F.Supp.3d 349, 353 (D. Mass. 2014). However, “[t]he strongest case for granting a stay is where a party under criminal indictment is required to defend a civil proceeding involving the same matter.” Volmar Distribs., Inc. v. N.Y. Post Co., 152 F.R.D. 36, 39 (S.D.N.Y. 1993). Such is the case here.

         The subjects of the civil and criminal matters are sufficiently similar to risk prejudice to Liberty and Hess, as criminal defendants, should the two proceedings proceed simultaneously. The stay of a civil proceeding pending the completion of a closely connected criminal case is necessary where there is “substantial overlap between the subject matter of the two proceedings.” See S.E.C. v. Desai, 672 Fed.Appx. 201, 205 (3d Cir. 2016). In such a situation, “[a] stay can protect a civil defendant from facing the difficult choice between being prejudiced in the civil litigation, if the defendant asserts his or her Fifth Amendment privilege, or from being prejudiced in the criminal litigation if he or she waives that privilege in the civil litigation.” Louis Vuitton Malletier S.A. v. LY USA, Inc., 676 F.3d 83, 97 (2d Cir. 2012).

         Here, the criminal proceeding against Liberty and Hess is moving apace and is currently scheduled to be ready for trial in May of 2020. See Liberty et al., No. 2:19-cr-00030-GZS, ECF No. 80. Thus, it is likely that a stay of this proceeding tied to the conclusion of the criminal trial will not exceed 12 months and, therefore, will not substantially prejudice the SEC and the interests it asserts. See Trs. of Plumbers & Pipefitters Nat'l Pension Fund v. Transworld Mech., Inc., 886 F.Supp. 1134, 1139 (S.D.N.Y. 1995) (“A stay of a civil case is most appropriate where a party to the civil case has already been indicted for the same conduct . . . [because] the prejudice to the plaintiffs in the civil case is reduced since the criminal case will likely be quickly resolved due to Speedy Trial Act considerations.”).

         A stay will also promote the public interest and conserve judicial resources. See Marquis v. F.D.I.C., 965 F.2d 1148, 1154 (1st Cir. 1992) (“[F]ederal district courts possess the inherent power to stay pending litigation when the efficacious management of court dockets reasonably requires such intervention.”). “The conviction of a civil defendant as a result of the entry of a plea or following a trial can contribute significantly to the narrowing of issues in dispute in the overlapping civil cases and promote settlement of civil litigation not only by that defendant but also by co-defendants who do not face criminal charges.” In re Worldcom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2002 WL 31729501, at *8 (S.D.N.Y. Dec. 5, 2002); see also Javier H. v. Garcia-Botello, 218 F.R.D. 72, 75 (W.D.N.Y. 2003) (“By proceeding first with the criminal ...

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