United States v. Wey

• Decision Date: 01 May 2017
• Docket Number: 15-CR-611 (AJN).
• Citation: 252 F.Supp.3d 237
• Parties: UNITED STATES of America, v. Benjamin WEY, Defendant.
• Court: U.S. District Court — Southern District of New York

252 F.Supp.3d 237

UNITED STATES of America,

v.Benjamin WEY, Defendant.

15-CR-611 (AJN).

United States District Court, S.D. New York.

Signed May 1, 2017

Andrew Caldwell Adams, Brooke Elizabeth Cucinella, Michael Ferrara, Sarah Kathleen Eddy, Brendan Francis Quigley, Ian Patrick McGinley, United States Attorney's Office, New York, NY, for Plaintiff.

Barry McNeil, Pro Hac Vice, Haynes and Boone, LLP, Dallas, TX, Joseph Craig Lawlor, Haynes and Boone, LLP, Sarah Elizabeth Jacobson, David Mark Siegal, Haynes and Boone, LLP, New York, NY, for Defendant.

MEMORANDUM & ORDER

ALISON J. NATHAN, United States District Judge

Before the Court is a motion by non-party Nasdaq, Inc. ("Nasdaq") to quash a subpoena duces tecum issued pursuant to Federal Rule of Criminal Procedure 17(c) upon the ex parte application of Defendant Benjamin Wey. For the reasons set forth below, Nasdaq's motion is DENIED.

I. Background

Defendant Wey is charged in an eight-count indictment returned on September 8, 2015. Dkt. No. 2 (the "Indictment"). The Indictment alleges that between approximately 2007 and 2011 Wey, along with co-Defendant Seref Dogan Erbek and unindicted co-conspirators known and unknown, orchestrated a scheme by which Wey—through various non-party entities, family members, and associates (the "Nominees")—covertly amassed beneficial ownership of substantial portions of the equity stock of several publicly traded companies (the "Issuers"), manipulated the market price of the Issuers' stock, liquidated his holdings at artificially inflated prices, and then laundered millions of dollars in ill-gotten proceeds. See, e.g., Indictment ¶¶ 7, 13, 18–22.

Specifically, the Indictment alleges that Wey caused the Nominees to acquire on his behalf substantial portions of the shares of certain U.S.-based over-the-counter-traded shell companies and then, through his consulting firm New York Global Group, Inc. and its alleged affiliate in Beijing, facilitated "reverse merger" transactions whereby China-based operating companies merged into those shell companies, thus forming new publicly traded corporations—the Issuers. Id. ¶¶ 8–12. According to the Indictment, the Nominees acquired and retained, for Wey's undisclosed benefit, stock in the Issuers by virtue of their ownership of the target shell companies, with these Wey-controlled holdings together constituting more than five percent of the Issuers' outstanding shares. Id. ¶¶ 7, 11–14.

Wey then proceeded, the Indictment alleges, to manipulate the demand for and price of Issuer stock. Id. ¶¶ 15–19. Critical to that purported manipulation scheme—and pertinent to the instant motion—was an effort, allegedly directed or otherwise orchestrated by Wey, to secure listings on the Nasdaq Stock Market (a U.S.-based securities exchange owned and operated by movant Nasdaq) for several of the Issuers, including SmartHeat, Inc. ("SmartHeat"), Deer Consumer Products, Inc. ("Deer"), and CleanTech Innovations, Inc. ("CleanTech"), so that their shares could be traded in greater volumes and in more liquid markets. Id. ¶ 15. As part of that effort, Wey allegedly engaged in "deception" of Nasdaq, facilitating the Issuers' satisfaction of Nasdaq's 300 "round-lot" shareholder requirement—that is, the requirement that all listed issuers have at least 300 shareholders owning at least 100 shares of common stock each—by artificially inflating the Issuers' investor bases through stock giveaways from Nominees to other Wey confederates and issuances of round-lot share blocks to individuals who never actually received shares or were otherwise unaware of their ownership. Id. ¶¶ 15–17. According to the Indictment, Wey persisted in this "deceptive" scheme despite Nasdaq "repeatedly inform[ing] attorneys for the Issuers, with whom Wey was in frequent contact about the 300 round-lot shareholder requirement, that gifted shares could not contribute to the minimum shareholder requirement for listing on its exchange because such shares did not establish ‘sufficient public float, investor base, and trading interest’ in the company." Id. ¶ 17. Nasdaq ultimately approved the Issuers' listing applications. Id.

Wey is scheduled for trial in October 2017 on charges of securities fraud, wire fraud, conspiracy to commit securities and wire fraud, failure to disclose beneficial ownership of Deer and CleanTech, and money laundering. Id. ¶¶ 23–40. In September 2016, Wey submitted an ex parte application for the issuance, pursuant to Federal Rule of Criminal Procedure 17(c), of subpoenas duces tecum directed to several non-parties, including Nasdaq. The proposed subpoena to Nasdaq sought:

All emails and records related to the listing applications and approvals for [SmartHeat], [Deer], and [CleanTech], including in particular, any communications regarding, or interpretation or application of, the 300 round-lot shareholder requirement.

September 2, 2016 Declaration of David M. Siegal, Ex. C Att. A. In a Sealed Ex Parte Order dated September 20, 2016 (the "September 20 Order"), the Court denied Wey's application, concluding, as to the requested Nasdaq subpoena, that Wey had not identified the documents sought with the requisite specificity and had failed to make the necessary showing that all requested documents would be admissible at trial. September 20 Order at 5–7. The September 20 Order did, however, afford Wey leave to renew his application and make a proper showing that each requirement for issuing a Rule 17(c) subpoena was satisfied. Id. at 8. It also granted Wey's request to allow the application to proceed ex parte , citing its disclosure of certain elements of the defense's trial strategy. Id. at 2.

On December 7, 2016, Wey, again proceeding ex parte, renewed his motion. The revised application substantially narrowed the set of documents sought, limiting it to:

All correspondence and records sent or received by Keely Walter, William Slattery, or Andrew Hall relating to, interpreting or applying NASDAQ's 300 round-lot shareholder requirement, with respect to the listing applications of:

1. [SmartHeat], during the period of June 20, 2008 through January 27, 2009;

2. [Deer], during the period of May 4, 2009 through July 16, 2010; and

3. [CleanTech], during the period July 13, 2010 through December 10, 2010.

December 7, 2016 Declaration of David M. Siegal, Ex. C, Att. A. It also set forth anticipated bases for admission of the documents at trial through several specific exceptions to the hearsay rule. See Memorandum of Law in Support of Defendant Benjamin Wey's Renewed Ex Parte Motion for the Issuance of Rule 17(c) Subpoenas at 25. In another Sealed Ex Parte Order dated December 15, 2016 (the "December 15 Order"), the Court granted the renewed motion, concluding that Wey had "address[ed] and allay[ed]" the concerns, articulated in the September 20 Order, regarding the specific identification and likely admissibility of the targeted Nasdaq documents. December 15 Order at 2–3.

Wey's renewed proposed subpoena to Nasdaq (the "Subpoena") issued the same day.

On February 3, 2017, Nasdaq filed the instant motion to quash. Dkt. Nos. 89–90. Nasdaq represents in its moving papers that it is "ready and willing to produce many of the requested documents as a compromise," including "all documents responsive to the [S]ubpoena that Nasdaq sent to, or received from, the Issuers," but otherwise "objects to the [S]ubpoena because it seeks disclosure of confidential investigative and deliberative records related to particular issuers' applications for listing on Nasdaq's exchange." Memorandum in Support of Motion to Quash Third–Party Subpoena Directed to Nasdaq, Inc., Dkt. No. 90 ("Br."), at 1, 3 n.1. Wey opposes Nasdaq's motion. Dkt. No. 98. The Government has made no submission concerning this dispute.

II. Discussion

Nasdaq asserts three arguments in support of its motion to quash. First, it contends that its subsidiary Nasdaq Stock Market, which owns and controls the documents at issue, is a self-regulatory organization, and, accordingly, enjoys absolute immunity from discovery. Second, it avers that the documents are protected from disclosure by the deliberative process, law enforcement, and investigative privileges. And third, it argues that the Subpoena, even in its revised form, fails to satisfy the requirements of Rule 17(c). Br. at 3–4. The Court will address each argument in turn.

A. Nasdaq and Its Subsidiary SRO Do Not Enjoy Absolute Immunity from Third–Party Subpoenas in Criminal Cases

Nasdaq Stock Market is undisputedly a national stock exchange registered with the Securities Exchange Commission ("SEC") and thus, by statute, a self-regulatory organization ("SRO") with attendant regulatory, enforcement, and adjudicatory authority subject to SEC approval and oversight. See In the Matter of the Application of Nasdaq Stock Market LLC for Registration as a National Securities Exchange, Exchange Act Release No. 34–53128, 2006 WL 92913 (Jan. 13, 2006) ; 15 U.S.C. §§ 78c(a)(26), 78f, 78s(b) ; see also Lanier v. Bats Exchange, Inc., 838 F.3d 139, 143 (2d Cir. 2016) (recognizing "considerable authority" of SROs like Nasdaq Stock Market). Nasdaq asserts that by virtue of its subsidiary's status as an SRO, it enjoys " ‘absolute immunity’ " when " ‘acting under the aegis of [its] regulatory duties.’ " Br. at 4 (additional internal quotation marks and emphasis omitted) (quoting DL Capital Grp., LLC v. Nasdaq Stock Market, Inc., 409 F.3d 93, 97 (2d Cir. 2005) ). That immunity, Nasdaq contends, broadly shields it from the " ‘burdens of litigation, including discovery,’ " and thus excuses it altogether from compliance with subpoenas, including the one at issue. Br. at 4 (quoting In re Barclays Liquidity Cross & High Frequency Trading Litig., 126 F.Supp.3d 342, 355 (S.D.N.Y. 2015) ). Such protection is particularly appropriate here, according to Nasdaq, because Wey "seeks disclosure of records and communications concerning Nasdaq's enforcement of a listing standard"—"material at the...