Sec. & Exch. Comm'n v. Forster

• Decision Date: 05 December 2015
• Docket Number: 15–mc–246
• Citation: 147 F.Supp.3d 223
• Parties: Securities and Exchange Commission, Applicant, v. Michael J. Forster, Respondent.
• Court: U.S. District Court — Southern District of New York

147 F.Supp.3d 223

Securities and Exchange Commission, Applicant,

v.Michael J. Forster, Respondent.

15–mc–246

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

Signed December 5, 2015

Howard A. Fischer, John O'Donnell Enright, U.S. Securities and Exchange Commission, New York, NY, for Applicant.

Paul Scott Hugel, Clayman & Rosenberg, New York, NY, for Respondent.

OPINION AND ORDER

JOHN G. KOELTL

, District Judge:

The Securities and Exchange Commission (“SEC”) moves for an order requiring the respondent, Michael J. Forster, to comply with a subpoena for documents related to an SEC investigation into possible violations of the securities laws by Forster and his various alleged nominees. For the reasons that follow, the motion is denied and the Subpoena, either in its original or modified form, is quashed without prejudice to the ability of the SEC to serve a proper subpoena.

I.

The SEC is investigating possible violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 by Forster and what the SEC describes as Forster's various nominees, including SLO Holdings 3 LLC, OTC Media LLC, Gidapis LLC, and Kensington Marketing LLC (the “Nominees”); and by Monarch Bay Securities LLC, a broker-dealer registered with the SEC, and related, affiliated, or employed persons or entities. See Enright Decl. ¶ 4. The SEC believes that Forster, a stock promoter, has engaged in “pump-and-dump” stock schemes through the Nominees “without accurately disclosing the consideration issuers are paying him to conduct the promotions.” Id. ¶ 6. The SEC “is also investigating whether Forster has been paying undisclosed compensation to broker-dealers, including, among others, Monarch Bay, to manipulatively trade in the stock of issuers he is promoting.” Id. The SEC is also investigating whether Monarch Bay and its agents and related parties may have violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b–5 thereunder, by, among other things “making false statements of material fact or failing to disclose material facts concerning, among other things, their receipt of undisclosed payments to manipulatively trade in certain securities.” Id. ¶ 8. The United States Attorney for the Northern District of Ohio has notified Forster that Forster is the target of a criminal investigation concerning violations of 18 U.S.C. § 1349

(conspiracy to commit securities and wire fraud) and other federal crimes. See Hugel Decl. Ex. B (letter to Forster dated Sept. 18, 2014).

On February 18, 2015, as part of its investigation into possible violations of the securities laws, the SEC issued a subpoena to Forster with a return date of March 4, 2015. Enright Decl. ¶ 10; id. Ex. A, Subpoena In the Matter of SLO 3 Holdings LLC (N.Y.–9227), ECF No. 13–1, Feb. 18, 2015 (“Subpoena”). The Subpoena requires Forster to produce seven categories of documents. See Subpoena at 9–10.¹ The seven categories are: (1) all documents concerning Harmon David Kavrell, the Managing Director at Monarch Bay, and all communications with or concerning him, including four enumerated subcategories listing what topics may have been discussed; (2) all documents concerning and communications with or concerning Monarch Bay, its employees, and agents; (3) all documents concerning and communications with or concerning COR Clearing LLC and its employees and agents; (4) all documents concerning and communications with or concerning Microcap Innovations LLC and its employees and agents; (5) all documents and communications concerning Forster's promotion of any security including but not limited to several enumerated subcategories of securities; (6) all documents and communications concerning Forster's trading in any security he has promoted; and (7) documents sufficient to identify all bank, brokerage, and other financial accounts controlled by Forster. Id. at 9–10.

The Subpoena instructs Forster that, if documents responsive to the Subpoena “no longer exist because they have been lost, discarded, or otherwise destroyed,” Forster “should identify such [d]ocuments and give the date on which they were lost, discarded or destroyed.” Id. at 9. The Subpoena also defines the terms “you” and “your” to mean “Michael J. Forster and any of your nominees or alter egos, including but not limited to SLO 3 Holdings LLC, Gidapis LLC, and OCT Media LLC.” Id. at 7 (emphasis removed). The term “concerning” as used in the Subpoena is defined to mean “directly or indirectly, in whole or in part, describing, constituting, evidencing, recording, evaluating, substantiating, concerning, referring to, alluding to, in connection with, commenting on, relating to, regarding, discussing, showing, describing, analyzing or reflecting.” Id. at 6. The Subpoena does not identify any particular records that Forster must produce, such as a specific bank statement.

Forster raised objections to the Subpoena with the SEC. First, Forster's attorney argued that several of the specific requests were, among other shortcomings, “unduly burdensome.” Enright Decl. ¶ 15 & Ex. C at 1. A few weeks later, because Forster had been designated a “target” in a criminal investigation and because the SEC was investigating Monarch Bay and SLO Holdings 3 for securities law violations, Forster asserted his rights under the Fifth and Sixth Amendments to the United States Constitution and refused to produce any document requested by the Subpoena. See Enright Decl. Ex. E. at 1. The SEC responded that the privilege against self-incrimination could not be invoked in a blanket fashion. In correspondence between the SEC and Forster's counsel, the SEC attempted to describe in greater detail the material sought by the Subpoena. See Enright Decl. Ex. G at 2–4. Forster continued to assert a blanket privilege. Unable to resolve the impasse, on August 5, 2015, the SEC filed this action to compel compliance with the Subpoena. See Enright Decl. ¶¶ 34–37.

On September 18, 2015, this Court, sitting as the Part I Judge, heard oral argument on the SEC's motion to compel Forster to produce documents in response to the Subpoena. The Court questioned the breadth of the Subpoena, and the SEC agreed to submit supplemental briefing or narrow the Subpoena. See generally Sept. 18, 2015 Tr. at 3–5, 42–45.

On October 13, 2015, the SEC submitted a letter to the Court enclosing correspondence with Forster over proposed modifications to the Subpoena. See SEC Ltr., Oct. 13, 2015 & Ex. A (Sept. 25, 2015 Ltr. from SEC to Forster (“Subpoena Modifications”)).

The SEC offered to modify the Subpoena as follows. First, with respect to the definitions of “you” and “your,” the SEC stated that it would narrow the definitions to mean “Forster, SLO Holdings 3 LLC, OTC Media LLC, Gidapis LLC, and Kensington Marketing LLC.” Subpoena Modifications at 1. In accordance with these definitions, the SEC wrote, Forster would still “be obligated to produce all responsive documents that (1) he possesses in his personal capacity; and/or (2) he possesses on behalf of the entities SLO 3 Holdings LLC, OTC Media LLC, Gidapis LLC, and/or Kensington Marketing LLC.” Id. Second, the SEC stated that it would strike the paragraph from the Subpoena that called on Forster to identify documents that no longer exist and the date on which they were lost, discarded, or destroyed. Id.

Third, the SEC stated that it would modify the specific requests in several ways. See id. at 2. First, it would excuse compliance with Item No. 7 of the Subpoena, which had instructed Forster to produce documents sufficient to identify all bank accounts and other accounts under his control or held for his benefit. Second, it would narrow Item No. 5 of the Subpoena such that Forster would not be obligated to produce account documents from Wells Fargo. Third, the SEC stated that it would narrow Item No. 6 such that Forster “would not be obligated to produce account documents from E*Trade Securities LLC, Fidelity Brokerage Services LLC, or Monarch Securities LLC.” Id.

Forster's counsel insisted that if the SEC served Forster with either the original Subpoena or one with the proposed modifications, Forster “would continue to invoke his Fifth Amendment privilege in response to each request.” SEC Ltr., Oct. 13, 2015, Ex. B at 1. The SEC then renewed its request to this Court to grant its application and order Forster's compliance with the Subpoena, SEC Ltr., Oct. 13, 2015, at 3, and Forster filed a brief in opposition to that motion. Because the SEC no longer seeks to enforce the original Subpoena, the Court now considers whether the Subpoena with its proposed modifications passes constitutional muster.

II.

The Fifth Amendment provides in relevant part that no person “shall be compelled in any criminal case to be a witness against himself.” U.S. Const. Amend. V

. Generally, the Fifth Amendment does not protect against compliance with a subpoena for pre-existing records because the creation of the records was not compelled. See

United States v. Doe, 465 U.S. 605, 610, 104 S.Ct. 1237, 79 L.Ed.2d 552 (1984) ; Fisher v. United States, 425 U.S. 391, 409–10, 96 S.Ct. 1569, 48 L.Ed.2d 39 (1976) ; United States v. Gendreau, No. 12–mc–303, 2014 WL 464754, at *2 (S.D.N.Y. Jan. 22, 2014) ; SEC v. Ryan, 747 F.Supp.2d 355, 363 (N.D.N.Y.2010).

However, the act of producing records may involve communicative aspects and compelling that communication may violate the Fifth Amendment privilege against compelled testimony. Therefore, requiring compliance with such a subpoena may be precluded by the act-of-production aspect of the Fifth Amendment. See Fisher, 425 U.S. at 410, 96 S.Ct. 1569

; Gendreau, 2014 WL 464754, at *2 ; Ryan, 747 F.Supp.2d at 363. Simply producing documents “has communicative aspects of its own, wholly aside from the contents of the papers produced. Compliance with the subpoena tacitly concedes the existence of the papers demanded and their possession or control by the [person subpoenaed].” Fisher, 425 U.S. at 410, 96...