Porrazzo v. U.S. Sec. & Exch. Comm'n

• Decision Date: 02 April 2018
• Docket Number: MC 18-00106 LEK-KSC
• Parties: EDWARD MICHAEL PORRAZZO and MARIANNE VERONIKA SANDOR, Plaintiffs, v. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Defendant.
• Court: U.S. District Court — District of Hawaii

EDWARD MICHAEL PORRAZZO and MARIANNE VERONIKA SANDOR, Plaintiffs, v. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Defendant.

MC 18-00106 LEK-KSC

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF HAWAII

April 2, 2018

ORDER DENYING MOTION FOR ORDER PURSUANT TO CUSTOMER CHALLENGE PROVISIONS OF THE RIGHT TO FINANCIAL PRIVACY ACT OF 1978

Before the Court is pro se Movants Edward Michael Porrazzo and Marianne Veronika Sandor's ("Movants") Motion for Order Pursuant to Customer Challenge Provisions of the Right to Financial Privacy Act of 1978 ("Motion"), filed on March 21, 2018. [Dkt. no. 1.] Respondent Securities and Exchange Commission ("SEC") filed its Verified Response to Motion to Quash or Modify Administrative Subpoena ("Verified Response") on March 27, 2018, and Movants filed their reply on April 2, 2018. [Dkt. nos. 3, 8.] The Court finds this matter suitable for disposition without a hearing pursuant to Rule LR7.2(d) of the Local Rules of Practice of the United States District Court for the District of Hawai`i ("Local Rules"). The Motion is hereby denied for the reasons set forth below.

BACKGROUND

Movants are a husband and wife who have, or previously had, accounts with Bank of America in Delaware ("BOA"), Wells Fargo Bank in Arizona ("Wells Fargo"), Chase Bank in Indiana ("Chase"), and First Hawaiian Bank in Hawai`i ("FHB" and collectively, "the Financial Institutions"). In SEC Matter LA-4895 regarding Moddha Interactive Inc. ("Moddha"), the SEC has served a subpoena on each of the Financial Institutions for Movants' financial records ("Subpoenas"). [Motion at 2.¹]

According to the SEC, Movants are Moddha's principals, and Moddha is a Hawai`i corporation that has been offering or selling securities since at least July 2012. [Verified Response at 1-2.²] Moddha describes itself as "a worldwide Positive Media and Technology Corporation that is uniquely positioned to profit from consumer product sales, subscription services; including vast licensing dollars with its proprietary hardware, softwareand original content in diverse global industries." [Starr Verification, Exh. 2 (Moddha's Confidential Private Offering Memorandum ("Offering Memo")) at 5.] Moddha's securities are not registered with the SEC. The SEC asserts it "has cause to believe that since January 2017, Moddha has potentially raised at least $780,000 in funds from 8 investors who were likely provided the company's [Offering Memo] in the course of their decision to invest." [Verified Response at 3.]

Movants ask this Court to quash or modify the Subpoenas pursuant to the Right to Financial Privacy Act of 1978 ("RFPA"), 12 U.S.C. § 3401, et seq., on the ground that the records sought in the Subpoenas are not relevant to the law enforcement inquiry described in the Customer Notice Movants received on March 16, 2018, even if the inquiry is legitimate. [Motion at 2-3.] According to Movants, even though they did not receive the Subpoenas until March 16, the SEC served them on the Financial Institutions on or about March 5, 2018. One of the Financial Institutions informed Movants it was providing their personal account records. Movants state this occurred before they had notice of the Subpoenas and an opportunity to respond. [Id. at 4-5.]

Movants state the letter accompanying the Subpoenas described SEC Matter LA-4895 as "a non-public, fact-finding inquiry." [Id. at 3.] The investigation was launched based on acomplaint the SEC received against Moddha. Movants state they "are reasonably informed" the complaint was made by a "disgruntled shareholder" of Moddha, who also filed a civil case against Moddha "for an unpaid loan he solicited from the Company with Usurious interest." [Id.] Movants contend the disgruntled shareholder's complaint is meritless. [Reply at 7.]

According to Movants, the Subpoenas cover their personal financial records, many of which are not related to the fact-finding investigation regarding Moddha. Movants acknowledge their personal financial records could be said to contain some information that "touches a matter under the SEC's Fact-Finding investigation," but Movants argue the scope of the Subpoenas is excessive for the investigation, which is at an "initial, early stage." [Motion at 3.] Movants argue the $1,000.00 minimum threshold in the Subpoenas is insufficient to eliminate transactions irrelevant to the investigation. They contend courts routinely quash similar subpoenas as overbroad, unnecessarily intrusive, and a violation of the RFPA, particularly where there has been no prior showing of wrong-doing. Moreover, the broad scope of the Subpoenas is unnecessary because Moddha is fully cooperating with the investigation, and there are other reasonable alternatives to obtain relevant information. [Id. at 3-4.] Movants also contend the current Moddha investigation is improper because they and Moddha havealready been cleared of wrong-doing in SEC Case Number SEU-204-046. [Reply at 8.]

Movants ask this Court to: 1) quash or modify the Subpoenas; and 2) order that the records already provided by the Financial Institutions pursuant to the Subpoenas be returned. If this Court declines to quash or modify the Subpoenas, Movants ask this Court to stay their enforcement pending appeal because Movants have "shown and can show a likelihood of success on the merits." [Motion at 5.]

The SEC states the Subpoenas were issued after it discovered a substantial amount of investor funds Moddha raised were transferred to Movants' personal accounts. [Verified Response at 1.] The SEC submitted its Order Directing Private Investigation and Designating Officers to Take Testimony ("Investigation Order"), which the SEC states was issued on January 31, 2018. [Starr Verification, Exh. 1; Verified Response at 2.] The SEC also submitted copies of the subpoena and a transmittal letter to Chase ("Chase Subpoena"), BOA ("BOA Subpoena"), and FHB ("FHB Subpoena"). [Starr Verification, Exhs. 3.1, 3.2, 3.3.] The SEC did not submit a copy of the subpoena served on Wells Fargo ("Wells Fargo Subpoena") because the SEC contends the Motion does not challenge it. [Verified Response at 5 n.2.]

According to the SEC, Moddha has a corporate banking account at BOA, and Movants are the only signatories. Based on the investigation to date, the SEC states:

Based on a preliminary analysis account records in 2017 and early 2018, about $780,000 in investor funds was apparently deposited to its corporate account in that time. It appears, however, that more than $121,000 of corporate funds were converted for movants' personal use, in the form of transfers to Porrazzo and Sandor, and travel, meals, and shopping expenses (e.g., purchases at retailers like Liquor Barn, Costco, Lowe's, and Target that have no evident corporate purpose).

[Id. at 3-4.] Further, Movants have admitted: using the corporate account for personal expenses and using personal accounts to pay corporate expenses; intermingling funds from the corporate account with their personal accounts; using one ledger to record personal account transactions and corporate transactions; and receiving loans from Moddha. [Id. at 4.] The Offering Memo contains a section describing how the proceeds from the offering would be used. The section does not disclose that invested funds could be used for Movants' personal purposes. [Offering Memo at 52-53.]

The SEC asserts the Chase Subpoena, BOA Subpoena, and FHB Subpoena were issued regarding Movants' personal accounts "to obtain additional information on, among other things, whether movants were engaging in a misappropriation of investor funds in violation of the representations made by Moddha's [Offering Memo], and where investor funds might currently be located,should disgorgement be ordered against Moddha and its principals at some later date." [Verified Response at 4-5.] The SEC states customer notice about those Subpoenas were provided to Movants, pursuant to the RFPA, by certified mail on the date they were issued. Further, the Subpoenas were provided to Movants' counsel by email. [Id.]

STANDARD

Under the Right to Financial Privacy Act ("RFPA"), 12 U.S.C. § 3401 et seq., a financial institution may disclose a customer's financial records if such records are properly requested by a governmental authority via an administrative subpoena or judicial subpoena. 12 U.S.C. § 3402(2) and (4). If a customer objects to the disclosure of their records, the customer must file a motion to quash the subpoena that includes an affidavit or sworn statement, and timely serve the government entity with the motion. 12 U.S.C. § 3410(a);[³] see alsoS.E.C. v. Jerry T. O'Brien,Inc., 467 U.S. 735, 745, 104 S. Ct. 2720, 81 L. Ed. 2d 615 (1984) (noting that "[a] customers's ability to challenge a subpoena [under the RFPA] is cabined by strict procedural requirements"). If the Court orders the government entity to respond to the motion to quash, the government must filed a sworn response. § 3410(b).

In ruling on the motion, the Court relies on the parties' sworn statements and any additional proceedings the Court finds appropriate. § 3410(b). The Court must deny the motion to quash if either the applicant is not a customer whose financial records are being requested or "there is a demonstrable reason to believe that the law enforcement inquiry is legitimate and a reasonable belief that the records sought are relevant to that inquiry." § 3410(c); Rodriguez v. Fed. Sav. and Loan Ins. Corp., 712 F. Supp. 159, 162 (N.D. Cal. 1989). The government entity has the ultimate burden of showing that the records sought are relevant to a legitimate law enforcement inquiry. In re Blunden, 896 F. Supp. 996, 999 (C.D. Cal. 1995) (quoting Collins v. Commodity Futures Trading Comm., 737 F. Supp. 1467, 1480 (N.D. Ill. 1990). "For purposes of an administrative subpoena, the notion of relevancy is a broad one." Sandsend Fin. Consultants, Ltd. v. Fed. Home Loan Bank Bd., 878 F.2d 875, 882 (5th Cir. 1989). Subpoenaed information is

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