Sec. & Exch. Comm'n v. Rayat

• Decision Date: 09 February 2023
• Docket Number: 21-cv-4777 (LJL)
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. HARMEL S. RAYAT, et al., Defendants. Shareholder Number of Shares Class FMV-Cdn $ ACB Cdn $ PUC Cdn $
• Court: U.S. District Court — Southern District of New York

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
HARMEL S. RAYAT, et al., Defendants.

No. 21-cv-4777 (LJL)

United States District Court, S.D. New York

February 9, 2023

OPINION AND ORDER

LEWIS J. LIMAN, United States District Judge:

Defendants RenovaCare, Inc. (“RenovaCare”) and Harmel S. Rayat (“Rayat”) (together, “Moving Defendants”) move the Court to issue a Letter of Request for International Judicial Assistance to the Supreme Court of British Columbia in Vancouver, in the Province of British Columbia, Canada (“Request”), requesting assistance to compel the oral deposition of a British Columbia resident, Mary Ellis, CPA, CA, and the production of documents from two Canadian entities, MNP LLP and Deloitte LLP (“Deloitte”).^[1] Dkt. No. 178. Plaintiff, the United States Securities and Exchange Commission (“SEC”), does not oppose the Request but argues that it should be expanded to include additional documents. Dkt. No. 180.

For the following reasons, the Request is granted in part and denied in part. The Court agrees with the SEC that the Moving Defendants' proposed limitations as to the scope of the production of tax returns and related evidence are inappropriate. The Court accordingly so-orders the SEC's proposed letter of request, a signed copy of which is attached to this Opinion and Order.

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BACKGROUND

I. The Allegations

Familiarity with the prior proceedings in this case is assumed.

The amended complaint (“Complaint”) charges Rayat and RenovaCare, of which Rayat was the controlling shareholder, as well as Jatinder Bhogal (“Bhogal”), Jeetenderjit Singh Sidhu (“Sidhu”), and Sharon Fleming (“Fleming”) (collectively, “Defendants”), inter alia, with committing securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, promulgated thereunder, 17 C.F.R. § 240.10b-5(a), (b), and (c). Dkt. No. 118. In broad strokes, the Complaint alleges a “pump and dump” scheme that lasted from 2007 to 2018. Id. ¶¶ 1-2. During that time, Defendants engaged in a fraudulent scheme to inflate the share price and trading volume of RenovaCare and to sell its stock at inflated prices to unsuspecting retail investors. Id. Defendants allegedly accumulated millions of shares of RenovaCare stock, distributed it among the Defendants, and then promoted RenovaCare stock to investors through a paid third-party promotional campaign that they secretly funded. Id. ¶ 2. Defendants also disseminated materially false statements about the RenovaCare in a press release and a Form 8-K filed with the SEC and engaged in manipulative trading across multiple accounts to support the share price and trading volume of RenovaCare stock while selling over one-million shares to monetize the scheme. Id.

Rayat is alleged to have been the ringleader of the scheme. But Rayat did not personally sell any shares himself, in part because he was unsuccessful in opening a trading account. Id. ¶ 62. Rather, it is the SEC's theory that he played the “long game.” Id. ¶ 3. Beginning no later than 2007, Rayat transferred shares of RenovaCare and other penny stocks to his co-Defendants Bhogal and Sidhu and others while retaining a financial interest in the shares that he transferred-either in the form of debt obligations or preferred shares in the entities that received

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the transferred shares, thereby permitting him to secretly profit when others sold the shares during the promotional campaign. Id.

Rayat disputes that he maintained an interest in the shares transferred to Bhogal and Sidhu. He claims that the 2007 and 2008 stock transfers were intended to be a gift to them and their families “in a manner that reduced any corresponding tax burden.” Dkt. No. 180-3 at 7. He testified during the SEC's investigation that he was concerned that a gift to Bhogal and Sidhu would have been a taxable event for him and so he “went to [his] lawyers and accountants, said how do I do this without-without a tax impact, and how do I plan, you know, for my kids? How do I do this, so in the future there's limited or minimal taxes? And that's when everything was structured out, and all the detail-I just followed their leads.” Dkt. No. 180-4 at 150:10- 151:9.

II. The Letter of Request

The letter of request seeks the testimony of Mary Ellis (“Ellis”), a resident of British Columbia and an accountant at the Langley, British Columbia office of MNP LLP. Dkt. No. 179-1 at 2-3. Ellis previously served as an accountant at Deloitte until a subset of Deloitte was purchased by MNP LLP in or around March 2021. Id. at 3. Ellis has served as the personal accountant to Rayat and Sidhu for approximately fifteen years. Id. According to the Moving Defendants, Ellis provided accounting advice concerning, and was involved in structuring, the 2007-era transactions and certain subsequent related-transactions between and among Rayat, Sidhu, and Bhogal. Id. at 3-4. It is the Moving Defendants' expectation that Ellis will be able to provide testimony regarding the purpose of the transactions, including their structure, whether the transactions involved an exchange at fair market value, and whether it is possible for Rayat to profit from trading conducted by entities owned by Bhogal and Sidhu given certain Canadian tax provisions. Id. at 4. Moving Defendants expect that Deloitte, as Ellis's employer during some of

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the transactions, and MNP LLP, as her current employer, may possess documents related to the transactions. Id.

Deloitte has declined to make Ellis available for testimony on a voluntary basis,^[2] and has stated that formal process would be necessary for it to produce documents; MNP LLP has also stated that it would not provide documents on a voluntary basis. Dkt. No. 179-2 ¶ 4(g), (h), (j). Rayat is not in possession of the 2007 and 2008 transaction documents. Dkt. No. 180-3 at 7.

III. The Dispute Between the Parties

The parties agree that the Court should issue a letter of request but differ as to its scope.

Moving Defendants argue that the Request should be limited to tax return information relating to what Moving Defendants term the “Estate Planning Transactions”-the 2007-era transactions and certain subsequent related transactions between and among Rayat, Sidhu, and Bhogal, and certain entities they owned or controlled. Dkt. No. 181 at 2. To that end, Moving Defendants argue that the return information that should be subject to the Request are “tax returns, financial statements, and related documents for [Rayat, Bhogal, and Sidhu], or any entity they owned or controlled (including but not limited to the entities enumerated [elsewhere in the Request]), for the tax years 2007 to the present reflecting the transfer of funds or assets between or among those individuals and their respective entities.” Dkt. No. 179-1 at 9-10. Moving Defendants also would limit the tax return information for various trusts related to the Defendants to that which reflects the transfer of funds or assets between or among Rayat, Bhogal, and Sidhu, or any entity they owned or controlled, and would limit the request for communications with Rayat, Bhogal, and Sidhu or persons acting on their behalf to

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communications “concerning any transfer of funds or other asset, a financial interest, or a financial relationship, direct or indirect, between or among any of them or any entity they owned or controlled.” Id. at 10-11. Moving Defendants would have Ellis testify about the “purpose and structure of the Estate Planning Transactions” but not on any other subjects. Id. at 7.

The SEC argues that the Request should have a broader scope. In particular, it asks that the Request include (i) tax returns, financial statements, and related documents for Rayat, Bhogal, and Sidhu or any entity they directly or indirectly owned or controlled for the tax years 2007 to the present, without any additional limitations; (ii) tax returns, financial statements, and related documents for certain trusts for the same tax years again without additional limitations; and (iii) communications with Rayat, Bhogal, and Sidhu, again without any limitation. Dkt. No. 180-1 at 10-11. It asks that Deloitte and MNP LLP also be required to produce documentation related to the creation or dissolution of the trusts associated with the Moving Defendants, id. at 13, and that Ellis provide testimony not only on “the purpose and structure of the Estate Planning Transactions” but also on “defendants' other financial relationships, and other of defendants' accounting and tax-related information.” Id. at 8.

DISCUSSION

“Rule 28(b) of the Federal Rules of Civil Procedure and 28 U.S.C. § 1781(b)(2) authorize federal courts to issue letters rogatory that enable a U.S. litigant to obtain non-party discovery from a foreign entity.” Lantheus Med. Imaging, Inc. v. Zurich Am. Ins. Co., 841 F.Supp.2d 769, 776 (S.D.N.Y. 2012). Rule 28(b) provides that a deposition may be taken in a foreign country pursuant to a letter of request issued “on appropriate terms after an application and notice of it” and “without a showing that taking the deposition in another manner is impracticable or inconvenient.” Fed.R.Civ.P. 28(b). Section 1781 of Title 28, which authorizes the United States Department of State to accept letters rogatory issued by foreign tribunals, allows for “the

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transmittal of a letter rogatory or request directly from a tribunal in the United States to the foreign or international tribunal, officer, or agency to whom it is addressed and its return in the same manner.” 28 U.S.C. § 1781(b)(2). “In considering the issuance of letters rogatory, U.S. courts apply the discovery principles contained in Rule 26.” Lantheus Med. Imaging, Inc., 841 F.Supp.2d at 776. “The decision of whether to issue letters rogatory is within the discretion of the court.” Pearlstein v. BlackBerry Ltd., 332 F.R.D. 117, 120 (S.D.N.Y. 2019).

Both the SEC and Moving Defendants...