Sec. v. Ryan

• Citation: 747 F.Supp.2d 355
• Decision Date: 20 October 2010
• Docket Number: Civ. No. 1:10–CV–513 (NAM/RFT).
• Parties: SECURITIES and EXCHANGE COMMISSION, Plaintiff,v.Matthew John RYAN and Prime Rate and Return, LLC, individually and doing business as American Integrity Financial Co., Defendants.
• Court: United States District Courts. 2nd Circuit. United States District Court of Northern District of New York

747 F.Supp.2d 355

SECURITIES and EXCHANGE COMMISSION, Plaintiff,

v.Matthew John RYAN and Prime Rate and Return, LLC, individually and doing business as American Integrity Financial Co., Defendants.

Civ. No. 1:10–CV–513 (NAM/RFT).

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

Oct. 20, 2010.

U.S. Securities & Exchange Commission, Preethi Krishnamurthy, Esq., of Counsel, New York, NY, for Plaintiff.Matthew John Ryan, Cropseyville, NY, pro se.Lemery Greisler LLC, Paul A. Levine, Esq., of Counsel, Albany, NY, for Defendant Prime Rate and Return, LLC.The Bosman Law Firm, L.L.C., Beth A. Locastro, Esq., T. Padric Moore, Esq., of Counsel, Rome, NY, for Bosman & Associates, PLLC.

MEMORANDUM–DECISION and ORDER

RANDOLPH F. TREECE, United States Magistrate Judge.

On May 3, 2010, the Securities and Exchange Commission (hereinafter “SEC”) filed a Complaint against Matthew John Ryan (hereinafter “Ryan”) and Prime Rate and Return, LLC (hereinafter “Prime Rate”), seeking to stop an alleged ongoing fraud purportedly being perpetrated by these Defendants upon senior citizens who were seeking fixed income investments. Dkt. No. 1, Compl. Concurrent with filing the Complaint, the SEC filed a Motion for a Temporary Restraining Order, Dkt. No. 5, which resulted in the Honorable Norman A. Mordue, Chief United States District Judge, issuing an Order to Show Cause and an Order freezing assets and temporarily appointing Paul A. Levine, Esq., as Receiver for Prime Rate, Dkt. No. 6. Ultimately, based upon a joint Stipulation, a Preliminary Injunction was imposed, which directed, inter alia, that Levine shall serve as Receiver over Prime Rate and all entities it controls with the penultimate responsibility to “succeed to all rights to manage all properties owned or controlled by Prime Rate,” to control all of the assets, books, records, and documents, to preserve the status quo, to ascertain the extent of commingling of funds and assets, and to prevent dissipation of assets. Dkt. No. 11, Stip. & Consent Order (hereinafter Prelim. Inj.), dated June 7, 2010, at ¶¶ IV & V.

Prior to the issuance of the Preliminary Injunction, Bosman & Associates PLLC (hereinafter “Bosman & Associates”) provided legal advice to Ryan, Prime Rate, and its associated businesses. However, the Injunction eventually restrained and enjoined Bosman & Associates, as well as others, from transacting further business with and on behalf of Prime Rate and the collective entities. In exercising the duties and responsibilities delegated to him, Levine sought from Bosman & Associates approximately eight (8) specific items, which would be expected to be found within the law firm's files regarding Prime Rate. When Bosman & Associates would not cooperate with the Receiver's request by providing the files or information, Levine appealed to this Court to intervene. Dkt. No. 17, Rec. Lt–Mot. to Intervene, dated June 22, 2010. Bosman & Associates opposed the Receiver's Motion, raising that since it was owed more than $32,000 for services rendered, it had both a charging and retaining lien on the files, and, by virtue of these liens, it would not be sharing the files nor revealing related information to the Receiver. Dkt. No. 23, Bosman & Assocs. Lt.-Br., dated July 1, 2010.

Because of this discovery imbroglio, the Court directed further briefing and set a Hearing date. On September 30, 2010, the Receiver filed a Pre–Hearing Statement and Memorandum of Law. Dkt. No. 45. On October 7, 2010, both Ryan and Bosman & Associates filed their respective Opposition thereto, Dkt. Nos. 52, Bosman's Mem. of Law,¹ 54, Ryan's Lt.-Mem., to which Levine filed a Reply on the following day, Dkt. No. 55, Rec. Reply Mem. of Law, dated Oct. 8, 2010. The Hearing was convened on October 13, 2010, and all of the issues were exhaustively discussed on the record. During the Hearing the Court ruled on several issues and reserved as to others, all of which will be fully expounded upon herein.

I. BACKGROUND

The records reveals that Ryan, who has worked in the securities and insurance industry since 1997, served as the single member of Prime Rate, a limited liability company formed in 2001 under the laws of Delaware. Compl. at ¶¶ 10 & 11. At least in terms of this litigation, Prime Rate was doing business as American Integrity Financial Company (hereinafter “American Integrity”).² The SEC's Complaint alleges that Ryan and Prime Rate raised approximately $6.5 million from investors—mostly the elderly—by falsely promising them “guaranteed” fix rates of return ranging from 3.85% to 9.35 %. The SEC asserts that “American Integrity is a classic Ponzi scheme.” Id. at ¶ 1. Because of these allegedly fraudulent representations, which may have commenced as early as 2002, Ryan and Prime Rate are accused of violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Sections 5(a) and (c) of the Securities Act. Id. at ¶ 6.

The record also reflects that on August 18, 2009, both Ryan, in his individual capacity, and Prime Rate signed a retainer agreement with Bosman & Associates, a general practice law firm. Dkt. No. 23, Ex. A, Redacted Retainer Agreement.³ Because Bosman & Associates would only provide Levine with a redacted version of the Retainer Agreement, the true extent of its representation to both or either Ryan and Prime Rate over the past years is barely known. But it is safe to presume that the legal representation primarily concerned real estate closings, preparing legal documents such as promissory notes, loan agreements, and mortgage notes, advising on other business transactions, counseling on personal legal matters for Ryan, and conducting litigation on behalf of both Ryan and Prime Rate. See Dkt. Nos. 45, Exs. A–F, & 6, Order to Show Cause Addendum. The record indicates that Bosman & Associates may have approximately 121 files related to Ryan and Prime Rate—approximately 93 archived files and 38 current files. Dkt. No. 17, Ex. A, Levine's Lt., dated May 25, 2010. In Bosman & Associate's view, Ryan was the primary client, that is, Prime Rate and Ryan were so inextricably intertwined that they are virtually indistinguishable.

Concurrently, albeit not intended as a coordinated endeavor with the SEC, a grand jury for the Northern District of New York returned a ten (10) count Indictment against Ryan which, based upon the same facts alleged in our Complaint, charges him with committing securities and mail fraud. Crim. Case No. 1:10–CR–319, Dkt. No. 1, Indict., dated June 18, 2010. Primarily concerned that discovery in this civil case may compromise the criminal prosecution of Ryan, the United States Attorney for the Northern District of New York filed a Motion to Intervene and a Stay of Discovery. Dkt. No. 33, U.S. Atty. Office's Mot. to Intervene, dated Sept. 8, 2010. Essentially, no objections were interposed against this Motion, see Dkt. Nos. 34 & 35, and accordingly Judge Mordue issued a Memorandum–Decision and Order granting the Motion to Intervene and staying Discovery pending the completion of the criminal prosecution, “except that Paul A. Levine, Esq., the Court-appointed Receiver, may continue to obtain discovery from third parties.” Dkt. No. 57, Mem.-Dec. & Order, dated Oct. 8, 2010.

Section V of the Preliminary Injunction describes exhaustively how the Receiver is empowered to take control over all assets, “including all books, records, and documents, of Prime Rate,” to preserve those records and documents, to assume all rights and powers set forth in the applicable management and LLC agreements, to take steps to locate assets, and to determine the disposition and use of funds. Dkt. No. 11, Prelim. Inj. Sec. V at pp. 5–9. When Levine approached Bosman & Associates for information, he was essentially seeking eight (8) discrete items: (1) a file list of the total universe of files; (2) a copy of the retainer agreement; (3) explanation of the settlement offer on the 669 Riverview Properties, Inc. matter; (4) copies of the EMC mortgage file; (5) a copy of pleadings handled by Steve Waite, Esq., (6) details regarding the potential sale of property located on 5th Avenue, Troy, New York; (7) a copy of settlement with Sandy Horowitz; and, (8) information regarding deposits by Ryan and Prime Rate into the Bosman & Associates' escrow account. Dkt. No. 17, Ex. A, Levine's Lt., dated May 25, 2010.

Initially, the only issue submitted to the Court was whether the Bosman & Associates' charging and retaining liens should prevent Levine from obtaining possession of its files on behalf of Prime Rate. To date, Bosman & Associates is owed $32,604.67 in legal fees and disbursements. Dkt. No. 23 at p. 1. Furthermore, the law firm represented Prime Rate on an unrelated lawsuit where a settlement may be imminent. Because of both the pending litigation with a possible favorable outcome and the fact that Bosman & Associates possesses at least 121 relevant files, the law firm invokes it rights to both the statutory and common law liens. See generally Dkt. Nos. 23 & 52. However, in its subsequent filing, Bosman & Associates raises a host of other legal impediments to sharing any files with the Receiver. Dkt. No. 52. In addition to the legal liens, Bosman & Associates raises, inter alia, the attorney-client privilege chiefly held by its primary client Ryan as well as the Receiver's conflict of interest with Bosman & Associates as significant obstructions to disclosure. The law firm posits that if attorney-client privileged communications were to be invaded by the Receiver or if it was compelled to reveal such privileged communications, even by court order, grave ethical consequences would be visited upon it. Id.

II. DISCUSSION

A. Discovery from Bosman & Associates

There are two fundamental principles we must dissect in order to determine if the Receiver is entitled to discovery of documents and data from Bosman & Associates. First, the Court must ascertain...