Pharmaceutical entrepreneur Martin Shkreli and lawyer Evan Greebel have filed memorandums in opposition to the federal government’s request for a full stay of SEC fraud proceedings and discovery during the pendency of related criminal proceedings. According to the defendants, a blanket stay would prejudice their defense and is unnecessary to address any potential evidentiary concerns of the government (SEC v. Shkreli, February 11, 2016).
Ongoing proceedings. The Department of Justice and the SEC charged Shkreli and Greebel with breaking federal criminal and civil securities and wire fraud laws in their roles in fraudulent investment schemes. A federal grand jury indicted Shkreli on multiple counts of securities fraud, conspiracy to commit securities fraud, and conspiracy to commit wire fraud, including one wire fraud conspiracy count against both Shkreli and Greebel. The SEC’s complaint alleges that Shkreli violated the antifraud provisions of Securities Act Section 17, Investment Advisers Act Section 206, and Exchange Act Rule 10b-5 and that Greebel aided and abetted the Rule 10b-5 violations. The agency further alleged that Shkreli violated Exchange Act Rule 10b-21, which treats the deception of a broker-dealer about one’s intention or ability to deliver an equity security as a manipulative or deceptive device or contrivance.
Proposed stay of SEC proceedings. The government has requested to stay the civil proceedings because of the ongoing parallel criminal case. In support of the motion, the government argues that a stay is appropriate because the same alleged fraudulent schemes are at issue in both the civil and criminal cases and that the defendants should not be allowed to take unfair advantage of broad civil discovery rules to avoid the restrictions on criminal discovery.
The government also contends that a stay is necessary to preserve the secrecy of ongoing grand jury proceedings and will promote overall judicial economy by ultimately streamlining issues in the civil case. Courts have regularly permitted the government to intervene to request a stay in an ongoing civil case when a criminal indictment has been filed, the government explained, and the interests of the public, the parties, and the court weigh in favor of a stay.
Opposition to stay. Both Shkreli and Greebel oppose a full stay of the civil cases. The government’s arguments for a stay (similar facts, secrecy, and judicial economy) do not address the particular facts and circumstances of the ongoing proceedings, and the strong possibility that the criminal matter may not resolved quickly would cause unfair prejudice, the defendants state. Further, civil discovery would not prejudice the criminal action or the public interest, they explain, and the government’s “theoretical” threats do not justify a complete stay. In fact, they note, multiple courts have begun to reject blanket stays of SEC enforcement actions in favor of a more limited approach to acknowledge defendants’ interest in a prompt resolution of SEC proceedings. The prejudice of denying all discovery to the defendants far outweighs any prejudice that the government may experience during civil discovery, according to the defendants.
As such, the defendants propose that document discovery and depositions of those who invoke their Fifth Amendment rights should be stayed and that all other matters proceed on the condition that government counsel be allowed to participate. A limited stay would be more appropriate to address the government’s concerns while protecting the defendants’ own interests, they conclude.
The case is No. 15-cv-7175 (KAM).
Attorneys: Paul G. Gizzi for the SEC. Marcus A. Asner (Arnold & Porter LLP) for Martin Shkreli.
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