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In re Application of Executive Securities Corporation. Executive Securities Corp.

March 11, 1983

IN RE APPLICATION OF EXECUTIVE SECURITIES CORPORATION. EXECUTIVE SECURITIES CORPORATION, BY CAMERON F. MACRAE III, AS TRUSTEE, APPLICANT-APPELLANT,
v.
JOHN DOE, OBJECTOR-APPELLEE.



Appeal from an order of the United States District Court for the Southern District of New York (Kevin Thomas Duffy, Judge) denying an application to release the transcripts of a witness's grand jury testimony. Reversed and remanded.

Author: Newman

Before:

KAUFMAN, TIMBERS, and NEWMAN, Circuit Judges.

NEWMAN, Circuit Judge:

This is an appeal from an October 26, 1982 order of the United States District Court for the Southern District of New York (Kevin Thomas Duffy, Judge) denying an application under Fed. R. Crim. P. 6(e)(3)(C)(i) for the release of the testimony of a grand jury witness. The Court ruled that the applicant in this case, who was acting as trustee for the liquidation of Executive Securities Corporation, had not established a particularized need for the testimony. We conclude that the District Court overestimated the harm that would be done by releasing the testimony in this case and underestimated the applicant's need for the materials. We therefore reverse the District Court's order and remand the matter.

I.

On February 14, 1975, appellant Cameron F. MacRae was appointed trustee for the liquidation of Executive Securities Corporation, a financially distressed broker-dealer. Pursuant to the Securities Investor Protection Act of 1970 § 5(b)(3), 15 U.S.C.§ 78eee (b)(3) (1976 & Supp. IV 1980), MacRae was nominated to be trustee by the Securities Investor Protection Corporation (SIPC), a corporation established by Congress, and was appointed by order of the United States District Court for the Southern District of New York (Charles H. Tenney, Judge). As trustee of Executive Securities, MacRae possessed powers and duties comparable to those of a trustee for a debtor forced into Chapter 7 liquidation under the Bankruptcy Code. See 15 U.S.C. § 78fff(b) (Supp. IV 1980).

While serving a trustee, MacRae came to suspect that Richard O. Bertoli, former president of Executive Securities, had defrauded the corporation and its creditors. To recoup the losses caused by this fraud, MacRae filed sit against Bertoli alleging $2.8 million dollars of damages. Executive Securities Corp. v. Bertoli, 77 Civ. 714 (MJL) (S.D.N.Y.).*fn1 MacRae's suit against Bertoli was filed on February 14, 1977, and still awaits trial in the Southern District of New York. The pace of litigation has been slowed by Bertoli's persistent claims that he is impoverished and will not be able to pay any judgment rendered against him.

In April 1981, the United States Attorney gave an unexpected boost to MacRae's suit against Bertoli by making an ex parte application to the Southern District of New York (Morris E. Lasker, Judge) for the release of certain grand jury testimony and related materials. The grand jury records, which Judge Lasker released to the trustee, revealed that Bertoli had fraudulently transferred $210,000 of stock held by a subsidiary of Executive Securities to Bland Investments, S.A., a Cayman Islands corporation. The transfer took place between 1977 and 1980, a period throughout which Bertoli was pleading impoverishment in the District Court. A crucial component of the grand jury records was testimony by the appellee in this case, a witness whom we shall call John Doe.Doe, an officer of Bland Investments and a Cayman Islands attorney, testified that the beneficial owner of Bland was Alfred B. Averell, a close associate of Bertoli's and a former vice-president of Executive Securities. In light of Doe's testimony and the close relationship between Bertoli and Averell, MacRae had a substantial claim under the Cayman Islands law of fraudulent conveyances to recover the $210,000 that Bertoli had transferred to Bland Investments. With Doe's grand jury testimony in hand, MacRae began preparations to institute appropriate action in the Cayman Islands courts.

Before MacRae could file suit, however, counsel for Doe appeared before the Southern District of New York (David N. Edelstein, then Chief Judge) with an application to reseal the witness's testimony. While the Court was considering Doe's application, lawyers for the witness and MacRae agreed to reseal the testimony with a stipulated order, which Judge Edelstein subsequently endorsed. The record was resealed on the following terms:

[A]s long as [Doe] and his law firm concede and do not deny in any litigation in the Cayman Islands that insofar as their knowledge extends, Alfred B. Averell was at all material times the beneficial owner of Bland Investments, S.A., the United States Attorney for the District shall not release or divulge to any person or entity the transcript of any testimony by [Doe] before a federal grand jury on December 1, 1980.

The order also specified that a further order from the District Court would be necessary to reopen the sealed record.

Armed with the stipulated order, MacRae began efforts in the Grand Court of the Cayman Islands to recover the fraudulently transferred assets. Counsel from Doe's firm, representing both Bland Investments and Averell, promptly breached the condition of the consent order by denying that Averell was the beneficial owner of Bland Investments. Counsel from Doe's firm also counterclaimed against MacRae for $210,000 alleging wrongful interference with Bland Investments' business affairs.

MacRae thereupon returned to the Southern District of New York to request that Doe's grand jury testimony be reopened. Local counsel for Doe opposed MacRae's application. MacRae initially argued that the District Court (Kevin Thomas Duffy, Judge) should release the records without further adjudication because Judge Edelstein's order was self-executing as soon as Doe or his law firm denied that Averell was the beneficial owner of Bland Investments. The District Court rejected this argument on the ground that a witness may not stipulate to the release of grand jury testimony. The Court ruled that the judiciary should determine whether an application has established a "particularized need" for the records that outweighs the public's interest in maintaining grand jury secrecy. See Douglas Oil Co. v. Petrol Stops Northwest, 441 U.S. 211, 222, 60 L. ...


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