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CFTC v. STANDARD FOREX

February 27, 1995

Commodity Futures Trading Commission, Plaintiff, against Standard Forex, Inc., et alia, Defendants.


The opinion of the court was delivered by: CHARLES P. SIFTON

 SIFTON, District Judge.

 This is an action by plaintiff Commodity Futures Trading Commission (the "CFTC") for violation of the Commodities Exchange Act. 7 U.S.C. §§ 1 et seq. Defendant Yuanyi Lao ("Lao") now objects, pursuant to Rule 72(a) of the Federal Rules of Civil Procedure, to an order entered by Magistrate Judge Roanne Mann: (i) directing Longo & Bell, the former counsel to defendant Standard Forex, Inc., to turn over to the equity receiver for Standard Forex, Samuel Abernethy, Esq. (the "Receiver") Longo & Bell's pre-litigation file of its communications with Standard Forex and (ii) granting the Receiver the power to assert or waive the attorney-client privilege of Standard Forex. For the reasons set forth below, the magistrate judge's decision is affirmed.

 BACKGROUND

 On January 8, 1993, the CFTC commenced this action and obtained an ex parte temporary restraining order (i) barring Standard Forex from continuing to engage in foreign exchange currency transactions and (ii) appointing the Receiver as temporary equity receiver to seize the assets of Standard Forex, on the grounds that Standard Forex was allegedly violating the Commodity Exchange Act by offering and selling futures contracts to the public, in violation of 7 U.S.C. § 6(a), and committing fraud in connection with those sales, in violation of 7 U.S.C. § 6b(a). Among other parties, the CFTC also named as defendants in the action Lao and James Feng, a director and vice president, respectively, of Standard Forex.

 On August 9, 1993, the Court issued a preliminary injunction (i) enjoining defendants from continuing to violate the Commodities Exchange Act, (ii) continuing the appointment of the Receiver, and (iii) freezing Standard Forex' assets. On August 23, 1993, the CFTC added Pundi Forsten International, the former 50% shareholder of Standard Forex, and Moses Wong, a former director of Standard Forex, as defendants. On March 18, 1994, the Court referred the case to Magistrate Mann for the supervision of discovery in the action.

 On October 14, 1994, the CFTC directed Longo & Bell by subpoena to appear at a deposition on November 22, 1994, and to produce any documents that it had relating to Standard Forex and the subject matter of the litigation. Longo & Bell objected to the production of documents, asserting that its files contained documents that were covered by the attorney-client privilege.

 The CFTC moved for an order from Magistrate Mann compelling production of the subpoenaed documents. Defendants Lao and Feng opposed the application.

 At a hearing on November 22, 1994, Magistrate Mann granted the CFTC's application and directed Longo & Bell to produce its Standard Forex file and any other documents responsive to the subpoena served on it to the Receiver by December 6, 1994. Magistrate Mann predicated her order on the grounds that, pursuant to CFTC v. Weintraub, 471 U.S. 343, 85 L. Ed. 2d 372, 105 S. Ct. 1986 (1986), and its progeny, the power to assert or waive the attorney-client privilege of Standard Forex rests with the Receiver, who functions as the management of the company in receivership.

 Magistrate Mann denied Lao's motion for a stay pending this Court's review of her order pursuant to Fed. R. Civ. P. 72(a). Lao then applied to this Court for a stay pending review. On December 6, 1994, the Court granted Lao's motion and stayed Magistrate Mann's order pending further review. Longo & Bell and defendant Feng have joined in Lao's appeal of Magistrate Mann's order. Plaintiff CFTC and the Receiver have filed papers urging affirmance of Magistrate Mann's order.

 DISCUSSION

 Under 28 U.S.C. § 636(b)(1) and Fed. R. Civ. P. 72, a district court may overturn a magistrate's order on a nondispositive matter when such order is "found to be clearly erroneous or contrary to law." Pre-trial matters involving discovery are generally considered nondispositive since they do not resolve the substantive claims for relief alleged in the pleadings. See Thomas E. Hoar, Inc. v. Sara Lee Corp., 900 F.2d 522, 525 (2d Cir.), cert. denied, 498 U.S. 846, 111 S. Ct. 132, 112 L. Ed. 2d 100 (1990). This includes issues of privilege. See, e.g., Alpex Computer Corp. v. Nintendo Co., Ltd., 1992 U.S. Dist. LEXIS 3129, 1992 WL 51534 (S.D.N.Y. March 10, 1992). Accordingly, Magistrate Mann's decision should be reviewed under a clearly erroneous standard of review. The Supreme Court has recognized that "[a] finding is 'clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum, 333 U.S. 364, 395, 92 L. Ed. 746, 68 S. Ct. 525 (1948). Pursuant to this highly deferential standard of review, magistrates are afforded broad discretion in resolving discovery disputes, and reversal is appropriate only if that discretion is abused. Federal Ins. Co. v. Kingbury Properties, Ltd., 1992 U.S. Dist. LEXIS 18604, 1992 WL 380980, at *2 (S.D.N.Y. Dec. 7, 1992).

 Magistrate Mann predicated her decision primarily upon Weintraub. 471 U.S. 343, 85 L. Ed. 2d 372, 105 S. Ct. 1986. There, the Supreme Court held that a trustee in bankruptcy has the power to assert or waive the debtor's attorney-client privilege. The Court premised this conclusion on the fact that a corporation, as an inanimate entity, must act through agents. While, for a solvent corporation, that agent is normally the corporation's management, for a corporation whose affairs are being managed by a trustee for the benefit of shareholders and creditors alike, that agent is the trustee. Id. at 356. It is otherwise at odds with the purposes of instituting a trustee to circumscribe his or her powers solely with respect to the attorney-client privilege. Id.

 This issue has been rarely addressed with respect to receivers appointed outside of the bankruptcy context, and Weintraub presents the closest analogous situation. Lao argues that Weintraub is inapposite since the Court admonished that "for solvent corporations, this right rests with its directors and officers." 471 U.S. at 356. The focus of Weintraub, however, was not with this dicta but, rather, with whom the attorney-client privilege vests upon a change in control of a corporation. Id. at 349. In reaching its ultimate conclusion, the Court was concerned less with the linguistic difference between whether the person happens to be a trustee or a receiver and more with a functional analysis -- in other words "the roles played by the various actors ... to determine which is most analogous to the role played by ...


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