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U.S. v. EBERHARD

United States District Court, S.D. New York


March 30, 2004.

UNITED STATES OF AMERICA, -against- TODD EBERHARD, Defendant

The opinion of the court was delivered by: ROBERT SWEET, Senior District Judge

OPINION

Defendant Todd Eberhard ("Eberhard") has moved for a stay of certain securities arbitration proceedings until the conclusion of the criminal case pending against him in this Court, renewing an application previously denied without prejudice by the Honorable Richard M. Berman in the related civil enforcement proceedings, SEC v. Eberhard, S.D.N.Y., No. 03 Civ. 0813 (RMB).*fn1 For the reasons set forth below, Eberhard's motion to stay the pending securities arbitrations is denied.*fn2

 Prior Proceedings and Background

  On February 4, 2003, the government commenced a criminal action against Eberhard, alleging that over the span of several years he defrauded certain individual investors for whom he performed investment advisory and security brokerage services, and charging him with conspiracy, investment advisor fraud, and wire fraud. Eberhard is alleged to have conducted investment advisory business through Eberhard Investment Associates and its predecessor Page 2 entity Eberhard Investment Advisers (collectively, "EIA"), and managed client accounts through Clearing Services of America, inc. ("CSA"), a registered broker-dealer, and through Park South Securities, LLC ("PSS"), a limited liability company of which he was a part owner.

  On February 5, 2003, the Securities and Exchange Commission ("SEC") commenced a civil enforcement action against Eberhard, alleging that he, along with his broker-dealer firm, PSS, and his investment advisory firm, EIA, violated various federal securities laws. On that same date, the SEC also obtained an order to show cause and temporary restraining order ("the February 5, 2003 Order") according to which assets belonging to Eberhard and EIA were frozen pending a preliminary injunction hearing.

  On February 13, 2003, the court in the related civil action granted the SEC's unopposed request, and issued a preliminary injunction and order freezing assets and granting other relief ("the February 13, 2003 Order") to keep the asset freeze in place indefinitely and to appoint a Receiver for EIA, among other items. The February 13, 2003 Order enjoins all creditors and claimants from taking "any action" that would interfere with the Court's jurisdiction over the Receivership estate. (February 13, 2003 Order at ¶ XI.) Page 3

  The February 13, 2003 Order was thereafter amended on April 18, 2003, when the court in SEC v. Eberhard issued an order amending preliminary receivership order ("the April 18, 2003 Order"). This third order provides for the receiver to take possession and control over all of Eberhard's assets, including his personal assets.

  On October 16, 2003, Eberhard moved the court in the civil enforcement proceeding for a stay of certain securities arbitration proceedings then pending before the National Association of Securities Dealers, Inc. ("NASD").*fn3 Following briefing by the SEC and the receiver as well as by various non-party claimants involved in the NASD arbitration proceedings ("the NASD arbitrations" or "the arbitrations"), the court denied Eberhard's motion without prejudice to the renewal of his application in this Court. In denying Eberhard's motion, the court stated that the NASD arbitrations " (at least prior to the entry of judgment) do not conflict with the Court's prior orders, dated February 5, 2003, February 13, 2003, and April 18, 2003." (December 9, 2003 Order at ¶ 1.) Page 4 Eberhard renewed his application for a stay of the pending NASD arbitrations on January 12, 2004, and oral arguments were held on January 22, 2004. At the Court's direction, Eberhard thereafter submitted an order to show cause why a stay of the NASD arbitrations should not issue, setting a return date of February 4, 2004 to ensure that all interested parties received appropriate notice prior to the entry of any stay. Following receipt by this Court of the motion papers filed on the previous application as well as various materials in opposition to Eberhard's request submitted on behalf of non-party claimants in the arbitration proceedings, oral argument on the renewed application was held on February 4, 2004. The instant motion was marked fully submitted at that time.

 Discussion

  Eberhard argues that the NASD arbitrations should be stayed on the grounds that the NASD claimants are covered by the February 5, 2003 Order, the February 13, 2003 Order and the April 18, 2003 Order ("the Receivership Orders"), and that any further arbitration action would violate these Orders. Eberhard also argues that this Court should issue a stay of the NASD arbitrations because he otherwise will be compelled to assert his Fifth Amendment privilege during the course of the NASD arbitrations, thereby rendering him unable to defend himself effectively therein. Finally, Eberhard contends that any findings made in the course of Page 5 the NASD arbitrations could be considered res judicata or collateral estoppel and would therefore undermine Eberhard's ability to have a full and fair trial in either of the civil or criminal actions pending against him, thus justifying a stay of the NASD arbitrations.

  Eberhard has not moved to enjoin the NASD arbitrations, but instead would have this Court stay the arbitrations pursuant to either the Federal Arbitration Act or the inherent powers of the district court.

  I. The Receivership Orders

  In response to Eberhard's previous application to stay the NASD arbitrations, the court in the civil enforcement proceedings held that the arbitrations "do not conflict with the Court's prior orders." (December 9, 2003 Order at ¶ 1.) Even assuming this Court were inclined to disturb Judge Herman's considered conclusion, which it is not, Eberhard has demonstrated no basis for doing so.

  By their own terms, the Receivership Orders prohibit creditors or claimants from taking any action "to interfere with the taking control, possession, or management of the Receivership Assets . . . nor interfere in any way with the exclusive jurisdiction of this Court over the receivership estate." (April 18, 2003 Page 6 Order at ¶ XI; see also February 13, 2003 Order at ¶ XI.) Thus, the Receivership Orders prohibit interference with the Receivership itself. They do not, as Eberhard argues, bar "any claimants from seeking claims against the defendants in any place other than the District Court." (Def. Mem. at 2.) Nor do the Receivership Orders prohibit claimants from establishing in arbitration the dollar amount of any purported liability. There is therefore no reason to conclude that the continued administration of the NASD arbitrations, at least prior to the entry of judgment, would be in violation of the Receivership Orders.

  II. The Power to Stay the NASD Arbitrations

  The Federal Arbitration Act ("FAA") authorizes a district court to stay litigation pending arbitration. See 9 U.S.C. § 3. The FAA also gives a district court the power to compel arbitration, although only in its own district. See 9 U.S.C. § 4; Kipany Productions, Ltd. v. RMH Teleservices, Inc., No. 97 Civ. 7599 (LMN), 1997 WL 706445, at *1 (S.D.N.Y. Nov. 13, 1997). It remains an open question within this Circuit, however, whether the FAA endows federal courts with the authority to stay arbitration proceedings pending the result of litigation, as Eberhard would have this Court do.*fn4 See Westmoreland Capital Corp. v. Findlay, Page 7 100 F.3d 263, 266 n.3 (2d Cir. 1996) ("Because we find that subject matter jurisdiction is lacking, we do not need to decide whether the FAA gives federal courts the power to stay arbitration proceedings.").

  A number of federal courts have held that, "in appropriate circumstances, § 4 of the FAA may be applied to stay or enjoin arbitration proceedings." Id. (citing Societe Generale de Surveillance, S.A. v. Raytheon European Management & Sys. Co., 643 F.2d 863, 868 (1st Cir. 1981); L.F. Rothschild & Co., Inc. v. Katz, 702 F. Supp. 464, 468 (S.D.N.Y. 1988)). In reaching this conclusion, courts have often relied on the First Circuit's reasoning in Societe Generale that "to enjoin a party from arbitrating where an agreement to arbitrate is absent is the concomitant of the power to compel arbitration where it is present." Societe Generale, 643 F.2d at 868 (citation omitted). See L.F. Rothschild & Co., Inc., 702 F. Supp. at 468; cf. SATCOM Int'l Group PLC v. ORBCOMM Int'l Partners, L.P., 49 F. Supp.2d 331, 342 (S.D.N.Y. 1999).

  Even where courts in this Circuit have concluded that § 4 of the FAA permits the issuance of a stay, however, they appear to have done so only in those circumstances where a stay would be incidental to the court's power under the FAA to enforce contractual agreements calling for arbitration, as demonstrated by the cases Page 8 cited by Eberhard. See, e.g., Westmoreland Capital Corp. v. Findlay, 916 F. Supp. 242, 247 (W.D.N.Y. 1996) (declining to issue a stay on the alternative ground that petitioner's statute of limitations question was within the scope of issues that the parties had agreed were arbitrable), aff'd, 100 F.3d 263; L.F. Rothschild & Co., Inc., 702 F. Supp. at 468 (enjoining defendants from proceeding with an arbitration where it was not authorized by contract). As Eberhard has made no claims regarding the applicability or scope of the arbitration agreement that led to the NASD arbitrations, he has not demonstrated circumstances that might allow this Court to issue a stay of the NASD arbitrations under the FAA.*fn5

  Similarly unconvincing are Eberhard's arguments that the district court's power to stay a parallel proceeding permits this Court to issue a stay of the NASD arbitrations. The cases Eberhard cites stand only for the proposition that courts may, in their discretion, stay civil proceedings in light of pending parallel criminal prosecutions and that the power to do so "is incidental to Page 9 the power inherent in every court to control the disposition of the causes on its docket." Landis v. North American Co., 299 U.S. 248, 254 (1936); see also United States v. Kordel, 397 U.S. 1, 7 n.27 (1970). It does not follow from this proposition that a district court's power to stay a proceeding — derived from the ability to control its own docket — extends to arbitration proceedings administered outside of the auspices of the federal courts.*fn6 Page 10

  III. Eberhard's Remaining Arguments

  Even assuming, arguendo, that this Court had the authority to stay the NASD arbitrations, none of Eberhard's remaining arguments for a stay of the arbitrations are sufficient to warrant one here.

  A. Fifth Amendment Claim

  Eberhard contends that if the NASD arbitrations are permitted to proceed while the criminal case against him is still pending, he will be compelled to assert his Fifth Amendment privilege in the arbitrations and thus would be unable to defend himself effectively during those proceedings. (Def. Mem. at 6.)

  Such grounds alone do not provide an adequate basis to stay a civil proceeding even where a federal court has the authority to do so, much less a basis to stay an independent arbitration proceeding. See Sterling Nat'l Bank v. A-l Hotels Int'l, Inc., 175 F. Supp.2d 573, 576 (S.D.N.Y. 2001) (noting that it is "well understood that such a stay is not constitutionally required whenever a litigant finds himself facing the dilemmas inherent in pursuing civil litigation while being the subject of a related criminal investigation"); Citibank, N.A. v. Hakim, No. 92 Civ. 6233 (MBM), 1993 WL 481335, at *2 (S.D.N.Y. Nov. 18, 1993) ("Here, defendant has argued that he will be forced to choose Page 11 between testifying or asserting his Fifth Amendment privilege, and, in turn, either risking self-incrimination or adverse inferences and a diminished ability to defend against the civil claims asserted against him. Such a predicament will not alone justify a stay of civil discovery."); Paine, Webber, Jackson & Curt is Inc. v. Malon S. Andrus, Inc., 486 F. Supp. 1118, 1119 (S.D.N.Y. 1980) ("That defendant's conduct also resulted in a criminal charge against him should not be availed of by him as a shield against a civil suit and prevent plaintiff from expeditiously advancing its claim.").

  In general, "`absent a showing of undue prejudice upon defendant or interference with his constitutional rights, there is no reason why plaintiff should be delayed in its efforts to diligently proceed to sustain its claim.'" Transatlantic Reinsurance Co. v. Ditrapani, No. 90 Civ. 3884 (JMC), 1991 WL 12135, at *2 (S.D.N.Y. Jan. 28, 1991) (quoting Paine, Webber, Jackson & Curtis Inc., 486 F. Supp. at 1119). "Ultimately, what is at risk is not [defendants'] constitutional rights . . . but their strategic position in the civil case." Sterling Nat'l Bank, 175 F. Supp.2d at 578 n.4.

  This is not to suggest that the situation in which Eberhard finds himself and the difficult choices he faces should be ignored or even taken lightly. "There is no question that any defendant facing parallel criminal and civil litigation is hard put Page 12 to decide whether to waive the privilege and give potentially damaging testimony or to assert it at the risk of having a Court or jury draw adverse inferences against him in the civil case." Sterling Nat'l Bank, 175 F. Supp.2d at 578. Given the gravity of the situation, courts will, on occasion, grant a discretionary stay of a parallel civil proceeding. In doing so, they have generally relied on a balancing test, whereby numerous factors are considered, including:

1) the extent to which the issues in the criminal case overlap with those presented in the civil case; 2) the status of the case, including whether the defendants have been indicted; 3) the private interests of the plaintiffs in proceeding expeditiously weighed against the prejudice to plaintiffs caused by the delay; 4) the private interests of and burden on the defendants; 5) the interests of the courts; and 6) the public interest.
In re WorldCom Inc. Sec. Litig., Nos. 02 Civ. 3288 (DLC) & 02 Civ. 4816 (DLC), 2002 WL 31729501, at *4 (S.D.N.Y. Dec. 5, 2002) (citations omitted); see also Sterling Nat'l Bank, 175 F. Supp.2d at 576; Trustees of Plumbers & Pipefitters Nat'l Pension Fund v. Transworld Mechanical, Inc., 886 F. Supp. 1134, 1139 (S.D.N.Y. 1995).

  The overlap of issues in the criminal and civil proceedings is the threshold factor to be considered in determining whether a stay is needed. See In re WorldCom Inc. Sec. Litiq., 2002 WL 31729501, at *4; see also the Honorable Milton Pollack, Page 13 Parallel Civil and Criminal Proceedings, 129 F.R.D. 201, 203 (March 1990) ("The most important factor at the threshold is the degree to which the civil issues overlap with the criminal issues."). Simply stated, "[i]f there is no overlap, there would be no danger of self-incrimination and accordingly no need for a stay." Trustees of Plumbers & Pipefitters Nat'l Pension Fund, 886 F. Supp. at 1139 (citation omitted). In evaluating the potential overlap, the court must engage in a fact-intensive inquiry. See Sterling Nat'l Bank, 175 F. Supp.2d at 576.

  Although Eberhard argues that, "[o]stensibly, the issues determined by any of the NASD arbitrations will be virtually identical to the issues in the instant action" (Def. Mem. at 6-7), he offers no factual support for such a conclusion. Indeed, Eberhard has provided no description of the subject matter of the NASD arbitrations, nor any details as to the specific claims involved, the states in which the arbitrations are pending, or where the claimants reside. Absent such information, it is not possible to conduct the threshold analysis required to determine the extent to which the issues in the NASD arbitrations overlap, if at all, with those in the criminal case against Eberhard.

  B. Collateral Estoppel Claim

  In the alternative, Eberhard contends that any findings made in the course of the NASD arbitrations could be considered res Page 14 judicata*fn7 or collateral estoppel, and could thus make it "virtually impossible for Mr. Eberhard have a full and fair trial" in either of the civil or criminal actions pending against him. (Def. Mem. at 7.)

  Preclusive potential, however, is not an adequate ground to issue a stay of a state court proceeding. See In re Baldwin-United Corp., 770 F.2d 328, 336 (2d Cir. 1985) ("[T]he mere existence of a parallel lawsuit in state court that seeks to adjudicate the same in personam cause of action does not in itself provide sufficient grounds for an injunction against a state action in favor of a pending federal action" unless the parallel proceeding threatens to impair the court's exercise of jurisdiction in its own case.) (citation omitted); see also Standard Microsystems Corp. v. Texas Instruments Inc., 916 F.2d 58, 60-61 (2d Cir. 1990) (same). Eberhard provides no reason to conclude that arbitration proceedings should be treated differently. Thus, the possible preclusive effect of issues resolved in the NASD arbitrations may not be said to provide any basis for justifying a stay of the arbitrations here. See Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 225 (1985) (White, J., concurring) ("The Court's opinion Page 15 makes clear that a district court should not stay arbitration, or refuse to compel it at all, for fear of its preclusive effect").*fn8

 Conclusion

  For the reasons set forth, Eberhard's motion to stay the NASD arbitrations is denied.

  It is so ordered.


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