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
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
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
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.)
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 ¶
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.
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
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
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,
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.
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
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
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
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
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
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
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
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
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,
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
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.
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
makes clear that a district court should not stay arbitration, or
refuse to compel it at all, for fear of its preclusive effect").*fn8
For the reasons set forth, Eberhard's motion to stay the NASD
arbitrations is denied.
It is so ordered.