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Securities and Exchange Commission v. Pentagon Capital Management PLC

United States District Court, Second Circuit

October 29, 2013


Paul G. Gizzi, Esq., Christopher J. Dunnigan, Esq. John C. Lehmann Jr., Esq., SECURITIES AND EXCHANGE COMMISSION, New York, NY, Attorneys for Plaintiff.

Frank C. Razzano, Esq., Ivan B. Knauer, Esq., Matthew D. Foster, Esq., PEPPER HAMILTON LLP, Washington, DC, Attorneys for Defendants.


ROBERT W. SWEET, District Judge.

Pepper Hamilton LLP ("Pepper Hamilton"), counsel for Defendant Pentagon Capital Management PLC ("PCM"), and Seyfarth Shaw LLP ("Seyfarth Shaw"), counsel for Lewis Chester, have moved to modify the restraining notice issued by the Plaintiff Securities and Exchange Commission ("SEC") to allow for respective fees and expenses or, in the alternative, to withdraw. Based on the conclusions set forth below, PCM's motion to modify the restraining notice is granted and Seyfarth Shaw's motion for payment of outstanding legal fees is granted.

Prior Proceedings

Prior proceedings and the facts in this action are described in the opinions of this court, dated February 14, 2012 and February 10, 2009 granting judgment in favor of the SEC. See SEC v. Pentagon Capital Mgmt. PLC, ___ F.Supp.2d ___ , 2012 WL 479576 (S.D.N.Y. February 14, 2012); SEC v. Pentagon Capital Mgmt. PLC , 612 F.Supp.2d 241 (S.D.N.Y. 2009). A brief summary of the procedural background relevant to the instant motion follows:

On March 28, 2012, this Court entered a Final Judgment of over $98.6 million against the Defendants and Relief Defendant. On April 25, 2012, Defendants filed a notice of appeal. This Court denied a subsequent motion by the Defendant Lewis Chester ("Chester"), PCM, and Pentagon Special Purpose Fund, Ltd. ("PSPF") for a stay of execution without posting a supersedeas bond in accordance with Rule 62 of the Federal Rules of Civil Procedure. Chester and PCM, but not PSPF, made a motion to the Second Circuit for the same relief. On May 23, 2012, the Second Circuit denied the motion. (Dunnigan Decl., Ex. 1.

On June 7, 2012, the SEC served a restraining notice pursuant to New York Civil Practice Law and Rules § 5222 on Chester, PCM and PSPF, as well as post-judgment document requests. On June 12, 2012, the SEC propounded interrogatories to PCM and PSPF. On June 13, 2012, the SEC propounded interrogatories to Chester. These discovery requests were served on Pepper Hamilton, counsel for PCM, Chester, and PSPF. On June 28, 2012, after service of the restraining notice and interrogatories, PCM filed for administration in the United Kingdom (Def. Memo at 3).

On July 5, 2012, Squire Sanders (UK) LLP, the U.K. counsel for the Administrators, sent letters to both Pepper Hamilton and the SEC. In the first letter (the "Pepper Hamilton Letter"), the Administrators agreed to let Pepper Hamilton keep a flat fee paid to it on February 17, 2012, and agreed to underwrite additional expenses for Chester and PCM's appeal to the Second Circuit. However, the Administrator instructed Pepper Hamilton not to respond to the pending discovery requests. (Knauer Decl., Ex. 1, pgs. 2-3).

In the Administrators' second letter (the "SEC Letter"), the Administrators informed the SEC that "Pentagon has entered administration because it is insolvent and there are very limited funds in the administration estate to enable the Company to be involved in the Post-Judgment Proceedings." (Dunnigan Decl. Ex. 5, pg. 3). The Administrators also informed the SEC that they viewed the SEC's United States based judgment as unenforceable outside the United States unless it was domesticated in the U.K.

On July 5, 2012, Pepper Hamilton sent a letter to this Court asking to be relieved as counsel for PCM and PSPF. On July 9, 2012, counsel for the Administrators sent a further letter to Pepper Hamilton, stating that PCM would no longer pay for any of PSPF's legal costs. (Knauer Decl. Ex. 1). On July 25, 2012, Pepper Hamilton's request to withdraw was denied.

After the Court denied Pepper Hamilton's motion to withdraw, counsel for the parties corresponded regarding the effect of the SEC's restraining notice on Pepper Hamilton's continuing representation of its clients. On August 21, 2012, counsel proposed the following:

• Pepper Hamilton can continue to draw down the flat fee while representing the administrators for PCM and Chester in ...

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