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Securities and Exchange Commisison v. Pence

United States District Court, S.D. New York

October 31, 2017

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
STEPHEN B. PENCE, Defendant.

          OPINION AND ORDER

          GABRIEL W. GORENSTEIN, UNITED STATES MAGISTRATE JUDGE.

         The Securities and Exchange Commission ("SEC") has sued Stephen B. Pence for allegedly violating federal securities laws in connection with a scheme to defraud General Employment Enterprises, Inc. ("GEE") and its investors in 2009 and 2010. Both the SEC and Pence seek to depose Gregory Bartko, an inmate at the Coleman Federal Correctional Institution in Sumterville, Florida. Bartko has moved to invoke his Fifth Amendment privilege against self-incrimination.[1] For the reasons set forth below, Bartko's motion is granted in part and denied in part.

         I. BACKGROUND

         Bartko seeks to invoke his privilege against self-incrimination with respect to two distinct sets of facts: (I) the conduct underlying his prior criminal conviction, including the related arrest, trial, sentencing, and post-sentencing proceedings; and (ii) his role in the scheme alleged in the complaint.

         A. Bartko's Criminal Conviction and Related Matters

In his memorandum of law, Bartko states that his prior criminal conduct and all related proceedings stem from his management of two private equity funds in 2004 and 2005: the Caledonian Fund and the Capstone Fund. See Bartko Mem. at 3-8.

         According to Bartko, in 2004, he was a "securities lawyer and securities dealer" and managed the Caledonian Fund alongside his partner Darryl Laws. See Bartko Mem. at 3-5. An individual named James K. Colvin agreed with Bartko to raise $3 million in investments for the Caledonian Fund. See id. at 4. Colvin's source of funding was the fraudulent investment activities of an individual named Scott Hollenbeck. See id. Bartko's law firm also represented Hollenbeck in an SEC civil enforcement proceeding. See id. at 4. In October 2004, the Caledonian Fund was "shuttered" after Colvin's $3 million commitment proved "hollow." Id. at 5.

         In November 2004, Bartko started another private equity fund, the Capstone Fund. See Bartko Mem. at 3, 5. Bartko arranged for Hollenbeck to refer potential investors to the fund from November 2004 through January 2005, even though Hollenbeck was prohibited by law from directly selling investments as a result of the civil enforcement action against him. See Id. at 5-6. The Government contended that "[b]etween December 21, 2004, and January 10, 2005, a total of $1, 156, 125 from 18 different victims was deposited into accounts controlled by Hollenbeck, and the exact same amount was transferred by Hollenbeck to Bartko's account." See Brief for Appellee at 15, United States v. Bartko, 728 F.3d 327 (4th Cir. 2013), cert, denied, 134 S.Ct. 1043 (No. 12-4298). In Bartko's view, after "problems developed in the manner that Hollenbeck forwarded investor funds and subscription documents, " Bartko sought to refund $1 million to investors, but Hollenbeck devised a scheme to embezzle or otherwise retain these funds. See Bartko Mem. at 6. Bartko claims to have later refunded approximately 94% of these investments after being confronted by an SEC attorney in March 2005. See id.

         In connection with these activities, Bartko was tried and convicted in the United District Court for the Eastern District of North Carolina for "conspiracy to commit mail fraud, selling unregistered securities, engaging in money laundering . . . unlawful monetary transactions . . . [four counts of] mail fraud and aiding and abetting . . . [and] selling unregistered securities and aiding and abetting . . . ." Sentencing Transcript for Gregory Bartko in United States v. Bartko, No. 5:09 Cr. 321-D-l (annexed as Ex. C to the Declaration of Nicholas A. Pilgrim, filed Aug. 8, 2017 (Docket # 59) ("Pilgrim Decl.")) ("Sent. Tr."), at 4. Bartko had testified at trial, and the sentencing judge found that Bartko gave "false, material, perjurious" testimony that was "intended to obstruct justice." Id. at 89. The judge added an obstruction enhancement to Bartko's sentencing guidelines calculation. Id.

         After trial, Bartko filed four motions for a new trial. See Bartko, 728 F.3d at 334. These motions contained claims that the government failed to turn over exculpatory and impeachment evidence, that the government permitted Hollenbeck to testify falsely, that the trial court erred in considering an ex parte sealed document the government submitted, that the trial court erred in failing to give jury instructions regarding multiple conspiracies and accomplice liability, and that the trial court improperly computed Bartko's sentencing range under the Sentencing Guidelines. See id. at 334-47. All of these motions were denied by the district court. See Id. at 331. The Fourth Circuit affirmed Bartko's conviction and sentence. See id. at 347.

         Bartko thereafter filed a motion to vacate the trial court's judgment pursuant to 28 U.S.C. § 2255. See Motion to Vacate, Set Aside, or Correct Sentence Pursuant to 28 U.S.C. § 2255 in Gregory Bartko v. United States, No. 5:09 Cr. 321-D-l (E.D. N.C. Jan. 26, 2015) (Docket # 292) ("Bartko Mot. to Vacate"). In that petition, Bartko seeks to vacate his judgment of conviction based on "various instances of prosecutorial misconduct and the presentation of false and misleading evidence, " Id. at 1, including failures to produce notes of witness interviews and exculpatory documents, i<i at 13-43. This motion is still pending and Bartko asserts that "it is possible, and perhaps even likely, that Bartko may testify in further support of his claims" at an evidentiary hearing held in his habeas proceeding. Bartko Mem. at 12. While Bartko does not mention it, we note also that if the judgment of conviction were vacated, a new trial would potentially be held and the Government would be able to use any statements Bartko made in a deposition in the instant case against him as evidence in the new trial.

         B. SEC's Civil Suit Against Pence

         On September 9, 2015, the SEC filed the complaint in this action accusing Pence of various securities law violations between July 2009 and November 2010. See Complaint, filed Sept. 9, 2015 (Docket # 1) ("CompL"), ¶ 1.

         The SEC's complaint alleges that on July 1, 2009, PSQ, LLC ("PSQ") acquired a majority interest in GEE by means of a securities purchase and tender offer agreement. See Id. ¶¶ 2, 27. Although Pence allegedly owned PSQ in its entirety, the SEC claims that Pence in fact owned PSQ on behalf of a convicted felon named Wilbur Anthony Huff, and that Pence acted as Huffs agent. See id. ¶¶ 2, 23, 28, 32. The purpose of this arrangement was to circumvent "legal and practical barriers [preventing Huff from] operating business entities in his own name, " inasmuch as Huff was a convicted felon who could not operate the company in his own name. Id. ¶ 17. This arrangement persisted until "November 17, 2010, when [Pence] transferred his 100% interest in PSQ to another Huff associate, who, like Pence, paid no consideration to become PSQ's nominal owner." Id. ¶ 14. Entities affiliated with Huff had provided PSQ with the money to purchase GEE. See id ¶¶ 28, 31.

         After GEE's acquisition, Huff carried out a fraudulent scheme to have GEE transfer $2.3 million from GEE's checking account to an entity owned by the President of Park Avenue Bank ("PAB"), Charles J. Antonucci, Sr., with whom Huff allegedly had prior business dealings. Id. ¶¶ 4-5, 18.[2] As part of its acquisition of GEE, PSQ caused $1, 925, 000 to be deposited in an account for GEE at PAB. See id. ¶ 35. Also, after PSQ acquired GEE, Pence and then Huff gained the ability to appoint three of GEE's five directors. See id. ¶¶ 2, 27, 32. Pence appointed himself chairman of the board, appointed two other directors, and then selected Ronald E. Heinemen, to whom Huff had directed "substantial monthly payments, " as GEE's CEO. See id. ¶¶ 20, 27. GEE then deposited an additional $750, 000 from its other bank accounts into its PAB account. See id. ¶ 35. In July 2009, $2.3 million of the funds in GEE's PAB account were allegedly withdrawn. See id ¶ 38. Heinemen claimed that these funds were invested in a certificate of deposit at PAB, when in fact they were transferred to Park Avenue Insurance, another entity owned by Antonucci. See id. ¶¶ 5, 38-41. Entities affiliated with Huff ultimately returned the same amount to GEE's PAB account after an outside audit committee investigated the funds' disappearance. See id. ¶¶ 5, 48-53.

         The SEC accuses Pence of, inter alia, making a series of false or materially misleading claims to GEE's outside auditor during GEE's 2009 fiscal year end audit, and of otherwise withholding information material to the audit. Id. ¶¶ 1, 6, 48, 51, 53, 57, 63, 65. More specifically, the SEC alleges that Pence signed a 2009 Form 10-K on January 8, 2010, containing false statements of fact, including, inter alia, that the $2.3 million withdrawn from GEE's account was used to buy a certificate of deposit from PAB, see Id. ¶¶ 1, 7, 66-67, and that GEE retrieved this money "through a non-recourse assignment of the CD for face value to an unrelated party." Id. ¶ 7. The SEC also accuses Pence of misrepresenting in certain securities filings the source of PSQ's funding to acquire GEE. See id. ¶ 29.

         C. Procedural History

         On April 26, 2017, Pence filed a motion seeking leave to depose Bartko in connection with this matter. See Notice of Motion of Defendant Stephen B. Pence for Leave to Depose Inmate Gregory Bartko, filed Apr. 27, 2017 (Docket # 39) ("Leave Mot."). Pence alleged that Bartko "represented PSQ in connection with its purchase of shares in GEE, " and that Bartko served as GEE's general counsel from on or about October 13, 2009, through November 19, 2010. See Memorandum of Law in Support of Defendant's Motion for Leave to Depose Inmate Gregory Bartko, filed Apr. 27, 2017 (Docket # 41), at 2. Pence alleged that Bartko advised him regarding "the disclosures he needed to make in connection with PSQ's acquisition of GEE and immediately thereafter .... [and] how GEE's excess funds should be invested." Id. at 4. Pence also asserted that Bartko helped investigate the disappearance of the $2.3 million from GEE's bank account. Id. This Court ordered Bartko to send a letter to the parties explaining his objections, if any, to being deposed. See Order, filed Apr. 26, 2017 (Docket # 38). Bartko responded that he had no objections, but sought to reserve his right to claim "any appropriate attorney-client privilege during my deposition which may be required under the law, as well as any other relevant evidentiary privileges." Letter from Gregory Bartko, filed May 11, 2017 (Docket # 43). This Court granted Pence's motion on May 15, 2017. See Memo Endorsement of Notice of Motion of Defendant Stephen B. Pence for Leave to Depose Inmate Gregory Bartko, filed May 15, 2017 (Docket # 44) ("Leave Memo Endorsement").

         On July 14, 2017, this Court received a letter written by Bartko, which stated that Bartko would "declin[e] to submit to any testimonial deposition in any pending civil or criminal matter until [his] Habeas Petition is fully litigated." Letter from Gregory Bartko (annexed as Ex. A to the SEC's Letter to the Court, filed July 14, 2017 (Docket # 49)), at 1. The Court thereafter instructed the SEC and Pence to submit letters to Bartko and his habeas attorney containing a list of potential areas of questioning. See Order, filed July 14, 2017 (Docket # 50), at 1. The Order further specified that if Bartko intended to refuse to answer questions relating to any of these topics, he should submit a letter or memorandum of law to this Court setting forth his legal arguments for such refusals. See id.

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pence and the SEC submitted their proposed topics to Bartko shortly thereafter. See Letter from SEC to Gregory Bartko and Don Samuel Re: July 14, 2017 Order Re: Deposition of Federal Inmate Gregory Bartko (annexed as Ex. A to Pilgrim Decl.) ("SEC Proposed Topics"); Letter from Stephen B. Pence to Gregory Bartko (annexed as Ex. A to the Declaration of Alan S. Lewis in Response to Gregory Bartko's Invocation of his Fifth Amendment Privilege, filed Aug. 8, 2017 (Docket # 56) ("Lewis Decl.")) ("Pence Proposed Topics"). Bartko then filed a memorandum of law in which he argued that he may refuse to answer deposition questions by either party relating to all of the proposed topics "[e]xcept for general biographical information, ...


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