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U.s. Securities AND EXCHANGE COMMISSION seeks sanctions against three defendants. Over four weeks have passed since response deadline for second request for Production of Documents. Continued failure to respond is unreasonable, and sanctions should be issued.
U.s. Securities AND EXCHANGE COMMISSION seeks sanctions against three defendants. Over four weeks have passed since response deadline for second request for Production of Documents. Continued failure to respond is unreasonable, and sanctions should be issued.
U.s. Securities AND EXCHANGE COMMISSION seeks sanctions against three defendants. Over four weeks have passed since response deadline for second request for Production of Documents. Continued failure to respond is unreasonable, and sanctions should be issued.
___________________________________________ ) SECURITIES AND EXCHANGE COMMISSION, ) ) Plaintiff, ) ) v. ) Case No. 1:12-cv-12334-WGY ) SPENCER PHARMACEUTICAL INC., et al., ) ) Defendants. ) ___________________________________________ )
PLAINTIFF SECURITIES AND EXCHANGE COMMISSIONS MEMORANDUM OF LAW IN SUPPORT OF ITS MOTION TO COMPEL THE PRODUCTION OF DOCUMENTS AND TO ISSUE SANCTIONS
Pursuant to Federal Rule of Civil Procedure 37 and Local Rule 37.1, the U.S. Securities and Exchange Commission (the Commission) hereby respectfully moves the Court to (i) compel the production of documents by defendants J ean-Franois Amyot, Hilbroy Advisory Inc., and IAB Media Inc. (collectively, the Amyot Defendants); and (ii) issue sanctions in the form of an order prohibiting the Amyot Defendants from using to support any defenses, or introducing as evidence, any documents sought in any of the Commissions document requests not produced within 14 days. Over four weeks have passed since the response deadline for the Commissions Second Requests for the Production of Documents to the Amyot Defendants, served on March 7, 2014. The only response the Commission has received is repeated verbal statements from the Amyot Defendants counsel that he is still trying to work with his clients to determine whether responsive documents exist. The Amyot Defendants have not provided a written response, nor have they indicated when they expect their search for documents to be complete. Such continued failure to respond is unreasonable, and an order compelling production and issuing discovery sanctions should be issued. Case 1:12-cv-12334-WGY Document 69 Filed 05/07/14 Page 1 of 9 2
BACKGROUND The SEC filed this action in December 2012 against (i) Spencer Pharmaceutical Inc. (Spencer), a Delaware corporation; (ii) Canadian residents J ean-Franois Amyot, Maximilien Arella, and Ian Morrice; and (iii) Canadian companies Hilbroy Advisory Inc. (Hilbroy) and IAB Media Inc. (IAB). The SEC alleges that the defendants violated the federal securities laws when they orchestrated a pump-and-dump involving the penny stock shares of Spencer. The defendants scheme involved falsely promoting Spencers business activities and a bogus all-cash buyout offer and then selling Spencers shares at inflated prices. Between March and November 2010, the defendants misled investors about Spencers business through false and misleading public statements and promotional materials. Then, beginning in early November 2010, the defendants announced, and thereafter relentlessly promoted, the news that Spencer had received an unsolicited $245 million buyout offer from Al-Dora Holdings (Al-Dora), a purported Kuwaiti company. Two days before the closing date, however, Spencer abruptly announced a mutual extension agreement and, following months of subsequent silence, announced in September 2011 that negotiations had ceased. In truth, the SEC alleges, the transaction never took place because the offer was nothing more than a fiction. Amyot orchestrated all aspects of the scheme and the offer, including the steps taken by Al-Dora. Amyot also directed all aspects of the false and misleading promotional efforts, including the activities of Hilbroy and IAB, which he controlled. As a result, Amyot profited when he dumped approximately 36 million shares for gross proceeds in excess of $5.8 million. Amyot was able to secure this profit in large part because he also orchestrated, at the outset, the issuance of millions of Spencer shares to entities and funds he controlled. Discovery in this matter has been ongoing for many months, and depositions are scheduled to begin on May 27 th . Defendants Arella and Morrice have both produced documents in response to the Commissions document requests, and third-party witnesses are beginning to Case 1:12-cv-12334-WGY Document 69 Filed 05/07/14 Page 2 of 9 3
as well. The Amyot Defendants, by contrast, have not produced a single document to the Commission, despite two sets of document requests and multiple telephone conferences. Instead, the only documents the Commission has received from the Amyot Defendants files were received indirectly from the Quebec Autorit des Marchs Financiers (AMF), which executed a search warrant on IAB in Quebec in J une 2011. On March 7, 2014, the SEC issued its Second Requests for the Production of Documents to the Amyot Defendants, which are the subject of the present motion (the Document Requests, attached hereto as Exh. 1). The Document Requests seek two categories of documents: (1) communications with certain individuals concerning Spencer, Al-Dora, and Al- Doras subsidiary, which was the entity that would purportedly acquire Spencer; and (2) documents and communications concerning certain aspects of the Amyot Defendants conduct involving other companies, the stocks of which the Amyot Defendants may have manipulated using similar plans and with similar intent. The Amyot Defendants have failed to respond to the Document Requests in writing or through the production of documents. Rather, the Amyot Defendants counsel has stated only that he is continuing to try to work with his clients to determine whether responsive documents exist. No justifiable reasons have been given for why the search has taken so long, nor has any indication been given when it will be complete. The Amyot Defendants failure to timely respond is not without precedent. In response to the Commissions First Set of Document Requests, served September 9, 2013 and attached hereto as Exh. 2, the Amyot Defendants failed to respond within 30 days. When they ultimately did respond in November 2013, after several letters inquiring about their delay, the Amyot Defendants claimed that they had no responsive documents to produce. See Correspondence between J . Drabick and J . Uretsky, attached hereto as Exh. 3; Amyot Defendants Responses and Objections, attached hereto as Exh. 4. Incredibly, even though the requests sought documents for the period J anuary 2009 to the present, the Amyot Defendants claimed that all of the Case 1:12-cv-12334-WGY Document 69 Filed 05/07/14 Page 3 of 9 4
responsive documents were either (i) seized by the AMF in J une 2011, and/or (ii) were gotten rid of by the Amyot Defendants shortly after the seizure took place. See Exh. 3 at 9-10 (Nov. 5, 2013 Letter from J . Uretsky). 1
On May 2, 2014, the undersigned, as counsel for the Commission, conferred in good faith via telephone with counsel for the Amyot Defendants concerning their lack of response. The undersigned had previously conferred with counsel for the Amyot Defendants on the same issue shortly after the deadline passed on April 7, 2014. No resolution was reached during either conference. ARGUMENT I. The Amyot Defendants Complete Failure to Respond Warrants Granting the Commissions Motion to Compel
The Federal Rules of Civil Procedure plainly require a response to the Commissions Document Requests and the Amyot Defendants failure to respond warrants issuance of an order compelling production. Rule 34(b)(2)(A) provides that a party upon whom a document request is served must respond in writing within 30 days after being served. Rule 34 goes on to provide that such response must include a response as to each item in the document request stat[ing] that inspection and related activities will be permitted or stat[ing] an objection to the request, including the reasons. Fed. R. Civ. P 34(b)(2)(B). The Amyot Defendants have not responded in writing at all, much less on an item-by-item basis. Under Rule 37, this failure warrants granting the Commissions motion to compel. Fed. R. Civ. P. 37(a)(3)(B) (A party seeking discovery may move for an order compelling production. This motion may be made if (iv) a party fails to respond that inspection will be permitted as requested under Rule 34.).
1 The Amyot Defendants likewise failed to timely file their Answer, which they filed on September 6, 2013, over five weeks after it was due. Case 1:12-cv-12334-WGY Document 69 Filed 05/07/14 Page 4 of 9 5
Moreover, any objections the Amyot Defendants may have had to the Document Requests have been waived by their failure to timely respond. To be sure, the Commission believes that the Document Requests are not objectionable and fall squarely within Rule 26s broad standard for discoverable information. Fed. R. Civ. P. 26(b)(1) (Parties may obtain discovery regarding any nonprivileged matter that is relevant to any partys claim or defense .); see also, e.g., Whittingham v. Amherst College, 164 F.R.D. 124, 126 (D. Mass. 1995) ([I]nformation is discoverable if there is any possibility it might be relevant to the subject matter of the action.). But even if the Amyot Defendants disagree and believe that one or more requests are objectionable, any such objections should be deemed waived. Failure to file a timely objection to a request for production of documents constitutes a waiver of any objections which a party might have to the requests. Willard v. Constellation Fishing Corp., 136 F.R.D. 28, 31 (D. Mass. 1991); see also Krewson v. City of Quincy, 120 F.R.D. 6, 7 (D. Mass. 1988) ([A] failure [to file timely objections] constitutes a waiver of any objections which a party might have to the requests. Any other result would . . . give a license to litigants to ignore the time limits for discovery without any adverse consequences. (internal citations omitted)); Kooker v. Susan Marie II, Inc., 1998 WL 34061513, *1 (D. Mass. Nov 10, 1998). Here, the lack of response four weeks after the response deadline, coupled with the Commissions multiple inquiries and the Amyot Defendants history of late responses, warrants holding that the Amyot Defendants objections, if any, have been waived. Cf. Brenford Envtl. Sys. v. Pipeliners of Puerto Rico, Inc., 269 F.R.D. 143 (D.P.R. 2010) (holding all objections waived when party provided response to document requests 61 days late); Krewson, 120 F.R.D. at 7 (holding all objections waived when defendant failed to file objections until after deadline had passed and a motion to compel was filed). For the reasons stated above, the SEC respectfully requests that this Court issue an order compelling the Amyot Defendants to produce all responsive documents to the Document Case 1:12-cv-12334-WGY Document 69 Filed 05/07/14 Page 5 of 9 6
Requests within 14 days. Given the Amyot Defendants prolonged delay and the upcoming depositions in this matter, the Commission suggests that a 14-day deadline is both reasonable and warranted. II. The Court Should Issue Sanctions in the Form of an Order Prohibiting Use of Later-Produced Documents by the Amyot Defendants
The Amyot Defendants failure to respond the Document Requests, when considered in context of the Amyot Defendants failure to produce any documents to date, also warrants the issuance of discovery sanctions. The Court has broad discretion and authority to issue discovery sanctions when the facts and circumstances so warrant. See Martinez-Serrano v. Quality Health Servs. of Puerto Rico, Inc., 568 F.3d 278, 283 (1st Cir. 2009) (It is a bedrock principle that federal trial courts possess wide-ranging authority to manage the conduct of litigation and, as a necessary corollary of that authority, to sanction litigants who fail to comply with court-imposed deadlines.); Faigin v. Kelly, 184 F.3d 67, 84 (1st Cir. 1999) (A district courts case-management powers apply with particular force to the regulation of discovery and the reconciliation of discovery disputes.). Pursuant to Rule 37(d)(1)(A)(ii), the Court may order sanctions if a party, after being properly served with a request for inspection under Rule 34, fails to serve its written response. Rule 37 further provides that the sanctions available include prohibiting the disobedient party from supporting or opposing designated claims or defenses, or from introducing designated matters into evidence. Fed. R. Civ. P. 37(d)(3), (b)(2)A)(ii)). In this matter, there is no dispute that Amyot Defendants were properly served with the Document Requests and that the Amyot Defendants have failed to timely respond. Counsel for the Amyot Defendants has not provided any justifiable reason for the delay, and instead claims only that he is continuing to try to work with his clients to determine whether responsive documents exist. This delay has occurred against the backdrop of the Amyot Defendants failure Case 1:12-cv-12334-WGY Document 69 Filed 05/07/14 Page 6 of 9 7
to produce a single document thus far in this litigation, despite multiple conferences and despite Commission correspondence explaining why such failure is incredible given the scope and timeframe of the requests. See, e.g., Exh. 3 at 12-13 (Nov. 7, 2013 Letter from J. Drabick). In these circumstances, it would be unjust for the Amyot Defendants to be permitted to later produce documents in support of their defenses when they have failed to timely produce any documents to date. With the bulk of the depositions in this matter nearly all of which will take place in Canada pursuant to letters rogatory set to take place in late May and June 2014, the Commission would be unfairly prejudiced if the Amyot Defendants were to produce documents thereafter in support of their defenses. See Update Art, Inc. v. Modiin Pub., Ltd., 843 F.2d 67, 71 (2d Cir. 1988) (noting that a purpose of sanctions is to ensure that a party will not benefit from its own failure to comply). Accordingly, the Commission respectfully requests that the Court issue sanctions pursuant to Rule 37(d)(3) and (b)(2)A)(ii) in the form of an order prohibiting the Amyot Defendants from using to support any defenses, or introducing as evidence, any documents sought in any of the Commissions document requests not produced within 14 days of the date of the Courts order. Cf. Applewood Landscape & Nursery Co., Inc. v. Hollingsworth, 884 F.2d 1502, 1507 (1st Cir. 1989) (upholding district court sanction under Rule 37 prohibiting a party from offering testimony of surprise expert witness who was not designated or placed on witness list in timely manner); Petroleum Ins. Agency, Inc. v. Hartford Accident and Indem. Co., 106 F.R.D. 59, 64 (D. Mass. 1985) (noting that a partys negligent failure to timely produce documents in response to document requests would fully support a sanction in the form of an order precluding use of the later-produced documents at trial). 2
2 The Commission notes that Rule 37(d)(3) also provides that [i]nstead of or in addition to these sanctions, the court must require the party failing to act, the attorney advising that party, or both to pay the reasonable expenses, including attorneys fees, caused by the failure, unless the failure was substantially justified or other circumstances make an award of expenses unjust. The Commission Case 1:12-cv-12334-WGY Document 69 Filed 05/07/14 Page 7 of 9 8
CONCLUSION For the reasons stated above, the SEC respectfully requests that this Court grant the Commissions motion to compel and issue sanctions in the Commissions favor.
Dated: May 7, 2014 Respectfully submitted,
/s/ J ames R. Drabick Frank C. Huntington (Mass. Bar No. 544045) Amy Gwiazda (Mass. Bar No. 663494) J ames R. Drabick (Mass. Bar No. 667460)
Attorneys for Plaintiff SECURITIES AND EXCHANGE COMMISSION 33 Arch Street, 23 rd Floor, Boston, MA 02110 (617) 573-4535 (Drabick direct) (617) 573-4590 (fax) drabickj@sec.gov (Drabick email)
does not believe that the Amyot Defendants failure to timely respond to the Document Requests is substantially justified. The Commission, however, is not affirmatively seeking the imposition of a monetary sanction, given the practical difficulties associated with calculating such an award for the Commission. Case 1:12-cv-12334-WGY Document 69 Filed 05/07/14 Page 8 of 9 9
CERTIFICATE OF SERVICE I, J ames R. Drabick, certify that on May 7, 2014, the foregoing Motion was filed electronically with the Court and was served upon each party appearing pro se and the attorney of record for each other party by electronic means on May 7, 2014.
/s/ J ames R. Drabick J ames R. Drabick Case 1:12-cv-12334-WGY Document 69 Filed 05/07/14 Page 9 of 9