Sec. & Exch. Comm'n v. Sterritt

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. RICHARD DALE STERRITT, JR. et al, Defendants.

21-CV-2008 (KAM)(PK)

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK

May 28, 2021

MEMORANDUM & ORDER

KIYO A. MATSUMOTO, United States District Judge:

In this civil action, commenced on April 14, 2021, the Securities and Exchange Commission (the "SEC") alleges that defendants Richard Dale Sterritt, Jr. (aka Richard Richman), Michael Greer, Deanna L. Looney, Robert W. Magness Jr., Katie Mathews, James Christopher Pittman, and Mark Ross (collectively, defendants) and Naomi Ross, Robyn L. Straza, Angeliki (aka Angie) Touhouliotis, and Rainmaker Advisors, LLC (collectively, relief defendants), participated in multiple fraudulent schemes in violation of the securities laws. (ECF No. 1, SEC Complaint ("SEC Compl.") ¶¶ 1-11.) On April 8, 2021, a grand jury in the Eastern District of New York returned a five-count indictment charging defendant's Richard Dale Sterritt, Jr., Michael Greer, Robert Magness, Mark Ross and Robyn Straza with securities fraud, securities fraud conspiracy, wire fraud conspiracy and money laundering conspiracy for essentially the same conduct alleged in the SEC Complaint. See United States v. Sterrit, et al., 21-cr-193 (KAM). The United States, through the United States Attorney in the Eastern District of New York (the "government"), has moved to intervene in this civil action in order to seek a stay the civil proceedings pending the outcome of the criminal case. (ECF Nos. 14, Notice of Motion; 14-1 Government's Memorandum of Law in Support of the Application to Intervene and Stay Civil Proceedings ("Gov. Mem.").) For the reasons set forth below, the government's motion to intervene and for a stay is GRANTED.

BACKGROUND

On April 8, 2021, the government filed a sealed five-count indictment charging defendants Richard Dale Sterritt, Jr., Michael Greer, Robert Magness, Mark Ross and Robyn Straza with criminal conspiracy and securities fraud. (See No. 21-cr-193, ECF No. 1, Indictment.) On April 14, 2021, the indictment was unsealed. (See No. 21-cr-193, ECF No. 7.) That same day, the SEC filed a civil complaint alleging violations of the securities laws by Sterritt, Greer, Magness, Ross, and Straza. (See SEC Compl.)

The civil and criminal actions address essentially the same allegedly fraudulent schemes involving the same securities. The indictment and the complaint allege that Sterritt and other defendants participated in fraudulent schemes concerning thesecurities of Zona Energy, Inc. ("Zona") and the public issuer that later acquired Zona, ERF Wireless, Inc. ("ERFB"), as well as a related market manipulation scheme in another publicly traded company, OrgHarvest, Inc. ("ORGH"). (Indictment ¶ 22; SEC Compl. ¶ 1.) Specifically, both the indictment and SEC complaint focus on: the Zona Energy Offering fraud and subsequent misappropriation of investor funds and scheme to launder proceeds (Indictment ¶¶ 23-48; SEC Compl. ¶¶ 30-77); the ORGH market manipulation scheme involving the use of matched trades and kickbacks to the undercover agent (Indictment ¶¶ 49-72; SEC Compl. ¶¶ 78-102); and the attempted ERFB stock manipulation scheme involving the use of nominee shareholders, a similar matched trading plan, and false press releases (Indictment ¶¶ 73-81; SEC Compl. ¶¶ 103-117).

After the SEC action was filed and the criminal indictment was unsealed, the government promptly moved to intervene in the instant SEC civil action to seek a stay of the civil action pending the outcome of the parallel criminal proceedings and filed a memorandum in support of that motion. (ECF No. 14.) According to the government, defendants Michael Greer, Deanna Looney, Robert Magness, Katie Mathews, James Christopher Pittman, Mark Ross, and relief defendant Robyn Straza have each advised the government through his or her counsel that they do not object to entry of the requested orderto stay the SEC civil case. (Gov. Mem. at 1.) Defendant Richard Dale Sterritt, Jr. has advised the government, through counsel, that he does not consent to entry of the requested order to stay.¹ (Id.) The government has not contacted relief defendants Naomi Ross, Angeliki Touhouliotis, or Rainmaker Advisors, LLC for their respective positions on the government's motion. (Id.) The government also consulted with the SEC, which takes no position on the government's motion to intervene and stay the civil proceedings. (Id.)

DISCUSSION

The court will independently analyze the two issues raised by the government's motion. First, the court will address the unopposed request by the government to intervene in this action.² Second, the court will address the government's request for a stay of this civil action.

I. Intervention

The government has moved to intervene in this action, arguing that it may do as a matter of right or alternatively ona permissive basis. (See Gov. Mem. at 4-7.) The request to intervene is unopposed, but the court nonetheless will address the government's motion.

Under Federal Rule of Civil Procedure 24, a party may intervene in a civil action either as a matter of right or on a permissive basis. Intervention as of right is appropriate when, upon a timely motion, a party seeking to intervene

claims an interest relating to the property or transaction that is the subject of the action, and is so situated that disposing of the action may as a practical matter impair or impede the movant's ability to protect its interest, unless existing parties adequately represent that interest.

Fed. R. Civ. P. 24(a)(2); see also Griffin v. Sheeran, 767 F. App'x 129, 132 (2d Cir. 2019) (summary order) ("To intervene as of right under Federal Rule of Civil Procedure 24(a)(2), 'an applicant must (1) timely file an application, (2) show an interest in the action, (3) demonstrate that the interest may be impaired by the disposition of the action, and (4) show that the interest is not protected adequately by the parties to the action.'" (quoting Catanzano v. Wing, 103 F.3d 223, 232 (2d Cir. 1996))).

Intervention as of right is appropriate in this case under Rule 24(a)(2). First, the SEC Complaint was filed on April 14, 2021 and the government moved to intervene in a timely manner on May 19, 2021, just over a month later. (See ECF Nos.1, 14); see Sec. & Exch. Commln v. Shkreli, No. 15-cv-7175 (KAM)(RML), 2016 WL 1122029, at *2 (E.D.N.Y. Mar. 22, 2016) (delay of just over one month was timely); United States v. Simpson Borough Place Corp., 01-cv-693 (DLI)(VVP), 2007 WL 2581888, at *3 (E.D.N.Y. Sept. 5, 2007) ("A delay of fifteen months is untimely."). Second, the court agrees that the government has "a discernible interest in intervening in order to prevent discovery in the civil case from being used to circumvent the more limited scope of discovery in the criminal matter." Shkreli, 2016 WL 1122029, at *2 (quoting S.E.C. v. Chestman, 861 F.2d 49, 50 (2d Cir. 1988)); see also Sec. & Exch. Comm'n v. El-Khouri, No. 19-cv-9744 (LAP), 2021 WL 601652, at *2 (S.D.N.Y. Jan. 26, 2021). Third, further proceedings in this action would likely impair the government's interest in the criminal case in limiting the defendants to the discovery available under the Federal Rules of Criminal Procedure. See id. Finally, although the interests of the SEC and the government overlap to some extent, the government is uniquely focused on the enforcement of criminal statutes. See S.E.C. v. Downe, No. 92-cv-4092, 1993 WL 22126, at *12 (S.D.N.Y. Jan. 26, 1993) ("[E]ven though the SEC is involved in this action, the United States Attorney may have an interest in this litigation which is qualitatively different from the SEC's interest.").

For these reasons, intervention as of right is appropriate in this action.

Alternatively, the court concludes that permissive intervention under Federal Rule of Civil Procedure 24(b)(1) is also appropriate. Rule 24(b)(1) provides that, upon a timely motion, a court "may" permit anyone to intervene who "has a claim or defense that shares with the main action a common question of law or fact." Fed. R. Civ. P. 24(b)(1)(B). "Permissive intervention pursuant to Rule 24(b) 'is discretionary with the trial court.'" Citizens Against Casino Gambling in Erie Cty. v. Hogen, 417 F. App'x 49, 50 (2d Cir. 2011) (summary order) (quoting H.L. Hayden Co. of N.Y. v. Siemens Med. Sys., Inc., 797 F.2d 85, 89 (2d Cir. 1986)); see also St. John's Univ., New York v. Bolton, 450 F. App'x 81, 84 (2d Cir. 2011) (summary order) ("A district court has broad discretion under Rule 24(b) to determine whether to permit intervention . . . .").

Here, as discussed above, there are overlapping facts and some legal issues between the SEC Complaint and the indictment in the criminal case. Specifically, defendants allegedly participated in fraudulent schemes concerning the securities Zona and the public issuer that later acquired Zona, ERFB, as well as a related market manipulation scheme in another publicly traded company, ORGH. (Compare Indictment ¶ 22, withSEC Compl. ¶ 1.) In participating in these fraudulent schemes, defendants allegedly engaged in practices in violation of federal criminal and securities laws including the use of matched trades, false press releases, and unlawful kickbacks to manipulate securities prices and defraud investors. (See Indictment ¶¶ 49-81; SEC Compl. ¶¶ 78-117.) Both actions share common legal and factual questions, which militates strongly in favor of permissive intervention. See Downe, 1993 WL 22126, at *11 (granting permissive intervention where criminal investigation and corresponding SEC action arose "out of common questions of law and fact"); see also Chestman, 861 F.2d at 50 (concluding that it was not an abuse of discretion to permit the government to intervene, either as of right or on a permissive basis, to seek a stay of civil discovery in parallel SEC action). Accordingly, permissive intervention is also appropriate.

For these reasons, the government's ...