This lawsuit was brought by the Securities and Exchange Commission (“SEC”) against Collector's Coffee Inc., d/b/a Collectors Café (“CCI”), and Mykalai Kontilai (“Mykalai”), the founder, President, and Chief Executive Officer of CCI, alleging that the defendants violated federal securities laws by defrauding investors. See Amended Complaint, filed Nov. 4, 2019 (Docket # 134). Before the Court is the SEC's motion for contempt and sanctions against Mykalai and his wife, Veronica Kontilai (“Veronica”), who was named as a “relief defendant.”[1] The Court held a two-day hearing on plaintiff's motion on December 7 and 8, 2020. In addition to the papers filed on the motion for contempt, the parties made a number of pre-hearing and post-hearing submissions.[2] After considering the parties’ submissions and the evidence presented at the hearing, we conclude that the motion for contempt and sanctions for violating the TRO and under the Court's inherent power should be denied. In a separate order issued today, we address the SEC's motion for sanctions pursuant to Fed. R. Civ. P. 37.

I. BACKGROUND

The SEC filed this action on May 14, 2019. (Docket # 1). At the time it filed the case, it presented to the district judge an ex parte motion for a temporary restraining order. (Docket ## 8-11). The district judge then assigned to the case, Judge Schofield, signed the temporary restraining order on the day the case was filed. See Temporary Restraining Order, dated May 14, 2019 (Docket # 12) (“TRO”).

The order froze the “assets, funds, or other property held by or under the direct or indirect control of Defendants Collectors’ Café or Mykalai Kontilai ... wherever located, up to the amount of $46,121,649.68 ....” TRO ¶ I.A. The TRO directed CCI and Mykalai to “hold and retain within their control, and otherwise prevent any disposition ... or other disposal whatsoever of any of their funds or other assets or things of value presently held by them ... in whatever form such assets may presently exist and wherever located” up to $46,121,649.68. Id. ¶ I.B. The TRO ordered CCI and Mykalai to refrain from “tak[ing] any action to interfere with the asset freeze, including, but not limited to, the filing of any lawsuits, liens, or encumbrances ... provided, however, that any party or non-party may seek leave from this order upon a proper showing.” Id. ¶ I.D. The TRO enjoined CCI and Mykalai from “destroying, altering, concealing, or otherwise interfering with the access of the SEC to any and all documents, books and records, that are in the possession, custody or control of the Defendants ... that refer, reflect, or relate to the allegations in the Complaint, or that refer reflect or relate to the Defendants’ assets, finances or business operations.” Id. ¶ II. Finally, the TRO required CCI and Mykalai to file a sworn accounting within five business days, describing each “account ... maintained in the names of Defendants,” along with all “investments, securities, funds, real estate, collectibles, and other assets held in the names of Defendants,” as well as every “transaction in which the ownership, direction or control of any funds or other assets ... have been transferred, directly or indirectly, to or from Defendant Collectors Café since April 1, 2014,” and every “transaction exceeding $3,000 in value in which the ownership, direction of control of any funds or other assets ... have been transferred, directly or indirectly, to or from Defendant Mykalai Kontilai since April 1, 2014.” Id. ¶ III.

The TRO set a hearing date for May 24, 2019, for the defendants to contest a contemplated preliminary injunction motion “extending the asset freeze and other ancillary relief entered in this Order until final adjudication of this case on the merits.” Id. ¶ VI. By joint letter motion, the parties asked Judge Schofield to vacate that hearing date and reset it to a later date. See Joint Letter Motion for Extension of Time and Extension of TRO at 2, filed May 20, 2019 (Docket # 17). The request stated that the “parties agree and request that all other provisions of the TRO remain in force, and the parties understand that by operation of the terms in the TRO, the asset freeze and order preserving documents and evidence ... remain in force pending the Court's adjudication of the SEC's Motion for a Preliminary Injunction or hearing on the merits.” Id. Judge Schofield adjourned the hearing and ultimately referred the contemplated motion for a preliminary injunction to the undersigned. See Order, entered June 24, 2019 (Docket # 52); Order, entered June 27, 2019 (Docket # 56). The parties later consented to the undersigned ruling on the motion. See Notice, Consent, and Reference of a Dispositive Motion to a Magistrate Judge, entered July 1, 2019 (Docket # 59); Notice, Consent, and Reference of a Dispositive Motion to a Magistrate Judge, entered Nov. 6, 2019 (Docket # 138).

This Court eventually set December 13, 2019, as the new hearing date on the motion for a preliminary injunction. See Memorandum Endorsement, entered Nov. 7, 2019 (Docket # 139). The SEC filed its motion for a preliminary injunction on November 12, requesting that this Court issue a “preliminary injunction continuing the asset freeze and other relief previously obtained, as well as additional relief, for the pendency of this litigation against Defendants [CCI] and Mykalai Kontilai, and Relief Defendant Veronica Kontilai.” See Renewed Motion for a Preliminary Injunction at 1, filed Nov. 12, 2020 (Docket # 141) (“Renewed Motion”). Several weeks later, the defendants along with Veronica requested a stay of the case to obtain new counsel. See Joint Letter Motion to Continue, filed Dec. 6, 2019 (Docket # 171); Letter Motion to Stay, filed Dec. 6, 2019 (Docket # 172). After a conference on December 6 to discuss the application, the parties submitted a joint letter and proposed order stipulating to “the relief sought in the Renewed Motion on a temporary basis pending a hearing on the Renewed Motion.” Joint Letter at 3, filed Dec. 9, 2020 (Docket # 174). The Court signed the proposed order attached to the joint letter on the same day. See Order, entered Dec. 9, 2020 (Docket # 175) (“Stipulated Order”). The Stipulated Order included additional “obey-the-law” provisions directed at CCI and Mykalai (see id. ¶¶ I-III) and provisions freezing Veronica's assets “up to the amount of $313,622.” Id. ¶ IV.A. The Stipulated Order specifically exempted Veronica's “earnings for services rendered to, for or on behalf of Uber, Lyft and/or any other employer ....” Id. ¶ IV.D.

Since the issuance of the Stipulated Order, no party has sought a hearing date or adjudication of the preliminary injunction motion. Discovery has proceeded in the meantime and the defendants have gone through several iterations of attorneys.[3] The parties’ disputes over discovery and other matters have resulted in judicial intervention on more than a dozen occasions.[4]

The SEC first filed a motion for contempt on June 25, 2020. See Motion for Sanctions and Order Finding Contempt, filed June 25, 2020 (Docket # 414). Two days before his response was due, on July 7, 2020, Mykalai's counsel sought an indefinite extension to respond to certain aspects of the motion, among other forms of relief. See Letter from Steven Sessa, filed July 7, 2020 (Docket # 430). In response, the Court issued an order describing why the motion the SEC filed was confusing and gave the SEC leave to file a new motion. See Order, entered July 9, 2020 (Docket # 435). The SEC filed the instant motion on July 17, 2020. The motion is premised on allegations that the Kontilais violated the TRO, that Mykalai engaged in two insurance fraud schemes, and that Mykalai engaged in bad-faith litigation conduct. Following briefing, the SEC asked for additional sanctions pursuant to Fed. R. Civ. P. 37(b)(2)(A) based on Mykalai's alleged violation of this Court's July 6, 2020, Order (Docket # 427). See Letter from Terry Miller, filed July 30, 2020 (Docket # 497).

On October 30, 2020, the Court ordered the hearing on the motion. See Order, entered October 30, 2020 (Docket # 609). The hearing was held by video on December 7 and 8, 2020.[5]

II. FACTS

A. Undisputed Facts

The following facts are derived from the testimony at the hearing that has not been challenged by defendants or the SEC.

In about June 2019, Mykalai traveled to Mexico. (Mykalai: Tr. 149). He returned to the United States and then traveled to Canada on or around August 5, 2019. (Id. 151). From there, he flew to Ukraine (id.) and then took a train to Russia, arriving around September 2, 2019. (Id. 152). He was picked up from the train station by John Mark Dougan. (Id. 153). In Russia, Mykalai received money from Veronica via MoneyGram, consisting of about $25,000 total over a two-month period. (Id. 154). Part of that money was transferred to him via another person, a woman named Irena. (Id. 155). Mykalai gave Dougan money several times in 2019. (Id. 157; Dougan: Tr. 98).

While in Russia, Mykalai told Dougan that he was going to be firing his then attorney. (Mykalai: Tr. 157). Dougan recommended that Mykalai hire Steven Sessa. (Id. 158). Mykalai contacted Sessa via telephone around October 2019. (Id. 159). Sessa traveled to Moscow in late December 2019 to meet Mykalai. (Id. 159). Dougan and Mykalai picked Sessa up at the airport in a car. (Id. 161). Sessa told Mykalai later that, at some point during Sessa's trip, Sessa and Dougan spoke about the possibility of Sessa giving to someone else a portion of the attorney's fees due to Sessa in the case. (Id. 162).

Mykalai ultimately hired Sessa as his attorney, along with Curtis Alva. (Id. 177). At some point, Mykalai authorized the filing of a lawsuit against Debevoise & Plimpton on behalf of himself personally. (Id. 179).

In May 2020, Dougan sent an email to Mykalai's insurance carrier. (Id. 191). In the email, Dougan claimed that Mykalai had tried to initiate two separate schemes to defraud relating to the insurance policy: 1) to have Sessa “bill the shit out of Chubb” and “slide [Mykalai] cash on the side,” and 2) to have another attorney file a class action against CCI, as to which Mykalai would admit liability and then split the resulting fee with the attorney who filed it. Defendant Exhibit S at 1-2 (admitted at Tr. 64) (the “Dougan Email”).

B. Hearing Testimony

The Court heard testimony from five witnesses. The SEC called Dougan, Mykalai, and Sessa. The defense also called Mykalai, along with Michael E. Gauger and Amparo Sanchez. The SEC intended to call Veronica (Tr. 127, 219), but she failed to appear. (See Tr. 320). We summarize the relevant parts of each witness's testimony next without making any judgment in the summary about whether the testimony is true or false.

1. John Mark Dougan

Dougan helped Mykalai with an application for asylum Mykalai made in Russia. (Dougan: Tr. 27). Dougan and Mykalai also discussed the insurance policy Mykalai had with Chubb. (Id. 28). Mykalai told Dougan that “his goal was to have Steve Sessa bill the insurance company and kick him back 50 or 60 percent of whatever fees were billed.” (Id. 40). Also, Mykalai wanted “to find yet another attorney to engage in a class action lawsuit on behalf of his investors” (id. 41) in order to split the resulting payout. (Id. 42). Dougan taped these conversations. (Id. 42). Dougan confirmed that the SEC's Exhibits 36 and 38 were accurate recordings of those conversations. (Id. 50). Dougan identified Mykalai as the voice on Exhibit 36 “explaining the plan to split fees with Mr. Kontilai's new lawyer” (id. 53) and testified that the recording was made in Dougan's apartment on December 30, 2019, prior to picking up Sessa. (Id. 54).

Dougan testified that he had made other recordings of conversations between himself, Sessa, and Mykalai (id. 55) and confirmed that the SEC's Exhibits 40 and 42 were recordings of those conversations. (Id. 56). Dougan stated the recordings were made in “the evening of December 30.” (Id. 56). Dougan made recordings of conversations between himself and Sessa alone on the night of December 30 and testified that the SEC's Exhibits 44 and 46 (the “Sessa Recording”) were the recordings of those conversations. (Id. 57-58).[6]

Dougan provided WhatsApp messages to the SEC between himself and Mykalai. (Id. 59-60), which were admitted as SEC's Exhibit 33 (admitted at Tr. 62) (the “WhatsApp Messages”). Some of the messages were “deleted at Mr. Mykalai's request.” (Id. 62).

On cross-examination, Dougan was questioned at length about incidents in his past and about his experience with manipulating audio files. (See id. at 67-86). Dougan also testified about his communications with the SEC, some of which were admitted into evidence. (Id. 111; 113; 114).

2. Mykalai Kontilai

In addition to recounting the facts described in section II.A above, Mykalai testified that he paid for his trip to Mexico with “four or 5,000” dollars from his in-laws. (Mykalai: Tr. 149). He used the same money to pay for his trip to Ukraine. (Id. 152). With regard to the MoneyGram transfers, Veronica got the funds from her parents (id. 206), and Mykalai believed such transfers were compliant with the asset freeze. (Id.).

Sessa told Mykalai in March 2020 that Dougan was attempting to extort both of them. (Id. 163).

Mykalai did not say any of the words on the recordings offered into evidence during Dougan's testimony. (Id. 169). Mykalai did not speak with Sessa about “a potential class action against Collector's Coffee” at the lunch they had. (Id. 171-72). By late December 2019, Mykalai believed his assets were unfrozen after conversing with Alva, his attorney. (Id. 176-77).

With regard to the alleged fee-sharing scheme, Mykalai stated that Dougan was lying about it, that the recordings were fabricated, and that he was being framed by Dougan. (Id. 197). He described the Dougan Email to the insurance company as “totally false,” except that it was true that “Steve Sessa did not participate in any type of fee sharing.” (Id. 209). Mykalai believed Dougan “was planning on sharing fees with Sessa.” (Id. 197). Sessa had told him about “text messages that he received from Dougan,” but Sessa never provided him with those messages after being asked. (Id. 199).

3. Steven Sessa

Sessa first spoke with Mykalai at the end of September 2019 by phone. (Sessa: Tr. 236). Sessa appeared at a conference in this case on December 6, 2019, at Mykalai's direction, but he had not yet “been formally engaged” at that time. (Id. 237). When he traveled to Russia in December 2019, Sessa had a conversation with Dougan “where [Dougan] proposed that [Sessa] share fees from this case with [Mykalai].” (Id. 239). This conversation was on December 31. (Id.). Sessa could not recall if part of the proposal involved sharing fees with Dougan himself. (Id.). Sessa returned early from the trip because of this conversation. (Id. 240). Sessa identified the voices in the Sessa Recording as Dougan and himself. (Id. 242).

Sessa would never participate in the proposed fee-splitting scheme, as it was improper. (Id. 243). He has never sent any money to Mykalai or Dougan (id. 253), never shared any fees with them, (id. 254), and never agreed to share fees with them. (Id.).

Mykalai had proposed to Sessa the possibility of filing a class action lawsuit in order to obtain a portion of the settlement for himself. (Id. 250). Sessa could not recall when this conversation took place (id. 251) and did not recall what he said in response. (Id. 252).

4. Michael E. Gauger

Gauger is the “second in charge” at the Palm Beach County's Sheriff's Office, where Dougan worked between 2005 and 2009. (Gauger: Tr. 269). Gauger testified that he was familiar with Dougan's reputation for truthfulness and that “his veracity for truth is extremely questionable.” (Id. 271).

5. Amparo Sanchez

Sanchez is the mother of Veronica. (Sanchez: Tr. 275). Veronica asked her for money in September and October of 2019. (Id.). At first Sanchez testified that Veronica did not tell her “why she was asking me for money” (id. 276) but then stated that Veronica said she was going to send the money to her husband, Mykalai. (Id.). Sanchez gave Veronica approximately $25,000. (Id.). The money came from selling Sanchez's house and the pensions that she and her husband had received. (Id.). Sanchez had taken the money “out of the bank which I had put away ... at home, along with some cash for emergencies for a long time.” (Id. 277). She denied ever receiving money from Mykalai or CCI. (Id. 278).

On cross-examination, Sanchez could not remember the name of the bank she had taken the money from (id. 280), although she had earlier identified it as the Bank of America. (Id. 279). She kept “40- or 50,000” dollars in cash at home. (Id. 280; accord id. 282). She had taken the money out of the bank “when I put my check many years ago.” (Id. 281). Sanchez testified she did not expect Veronica to pay the money back. (Id. 285). She testified that the house she lived in “is under Mykalai's name,” but that she and her husband “have been paying for everything so far.” (Id. 286). She first testified that she did not know if she provided any money to Mykalai to travel to Mexico in the summer of 2019 (id. 288) and then stated that she did not do so (id. 289).

C. Findings of Fact Relevant to Disputed Issues/Credibility Determinations

We next make certain findings relevant to the disputed issues in this case along with an assessment of credibility. Findings of fact also appear in the “Discussion” section that follows to the extent that section contains any factual statements regarding the evidence.

As for Dougan's testimony, the Court finds credible Dougan's account that Mykalai discussed with him and was contemplating schemes to defraud the insurance company by splitting fees with Sessa and orchestrating a phony class action suit that would be settled by means of a kickback to himself. (See Dougan: Tr. 40, 42). We note that this testimony is corroborated by the recordings in which Mykalai discusses the scheme with Dougan at length (see SEC Exhibits 36, 38), though we would find Dougan credible on this point even if there were no recordings.[7] Dougan's testimony was corroborated in part by Sessa's account, which confirmed that Mykalai had proposed the class action scheme directly to Sessa. (See Sessa: Tr. 250). The Court does not credit Mykalai's contention that Dougan fabricated the recordings in order to extort Mykalai and Sessa. Instead, we find the recordings genuine and note that Sessa recognized his voice on a recording and could not testify that the recording was fabricated. (Sessa: Tr. 242-43). The Court similarly does not credit Mykalai's assertion that Dougan fabricated the WhatsApp messages between himself and Mykalai and instead finds those messages genuine.

As for Mykalai, the Court does not credit Mykalai's denial that he proposed the insurance schemes (Mykalai: Tr. 171-72. 193-99), given the recordings and the fact that his own attorney, Sessa, admitted that Mykalai did propose the class-action scheme to him. (Sessa: Tr. 250). Because of his lack of credibility, and based on the fact that his attorneys actually sought to have the TRO vacated, the Court similarly finds incredible Mykalai's assertion that, following a conversation with Alva or at any other time after the TRO was entered, he did not believe his assets were frozen. (Mykalai: Tr. 175-77). Additionally, the notion that he believed his assets were unfrozen is inconsistent with the fact that, as he admitted, he never made any effort to access his assets. (Id. 176).

The Court finds credible Sessa's denial of participating in the proposed schemes. (Sessa: Tr. 254). The main source of the allegations, Dougan, never testified that Sessa participated or agreed to participate. His email to the insurance company did not contain any such allegation either. See Dougan Email at 1.

Some of Sanchez's testimony was incredible. She contradicted herself in her own testimony. She first said she did not know why Veronica needed money (Sanchez: Tr. 276), then said she did know (id.). She first said the money was from Bank of America (id. 279), then said it was not from that bank and then that she did not remember where it was from (id. 280). She first said she did not know if she gave Mykalai any money to travel to Mexico in the summer of 2019 (id. 288), then said categorically she did not give him any. (Id. 289). The Court is thus skeptical of her testimony that the money she gave to Veronica came from a house she had sold years ago, or from the pension sums that she and her husband received. (Id. 276). Sanchez seemingly had a conventional life in accumulating whatever savings she had. She worked for Motorola for 21 years and her husband worked for Hertz for 26 years. (Id.). She owned a house and she and her husband had pensions (Id. 276-77). Motorola made direct deposits of her pension payments to her bank. (Id. 281). It makes little sense that she would keep $40-50,000 of her own savings in cash in her home. (Id. 280).

Gauger's testimony concerning Dougan's reputation for truthfulness was not very helpful and does not alter our conclusions about Dougan's testimony.

III. DISCUSSION

The SEC argues that 1) Mykalai should be held in civil contempt for violating the TRO (SEC Br. at 32-42), 2) he should be sanctioned under the Court's inherent power for “a fraud upon the court and bad-faith litigation conduct” (SEC Br. at 46), and 3) he should be sanctioned under Fed. R. Civ. P. 37 for failing to comply with this Court's discovery order appearing as Docket # 427 (SEC Br. at 65-66).

The SEC argues that Veronica should be held in civil contempt and sanctioned for violating the TRO and failing to appear at the hearing. SEC Br. at 43.

We deal with the application for sanctions under Rule 37 in a separate Order. We address the arguments as to contempt and sanctions based on the inherent power of the Court next.

A. Civil Contempt

A federal court may hold a party in civil contempt for violation of a court order. See Chao v. Gotham Registry, Inc., 514 F.3d 280, 291 (2d Cir. 2008). “To establish contempt, ‘a movant must establish that (1) the order the contemnor failed to comply with is clear and unambiguous, (2) the proof of noncompliance is clear and convincing, and (3) the contemnor has not diligently attempted to comply in a reasonable manner.’ ” Perez v. Danbury Hosp., 347 F.3d 419, 423-24 (2d Cir. 2003) (citation omitted); accord Chao, 514 F.3d at 291. The movant bears the burden of proving contempt by “clear and convincing” evidence. See City of New York v. Local 28, Sheet Metal Workers’ Int'l Ass'n, 170 F.3d 279, 282 (2d Cir. 1999); accord E.E.O.C. v. Int'l Ass'n of Bridge Structural and Ornamental Ironworkers Local 580, 2011 WL 1219261, at *7 (S.D.N.Y. Mar. 11, 2011). “In the context of civil contempt, the clear and convincing standard requires a quantum of proof adequate to demonstrate a ‘reasonable certainty’ that a violation occurred.” Levin v. Tiber Holding Corp., 277 F.3d 243, 250 (2d Cir. 2002) (citation omitted); accord Leser v. U.S. Bank Nat'l Ass'n, 2011 WL 1004708, at *10 (E.D.N.Y. Mar. 18, 2011); City of New York v. Golden Feather Smoke Shop, Inc., 2010 WL 2653369, at *5 (E.D.N.Y. June 25, 2010).

The SEC alleges that Mykalai and Veronica violated the TRO in several ways. SEC Br. at 32. While Veronica did not file a brief, Mykalai makes a threshold argument that no violations could have occurred. The basis for this argument is that the TRO was not actually in effect because it had been superseded by the Stipulated Order issued on December 9, 2019. MK Br. at 26.

We find this argument completely meritless. Mykalai begins by arguing that the “duration limitations applicable to TROs in Rule 65” somehow terminated the TRO. MK Br. at 3. While Fed. R. Civ. P. 65(b)(2) requires that a deadline be put in a temporary restraining order of no more than 14 days, it also specifically allows for a longer period if “the adverse party consents to a longer extension.” Mykalai asserts that he did not stipulate to any extension “beyond the date of the Stipulated Order.” MK Br. at 26. But the record contains a document signed by his attorney stating that Mykalai “stipulated to an extension of the TRO and ha[s] agreed to waive any right to a hearing within fourteen days under Federal Rule of Civil Procedure 65(b)(2) and waived any right to appeal, if any, of the extended TRO.” See Docket # 17 at 1. Mykalai's agreement to extend had no termination date. The TRO itself contains no termination date. Thus, the TRO remains in effect unless Mykalai can point to an order or event terminating it.

Mykalai argues that the Stipulated Order containing the parties’ stipulation to some of the relief sought in the motion for a preliminary injunction “replace[d]” the TRO. MK Br. at 26. We reject this argument as well. Nothing in the text of the Stipulated Order states that it was superseding or “replacing” the TRO. The fact that the TRO stated that it would remain in force “pending the determination of the Commission's Motion for a Preliminary Injunction or hearing on the merits” did not cause the TRO to lose effect when the Stipulated Order was entered because the Stipulated Order did not “determin[e] ... the Commission's Motion for a Preliminary Injunction or hearing on the merits.” (TRO ¶ I). Indeed, there has never been an adjudication of the SEC's motion for a preliminary injunction or a hearing on the merits. Rather, after the Court had scheduled the preliminary injunction hearing for December 13, 2019 (see Order, entered Nov. 7, 2019 (Docket # 139)), following several requests for postponement by the parties (see Joint Letter Motion for Conference, filed Oct. 1, 2019 (Docket # 106); Letter from Terry Miller, filed Nov. 4, 2019 (Docket # 135)), the parties on December 9, 2019, stipulated to certain injunctive relief on a “temporary” basis in the Stipulated Order. See Stipulated Order at 1. In other words, the Stipulated Order was the mechanism to allow for the postponement of any hearing on or determination of the motion for a preliminary injunction.

Since the issuance of the Stipulated Order on December 9, 2019, neither party has sought a hearing or adjudication of the motion for a preliminary injunction — a fact later specifically recognized by Judge Schofield, see Order at 2, entered Nov. 6, 2020 (Docket # 619) (“Judge Gorenstein never ruled on the merits of Plaintiff's Motion for Preliminary Injunction.”), and seemingly recognized by Mykalai himself, see MK Reply at 67 (“the Court still has not scheduled the preliminary injunction hearing”). Thus, the only events that arguably would have terminated the effect of the TRO — the determination of the preliminary injunction motion or the hearing on that motion — have never taken place. Accordingly, the TRO remains in full force and effect.[8]

Of course, Mykalai himself has recognized that the TRO remains in effect since he asked for relief from the asset freeze contained in the TRO in November 2020 — nearly a year after the Stipulated Order was issued. See Letter from Robert Heim, filed Nov. 1, 2020 (Docket # 612). In two rulings on that request, Judge Schofield confirmed that the TRO and asset freeze remain in force. See Order, entered Nov. 6, 2020 (Docket # 619); Order, entered Nov. 20, 2020 (Docket # 658).

Because the TRO has not been vacated or superseded, Mykalai and Veronica can be held in contempt and sanctioned for violating it. We next address the specific ways in which the SEC alleges that Mykalai and Veronica violated the TRO.

1. Asset Freeze Violation

Mykalai received about $25,000 from Veronica via MoneyGram over a two-month period after he arrived in Russia in September 2019. (Mykalai: Tr. 152, 154). The SEC argues that the $25,000 transferred to Mykalai by Veronica violated the asset freeze portions of the TRO. It argues that the transfers, when considered in conjunction with Mykalai and Veronica's invocation of the Fifth Amendment in response to questions about their finances, “support the inference that Mykalai and Veronica had control of a substantial amount of cash in September and October 2019 that belonged to either Mykalai or CCI and was, therefore, frozen by the TRO.” SEC Br. as 33. It argues that the Court should find that the funds came from Mykalai or CCI's assets because “there is no evidence that either Mykalai or Veronica had a source of funds aside from CCI investor monies other than their claim that the funds came from a purported loan from Veronica's parents,” which should not be credited. Id. at 34. The SEC also argues that the source is irrelevant, because the asset freeze “applies to any funds acquired before or after entry of the TRO” until the frozen amount of $46,121,649.68 is secured. Id. at 37. It argues that Judge Schofield's Nov. 20, 2020, Order (Docket # 658) denying Mykalai's request for release of funds from the asset freeze supports this interpretation of the TRO. Id. at 36.

The problem for the SEC is that it bears the burden in this proceeding to demonstrate by “clear and convincing evidence” that Mykalai and Veronica violated the TRO. Perez v. Danbury Hosp., 347 F.3d 419, 423 (2d Cir. 2003) (citation omitted). Whatever logic there may be in noting that “there is no evidence” that Mykalai did not access his or CCI's funds, SEC Br. at 34, the argument shifts the burden of proof to the wrong party. While the Court agrees that neither Mykalai nor Sanchez were fully credible witnesses, their lack of credibility is not enough to allow us to find by “clear and convincing evidence” that the funds transferred to Mykalai were his or CCI's assets as opposed to funds from some other source. This is not to say that we are finding that the funds transferred to Mykalai were from non-CCI/Mykalai sources. Indeed, it seems more likely than not that the funds were from Mykalai and CCI. But proof of this fact has not been established by clear and convincing evidence. Veronica's failure to appear at the hearing and the Kontilais’ invocation of the Fifth Amendment does not alter this conclusion.

We also reject the SEC's assertion that the source of the funds does not matter, and that — even if the funds were from a non-Mykalai/CCI source — once Veronica took possession of the cash she was required “to hold and retain it.” Id. at 37. By making this assertion, the SEC is contending that funds acquired from even legitimate sources, such as bona fide gifts, after the issuance of the TRO were subject to the asset freeze in the TRO. We do not find it necessary to resolve the question of whether such “after-acquired” assets are covered by the TRO's asset freeze. Even accepting arguendo that this interpretation of the TRO is correct, the TRO was certainly not “clear and unambiguous” in this regard, as is required to find Mykalai and Veronica in contempt. King v. Allied Vision, Ltd., 65 F.3d 1051, 1058 (2d Cir. 1995). As explained in King, “[a] clear and unambiguous order is one that leaves no uncertainty in the minds of those to whom it is addressed ... who must be able to ascertain from the four corners of the order precisely what acts are forbidden.” Id. (citation and quotation marks omitted). Looking at the text of the TRO, and notwithstanding the SEC's complex argument to the contrary, SEC Br. at 37, it is not at all clear that funds acquired by Veronica or Mykalai after the date of the TRO from non-Mykalai/CCI sources are the subject of that order. The TRO applies to assets that are “held” by Mykalai/CCI (TRO ¶ I.A) and refers to any assets that are “presently held by them” in whatever form the assets “may presently exist.” Id. ¶ I.B. The word “presently” is understood by the ordinary person to refer to assets held at “present” — that is, at the time of the statement or writing, and not later. Thus, we accept that Mykalai and Veronica would be left with “uncertainty” as to whether the TRO covered assets acquired after the date of the TRO. King, 65 F.3d at 1058. As a result, the Court cannot find that the TRO clearly and unambiguously prohibited Veronica's transfer of cash to Mykalai without regard to the funds’ source. The SEC's interpretation of Judge Schofield's Order in this case (Docket # 658), see SEC Reply at 9, is irrelevant, because that order was issued after the contested transfers occurred, and thus cannot be said to have put Mykalai or Veronica on notice that their conduct was forbidden.

In sum, we cannot conclude that the SEC has met its burden of showing that Mykalai and Veronica should be held in contempt for violating the TRO through asset transfers.

2. Insurance Schemes Violation

The SEC argues that Mykalai's two schemes to defraud his insurance company violated the TRO because the TRO requires Mykalai to “prevent any ... transfer ... or disposal whatsoever of” his and CCI's assets (TRO ¶ I.B), and also because the TRO prohibits him from taking “any action to interfere with the asset freeze.” Id. ¶ I.D. The SEC contends that “the proceeds of CCI's insurance policy” counts as an asset, SEC Br. at 38, and that the schemes thus violated the above provisions. Id. at 39.

We agree that the insurance policy is part of the assets covered by the TRO. From the evidence presented at the hearing, the Court finds that Mykalai discussed the two schemes with Dougan and Sessa. The Court also finds that Mykalai took at least one step, ineffectual as it was, towards pursuing those schemes by arranging for Sessa to come to Moscow. However, the Court does not find that the schemes were ever implemented, that any proceeds were ever diverted to Mykalai or anyone associated with him, or that the value of the insurance policy was ever diminished by his contemplation of these schemes.

This appears not to matter to the SEC. In the SEC's view, taking “steps” in furtherance of a scheme that, if implemented, would violate a court order are sufficient to find a party in contempt. See SEC Reply at 20 (“Whether or not the prong of the scheme where Mykalai actually received funds was successfully implemented, it is beyond dispute that the SEC presented clear and convincing evidence ... that [Mykalai] took multiple steps toward that end ....”).

We disagree. Whether a court may find a party in contempt turns on the question of whether there is proof by clear and convincing evidence that a party has actually “failed to comply” with an order. Perez, 347 F.3d at 423. If the language of an order explicitly prohibits taking steps toward some result, or if it prohibits conspiring to violate any of the order's provisions, then certainly a party would fail to comply with such an order by acting in those ways. But the language of the TRO does not admit of any such interpretation.

First, Mykalai did not violate ¶ I.B of the TRO as the SEC contends. That section requires Mykalai and others subject to the order to “hold and retain within their control, and otherwise prevent any disposition, transfer ... or other disposal whatsoever of any of their funds or other assets or things of value presently held by them.” TRO ¶ I.B. The SEC presented no evidence — let alone clear and convincing evidence — that Mykalai or anyone else actually succeeded in disposing or transferring any of the funds or assets held by him or CCI. All that was presented was that Mykalai entertained the idea and talked with Dougan about recruiting Sessa into the scheme. While the SEC may be resting its position on the obligation to “prevent” the transfer of assets, the language of the TRO is not clear in forbidding unsuccessful attempts or conspiracies to dispose of frozen assets. Rather, in our view, to “fail to comply” with this provision would require that there ultimately be a “disposition, transfer ... or other disposal” of funds. An unsuccessful attempt by Mykalai to defraud his insurer cannot constitute the “disposal” forbidden by this provision. Id. In other words, notwithstanding his unsavory conduct, Mykalai cannot be found in contempt for failing to “prevent” something that never actually happened.

The SEC also argues that Mykalai's scheming was forbidden by the TRO's prohibition on taking “any action to interfere with the asset freeze.” TRO ¶ I.D. But the language does not prohibit an “attempt to interfere” or “conspiracy to interfere” with the asset freeze. It forbids only actual interference. Certainly, Mykalai could not have “ascertain[ed] from the four corners of the order,” King, 65 F.3d at 1058 (citation and quotation marks omitted), that attempting or conspiring to interfere would violate the TRO if his actions had absolutely no effect on any of the assets subject to the freeze.

Finally, the Court rejects the SEC's contention that the circumstantial evidence in the record is sufficient to find that Mykalai's schemes were actually implemented. SEC Br. at 23. The SEC's own witness, Dougan, repeatedly stated in text messages that Sessa rejected Mykalai's scheme as to the fee-splitting. See Dougan Email; Whatsapp Messages at 2 (“It's not going to happen.... He's actually offended.”). While Sessa was silent on the question of how he reacted to Mykalai's suggestion that he arrange for a collusive class action suit, one would expect that if such a suit had been filed, the SEC would have been able to find out about it. In any event, there is certainly no clear and convincing evidence that Mykalai ever implemented the schemes.

3. Destruction of Evidence Violation

The evidence showed that Mykalai deleted and caused to be deleted a number of the WhatsApp messages he sent to Dougan — as reflected both in Dougan's testimony and the messages themselves. See WhatsApp Messages; Dougan: Tr. 62-63. The SEC argues that Mykalai's deletion of these messages violated the TRO, because the TRO “clearly and unambiguously prohibits the destruction of evidence related to the allegations in the case and Defendants’ assets.” SEC Br. at 40. The provision in question enjoins Mykalai from “destroying, altering, concealing, or otherwise interfering with the access of the SEC to any and all documents, books and records ... that refer, reflect or relate to the allegations in the Complaint, or that refer, reflect or relate to the Defendants’ assets ....” TRO ¶ II. The SEC argues that the deleted messages are covered by this provision because the messages “contain details about the insurance fraud schemes described above and other facts relevant to Mykalai's and Veronica's assets, including statements about Mykalai's financial support from Veronica and a plan in which Veronica's father would sell a car in the United States and send the proceeds to Mykalai.” SEC Br. at 17.

Accepting the SEC's interpretation of the TRO, however, would again require this Court to diverge from Second Circuit precedent, which speaks to the need for the party enjoined to be able “to ascertain from the four corners of the order precisely what acts are forbidden.” King, 65 F.3d at 1058 (citation and quotation marks omitted). The SEC presumably asserts that the deletion of these messages violated the portion of the TRO that prohibits destroying records “that refer, reflect or relate to the Defendants’ assets,” inasmuch as communications about the insurance fraud scheme, arising after the Complaint was filed, plainly do not relate to “the allegations in the Complaint.” TRO ¶ II. We agree that at least some of the deleted messages likely related to the insurance fraud schemes given the context of the surrounding messages. Once again, however, the SEC runs into the high burden it faces on a motion for contempt. A person reading the TRO would certainly understand that books and records relating to the kinds of things commonly referred to as “assets” — such as bank records, brokerage records, receipts, loan documents — would be covered by the TRO. But the need for an enjoined party to be able to “ascertain from the four corners of the order precisely what acts are forbidden,” King, 65 F.3d at 1058, means that we cannot expect the party to recognize that discussions about an insurance policy comes within this provision. To some degree the problem is one of overbreadth. If we take the SEC's argument as to the meaning of the TRO to its logical conclusion, Mykalai could never delete even an innocuous email in which he discusses his insurance coverage because this would mean that he had “destroy[ed]” a “record” that “refer[s]” to an “asset.” TRO ¶ II. A lay person subject to the TRO would not readily assume that the TRO was intended to be so sweeping and thus could understandably be unaware that messages about the insurance policy must be preserved forever. As a result, we do not believe this conduct is appropriately punished through contempt.

The SEC also alleges that messages were deleted relating to a plan for Mykalai's father-in-law to sell a car and send the proceeds to him in Russia. SEC Br. at 17, 40. We are unable to make the finding, however, that any of the deleted messages related to the car. The deleted messages in the exhibit containing the WhatsApp Messages are not even in close proximity to the conversation about the car (see WhatsApp Messages at 17-19) and thus we certainly cannot find by clear and convincing evidence that they relate to the car. Moreover, the Court cannot find that the car constituted one of Mykalai's assets based on the current record and, as we have already explained, it is not sufficiently clear for purposes of making a contempt finding that after-acquired assets, such as gifts made by others, are covered by the TRO.

4. Lawsuit Violation

The SEC alleges that Mykalai violated the TRO when Mykalai and CCI filed suit against the law firm of Debevoise & Plimpton. SEC Br. at 40; SEC Exhibit 29 (admitted at Tr. 316); Mykalai: Tr. 179. Apparently Mykalai agreed that the attorney representing him in this lawsuit would be entitled to a contingency payment from the proceeds, see MK Br. at 44, though the SEC does not point to any admissible evidence of this arrangement.

The SEC contends that by filing this lawsuit and allowing for the contingency fee, Mykalai violated the TRO's provision enjoining Mykalai and CCI from “the filing of any lawsuits ... to impact the property and assets subject to this order” without leave from the Court. TRO ¶ I.D. The SEC also argues that the “claims asserted in the lawsuit belong to CCI and Mykalai and are thus assets subject to the asset freeze order.” SEC Br. at 40. It argues that by “conveying a contingency fee to an attorney,” Mykalai has “reduce[d] the value of a cause of action to [himself] ... and therefore diminishe[d] the value of Defendants’ assets.” SEC Reply at 12.

Unlike other conduct alleged by the SEC, the right to file a lawsuit against Debevoise & Plimpton accrued prior to the entry of the TRO inasmuch as Debevoise & Plimpton's representation of Mykalai and CCI occurred prior to that time. Thus, the right to file the lawsuit necessarily comes within the definition of “asset” in the TRO as a legal matter. Nonetheless, the motion before us is one for contempt, and even though the right to file the lawsuit is within the scope of the term “asset” in the TRO, there certainly could have been reasonable “uncertainty” in Mykalai's mind that the mere filing of that lawsuit and the making of the contingency fee arrangement violated the TRO. King, 65 F.3d at 1058 (citation and quotation marks omitted).

As for the contingent fee arrangement, a contingent fee arrangement at the going market rate arguably would not diminish the value of the lawsuit. But because we have not been cited any admissible evidence as to what the contingent fee arrangement was, we do not have clear and convincing evidence that the contingent fee arrangement itself diminished the assets potentially available to the Government. In light of these circumstances, we cannot find that the SEC is entitled to a finding of contempt on the basis that making the contingent fee arrangement was “clear[ly] and unambiguous[ly]” prohibited by the TRO. Id.

As to the argument that the filing of the lawsuit itself violated the portion of the TRO that forbids Mykalai from “the filing of any lawsuits ... to impact the property and assets subject to this order,” TRO ¶ I.D, again we cannot find that the order “clear[ly] and unambiguous[ly],” King, 65 F.3d at 1058, gave Mykalai notice that he was prohibited from filing a lawsuit whose only effect would seem to be to increase the assets available to the SEC. The term “impact” could reasonably be understood to not include a suit that was intended to increase assets given that the term was used in an order obviously seeking to prevent any diminishment in the value of assets — not to prevent their increase. Thus, the high standard has not been met as to the claim that the mere filing of the lawsuit was contemptuous.[9]

5. Disclosure Violation

After the TRO had been entered, Mykalai asked for relief from the provision of the TRO that required a sworn accounting, arguing that complying with it would infringe on his Fifth Amendment privilege against self-incrimination. See generally Letter Motion for Conference, filed June 18, 2019 (Docket # 40). The Court held a conference on this request on July 17, 2019, and at that conference Mykalai agreed to a modification of the TRO “to provide for the production of documents in lieu of the creation of a sworn accounting,” given his Fifth Amendment assertion. Order Amending Temporary Restraining Order at 2, entered July 31, 2019 (Docket # 78). Accordingly, the Court modified the TRO to require Mykalai to produce, among other things, “all documents in his custody or control evidencing title to real or personal property in which any defendant has any direct or indirect beneficial interest.” Id. Pursuant to this modification, the Court later ordered Mykalai to produce “documents in his custody or control ... pertaining to 566 Tam O Shanter, Las Vegas, Nevada, and 4035/4045 Pinecrest Street, Las Vegas, Nevada, as well as records from entities through which Kontilai may hold an interest in these properties, including but limited to the Bed Red Irrevocable Trust and the Paloma Emily, LLC” along with documents “evidencing title to real property in which Defendant Collector's Coffee Inc. or Relief Defendant Veronica Kontilai has any direct or indirect beneficial interest.” Order, entered July 24, 2020 (Docket # 477). The SEC contends that Mykalai has violated this order — and, by extension, the TRO as modified — because he has “produced no records related to the [Tam O Shanter] property, or Bed Red Irrevocable Trust and the Paloma Family, LLC.” SEC Br. at 41; accord id. at 18.

Mykalai responds by pointing to his Exhibit T (admitted at Tr. 315) (the “Sessa Email”), in which Sessa sent an email to the SEC's counsel titled “Property records” and stated that Mykalai was making a production of “all responsive documents to the Court's Order.” Sessa Email; see also MK Br. at 20 (quoting Sessa Email). Mykalai argues that the SEC has not offered “any evidence explaining why the August 11 production was inadequate,” and thus he has complied with the Order. MK Br. at 20. Mykalai also argues that the SEC “has access to all publicly filed tax and title records for the properties at issue,” and thus Mykalai “has no obligation to search public records to produce them.” Id. at 43. The SEC replies by arguing, somewhat cryptically, that they have “made explicit why the production is inadequate,” citing to Mykalai's quotation of their initial brief. SEC Reply at 13.

We recognize that the SEC has a valid objection to the admission of Sessa's email as hearsay (Tr. 315). Nonetheless, we cannot find that the SEC has met its burden of proof because “[a]n attorney's unsworn statements in a brief are not evidence.” Kulhawik v. Holder, 571 F.3d 296, 298 (2d Cir. 2009). Thus, for purposes of meeting the “clear and convincing” evidence requirement to show contempt, the SEC's assertion in their brief that Mykalai's production was deficient is not sufficient evidence to demonstrate that Mykalai actually possesses or controls any documents that he has failed to produce. It is the SEC's burden to prove by clear and convincing evidence that Mykalai has actually withheld documents within his custody or control. The SEC has not offered such proof.

B. Sanctions Pursuant to the Court's Inherent Power

The SEC seeks the sanction of “judgment on liability” — that is, default — against Mykalai pursuant to this Court's inherent power, arguing that his various schemes constituted a fraud upon the court. SEC Br. at 44-65.

1. Inherent Power Standard

The Court's inherent power includes “the ability to fashion an appropriate sanction for conduct which abuses the judicial process.” Chambers v. NASCO, Inc., 501 U.S. 32, 44-45 (1991). This power “must be exercised with restraint and discretion.” Id. at 44 (citation omitted). “But if in the informed discretion of the court, neither the statute nor the Rules are up to the task, the court may safely rely on its inherent power.” Id. at 50.

The SEC invokes the inherent power of the Court to sanction conduct that constitutes a “fraud on the court.” SEC Br. at 46-47. “A fraud on the court occurs where a party: (1) improperly influence[s] the trier, (2) unfairly hamper[s] the presentation of the opposing party's claim or defense, (3) lies to the court and his adversary intentionally, repeatedly, and about issues that are central to the truth-finding process, or (4) knowingly submit[s] fraudulent documents to the Court[.]” Beverly Hills Teddy Bear Co. v. Best Brands Consumer Prods. Inc., 2020 WL 7342724, at *16 (S.D.N.Y. Dec. 11, 2020) (quoting Passlogix, Inc. v. 2FA Tech., LLC, 708 F. Supp. 2d 378, 395 (S.D.N.Y. 2010)) (alterations original). “Sanctions for fraud are warranted if it is established by clear and convincing evidence that [a party] has sentiently set in motion some unconscionable scheme calculated to interfere with the judicial system's ability impartially to adjudicate the action.” Yukos Capital S.A.R.L. v. Feldman, 977 F.3d 216, 235 (2d Cir. 2020) (citation and quotation marks omitted). “[C]lear and convincing evidence of bad faith is a prerequisite to an award of sanctions under the court's inherent power.” Id.; accord DLC Mgmt. Corp. v. Town of Hyde Park, 163 F.3d 124, 136 (2d Cir. 1998). “Where a court finds fraud on the court, a variety of sanctions are available, including an award of attorney's fees, an adverse jury instruction, or the entry of default judgment against the offending party.” LifeTree Trading Pte., Ltd. v. Washakie Renewable Energy, LLC, 2017 WL 2414805, at *2 (S.D.N.Y. June 2, 2017) (citation omitted). “However, a sanction that has the effect of ending the case and granting judgment to one of the parties is so harsh a remedy that it should be imposed only in the most extreme of circumstances.” Id. (citation and quotation marks omitted). If a fraud is found, a court may consider five factors in determining the appropriate sanction:

Passlogix, 708 F. Supp. 2d at 394 (citation omitted).

2. Application to Mykalai's Conduct

The SEC points to a number of actions by Mykalai to justify the sanction of dismissal under the Court's inherent power. It relies most heavily on Mykalai's contemplated insurance fraud schemes as constituting a fraud on the court. SEC Br. at 49-56.

As already discussed, however, the evidence presented by the SEC demonstrated only that Mykalai had discussed the various schemes with Dougan and/or Sessa, and that the schemes were never put into place. The inchoate schemes cannot serve as a basis for the proposed sanctions as the SEC has not shown by clear and convincing evidence that Mykalai actually “set in motion” the “unconscionable scheme” he discussed. Yukos Capital S.A.R.L., 977 F.3d at 235. Using the language of conspiracy law, without actually using the word “conspiracy,” the SEC refers to “overt actions” undertaken in furtherance of the insurance schemes. SEC Br. at 56; see also SEC Reply at 20 (citing to case involving a “RICO conspiracy”). But the SEC gives no citation for the proposition that conspiracy to commit fraud on the Court could be punished through a terminating sanction where there has been no interference whatsoever with the Court's ability to adjudicate the action.

The SEC argues that when the original attorneys for Mykalai moved to withdraw, they acted improperly — and presumably at the direction of Mykalai — when they also sought a 45-day stay “to enable Mr. Kontilai to find new counsel and obtain the necessary approval of the insurance carrier that is providing coverage for the defense.” Motion for Edward J.M. Little to Withdraw as Attorney ¶ 3, filed Dec. 5, 2019 (Docket # 164). The SEC assumes this was part of Mykalai's scheme to defraud his insurer because it “omitted,” among other things, Mykalai's intention to use replacement counsel to further his scheme. SEC Br. at 57.[10] But the omission to disclose an intent or desire to perpetrate a scheme does not operate as a fraud on the court when the core of the scheme itself — that is, the illicit payments to Mykalai — was never implemented.

The SEC alleges that Mykalai's alleged TRO violations are evidence of his “obstruction of this case and efforts to obscure the truth,” SEC Br. at 58; but as we have already explained, we do not view these violations to have been proven by clear and convincing evidence, and for the same reason they cannot be the basis for the sanction of dismissal based on the inherent power of the Court.

The SEC also alleges that Mykalai has “delayed and attempted to delay the case through frivolous objections based on misleading factual assertions.” Id. at 59. As to delay, the SEC argues that (a) Mykalai's motion to stay the case in light of the pending case of Liu v. SEC, 754 Fed. Appx. 505 (9th Cir. 2018), vacated and remanded, 140 S. Ct. 1936 (2020), in the Supreme Court was an effort at bad faith delay, SEC Br. at 59; (b) his objections to discovery based on his asylum application were frivolous, id., and (c) that Mykalai's statements relating to the asylum application were misleading, because “Mykalai never told the parties or the Court that he left Russia on March 8 by plane.” Id. at 60. The SEC also argues that Mykalai's litigation over producing his tax returns “illustrates Mykalai's bad faith approach to this litigation.” Id. at 60-61.

We do not view Mykalai's statements about his asylum application being pending to be misleading given that he claims to have a method for appealing the denial. See Letter from Steven Sessa at 3, filed June 23, 2020 (Docket # 411). We do share the view that Mykalai's motions to stay based on Liu v. SEC and his objections to discovery based on his asylum application were utterly meritless and possibly frivolous. And it is certainly true that he (or his attorneys) deliberately wasted a good deal of the Court's and the parties’ time in the manner in which he litigated the production of the tax returns. But even in combination with other acts alleged, the SEC's showing falls too far short of the showing that must be made to default a party based on the Court's inherent power. See LifeTree Trading Pte., 2017 WL 2414805, at *2 (“[A] sanction that has the effect of ending the case and granting judgment to one of the parties is so harsh a remedy that it should be imposed only in the most extreme of circumstances.”) (citation and quotation marks omitted). Mykalai's conduct in litigating this case is certainly to be deplored. But the extreme remedy sought — default — is not warranted by his conduct to date.[11]

Finally, the SEC argues that Mykalai destroyed or “allowed the destruction of” evidence — pointing to incidents that occurred before suit was filed. SEC Br. at 61-62. A court's inherent power to sanction is of course directed to abuse of the “judicial process,” Chambers, 501 U.S. at 45 — not to actions before suit is filed. The SEC cites no case law that would allow a court to order a default for pre-suit conduct. For the same reason that an injunction cannot “reach backwards in time to action taken prior to the time it was issued,” Uniformed Fire Officers Assn. v. de Blasio, 973 F.3d 41, 48 (2d Cir. 2020) (citation and internal punctuation omitted), the Court's power to sanction for a fraud upon the court conduct should not reach back to acts by Mykalai occurring before the litigation began.

If that were not a big enough flaw in the request, the request suffers from another significant problem. The destruction of evidence is normally dealt with through an application for spoliation sanctions. The Supreme Court has cautioned that “a court ordinarily should rely on” other sanctioning mechanisms, such as the Federal Rules of Civil Procedure, “when there is bad-faith conduct in the course of litigation that could be adequately sanctioned under the rules ....” Chambers, 501 U.S. at 50. The same principle was repeated by the Second Circuit, which has noted that in the discovery context, a case-terminating inherent power sanction

Yukos Capital S.A.R.L, 977 F.3d at 235-36 (citations and quotation marks omitted). The SEC does not explain why a motion under Rule 37 or case law directed specifically at spoliation sanctions could not address any alleged destruction of evidence. It would be out of keeping with the admonitions in Chambers and Yukos Capital to find a default based on the inherent power doctrine when such sanctions are available.

C. Sanction for Veronica's Failure to Appear at the Contempt Hearing

The SEC seeks sanctions against Veronica “for her failure to appear at the hearing.” SEC Br. at 43. The SEC does not identify any order or subpoena requiring Veronica's attendance at the hearing, however. At the hearing and in its reply brief, the SEC asserted that Veronica had failed to appear in violation of a “subpoena” served upon her. See Tr. 304; SEC Reply at 8. But the SEC does not actually point to any evidence that such a subpoena was served upon Veronica. Absent a showing that she was aware that she was under court order or subpoena to attend the hearing, sanctions for contempt or under the inherent power of the Court should not issue.[12]

D. Rule 37 Sanctions

The SEC seeks evidentiary sanctions pursuant to Fed. R. Civ. P. 37(b)(2)(A) against Mykalai for his alleged failure to obey a discovery order issued on July 6, 2020 (Docket # 427). See SEC Br. at 65-67. We address this request in a separate Order.

IV. CONCLUSION

For the foregoing reasons, the SEC's motion for contempt and sanctions for violating the TRO and under the Court's inherent power (Docket # 452) should be denied.

PROCEDURE FOR FILING OBJECTIONS TO THIS REPORT AND RECOMMENDATION

Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties have fourteen (14) days (including weekends and holidays) from service of this Report and Recommendation to file any objections. See also Fed. R. Civ. P. 6(a), (b), (d). A party may respond to any objections within 14 days after being served. Any objections and responses shall be filed with the Clerk of the Court. Any request for an extension of time to file objections or responses must be directed to Judge Marrero. If a party fails to file timely objections, that party will not be permitted to raise any objections to this Report and Recommendation on appeal. See Thomas v. Arn, 474 U.S. 140 (1985); Wagner & Wagner, LLP v. Atkinson, Haskins, Nellis, Brittingham, Gladd & Carwile, P.C., 596 F.3d 84, 92 (2d Cir. 2010).