SEC v. McGinnis
SEC v. McGinnis
2019 WL 13172367 (D. Vt. 2019)
February 1, 2019
Reiss, Christina, United States District Judge
Summary
The SEC was sued by Mr. McGinnis for allegedly trading on material nonpublic information. The court denied Mr. McGinnis's motion to compel the SEC to provide a more comprehensive response to Interrogatory No. 2 and Interrogatory No. 23, finding that the SEC had adequately responded to both interrogatories. The court also cautioned the SEC to provide adequate disclosure of evidence in its responses to written discovery requests.
Additional Decisions
SECURITIES & EXCHANGE COMMISSION, Plaintiff,
v.
CHAD C. McGINNIS, SERGEY PUGACH, and JANUSZ SUCHOWIEJKO, Defendants, and
BELLA PUGACH, Relief Defendant
v.
CHAD C. McGINNIS, SERGEY PUGACH, and JANUSZ SUCHOWIEJKO, Defendants, and
BELLA PUGACH, Relief Defendant
Case No. 5:14-cv-6
United States District Court, D. Vermont
Filed February 01, 2019
Counsel
Dugan Bliss, Esq., U.S. Securities and Exchange Commission New York Regional Office, New York, NY, Gregory A. Kasper, Esq., James A. Scoggins, Esq., Polly A. Atkinson, Esq., U.S. Securities and Exchange Commission Denver Regional Office, Denver, CO, for Plaintiff.Benjamin M. Arrow, Esq., Pro Hac Vice, Evan I. Cohen, Esq., Pro Hac Vice, Michael Q. English, Esq., Pro Hac Vice, Finn Dixon & Herling LLP, Stamford, CT, Kevin M. Henry, Esq., Primmer Piper Eggleston & Cramer P.C., Burlington, VT, for Defendants.
Reiss, Christina, United States District Judge
ENTRY ORDER DENYING DEFENDANT CHAD C. McGINNIS'S MOTION TO COMPEL (Doc. 492)
*1 On November 12, 2018, Defendant Chad C. McGinnis filed a motion to compel Plaintiff Securities & Exchange Commission (the “SEC”) to supplement its response to Interrogatory Number 2 (“Interrogatory No. 2”) of Mr. McGinnis's first set of interrogatories which asked the SEC “to provide, for each of his challenged trades, the specific material nonpublic information (‘MNPI’) on which the SEC contends that Mr. McGinnis traded illegally[.]” (Doc. 492 at 1.) He further seeks an Order compelling the SEC to supplement its response to Interrogatory Number 23 (“Interrogatory No. 23”) of his third set of interrogatories by specifying the trades which it contends were illegal. The SEC opposed the motion on November 26, 2018. On December 4, 2018, Mr. McGinnis filed his reply, at which time the court took the motion under advisement.
The SEC is represented by Dugan Bliss, Esq., Gregory A. Kasper, Esq., James A. Scoggins, Esq., and Polly A. Atkinson, Esq. Mr. McGinnis is represented by Evan I. Cohen, Esq., Kevin M. Henry, Esq., Michael Q. English, Esq., and Benjamin M. Arrow, Esq.
I. Factual and Procedural Background.
On October 22, 2013, Mr. McGinnis served his first set of interrogatories on the SEC which included Interrogatory No. 2 sought “[f]or each ‘illegal trade’ identified in response to Interrogatory Number 1, identify the material, non-public information that Mr. McGinnis allegedly accessed or knowingly possessed at the time Mr. McGinnis made such ‘illegal trade.’ ” (Doc. 492-4 at 6.)[1] The SEC objected to Interrogatory No. 2 as “overbroad, unduly burdensome, and premature[,]” and responded further as follows:
For Mr. McGinnis's illegal trades around, at least, the February and May 2013 Green Mountain Coffee Roasters, Inc. (“GMCR”) earnings reports, Mr. McGinnis possessed material nonpublic information related to GMCR's revenues as identified in GMCR MC00000014 and the e-mail with attachments sent to counsel for both Defendants and the Commission by GMCR counsel Mark Vaughn on August 29, 2013 at 3:53 Eastern Time. Mr. McGinnis also could have accessed material nonpublic information related to GMCR's revenues, in a form similar to the email with attachments sent to counsel for both Defendants and the Commission by GMCR counsel Mark Vaughn on August 29, 2013 at 3:53 Eastern Time, prior to the time when the tracking evidenced by GMCR MC00000014 was enabled.
Additionally, for all of Mr. McGinnis's illegal trades, Mr. McGinnis knew the password for, and used, a master-key login called “USER-A” that granted him access to material nonpublic information without being tracked, as described by GMCR during its Rule 30(b)(6) depositions. Given Defendants’ phenomenal returns around GMCR earnings releases (and their lackluster trading in everything else), there is a strong inference that Mr. McGinnis accessed, and communicated to Mr. Pugach, material nonpublic information, the precise identity of which is unknown.
Id. at 6-7.
*2 After filing its First Amended Complaint on March 14, 2014, the SEC supplemented its response to Interrogatory No. 2 (the “Amended Response”) by identifying approximately seventy folders on GMCR's network from which the SEC alleged Mr. McGinnis accessed MNPI “using his HP Compaq dc7700 Workstation and USER-A login[ ]” around the February and May 2013 GMCR earnings reports. (Doc. 492-5 at 6.) The SEC also identified four documents purportedly containing MNPI which Mr. McGinnis allegedly accessed on GMCR's H:\drive.
Thereafter, Mr. McGinnis served his third set of interrogatories, which included Interrogatory No. 23, and requested that the SEC “[l]ist each of the allegedly illegal opening trades, including the date, time, amount and name of the security, upon which the SEC asserts a claim against Mr. McGinnis in this Action and its corresponding closing trade, including the date, time and amount.” (Doc. 492-6 at 8.) On November 3, 2014, the SEC responded that:
The date, amount, and volume of each illegal trade identified by the Commission are identified in paragraph 26 of the Amended Complaint, as well as the relevant trading records (deposition exhibits 12, 16). The time of each illegal trade, to the extent known, is identified in the trade reports produced by TD Ameritrade, which were previously produced to Defendants on October 25, 2013. The Commission also directs Defendant to the Commission's forthcoming expert report.
(Doc. 492-7 at 61-62.)
On March 14, 2018, the parties submitted a joint motion to modify the discovery schedule. The modified scheduled primarily addressed expert witness reports and deadlines, and it stated that fact discovery would be completed by July 13, 2018.
After receiving the SEC's rebuttal expert reports on May 30, 2018, Mr. McGinnis requested that the SEC supplement its response to Interrogatory No. 23 by specifying the trades it contended were made on the basis of MNPI and updating its response to Interrogatory No. 2 by describing the information it contended was MNPI and in Mr. McGinnis's possession. The SEC directed Mr. McGinnis to Scott F. Mascianica's declaration.
On June 29, 2018, the SEC amended its response to Interrogatory No. 2 (the “Second Response”). According to Mr. McGinnis, the Second Response did not identify, for each challenged trade, the exact information he possessed which was allegedly MNPI. After numerous requests, on October 30, 2018, the SEC provided an amended response to Interrogatory No. 2 (the “Third Response”) and produced more than 5,000 new GMCR documents. Mr. McGinnis contends that the Third Response fails to identify the challenged trades or the alleged MNPI in his possession.
II. Conclusions of Law and Analysis.
Mr. McGinnis argues that the SEC is required to supplement its “incomplete or incorrect” responses to his interrogatories by specifying each illegal trade it alleges was made on the basis of MNPI and the MNPI allegedly in his possession at the time of each trade. (Doc. 492-1 at 10) (internal quotation marks omitted). He argues that the SEC's responses are procedurally deficient because they rely on documents from a third party.
The SEC opposes the motion for supplementation on the basis that it “previously provided all of the information in its possession responsive to those interrogatories, supplemented its responses as appropriate, and has provided substantial additional information in response to requests from Mr. McGinnis as part of the conferral process. There is no additional information to provide[.]” (Doc. 496 at 1.)
*3 Rule 26 of the Federal Rules of Civil Procedure provides for the discovery of relevant, nonprivileged information, which “need not be admissible in evidence to be discoverable.” Fed. R. Civ. P. 26(b)(1). Rule 26 is to be “construed broadly to encompass any matter that bears on, or that reasonably could lead to other matter that could bear on, any issue that is or may be in the case.” Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 351 (1978). Pursuant to Rule 33, “[e]ach interrogatory must, to the extent it is not objected to, be answered separately and fully in writing under oath.” Fed. R. Civ. P. 33(b)(3).
Federal Rule of Civil Procedure 26(e) requires that:
A party who has made a disclosure ... must supplement or correct its disclosure or response[ ] ... in a timely manner if the party learns that in some material respect the disclosure or response is incomplete or incorrect, and if the additional or corrective information has not otherwise been made known to the other parties during the discovery process or in writing[.]
Fed. R. Civ. P. 26(e)(1)(A); see also Levinson v. Westport Nat'l Bank, 2013 WL 3280013, at *4 (D. Conn. June 27, 2013) (“[Rule] 26(e) does not grant a license to supplement a previously filed expert report because a party wants to, but instead imposes an obligation to supplement the report when a party discovers the information it has disclosed is incomplete or incorrect.”) (quoting Lewis v. FMC Corp., 786 F. Supp. 2d 690, 705 (W.D.N.Y. 2011) (internal quotation marks omitted)).
Where a party “fails to make a disclosure as required[,]” the other party “may move to compel disclosure[.]” Fed. R. Civ. P. 37(a)(3)(A). A party seeking to file a motion to compel after the close of discovery must establish “good cause.” See Fed. R. Civ. P. 16(b)(4) (“A schedule may be modified only for good cause and with the judge's consent.”); see also District of Vermont L.R. 26(a)(7) (“If additional discovery time is required due to case complexity or other extraordinary circumstances, counsel may move for an extension of time for good cause.”); Gucci Am., Inc. v. Guess?, Inc., 790 F. Supp. 2d 136, 139 (S.D.N.Y. 2011) (“Reopening discovery after the discovery period has closed requires a showing of good cause.”) (citing Gray v. Town of Darien, 927 F.2d 69, 74 (2d Cir. 1991)).
Although Fed. R. Civ. P. 33(d) permits a party to rely on its own business records, a response to written discovery relying exclusively on the business records of a third party does not fall within its embrace. To the extent Defendant McGinnis raises this challenge, it is inapplicable because a third party's business records are either not the sole source of the SEC's response or adequately identified. To the extent the SEC's references to third party records remain vague, it will be precluded from introducing that evidence at trial.
A. Whether the SEC Must Supplement its Response to Interrogatory No. 2.
Citing the SEC's burden at trial to prove that each of his challenged trades were made on the basis of MNPI, Mr. McGinnis contends that fundamental fairness requires the SEC to “identify the [precise MNPI], prove its materiality, and prove possession by Mr. McGinnis for each challenged trade.” (Doc. 492-1 at 14) (quoting SEC v. Gonzalez de Castilla, 184 F. Supp. 2d 365, 378 (S.D.N.Y. 2002) (internal quotation marks omitted)). Mr. McGinnis argues that the SEC's response to Interrogatory No. 2 in which it provided “a laundry list of GMCR system folders (whose contents on any particular day are anyone's guess) and documents identified only generically by type or category” is “procedurally improper and substantively deficient.” Id. at 14-15. The SEC responds that it has fully complied with its disclosure obligations with respect to Interrogatory No. 2.
*4 In its October 25, 2013 response to Interrogatory No. 2, the SEC identified Bates stamped documents provided to Mr. McGinnis, emails containing lists of potential MNPI, and circumstantial evidence which it alleged established “a strong inference that Mr. McGinnis accessed, and communicated to Mr. Pugach, material nonpublic information, the precise identity of which is unknown.” (Doc. 492-4 at 7) (observing that “Mr. McGinnis knew the password for, and used, a master-key login called ‘USER-A’ that granted him access to material nonpublic information without being tracked” and emphasizing his “phenomenal returns around GMCR earnings releases (and [his] lackluster trading in everything else)[ ]”).
In its October 30, 2018 response, the SEC supplemented its previous response and identified MNPI as including GMCR's “quarterly earnings and financial information prior to the public announcement of that information[,]” “[p]erformance supplement materials related to earnings announcements, including drafts of such materials[,]” “[e]arnings announcement conference calls and verbal remarks,” “SEC filings,” “[f]inancial statements, footnotes, and other financial data,” “[o]ther documents related to confidential quarterly earnings releases[,]” and “[o]ther documents related to financial information underlying confidential quarterly earnings releases.” (Doc. 492-11 at 5-11.) In addition to its disclosure in Deposition Exhibit 4A, which contained a list of specific dates and times, the SEC asserted that Mr. McGinnis allegedly accessed MNPI through the Sales Portal” containing in-home revenue information, updated weekly, from approximately 2012-2013. Citing SEC expert Daniel L. Regard's reports and exhibits, the SEC listed folders and documents produced by GMCR containing MNPI and “forensically determinable dates and times for access to these folders.” Id. It also identified documents Mr. McGinnis purportedly accessed through GMCR's H:\ drive and thumbnail images of MNPI from the CHADMCLT laptop's cache file. In its responses to Interrogatory No. 2, the SEC listed types of MNPI which Mr. McGinnis could have accessed and further answered that the precise identity of the MNPI is “unknown.” (Doc. 492-4 at 7.)
Courts in the Second Circuit “have held that circumstantial evidence such as suspicious timing of trades, contacts between potential tippers and tippees, and incredible reasons for such trades provide an adequate basis for inferring” the possession of MNPI and that tipping activity occurred. S.E.C. v. Singer, 786 F. Supp. 1158, 1164 (S.D.N.Y. 1992); see also Herman & MacLean v. Huddleston, 459 U.S. 375, 390 n.30 (1983) (noting “that circumstantial evidence can be more than sufficient[ ]” to establish scienter in securities fraud action); S.E.C. v. Musella, 678 F. Supp. 1060, 1063 (S.D.N.Y. 1988) (recognizing “circumstantial evidence[ ] ... may be considered on the scienter issue.”). Because the SEC may satisfy its burden of proving that Mr. McGinnis possessed MNPI entirely by circumstantial evidence, its responses to Interrogatory No. 2 satisfy its discovery obligations under Rules 26 and 33. Mr. McGinnis's motion to compel an additional response to Interrogatory No. 2 is therefore DENIED. The SEC is cautioned that, at trial, it will be precluded from offering any evidence that has not been disclosed to Defendants and that the generality of its present response may inhibit the court from concluding that disclosure has been made. See Fed. R. Civ. P. 37(a)(4) (deeming “an evasive or incomplete disclosure, answer, or response” as “a failure to disclose, answer, or respond[ ]”).
B. Whether the SEC Must Supplement its Response to Interrogatory No. 23.
Mr. McGinnis next asserts that he “must know the precise trades the SEC will contend were made on the basis of MNPI because these are the trades he will be forced to defend[,]” and that he is unable to prepare for trial because the SEC's response to Interrogatory No. 23 and its “shifting definition of ‘illegal trades’ ” fail to specify which of his many trades prior to earnings announcements were illegal. (Doc. 492-1 at 12-13.) In opposing the motion, the SEC responds that “the answer to this interrogatory was detailed in Exhibit 19 to the declaration of Scott Mascianica, which was incorporated in the Commission's answer to Interrogatory No. 1, which substantially duplicates Interrogatory No. 23.” (Doc. 496 at 2) (footnote omitted). It further points out that it offered to supplement its response to Interrogatory No. 23 by formally incorporating its response to Interrogatory No. 1, but counsel for Mr. McGinnis rejected its offer.
*5 Cross-referencing previously disclosed discovery responses is a legitimate means of answering an interrogatory, as long as the referenced responses provide the required information. See, e.g., Tota v. Franzen, 2007 WL 2693441, at *8 (W.D.N.Y. Sept. 10, 2007) (allowing a plaintiff facing “duplicate requests[ ]” to “respond either in such a way that cross-references responses provided to another defendant or serve an omnibus response answering (for example) all defense interrogatories in one document and served upon all parties[ ]”); see also Pietrangelo, II v. Alvas Corp., 2010 WL 3323729, at *1 (D. Vt. Apr. 23, 2010) (concluding defendant provided statements of its officers as requested and “cross-referencing to those statements was an adequate means of responding” to a similar interrogatory).
Interrogatory No. 23 asked for the date, time, amount, and name of the security for each allegedly illegal trade as well as its corresponding closing trade, including the date, time, and amount. This request is duplicative of Interrogatory No. 1, which sought “the date, time, amount and volume of each ‘illegal trade’ (as referenced in Paragraph 18 of the Complaint) by Mr. McGinnis that forms the basis of the plaintiff's claims in the Complaint.” (Doc. 492-4 at 4.) In its October 25, 2013 response to Mr. McGinnis's first set of interrogatories, the SEC identified Exhibit 19 of Mr. Mascianica's revised declaration, the previously disclosed TD Ameritrade Trade Reports, and native files and a list thereof for Mr. McGinnis. The requested information was therefore provided, and the court finds that cross-referencing and incorporating its response to Interrogatory No. 1 was an adequate means of responding to Interrogatory No. 23 even if it incorporated records from a third party.[2] Accordingly, Mr. McGinnis's motion to compel an additional response to Interrogatory No. 23 is DENIED. Again, however, the SEC is cautioned that its responses to written discovery requests shall provide the means by which the court determines whether evidence has been adequately disclosed. See Hodgdon v. Nw. Univ., 245 F.R.D. 337, 341 (N.D. Ill. 2007) (“By requiring comprehensive disclosure of relevant information, the Federal Rules of Civil Procedure seek to avoid the surprise and secrecy that are antithetical to the informed determination of cases of their merits.”).
CONCLUSION
For the foregoing reasons, Mr. McGinnis's motion to compel is DENIED (Doc. 492).
SO ORDERED.
Dated at Burlington, in the District of Vermont, this 1st day of February, 2019.
Footnotes
Interrogatory Number 1 requested that the SEC “[i]dentify the date, time, amount and volume of each ‘illegal trade’ (as referenced in Paragraph 18 of the Complaint) by Mr. McGinnis that forms the basis of the plaintiff's claims in the Complaint.” (Doc. 492-4 at 4.) The Commission responded:
The date, amount, and volume of each illegal trade identified by the Commission thus far is identified in Exhibit 19 of the Revised Declaration of Scott F. Mascianica in Support of Plaintiff Securities and Exchange Commission's Motion for Preliminary Injunction. The time of each illegal trade, to the extent known, is identified in the Trade Reports produced by TD Ameritrade, which were previously produced to Defendants. Native files ... are being transmitted again with these Responses for convenience[.]
Id. at 5. The SEC's response also included a list of relevant documents provided to Mr. McGinnis and co-Defendant Sergey Pugach.
Pursuant to Local Rule 26(c)(1), “[a] party may not file a Fed. R. Civ. P. 26 or 37 motion unless the filing party has conferred with opposing counsel in a good faith effort to reduce or eliminate the controversy or arrive at a mutually satisfactory resolution.” Although Mr. McGinnis faults the SEC for failing to incorporate Mr. Mascianica's declaration into its response to Interrogatory No. 23, he refused the SEC's offer to provide an amended response to Interrogatory No. 23. See Doc. 492-8 at 2; see also Sec. & Exch. Comm'n v. Mazzo, 2013 WL 12172628, at *3 (C.D. Cal. Oct. 24, 2013) (observing that “[i]f the parties reach an impasse after making good-faith efforts to resolve their disputes about a discovery request, then—and only then—may the moving party proceed with bringing a motion to compel”). He does not adequately explain why that offer is deficient.