Free Reply to Response to Motion - District Court of California - California

Case 3:08-cv-00764-BEN-NLS

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Joseph N. Casas (SBN 225800) Tamara M. Craft (SBN 234419) CASAS LAW GROUP, P.C. 2323 Broadway, Suite 202 San Diego, CA 92102 Phone: (619) 692-3146 Facsimile: (619) 692-3196 Email: [email protected] Attorneys For Defendant Matthew La Madrid UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF CALIFORNIA

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

CASE NO. 08-CV-0764 BEN (NLS) DEFENDANT MATTHEW LA MADRID'S REPLY IN SUPPORT OF MOTION TO STAY DATE: TIME: COURTROOM: JUDGE: August 11, 2008 10:30 a.m. 3 Hon. Roger T. Benitez

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v. PLUS MONEY, INC. AND MATTHEW LA MADRID. Defendants, THE PREMIUM RETURN FUND LIMITED-LIABILITY LIMITED PARTNERSHIP; THE PREMIUM RETURN FUND II LIMITED-LIABILITY LIMITED PARTNERSHIP; THE PREMIUM RETURN FUND III LIMITEDLIABILITY LIMITED PARTNERSHIP; RETURN FUND, LLC; RETURN FUND II, LLLC; RETURN FUND III, LLC; RETURN FUND IV, LLC; RETURN FUND V, LLC; RETURN FUND VI, LLC; PALLADIUM HOLDING COMPANY; and DONALD LOPEZ, Relief Defendants.

DEFENDANT MATTHEW LA MADRID'S REPLY IN SUPPORT OF MOTION TO STAY 08cv0764 BEN (NLS)

Case 3:08-cv-00764-BEN-NLS

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The SEC and the Receiver's entire opposition to Mr. La Madrid's motion to stay boils down to two main assertions: (1) that Mr. La Madrid is not entitled to a stay because he has not yet been indicted; and (2) that the requested stay is indefinite and too broad. Neither of these claims is persuasive, and the particular circumstances and interests involved in this case make the issuance of a stay appropriate. I. THE SEC EXAGGERATES THE SHOWING REQUIRED FOR ISSUANCE OF A STAY

A defendant who "reasonably apprehends a risk of self-incrimination" can claim Fifth Amendment privilege even if no criminal charges are pending against him and "even if the risk of prosecution is remote." Wehling v. Columbia Broadcasting System, 608 F.2d 1084, 1087 n. 5 (5th Cir. 1979). The Fifth Amendment privilege operates where the information sought to be extracted presents "a realistic threat of incrimination" as distinguished from "a mere imaginary possibility." United States v. Powe, 591 F.2d 833, 845 n. 36 (D.C. Cir. 1978). It is "only when there is but a fanciful possibility of prosecution that a claim of Fifth Amendment privilege is not well-taken." United States v. U.S. Currency, 626 F.2d 11, 14 (6th Cir. 1980). See also Andover Data Services, 876 F.2d 1080, 1081-82 (2nd Cir. 1989) (Fifth Amendment privilege can be invoked whenever witness reasonably believes evidence could be used in a criminal proceeding or could lead to other evidence that might be so used). Accord, Matter of Seper, 705 F.2d 1499, 1501 (9th Cir. 1983). Here, the threat of prosecution is far greater than a "fanciful" or "mere imaginary" possibility. A grand jury has already been impaneled to investigate Mr. La Madrid's alleged criminal activity. See Declaration of Joseph N. Casas ("Decl. JNC") filed currently herewith, ¶ 2. Assistant United States Attorney Steven E. Stone is actively presenting the case to the grand jury, and intends to prosecute Mr. La Madrid for alleged crimes involving his management of the Premium Return Funds. Decl. JNC, ¶ 3. Witnesses have been subpoenaed to appear and testify before the grand jury regarding Mr. La Madrid's alleged criminal conduct, and they have been commanded to produce documents regarding investments made with him. Decl. JNC, ¶ 4-6. The Federal Bureau of Investigation, at the direction of the United States 2
DEFENDANT MATTHEW LA MADRID'S REPLY IN SUPPORT OF MOTION TO STAY 08cv0764 BEN (NLS)

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Attorney's Office, has executed a search warrant on Mr. La Madrid's residence which lists the items to be seized as "evidence, fruits, and/or property" evidencing crimes "committed by Matthew LaMadrid, also known as Matthew La Madrid and Beau LaMadrid (`LaMadrid')." Decl. JNC, ¶ 7. Mr. La Madrid and his attorneys are informed and believed that the grand jury will be returning an indictment forthwith. Decl. JNC, ¶ 8. This is all clear and convincing evidence of Mr. La Madrid's clear and present danger of prosecution. The Court should give careful consideration to Mr. La Madrid's Fifth Amendment rights in ruling on his request for a stay. Although the Government's criminal investigation and Mr. La Madrid's pending indictment do not automatically entitle him to a continuance, he is entitled to a thoughtful consideration of the extent to which his Fifth Amendment rights are implicated. Fed. Sav. and Loan Ins. Corp. v. Molinaro, 889 F.2d 899, 902 (9th Cir. 1989) (citing SEC v. Dresser Indus., 628 F.2d 1368, 1375 (D.C. Cir. 1980)) ("A court must decide whether to stay civil proceedings in the face of parallel criminal proceedings in light of the particular circumstances and competing interests involved in the case....Obviously a court should consider the extent to which the defendant's fifth amendment rights are implicated.") The Receiver's suggestion that a court should not even consider issuing a stay to an unindicted defendant is flatly wrong, and there is no authority to support such an assertion. See Opposition of Stephen J. Donnell, Receiver, to Defendant Matthew La Madrid's Motion to Stay Civil Proceedings Pending Resolution of Criminal Action at p. 5, li. 18. Currently unindicted defendants are entitled to no less consideration of their Fifth Amendment rights than indicted defendants when ruling on a motion to stay. Brock v. Tolkow, 109 F.R.D. 116, 119 n. 2 (E.D.N.Y. 1985) (the fact that an indictment has not been returned "does not make consideration of the stay motion any less appropriate.") Issuance of a stay is entirely appropriate regardless of whether the defendant has been indicted. See, e.g., Wehling v. Columbia Broadcasting System, 608 F.2d 1084 (determining that a stay of civil proceedings was proper even though no indictments had been issued); Twenty-First Century Corp. v. LaBianca, 801 F.Supp. 1007, 1010 (E.D.N.Y. 1992) (issuing stay in civil proceedings for unindicted defendant). 3
DEFENDANT MATTHEW LA MADRID'S REPLY IN SUPPORT OF MOTION TO STAY 08cv0764 BEN (NLS)

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II. THE REQUESTED STAY IS NOT INDEFINITE AND CAN BE LIMITED IN SCOPE Contrary to the SEC's suggestion, the requested stay is not indefinite. It has clear

endpoints and terminates at the later of (1) the adjudication of the criminal case and (2) the running of the statute of limitations for the criminal investigation. Considering that a grand jury is already investigating and preparing to indict Mr. La Madrid and that criminal defendants have a right to a speedy trial pursuant to the Sixth Amendment, the adjudication of the case should be timely. See Dickey v. Florida, 398 U.S. 30, 37 (1970). The SEC filed its complaint in this case on April 28, 2008, less than four months ago. This case is still very fresh, and the SEC's complaint alleges Mr. La Madrid's conduct to have occurred fairly recently, beginning in 2004 and ending in just March 2007. Furthermore, the stay is not indefinite as the SEC retains the right to move the Court and the Court may re-examine its decision to lift the stay at any point. Stays such as the one requested here, which are issued after the careful balancing of competing interests, are not unreasonable. United States v. Kordel, 397 U.S. 1, 12 n. 27 (1970); see also Wehling v. Columbia Broadcasting System, 608 F.2d 1084 (5th Cir. 1979). In Wehling v. Columbia Broadcasting System, 608 F.2d 1084 (5th Cir. 1979), for example, the Fifth Circuit reversed the lower court's denial of a motion for a stay and remanded with instructions that the case be stayed until the statute of limitations period would run three years later. The court observed that the party requesting the stay is not the only party who has important rights which must be respected. Id. at 1088. However, the court held that a stay of proceedings would protect the party exercising a constitutional privilege from unnecessary adverse consequences and would not impose undue hardship. Id. at 1088-1089. In the present case, while the SEC and the Receiver suggest that Mr. La Madrid's interests are entitled to little or no consideration, Mr. La Madrid acknowledges that the Court should carefully balance the interests of all the parties, taking into account the circumstances of this case. Based on those circumstances and interests discussed in this Reply and in his Motion to Stay, however, he respectfully urges the Court to conclude, as did the court in Wehling, that any 4
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inconvenience resulting from a stay is preferable at this point to requiring a party to forfeit his case by exercising his Fifth Amendment rights. Mr. La Madrid maintains that a complete stay would be entirely appropriate based on an analysis of the particular circumstances and interests involved in this case. But should the Court disagree, "[j]udicial discretion and procedural flexibility should be utilized to harmonize the conflicting rules and to prevent the rules and policies applicable to one suit from doing violence to those pertaining to the other." Campbell v. Eastland, 307 F.2d 478, 487 (5th Cir. 1962). In such situations, "a stay of all civil proceedings, or at least of all disclosure, or the imposition of protective orders is well within the informed discretion of the court; therefore, of course, so are less severe remedies such as the temporary deferral of discovery. In re Ivan F. Boesky Securities Litigation, 128 F.R.D. 47, 49 (S.D.N.Y. 1989). See SEC v. Dresser Industries, Inc., 628 F.2d 1368, 1375 (D.C. Cir. 1980) (Wright, J.), cert. denied, 449 U.S. 993 (1980) ("a court may decide in its discretion to stay civil proceedings, postpone civil discovery, or impose protective orders and conditions ..."). Mr. La Madrid is not opposed to and does not wish to interfere with the duties of the court-appointed Receiver. Mr. La Madrid respectfully defers to the Court's sound discretion in defining the scope of the Receiver's duties and fashioning a stay which will allow the Receiver to perform his duties as well as protect Mr. La Madrid's Fifth Amendment rights. III. THE CIRCUMSTANCES AND INTERESTS INVOLVED IN THIS CASE MAKE THE ISSUANCE OF A STAY APPROPRIATE

The Court should not be distracted or misled by the SEC's numerous attempts to discredit Mr. La Madrid such as by accusing him of "making up" his own factors under Keating v. Office of Thrift Supervision, 45 F.3d 322 (9th Cir. 1995). The SEC has blatantly ignored the rest of the same sentence, and the prior sentence in the Keating opinion, which unequivocally state that the defendant's Fifth Amendment rights should be considered "in addition" to the other factors. See Keating, 45 F.3d at 324-325. 5

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DEFENDANT MATTHEW LA MADRID'S REPLY IN SUPPORT OF MOTION TO STAY 08cv0764 BEN (NLS)

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Furthermore, the court's decision in Molinaro not to issue a stay does not determine the proper outcome in this case, because the facts in Molinaro are readily distinguishable. In Molinaro, the court found that the defendant continued to attempt to dispose of his assets, the action had already been pending for a year, and the court noted that the defendant had already given a partial deposition in the case. Molinaro, 889 F.2d at 903. In contrast, in the present case Mr. La Madrid is not attempting to dispose of his assets, the action has only been pending for a few months, and the alleged wrongful conduct is relatively recent. Mr. La Madrid has not given any deposition or made any other testimony contrary to maintaining his Fifth Amendment privilege. Although the SEC points to the Perales action as contrary conduct, that suit was filed to put other parties on notice of third party involvement and to prevent the tolling of the statute of limitations. Mr. La Madrid continues to assert his Fifth Amendment privilege. Also notably absent from the SEC's opposition is a candid discussion of the substantial prejudice and harm that would come to Mr. La Madrid if this case were to proceed to discovery and trial without a stay. In cases which have been highly publicized in the media, such as this case, "it is especially necessary to guard the rights of defendants, and the public deterrence value of an enforcement proceeding must not be allowed to override the individual defendant's due process rights." Keating, 45 F.3d at 326. Rather than acknowledge the sanctity of Mr. La Madrid's Fifth Amendment privilege against self-incrimination, the SEC disingenuously labels his decision to assert a right guaranteed by the Framers of our Constitution as "stonewalling" and "obstructionism." The SEC cavalierly dismisses his liability-or-liberty duress as "difficult choices." Confronted with the risk of loss of his liberty, it is respectfully suggested that Mr. La Madrid has no real choice but to invoke his Fifth Amendment rights. As a result of the adverse evidentiary inferences which would be permitted if this case proceeds to discovery and trial without a stay, Mr. La Madrid would be unable to defend himself and the result would be tantamount to his losing by default. Baxter v. Palmigiano, 425 U.S. 308, 318 (1976). That is contrary to the nature of the adversarial process and the entire bedrock of our judicial system which favors trial on the merits. Wendt v. Pratt, 154 6
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F.R.D. 229, 230 (D. Minn. 1994). Hidden in the middle of the SEC's opposition is the admission that this action and the pending criminal investigation overlap because they both involve the same alleged fraudulent activities as an investment advisor and investment manager. See SEC Oppo. at p. 5, li. 16. The SEC cites no authority for its claim that the interest of non-parties is "the most important consideration before the Court" when ruling on a motion to stay. There is authority, however, that the "most important factor at the threshold is the degree to which the civil issues overlap with the criminal issues." Milton Pollack, Parallel Civil and Criminal Proceedings, 129 F.R.D. 201, 203 (1989). There can be no genuine dispute that the SEC and the AUSA are all interested in the same information, arising out of the same activities and transactions, and alleging the same conduct. As such, the evidence gained through discovery and trial in this case would invariably be used to prove the elements in the forthcoming criminal case. Thus, the need for a stay is at its greatest urgency, because the risk of self-incrimination from disclosing evidence that would otherwise be non-discoverable in a criminal case is most severe. In short, careful consideration of the particular circumstances and interests in this case show that a stay is appropriate: Parallel civil and criminal investigations will unfairly prejudice Mr. La Madrid by making it impossible for him to exercise his Fifth Amendment rights while adequately defending himself in this action. The SEC will not suffer any significant prejudice from the issuance of a stay because the events alleged in its recently filed complaint are still fresh, and evidence and recoverable assets are currently in the possession of the FBI or are being monitored and tracked by the AUSA. All of Mr. La Madrid's assets have been frozen, all of the Return Funds' assets have been put into a receivership, and there is no evidence that evidence will be lost or that the Premium Return Fund investors' recovery will be diminished by issuing a stay. With the Government having executed search warrants and recovered significant amounts of discovery already, and with the Receiver holding all of the assets and accounts frozen, interests of the investors and the public are not being significantly hindered by stale evidence and depletion of the funds. There is 7
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no evidence that a stay will substantially reduce the amount of recovery by investors. A stay will optimize the use of judicial resources by avoiding duplication of effort and potential conflicts from the multiple related cases. Adjudication of the criminal case "will sharpen the issues and highlight the strengths and weaknesses of the parties' arguments, thus increasing the chances of settlement or dismissal" of the civil case. SEC v. Mutuals.com, Inc., 2004 WL 1629929, *4 (N.D. Tex. 2004). Due to differences in the standards of proof between civil suits and criminal prosecutions: ...the possibility always exists for a collateral estoppel or res judicata effect on some or all of the overlapping issues. Conviction of a defendant in a parallel criminal case may effectively dispose of all common issues in a subsequent civil action, although the reverse is not true. Thus, it was held that a district court did not abuse its discretion in deciding that judicial economy was best served by granting a stay of the civil case, where the proceedings involved substantial overlap of issues such that `resolution of the criminal case would moot, clarify, or otherwise affect various contentions in the civil case.' Milton Pollack, Parallel Civil and Criminal Proceedings, 129 F.R.D. 201, 203 (1989) (discussing United States v. Mellon Bank N.A., 545 F.2d 869, 873 (3d Cir.1976)). A stay will also serve the public interest by preserving the integrity of the criminal justice system and its scope of discovery, which is intended to be far more limited1. See Walsh Securities, Inc. v. Christo Property Management, Ltd., 7 F.Supp.2d 523, 529 (D.N.J. 1998); see also Crawford & Sons v. Besser, 298 F. Supp.2d 317, 319-320 (E.D.N.Y. 2004). Considerations
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"There is a clearcut distinction between private interests in civil litigation and the public interest in a criminal prosecution, between a civil trial and a criminal trial, and between the Federal Rules of Civil Procedure and the Federal Rules of Criminal Procedure. But these distinctions do not mean that a civil action and a criminal action involving the same parties and some of the same issues are so unrelated that in determining good cause for discovery in the civil suit, a determination that requires the weighing of effects, the trial judge in the civil proceeding should ignore the effect discovery would have on a criminal proceeding that is pending or just about to be brought. The very fact that there is clear distinction between civil and criminal actions requires a government policy determination of priority: which case should be tried first. Administrative policy gives priority to the public interest in law enforcement. This seems so necessary and wise that a trial judge should give substantial weight to it in balancing the policy against the right of a civil litigant to a reasonably prompt determination of his civil claims or liabilities. [¶] In handling motions for a stay of a civil suit until the disposition of a criminal prosecution on related matters and in ruling on motions under the civil discovery procedures, a judge should be sensitive to the difference in the rules of discovery in civil and criminal cases. While the Federal Rules of Civil Procedure have provided a well-stocked battery of discovery procedures, the rules governing criminal discovery are far more restrictive....Separate policies and objectives support these different rules." Campbell v. Eastland, 307 F.2d 478, 487 (5th Cir. 1962) 8
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of public policy should prevail in order to prevent the civil discovery rules from being subverted into a device for improperly obtaining discovery in the pending criminal proceedings. IV. CONCLUSION For all the above reasons, Mr. La Madrid respectfully urges the Court to grant his Motion to Stay.

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Respectfully submitted, Dated: August 4, 2008 CASAS LAW GROUP, P.C. /s/ Joseph N. Casas______ By: Joseph N. Casas Attorney for Defendant MATTHEW LA MADRID

DEFENDANT MATTHEW LA MADRID'S REPLY IN SUPPORT OF MOTION TO STAY 08cv0764 BEN (NLS)