Securities and Exchange Commission v. Carroll

Background

The Securities and Exchange Commission (SEC) brought this civil enforcement action against Michael A. Carroll and Michael V. Pappagallo, alleging violations of the Exchange Act of 1934 and related rules. The SEC alleged that Carroll and Pappagallo, identified as Brixmor Property Group’s former Chief Executive Officer and former Chief Financial Officer, respectively, manipulated publicly reported quarterly same-store net operating income growth figures. The opinion states that Brixmor is a real estate investment trust headquartered in Manhattan.

The defendants had also been indicted in a parallel federal criminal case involving the same alleged manipulation of Brixmor’s reported figures. The criminal indictment charged securities-law violations. The defendants had filed motions to dismiss the indictment, and those motions were fully briefed in the criminal case.

The United States, which was not originally a party to the civil action, moved to intervene under Federal Rule of Civil Procedure 24(a)(2) for the limited purpose of seeking a stay. The Government argued that civil discovery could circumvent the narrower discovery rules applicable in the criminal case and could affect the criminal proceedings. The defendants opposed a blanket stay. The SEC did not oppose the request.

Intervention

The court held that the Government had a legally protectable interest in preventing discovery in the civil case from being used to circumvent the limits on discovery in the criminal case. Because the civil and criminal cases involved overlapping issues, and because the defendants did not oppose intervention for this limited purpose, the court granted the motion to intervene.

Stay of Motion-to-Dismiss Briefing

The Government sought to stay the filing of any motions to dismiss the civil complaint. The court granted that request. It reasoned that the defendants intended to raise in the civil case arguments similar to those already presented in their motions to dismiss the criminal indictment, including arguments about materiality. The court stated that the legal issues overlapped and that staying the civil briefing would avoid duplicative work, conserve judicial resources, and reduce the risk of conflicting rulings.

The defendants argued that a stay could cause reputational harm and interfere with their ability to defend themselves and clear their names. The court concluded that the public interest in effective enforcement of the criminal law and the integrity of the parallel criminal case outweighed those concerns.

Stay of Discovery

The court also granted the Government’s request for a full stay of discovery. It found that the civil and criminal cases involved virtually identical facts, witnesses, and issues, and that the defendants had already been indicted rather than merely investigated. The court explained that allowing civil discovery could undermine the defendants’ protection against compelled self-incrimination, expand criminal discovery beyond the limits of the criminal rules, reveal the defense’s position before trial, or otherwise prejudice the criminal case.

The defendants proposed limited discovery, including document requests and a small number of depositions. The court rejected those proposals because even limited discovery could risk the integrity of the criminal proceedings, and because the civil case was unlikely to be resolved through limited discovery alone.

Disposition

The court granted the Government’s motion to: (1) intervene; (2) stay briefing on any motions to dismiss; and (3) stay discovery until the conclusion of the parallel criminal case. The Clerk was directed to terminate the motion and stay the civil action. The SEC was ordered to submit a status letter by May 18, 2020, and every 60 days afterward, and to notify the court promptly when the criminal case was resolved. The order addressed intervention and case-management issues; it did not decide whether the SEC’s allegations were legally or factually correct.