United States Securities and Exchange Commission v. Collector's Coffee Inc.

Background

The Securities and Exchange Commission brought civil fraud claims against Mykalai Kontilai and Collector’s Coffee, Inc. In an April 24, 2020 order, Magistrate Judge Gabriel Gorenstein directed Kontilai to produce all tax returns since the 2014 tax year that were in his possession, custody, or control. The magistrate judge also denied the SEC’s request to compel certain real-property records because the SEC had not addressed Kontilai’s argument that producing those records would implicate his Fifth Amendment act-of-production privilege.

Both sides sought reconsideration. In a June 1, 2020 order, Judge Gorenstein denied Kontilai’s request to reconsider the tax-return ruling. The judge found both that Kontilai had not previously raised his argument that the SEC needed to satisfy a heightened standard and that the argument failed on the merits because the SEC had a compelling need for the tax returns. The judge also granted in part the SEC’s reconsideration request by allowing the SEC to address the merits of Kontilai’s Fifth Amendment argument concerning the real-property records in a supplemental brief.

Objections and review standard

Kontilai filed objections under Federal Rule of Civil Procedure 72(a). Because the challenged rulings concerned discovery, the district court reviewed them under the deferential standard applicable to nondispositive magistrate-judge orders. The orders could be overturned only if they were clearly erroneous or contrary to law, and the district court stated that magistrate judges have broad discretion in resolving discovery disputes.

Tax records

The court overruled Kontilai’s objection to the denial of reconsideration concerning the tax returns. It held that Judge Gorenstein reasonably determined that Kontilai had not adequately raised the heightened-standard argument in his original briefing. The court also upheld the finding of a compelling need because Kontilai was not offering other contemporaneous documents that would show his income, other sources would provide only part of the information, and Collector’s Coffee, Inc. had repeatedly stated that it had no records beyond what had been given to the SEC.

The court rejected Kontilai’s argument that the SEC should first examine information from third-party discovery. It found that nothing cited by Kontilai showed that the third-party discovery would provide the information contained in his tax returns.

Real-property records

The court also overruled Kontilai’s objection to the June order’s decision to grant in part the SEC’s reconsideration request. The court held that Judge Gorenstein acted within his discretion in allowing the SEC to submit supplemental briefing on the merits of Kontilai’s Fifth Amendment argument. The court explained that reconsideration is discretionary and may be allowed to prevent manifest injustice. It found no clear error or abuse of discretion in allowing the additional briefing.

Disposition

The court overruled the objections and adopted the June order in its entirety. It further ordered Kontilai to produce the tax returns within two business days after issuance of the August 4, 2020 order. The opinion notes that, after supplemental briefing, Judge Gorenstein later ordered production of certain real-property records on July 24, 2020.