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

Background

The SEC brought civil fraud charges against Mykalai Kontilai and Collector’s Coffee Inc. The district court referred general pretrial matters—including scheduling, discovery, nondispositive motions, and settlement—to Magistrate Judge Gorenstein. The defendants filed four objections to Judge Gorenstein’s orders concerning recusal, a stay, deposition limits, and a motion to compel documents.

Under Federal Rule of Civil Procedure 72(a), a district judge may overturn a magistrate judge’s ruling on a nondispositive pretrial motion only if it is clearly erroneous or contrary to law. The district court explained that magistrate judges have broad discretion in resolving discovery and other nondispositive disputes.

Recusal

The defendants argued that Judge Gorenstein should have recused himself because of his past relationship with the law firm Debevoise & Plimpton LLC and its partners Andrew Ceresney and Mary Jo White. They also argued that his rulings showed a lack of impartiality.

The court rejected both arguments. It agreed that Judge Gorenstein’s relationships were too remote to cause a reasonable person to question his impartiality. The court also held that unfavorable rulings, without more, did not show the deep-seated favoritism or antagonism required for recusal. The objection to the recusal ruling was denied.

Motion to Stay

Kontilai objected to the denial of his request to pause the civil case. He argued that continuing the case could implicate his Fifth Amendment rights because of a related criminal matter.

The court held that a stay was not constitutionally required at that stage. Kontilai had already participated in discovery, testified at a contempt hearing, and submitted a verified complaint concerning the same events and transactions. The court also noted that Judge Gorenstein had left open the possibility of reconsidering a stay if Kontilai returned to face the criminal charges or if the civil case reached trial and Kontilai planned to testify. The court concluded that Judge Gorenstein properly exercised discretion in applying the relevant factors, and denied the objection to the stay ruling.

Deposition Limits

The defendants objected to the ruling concerning the presumptive limit of ten depositions. They sought clarification about several deposition issues and argued that depositions taken in an intervenor action should not count toward the limit in the SEC action. They also argued that there was adequate cause to allow more depositions.

The court said that requests for clarification should be directed to Judge Gorenstein and that his order was clear. Four witnesses already noticed for depositions did not count toward the defendants’ ten-deposition limit, and Judge Gorenstein would allow the defendants to exceed that limit for SEC witnesses whom he permitted them to depose. The court declined to review the argument about depositions in the intervenor action because the issue had not properly been presented to Judge Gorenstein. It also upheld the finding that nineteen of the twenty-two requested witnesses had been or would be deposed and that the remaining three witnesses’ testimony would be cumulative and unnecessary. The objection was denied.

Motion to Compel

The defendants sought SEC notes from interviews of twenty-one witnesses, SEC notes from an FBI interview of Gail Holt, and the FBI document known as an FD-302 created after Holt’s interview. Judge Gorenstein ruled that the SEC’s notes were protected by the work-product doctrine and that the FBI’s FD-302 was not in the SEC’s possession, custody, or control.

The district court upheld those rulings. It explained that work-product protection can cover factual investigation materials, not only an attorney’s opinions or legal theories. The SEC attorney who conducted the interviews stated that she prepared the notes because of the prospect of litigation, which supported applying the doctrine. The defendants had not raised some of their arguments before Judge Gorenstein, so the district court did not consider those arguments for the first time on objection. The court also held that the defendants had not shown a substantial need for the notes, particularly because they had deposed Holt and a desire to use interview notes for impeachment alone did not establish substantial need.

As to the FBI’s FD-302, the court held that the defendants had not adequately argued why the SEC was required to produce a document created and retained by the FBI. The defendants did not show under the civil discovery rules that the SEC had the practical ability to obtain the document. The objection to the motion-to-compel ruling was denied.

Disposition

The court ordered that all four of the defendants’ objections to Judge Gorenstein’s rulings were denied. This order addressed pretrial and discovery matters; the opinion did not decide the underlying civil fraud claims.