Securities and Exchange Commission v. Rayat

Background

The SEC sued Harmel S. Rayat and RenovaCare Inc. for alleged securities fraud under Section 10(b) of the Securities Exchange Act of 1934 and related rules. The complaint alleges that, from July 2017 through January 2018, Rayat and RenovaCare secretly disseminated false and misleading information about RenovaCare and another company controlled by Rayat through StreetAuthority, an online financial publishing company. The complaint further alleges that Rayat arranged payments through third parties to conceal his and RenovaCare’s involvement, and that Rayat and associates sold shares after RenovaCare’s stock price rose.

Rayat moved for a protective order under Federal Rule of Civil Procedure 26. He sought relief from responding to Requests for Production Nos. 1–23 and 28–31. The requests sought information about transactions involving Rayat and identified third parties, information concerning SolarWindow, communications with ten individuals, forensic copies of two cellphones, and six years of tax returns from an entity controlled by Rayat.

Arguments

Rayat argued that the requests sought irrelevant information and were disproportionate, untimely, or unduly burdensome. He also argued that the SEC had enough opportunity to obtain the information during its investigation and should not be allowed to seek it during the lawsuit.

The SEC responded that the information was relevant to its claims and to Rayat’s defenses. It argued that the financial records could show Rayat’s motive and financial interest in the alleged scheme, that information about SolarWindow could provide evidence about the alleged arrangement with StreetAuthority, that cellphone records could contain relevant messages, and that the tax returns could identify financial information concerning the entity through which Rayat held shares.

Court’s analysis

Rule 26 generally permits discovery of nonprivileged information that is relevant to a party’s claim or defense and proportional to the needs of the case. The court may limit discovery when it is outside that scope, excessively burdensome, cumulative, or disproportionate. The party seeking a protective order bears the burden of showing that a limitation is warranted.

The court held that the SEC established the relevance of each challenged category of documents and that Rayat had not identified an undue burden. Requests 1–19 concerned issues central to the case, including whether Rayat had a financial motive to increase RenovaCare’s stock price and whether he profited from the alleged increase. The court also found that the SolarWindow requests fell within the broad range of permitted discovery because evidence concerning Rayat’s involvement with SolarWindow and profits from its shares could support the SEC’s allegations concerning RenovaCare. The court accepted the SEC’s explanations for the relevance of the remaining requests.

The court rejected Rayat’s argument that the SEC should be barred from seeking information because it could have requested it during its investigation. The court explained that the discovery rule addresses whether a party had ample opportunity to obtain information through discovery in the lawsuit, not whether it could have obtained the information through a separate pre-lawsuit investigation. The court also stated that the SEC need not gather all evidence it may ultimately need before filing a case, so long as its claims and factual contentions satisfy the applicable filing requirements.

The court noted that Rayat had not objected to producing the tax returns based on confidentiality and had not raised cellphone-specific objections beyond his general objections. It therefore did not address broader issues concerning the production of tax-return information or cellphones.

Ruling

Judge Lewis J. Liman denied Rayat’s motion at Docket No. 55 for a protective order and directed the Clerk of Court to close that docket entry.