Securities and Exchange Commission v. Garelick

Background

The Securities and Exchange Commission (SEC) brought this civil enforcement action against Bruce Garelick, Michael Shvartsman, Gerald Shvartsman, and Rocket One Capital LLC. The SEC alleges that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and related regulations through insider trading in Digital World Acquisition Corporation securities before the October 2021 public announcement of a merger agreement. The SEC also alleges that Garelick violated Section 16(a) of the Exchange Act and a related regulation.

The United States obtained an indictment charging Garelick, Michael Shvartsman, and Gerald Shvartsman with federal securities-law violations based on the same alleged insider trading. The criminal case was scheduled for trial on April 15, 2024. The defendants had sought a later trial date, but the criminal court rejected those requests.

Intervention

The Government moved under Federal Rule of Civil Procedure 24 to intervene in the SEC’s civil case and asked the court to stay, or pause, the civil case until the criminal case was resolved. No defendant opposed intervention. Judge Gardephe explained that the United States Attorney may intervene to seek a stay when a parallel criminal case involves common legal or factual questions. He therefore granted the Government’s motion to intervene.

Stay analysis

A complete stay of civil discovery during related criminal proceedings is an extraordinary remedy, but courts may issue one when the criminal case is pending or imminent. The court considered the commonly used six factors: overlap between the cases; the status of the criminal case; the SEC’s interest in proceeding quickly; the defendants’ interests and burdens; the court’s interests; and the public interest.

The court found that the civil and criminal cases involved identical alleged conduct, the same alleged insider trading transactions, and overlapping individual defendants. This favored a stay. The criminal case had already resulted in an indictment and had a trial date about four months away, so the court concluded that the stay would not cause an undue delay.

The SEC took no position on the stay, making its interest neutral. Michael Shvartsman argued that a stay would delay his opportunity to clear his name and that document discovery should continue. The court concluded, however, that defendants and important witnesses were likely to invoke the constitutional protection against self-incrimination if questioned in depositions. The court also noted that the Government represented that the defendants had already received all materials the Government obtained from the SEC, including more than a million pages of discovery.

The court further concluded that the civil case could benefit from the criminal case because the criminal proceeding might resolve shared factual issues or make later civil discovery more efficient. Finally, the court found that the public interest in protecting the integrity of the criminal proceeding outweighed Michael Shvartsman’s and Garelick’s interest in obtaining civil discovery before the criminal case ended. The court considered the Government’s concerns about defendants using civil discovery to bypass the narrower discovery rules applicable in criminal cases, as well as the Government’s assertion that possible witness tampering had occurred.

Disposition

Judge Paul G. Gardephe granted the Government’s motion to intervene and granted its motion to stay the case. The entire civil case was stayed pending completion of the parallel criminal case. The Clerk of Court was directed to terminate the motion.