U.S. District Judge James Nowlin of the Western District of Texas has sanctioned the Securities and Exchange Commission for deposing a witness in a securities suit in January without giving prior notice to the defendants. But the SEC wants the judge to reconsider and argues that his order sets out a new rule of law.
In an Aug. 17 order, Nowlin found the SEC violated the Federal Rules of Civil Procedure (FRCP) by taking the deposition of a nonparty witness in Securities and Exchange Commission v. Life Partners Holdings Inc., et al., and that “sanctions are an appropriate remedy.”
The case started on Jan. 3, when the SEC filed a securities fraud complaint against Life Partners Holdings Inc. of Waco and company officers Brian Pardo, R. Scott Peden and David Martin. The SEC alleges in the complaint that Life Partners, through the three officers, “engaged in fraud that misled the company’s investors about its financial strength and sustainability,” Nowlin wrote in his order.
In answers filed on May 4, the defendants deny the allegations.
In a July 7 motion for sanctions, the defendants alleged the SEC deposed the nonparty witness before the parties’ Rule 26(f) conference. The defendants alleged in the motion that the deposition violated the FRCP because the deposition was taken without leave from the court prior to a Rule 26(f) conference and without notice to the defendants.
The SEC alleged the deposition was “properly taken under its regulatory authority to investigate potential violations of federal securities laws and was not an attempt to obtain ex-parte discovery,” Nowlin wrote.
Nowlin wrote in the order that, under Rule 26(d)(f), a party may not seek discovery before the parties have conferred, and the conference did not occur until May 31 — after the deposition — and violated Rule 30(b)(1) because the deposition occurred Jan. 26 without notice to the defendants.
Nowlin found that after he reviewed the deposition of the nonparty witness, it was “clear that the deposition was not taken for the sole purpose of investigating violations not alleged in the Complaint” but instead a “large portion” of the questions and answers at the deposition specifically relate to the allegations in the complaint against the defendants.
By examining the witness “without the presence of opposing counsel, and with the intent to obtain evidence in the present case against Defendants, Plaintiff clearly frustrated the fair examination” of the witness, Nowlin wrote in the order.
Nowlin granted, in part, the defendants’ motion for sanctions, which included their request for an order prohibiting the use of the nonparty witness’ deposition testimony “for any purpose” in the litigation. The judge also ordered the SEC to pay $5,000 in attorney fees to the defendants.
The judge denied the defendants’ request for other remedies.
On Aug. 28, the SEC filed a motion asking Nowlin to reconsider and vacate the motion for sanctions.
In its motion for reconsideration, the SEC alleges Nowlin’s order establishes a new rule of law — “namely that all investigative testimony conducted after a complaint is filed must be taken for the sole purpose of investigating violations unrelated to the allegations in the Complaint.” The SEC alleges the “new rule” has “serious policy implications and would dramatically alter the way the Commission conducts its investigations.”
The SEC alleges in the motion for reconsideration that its longstanding practice and routine is to continue related investigations after filing enforcement actions.
The SEC alleges that even if the court reaffirms its “new standard governing the conduct of investigative testimony,” the sanctions are unwarranted because it acted in “good faith” and followed prior case law and the commission’s policies.
Lawyers for most of the defendants did not return messages left at their offices. They include Jason Lewis, a partner in Locke Lord in Dallas for Pardo; S. Cass Weiland, a partner in Patton Boggs in Dallas for Martin; and Elizabeth Yingling, a partner in Baker & McKenzie in Dallas, for Peden and Life Partners Holdings. J. Pete Laney, of Austin’s Law Offices of J. Pete Laney who also represents Peden and Life Partners, declines comment on the SEC’s motion for reconsideration.
Toby Galloway, an SEC attorney in Fort Worth who filed the motion for reconsideration, did not return a telephone message seeking comment. Florence Harmon, a spokeswoman for the SEC in Washington, D.C., declines comment.