Dvorak Opening Brief

11-17025____________

UNITED STATES COURT OF APPEALSFOR THE NINTH CIRCUIT

____________

SECURITIES AND EXCHANGE COMM. Appellee

v.

BRIAN DVORAK Appellant

____________

APPEAL FROM THEUNITED STATES DISTRICT COURT

DISTRICT OF NEVADA AT LAS VEGASNo. 2:08CV00437-LRH-RJJRobert J. Johnson, U.S.M.J.

Larry R. Hicks, U.S.D.J.

____________

OPENING BRIEF OF APPELLANT DVORAK

__________

JOHN WESLEY HALL, JR.1202 Main Street; Suite 210Little Rock, Arkansas 72202-5057501-371-9131 / fax [email protected]

Attorney for Brian Dvorak

Case: 11-17021 01/16/2012 ID: 8032476 DktEntry: 17 Page: 1 of 45

mailto:[email protected]

TABLE OF CONTENTS

Table of Authorities.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Jurisdictional Statement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

State of the Issues Presented for Review. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Statement of the Case. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Statement of the Facts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Summary of the Argument. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Argument. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

I. The District Court’s Disgorgement Order finds no basis in the factspresented by Plaintiff nor in the supporting documentation presented tothe District Court. Further, to the extent the Disgorgement Order is inreality a summary judgment it was entered while there remained dis-puted issues of material fact. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17A. Standard of Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17B. Disgorgement Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18C. Issue of Material Fact. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21D. Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

II. The District Court’s refusal to stay these proceedings was error.. . . . . . . . 24A. Standard of Review.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24B. The Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25C. The Argument Below. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27D. U.S. District Courts Have Discretion to Stay Civil Proceedings

During the Pendency of a Parallel Criminal Action.. . . . . . . . . . . . . 30E. Defendant’s Fifth Amendment Rights are Implicated Because

the Issues in the Civil and Criminal Cases Substantially Overlap.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

F. The Risk of Prejudice From Staying the Civil Case Does NotWeigh Against Granting the Stay. . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

G. Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

1


III. The U.S. Magistrate Judge had no jurisdiction to solely decide theMotion for Stay without referral under 28 U.S.C. § 636, and this orderviolated U.S. Const., Art. III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37A. Standard of Review.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37B. Dvorak Was Entitled to Notice as a Matter of Due Process of

Law That There Was a Right of Appeal to the District CourtJudge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

C. De Novo Review is an Art. III Requirement. . . . . . . . . . . . . . . . . . . 40D. Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Certificate of Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Statement of Related Cases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

2


TABLE OF AUTHORITIES

CASES:

Anderson v. Liberty Lobby, 477 U.S. 242 (1986). . . . . . . . . . . . . . . . . . . . . . . . . . 23

Balint v. Carson City, 180 F. 3d 1047 (9th Cir. 1999) (en banc). . . . . . . . . . . . . . 23

Bridgeport Harbour Place, LLC v. Ganim, 269 F.Supp. 6 (D. Conn. 2002). . . . . 36

Campbell v. Rice, 408 F. 3d 1166 (9th Cir. 2005). . . . . . . . . . . . . . . . . . . . . . . . . 22

Dependable Highway Express, Inc. v. Navigators Ins. Co., 489 F. 3d 1059 (9th Cir. 2007). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

FTC v. Stefanchik, 559 F. 3d 924 (9th Cir. 2009).. . . . . . . . . . . . . . . . . . . . . . . . . 17

Hateley v. SEC, 8 F. 3d 653 (9th Cir. 1993). . . . . . . . . . . . . . . . . . . . . . . . . . . 18, 19

Heller Healthcare Finance, Inc. v. Byes, 2002 WL 1558337 (N.D.Tex. 2002).. . 34

Javier H. v. Garcia-Botello, 218 F.R.D. 72 (W.D.N.Y. 2003).. . . . . . . . . . . . 33, 34

Johnson v. Boyd-Richardson Co., 650 F.2d 147 (8th Cir. 1981) . . . . . . . . . . . . . 39

Keating v. Office of Thrift Supervision, 45 F. 3d 322 (9th Cir. 1995). . . . . . . . . . 31

Lefkowitz v. Turley, 414 U.S. 70 (1973). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Librato v. M.S. Carriers, Inc., 2002 WL 3149588 (N.D. Tex. 2002). . . . . . . . . . 31

Litton Indus., Inc. v. Lehman Bros., 734 F. Supp. 1071 (S.D.N.Y. 1990). . . . . . . 20

Lorin Corp. v. Goto & Co., Ltd., 700 F.2d 1202 (8th Cir. 1983) . . . . . . . . . . . . . 39

Malloy v. Hogan, 378 U.S. 1 (1964). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28, 37

Martinez v. Ylst, 951 F.2d 1153 (9th Cir. 1991). . . . . . . . . . . . . . . . . . . . . . . . . . . 40

3


Nettles v. Wainwright, 677 F.2d 404 (5th Cir. 1982) (en banc) (Unit B).. . . . . . . 39

Park Motor Mart, Inc. v. Ford Motor Co., 616 F.2d 603 (1st Cir. 1980). . . . . . . 40

Richardson v. Sunset Science Park Credit Union, 268 F.3d 654 (9th Cir. 2001). 39

Robbins v. Carey, 481 F.3d 1143 (9th Cir. 2007).. . . . . . . . . . . . . . . . . . . . . . . . . 45

SEC v. CMKM Diamonds, Inc., 656 F.3d 829 (9th Cir. 2011). . . . . . . . . . . . . . . . 44

SEC v. CMKM Diamonds, Inc., 2011 WL 1343004, 2011 U.S. Dist. LEXIS41841 (D. Nev. April 7, 2011). . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 12, 14, 37

SEC v. CMKM Diamonds, Inc., 2011 WL 3047476, 2011 U.S. Dist. LEXIS41841, Fed. Sec. L. Rep. P 96,364 (D. Nev. July 25, 2011). . . . . . . 8, 12, 14

SEC v. Colello, 139 F. 3d 674 (9th Cir. 1998). . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

SEC v. First City Fin. Corp., 890 F. 2d 1215 (D.C.Cir. 1989).. . . . . . . . . . . . . . . 18

SEC v. First Jersey Sec., Inc., 101 F. 3d 1450 (2d Cir. 1996). . . . . . . . . . . . . . . . 19

SEC v. First Pac. Bancorp, 142 F. 3d 1186 (9th Cir. 1998).. . . . . . . . . . . 17, 18, 19

SEC v. Happ, 329 F. 3d 12 (1st Cir. 2004). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

SEC v. Lorin, 76 F. 3d 458 (2d Cir. 1996) (per curiam). . . . . . . . . . . . . . . . . . . . . 18

SEC v. JT Wallenbrock & Assoc., 440 F. 3d 1109 (9th Cir. 2006).. . . . . . . . . 17, 18

SEC v. Thomas James Assocs., Inc., 738 F. Supp. 88 (W.D.N.Y. 1990). . . . . . . . 20

Securities and Exchange Commission v. Dresser Industries,202 U.S.App. D.C. 345, 628 F. 2d 1368 (1980). . . . . . . . . . . . . . . . . . . . . . 33

Simeonoff v. Hiner, 249 F. 3d 883 (9th Cir. 2001). . . . . . . . . . . . . . . . . . . . . . . . . 19

State Farm Lloyds v. Wood, 2006 WL 3691115 (S.D. Tex. 2006).. . . . . . 31, 33, 35

4


Stephen L. LaFrance Holdings, Inc. v. Sorensen, 2011 WL 6176589 (E.D.Ark. Dec. 13, 2011).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Trustees of Plumbers and Pipe Fitters Nat’l Pension Fund v.Tansworld Mech., Inc., 886 F.Supp. 1134 (S.D.N.Y. 1995). . . . . . . . . . . . 34

Turner v. Duncan, 158 F.3d 449 (9th Cir. 1998) . . . . . . . . . . . . . . . . . . . . . . . 39, 40

United States v. Gamba, 483 F.3d 942 (9th Cir. 2007). . . . . . . . . . . . . . . . . . . . . 37

United States v. Kordel, 397 U.S. 1 (1972).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

United States v. Reina-Tapia, 328 F.3d 1114 (9th Cir. 2003). . . . . . . . . . . . . . . . 40

United States v. Shami, 754 F.2d 670 (6th Cir. 1985). . . . . . . . . . . . . . . . . . . . . . 40

United States v. Torf, 357 F.3d 900 (9th Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . 39

United States v. Walters, 638 F.2d 947 (6th Cir. 1981). . . . . . . . . . . . . . . . . . 39, 40

Volmar Distributors, Inc. v. N.Y. Post Co., 152 F.R.D. 36 (S.D.N.Y. 1993).. . . . 30

Wehling v. Columbia Broadcasting System, 608 F. 2d 1084 (5th Cir. 1979). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Wright v. Collins, 766 F.2d 841 (4th Cir. 1985). . . . . . . . . . . . . . . . . . . . . . . . . . . 38

CONSTITUTIONAL PROVISIONS:

U.S. Const., Art. III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 16, 37, 40, 41

U.S. Const., Fifth Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21, 35

STATUTES AND RULES:

15 U.S.C. § 77(e). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

5


15 U.S.C. § 77t(b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 25

15 U.S.C. § 77t(d)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 25

15 U.S.C. § 77v(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 25

15 U.S.C. § 78u(d)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 25

15 U.S.C. § 78u(d)(3)(A). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 25

15 U.S.C. § 78u(e). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 25

15 U.S.C. § 78aa. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 25

18 U.S.C. § 1347. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

18 U.S.C. § 1956. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

18 U.S.C. § 1957. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

28 U.S.C. § 636. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 37, 38

28 U.S.C. § 1291. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Fed. R. App. P. 32(a)(7)(B). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Fed. R. App. P. 32(a)(7)(C). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

F.R.C.P. 56(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

F.R.C.P. 56(c-d).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Ninth Circuit Rule 32-1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

TREATISES AND MISCELLANEOUS:

ABA Model Rules of Professional Conduct Rule 3.3(a)(4). . . . . . . . . . . . . . . . . . 23

6


Pendency of Criminal Prosecutions as Ground for Continuance or Postpone-ment of Civil Action to Which Government is Party Involving Facts orTransactions upon which Prosecution is Predicated — Federal Cases,33 A.L.R. Fed. 2d 111 (2008). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

7


JURISDICTIONAL STATEMENT

The U.S. District Court for the District of Nevada had original subject matter

jurisdiction over this case pursuant to §§ 20(b), 20(d)(1), and 22(a) of the Securities

Act of 1933 (“Securities Act”), 15 U.S.C. §§ 77t(b), 77t(d)(1), & 77v(a), and §§ 21

(d)(1), 21(d)(3)(A), 21(e) and 27 of the Securities Exchange Act of 1934 (“Ex-

change Act”), 15 U.S.C. §§ 78u(d)(1), 78u(d)(3)(A), & 78aa because the claims for

relief were alleged to have, directly or indirectly, made use of the means or instru-

mentalities of interstate commerce, of the mails, or of the facilities of a national

securities exchange, in connection with the transactions, acts, practices and courses

of business alleged in the complaint.

By Order issued April 7, 2011, the District Court denied Brian Dvorak’s

motion to stay these proceedings pending resolution of a parallel criminal case.

(Exc. 1; SEC v. CMKM Diamonds, Inc., 2011 WL 1343004, 2011 U.S. Dist. LEXIS

41841 (D. Nev. April 7, 2011)) Then, by Order issued July 25, 2011 the District

Court granted the Motion by Plaintiff Securities and Exchange Commission for

Summary Judgment against various defendants including Appellant Dvorak. (Exc.

8; SEC v. CMKM Diamonds, Inc., 2011 WL 3047476, 2011 U.S. Dist. LEXIS

41841, Fed. Sec. L. Rep. P 96,364 (D. Nev. July 25, 2011)) Also on July 25, 2011,

the District Court filed a Judgment in a Civil Case. (Exc. 16) Finally, On August 1,

2011, the District Court filed its Final Judgment of Permanent Injunction and Other

8


Relief Against Defendants. (Exc. 17) Defendant Dvorak timely filed his Notice of

Appeal on August 23, 2011. (Exc. 22)

This Court has jurisdiction over this appeal pursuant to 28 U.S.C. § 1291

because the Final Judgment constitutes a final decision of a District Court disposing

of all matters.

9


STATEMENT OF THE ISSUES PRESENTED FOR REVIEW

I.

The District Court’s Disgorgement Order finds no basis in the facts

presented by Plaintiff nor in the supporting documentation presented to the

District Court. Further, to the extent the Disgorgement Order is in reality a

summary judgment it was entered while there remained disputed issues of

material fact.

II.

The District Court’s refusal to stay these proceedings was error.

III.

The U.S. Magistrate Judge had no jurisdiction to solely decide the Mo-

tion for Stay with a reference under 28 U.S.C. § 636, and this violated U.S.

Const., Art. III.

10


STATEMENT OF THE CASE

On April 7, 2008, the SEC initiated the present civil action against CMKM

Diamonds, Inc. and various defendants. (Docket No. 1) This action involves what

the SEC alleges to be a complex scheme to illegally issue and sell stock of Defen-

dant CMKM, a diamond and gold mining company, in an unregistered distribution.

1st Global Stock and Transfer, LLC was the stock transfer agent for CMKM. Helen

Bagley was the owner of 1st Global and Brian Dvorak was an attorney. 1st Global

and Bagley’s appeal are consolidated in 11-17021.

The SEC alleged that CMKM and its principle made materially false and

fraudulent representations regarding why certain restricted shares of stock should

have been reissued as free trading unrestricted securities. CMKM and its principals

then obtained legal opinion letters confirming the entitlement of the shareholders to

receive unrestricted shares. Said opinion letters and supporting corporate resolutions

were submitted to 1st Global and Bagley by Dvorak, thus his involvement in this

case.

Following issuance of the shares, the SEC alleges that various defendants, not

including Dvorak, manipulated CMKM’s stock price and volume, making materi-

ally false and misleading representations regarding the company during the period

from January 2003 through May 2005. Those defendants then sold billions of the

“wrongfully issued” free trading shares to an unsuspecting public.

11


On December 23, 2010 the SEC filed a motion for summary judgment in

Docket No. 161. (Exc. 256-659) Dvorak filed a motion to stay these proceedings,

asserting Fifth and Sixth Amendment rights because of the parallel criminal pro-

ceedings involving the same subject matter. (Exc. 82; 26) The District Court refused

to stay the proceedings as to Dvorak and an order to that effect was entered on April

7, 2011. (Exc. 1; SEC v. CMKM Diamonds, Inc., 2011 WL 1343004, 2011 U.S.

Dist. LEXIS 41841 (D. Nev. April 7, 2011)) Thereafter, the District Court found

that no genuine issue of material fact existed as to Dvorak being a ‘necessary partici-

pant’ and ‘substantial factor’ in an unregistered distribution. (Exc. 8) The District

Court entered a Final Judgment consistent with the July 25, 2011 Order. (Exc. 17;

SEC v. CMKM Diamonds, Inc., 2011 WL 3047476, 2011 U.S. Dist. LEXIS 41841,

Fed. Sec. L. Rep. P 96,364 (D. Nev. July 25, 2011)) In that final judgment the SEC

was granted an order of disgorgement against Dvorak, including pre-judgment

interest, or more than $400,000. (Exc. 17-21)

12


STATEMENT OF FACTS

Dvorak was a Las Vegas attorney at the time who was retained by CMKH

Diamonds, Inc. to perform legal services for the corporation in connection with the

issuance of securities. According to Dvorak’s pleadings in this case, he was paid

roughly $157,500 for the legal services he provided. On April 7, 2008, the SEC

initiated the present civil action against Dvorak and other defendants for violation

of the Securities Act of 1933 (“the Securities Act”), 15 U.S.C. § 77(e). (Docket No.

1.) Thereafter, the government initiated criminal proceedings as well against Dvorak

and the other defendants in this case. On December 23, 2010, more than two years

and eight months after this case was commenced, Plaintiff filed a motion for sum-

mary judgment as to Dvorak. (Exc. 256-659)

Dvorak moved for a stay of the proceedings in the civil case pending resolu-

tion of the parallel criminal proceedings, asserting that making him go forward with

the civil case would implicate his Fifth and Sixth Amendment rights. (Exc. 82) He

supplemented that motion with the contention that he was indigent, Plaintiff was

being less than candid with the District Court because it knew Dvorak could not

afford to present some of the evidence which was available to Plaintiff but which it

would not provide to him without incurring substantial costs and that, thus, he was

being denied a fair proceeding. (Exc. 24)

The District Court denied Dvorak’s motion for a stay in an opinion issued on

13


April 7, 2011. (Exc. 1; SEC v. CMKM Diamonds, Inc., 2011 WL 1343004, 2011

U.S. Dist. LEXIS 41841 (D. Nev. April 7, 2011)) The court ruled the affects upon

Dvorak’s Fifth Amendment rights were negligible, pointing to the fact he had

already given a deposition in the civil case, but failing to point out Plaintiff had

obtained that deposition from Dvorak without bothering to mention to him he had

already been indicted in the case or that the indictment was no unsealed until after

the deposition was taken. (Exc. 1-7)

In an Order issued July 25, 2011 the District Court granted the Motion by

Plaintiff SEC for Summary Judgment against various defendants including Dvorak.

(Exc. 8) Also on July 25, 2011 the District Court filed a judgment in a civil case.

(Exc. 16; SEC v. CMKM Diamonds, Inc., 2011 WL 3047476, 2011 U.S. Dist.

LEXIS 41841, Fed. Sec. L. Rep. P 96,364 (D. Nev. July 25, 2011)) On August 1,

2011, the District Court filed its Final Judgment of Permanent Injunction and Other

Relief Against Defendants 1st Global Stock Transfer, LLC, Helen Bagley, Sergey

Rumyantsev and Brian Dvorak. (Exc. 17-21) Among other things, the Final Judg-

ment included an order of disgorgement against the defendants, including a judg-

ment against Dvorak of $318,843 and prejudgment interest of $90,795.31, for a total

of $409,638.11. (Exc. 17-21)

14


SUMMARY OF THE ARGUMENT

I. The District Court erred in granting summary judgment for the SEC in

this case because disputed material facts of the amount owed by Dvorak were in

dispute. Dvorak was financially incapable of even buying a copy of his own deposi-

tion that the SEC took when, unbeknownst to Dvorak but likely known to the SEC,

he had been indicted in the District Court for criminal securities fraud. He was

deposed when, had he been told the all facts and the SEC been candid with him, he

would have known he was already indicted three months earlier but it was still

under seal.

Still, in the deposition, Dvorak put into evidence his trust account records that

showed that the SEC was high in what it claimed he owed by over $200,000. When

the SEC moved for summary judgment, it alluded to them, but it failed to put it in

evidence when it knew the truth. This violated the SEC’s duty of candor to the

district court.

Also, the district court erred in not ordering the SEC to produce it for the

motion for summary judgment.

II. The district court erred in refusing to stay this action pending resolu-

tion of the criminal case. Dvorak has a Fifth Amendment right not to aid the govern-

ment in the criminal case by testifying in this civil case with identical fact issues.

There was no prejudice to the SEC by granting the stay where Dvorak’s judgment

15


was less than two-tenths of one per cent of the total judgments already obtained.

III. The U.S. Magistrate Judge had no jurisdiction to solely decide the

motion for stay in this case without a referral under 28 U.S.C. § 636. Therefore, the

order on the motion to stay violated U.S. Const., Art. III on the jurisdiction of the

U.S. District Judges. Moreover, Dvorak was entitled to written notice of his need to

appeal to the U.S. District Judge as a matter of Fifth Amendment due process of law

to be bound by it.

16


ARGUMENT

I.

The District Court’s Disgorgement Order finds no basis in the facts

presented by Plaintiff nor in the supporting documentation presented to the

District Court. Further, to the extent the Disgorgement Order is in reality a

summary judgment it was entered while there remained disputed issues of

material fact.

A. Standard of Review

This court reviews the district court’s order of disgorgement for abuse of

discretion. SEC v. First Pac. Bancorp, 142 F.3d 1186, 1190 (9th Cir. 1998); SEC v.

JT Wallenbrock & Assocs., 440 F.3d 1109, 1113 (9th Cir. 2006). To the extent the

disgorgement order in this case flows from the District Court’s grant of summary

judgment to the SEC, this court reviews the issues de novo. FTC v. Stefanchik, 559

F. 3d 924, 927 (9th Cir. 2009).

B. Disgorgement Law

A district court has broad equity powers to order the disgorgement of ill-

gotten gains obtained through the violation of the securities laws. Disgorgement is

designed to deprive a wrongdoer of unjust enrichment, and to deter others from

violating securities laws by making violations unprofitable.” SEC v. First Pac.

Bancorp, 142 F.3d 1186, 1191 (9th Cir. 1998) (quotation marks and citations

omitted). “The amount of disgorgement should include all gains flowing from the

17


illegal activities.” JT Wallenbrock, 440 F.3d at 1114 (quotation marks omitted).

Disgorgement need be “only a reasonable approximation of profits causally con-

nected to the violation.” First Pac. Bancorp, 142 F.3d at 1192 n. 6.

The SEC “bears the ultimate burden of persuasion that its disgorgement

figure reasonably approximates the amount of unjust enrichment.” SEC v. First City

Fin. Corp., 890 F.2d 1215, 1232 (D.C. Cir. 1989); see also First Pac. Bancorp, 142

F.3d at 1192 n. 6. Once the SEC establishes a reasonable approximation of defen-

dants’ actual profits, however, the 9th Circuits join its sister circuits and hold that

the burden shifts to the defendants to “demonstrate that the disgorgement figure was

not a reasonable approximation.” First City Fin., 890 F.2d at 1232; see also SEC v.

Happ, 329 F.3d 12, 31 (1st Cir. 2004); SEC v. Lorin, 76 F.3d 458, 462 (2d Cir.

1996) (per curiam).

In Hateley v. SEC, 8 F.3d 653, 655-56 (9th Cir. 1993), a broker dealer and

two officers of a securities firm were ordered to disgorge 100% of the profits

obtained based on an illegal agreement, even though the agreement itself appropri-

ated to them only 10% of the profits as a commission. The Court held that it was

error to order disgorged more than the amount the individuals ultimately received,

because, “the very agreement that was the source of their liability” also limited their

ill-gotten gains, and courts “must view the agreement as a whole and cannot single

out the aspects of it that are favorable to the SEC’s position and disregard the parts

18


that are not.” Id.

Prejudgment interest awards are also reviewed for an abuse of discretion.

Simeonoff v. Hiner, 249 F.3d 883, 894 (9th Cir. 2001). In Simenoff the Court wrote:

The defendants still further argue that the district court improperlycalculated prejudgment interest from the date of the sales of securitiesto the public, rather than from the date the SEC filed its complaint. Wehold that the district court did not abuse its discretion by imposingprejudgment interest from the date the securities were sold in violationof Section 5. “Even if defendants were correct that the present litiga-tion was protracted through some fault of the SEC, defendants plainlyhad the use of their unlawful profits for the entire period... Given theremedial purpose of the statute, the goal of depriving culpable defen-dants of their unlawful gains, and the lack of any unfairness to defen-dants, we see no abuse of discretion in the court’s order.” First JerseySec., 101 F.3d at 1477.

As was made clear in First Pac. Bancorp, the district court has broad equity

powers to order the disgorgement of “ill-gotten gains” obtained through the viola-

tion of federal securities laws. 142 F.3d at 1191; see also SEC v. Colello, 139 F.3d

674, 679 (9th Cir. 1998) (“To order disgorgement, the district court ... need find

only that the defendant has no right to retain the funds illegally taken from the

victims.”). Disgorgement is designed to deprive a wrongdoer of unjust enrichment,

and to deter others from violating securities laws by making violations unprofit-

able.” First Pac. Bancorp, supra (citing Hateley v. SEC, 8 F.3d 653, 655 (9th Cir.

1993)). The district court also has broad discretion in calculating the amount to be

disgorged. See, e.g., SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1474-75 (2d Cir.

19


1996).

Under some circumstances, the broker might be entitled to offset expenses

customarily incurred in the purchase and sale of such stock if the investor would

have had to pay for such expenses in any legitimate transaction. For example, in

SEC v. Thomas James Assocs., Inc., 738 F. Supp. 88, 89-90 (W.D. N.Y. 1990), the

district court ordered the defendants (including a brokerage firm) to disgorge the

illegal profits reaped by their manipulation of the market to “charge excessive

markups in the initial aftermarket” of four initial public offerings. In assessing

disgorgement, the court deducted certain business expenses, such as commissions,

telephone charges and underwriting expenses. Id. at 92, 94-95. The court explained

that “markups are a function of the way a securities firm does business, and thus

have corresponding costs and expenses related to them.” Id. at 95. Given that the

customers would have had to factor these expenses into their returns regardless of

the defendants’ scheme, the court concluded that a reduction was appropriate “to

reflect a fair setoff for necessary business expenses.” Id. at 92 (emphasis added); see

also Litton Indus., Inc. v. Leham Bros., 734 F. Supp. 1071, 1077 (S.D.N.Y. 1990)

(allowing deductions for various transaction costs, including brokerage commis-

sions paid to third party brokers as part of an agreement for services customarily

rendered in connection with the transactions at issue).

20


C. Issue of Material Fact

The triable issue in this case is the amount of money received by Dvorak

which represented “ill-gotten gains” subject to disgorgement. The SEC failed to

mention or explain to the court that it purposely did not present the court with the

entire Dvorak deposition which included the exhibits that would show its damages

claim is, and always has been, controverted by Dvorak. That was the entire point of

Dvorak’s cross-examination during which he clearly controverted the SEC’s dam-

ages claim. While that deposition certainly reflects he had money go into and out of

his various accounts, had the court seen the entire deposition it would have had the

benefit of Dvorak’s explanation of why much of the money so flowing had no nexus

with this case.

But, did the SEC file that part with the Court? No. The SEC should have

fulfilled its duty of candor to the court and filed the entire deposition and all its

exhibits as an exhibit to its motion for summary judgment so Mr. Dvorak could get

it off of PACER for $2.40. (The SEC refused to provide Dvorak with a copy of his

own deposition unless he paid $800, a sum of money which he did not and still does

not have.) The granting of the Motion for Summary Judgment and the entry of a

judgment of disgorgement based on the SEC’s summary proof, without considering

the entire deposition which the SEC purposely withheld from the district court and

from him, denies Dvorak due process of law and equal protection of the law based

21


on his financial status in violation of the Fifth Amendment.

Dvorak didn’t need additional discovery because he simply cannot afford to

do it. He just want the government to fulfill its duty of candor to the court, to not

oppress persons who cannot afford to pay $800 a copy for its deposition of him and

then not make it all available to the court. Instead, the SEC picked just the parts it

wanted the court to read, knowing Dvorak could not submit the other parts because

of his indigency. In Campbell v. Rice, 408 F.3d 1166, 1175 (9th Cir. 2005) the court

noted:

A prosecutor, like all attorneys, also owes a duty of candor toward acourt. In particular “in an ex parte proceeding, a lawyer shall informthe tribunal of all material facts known to the lawyer which will enablethe tribunal to make an informed decision, whether or not the facts areadverse.” ABA Model Rules of Professional Conduct Rule 3.3(a)(4)(d)(2002) (emphasis added).

That same duty of candor should have placed on the SEC and its lawyers.

There is no factual dispute that Dvorak received about $157,500 for writing

the “letters,” but the SEC and the U.S. Attorney in the criminal indictment argue

that it was over $400,000. The SEC only wants the court to read that which supports

its conclusion and not provide a fair summary of the controverted facts.

In fact, the SEC amazingly goes so far to mention Dvorak’s “bank records”

being a basis for part of its motion, but then it remarkably failed its duty of candor

to the court and Dvorak to even include the part of Dvorak’s own bank records that

22


he put into evidence at the deposition during his cross-examination which is no-

where in the SEC’s filing, including the testimony relating to the records showing

that approximately $200,000 went through Dvorak’s lawyer’s trust account for an

unrelated purpose within a matter of days.

The government in the criminal prosecution, too, claims it was $495,000, and

the SEC makes the same mistake. To compound the mistake, it has purposely kept

from the court parts of Dvorak’s deposition which it knows creates an issue of fact

on the amount Dvorak received for his work for CMKM Diamonds, Inc.

The District Court in its decision does not set out a single factual finding as to

the amounts supposedly “wrongfully” received by Dvorak, other than the total

amount of the disgorgement order. Much of the evidence available was withheld

from the court by the SEC. It goes almost without saying that summary judgment

cannot be granted where there remain genuine issues of material fact. F.R.C.P.

56(a); Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986). The evidence before

the District Court, via the SEC’s motion for summary judgment, pointed out there

was a dispute as to the amount of “ill-gotten gains” received by Dvorak. Obviously,

when the District Court picked a number somewhere between what Dvorak claimed

was correct and the amount sought by the SEC there must have been a weighing of

the evidence by the District Court, and that, too, is improper. Balint v. Carson City,

180 F.3d 1047 (9th Cir. 1999) (en banc). The district court did not even note the

23


dispute Dvorak pointed out. See F.R.C.P. 56(c-d):

(c) PROCEDURES.. . .(3) Materials Not Cited. The court need consider only the cited

materials, but it may consider other materials in the record.. . .

(d) WHEN FACTS ARE UNAVAILABLE TO THE NONMOVANT. If anonmovant shows by affidavit or declaration that, for specified rea-sons, it cannot present facts essential to justify its opposition, the courtmay:

(1) defer considering the motion or deny it;(2) allow time to obtain affidavits or declarations or to take

discovery; or(3) issue any other appropriate order.

D. Conclusion

Dvorak submits the entire procedure by virtue of which the SEC sought and

obtained a judgment for disgorgement in this case was tainted and that the District

Court abused its discretion in granting disgorgement and erred as a matter of law in

determining the amount owed by Dvorak. He asks that the disgorgement judgment

be reversed and the matter remanded for a reconsideration of the proof of the proper

amount.

II.

The District Court’s refusal to stay these proceedings was error.


A District Court’s decision on an application for a stay of the proceedings is

24


reviewed for an abuse of discretion, but the review is “somewhat less deferential”

than in other abuse of discretion cases. Dependable Highway Express, Inc. v.

Navigators Ins. Co., 498 F. 3d 1059, 1066 (9th Cir. 2007).

B. The proceedings

The Securities and Exchange Commission filed this case in the District

asserting claims against all these defendants in April 2008, for: (1) Issuance of Sale

of Stock in an Unregistered Distribution, (2) Fraud in the Issuance of Unlegened

Stock Certificate Shares of Purportedly Unrestricted Stock, (3) Fraudulently Induc-

ing Investors to buy CMKM Stock, and (4) Violation of the Broker-Dealer registra-

tion Provisions, pursuant to Securities Act of 1933 (“Securities Act”), 15 U.S.C. §§

77t(b), 77(d)(1), and 77v(a), and §§ 21(d)(1), 21(d)(3)(A), 21(e), and 27 of the

Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. §§ 78u(d)(1),

78u(d)(3)(A), 78u(e), and 78aa. (Complaint, Doc. 1)

Before the civil case and the indictment, Dvorak cooperated with the SEC and

the U.S. Attorney in the obviously futile hope that they would decide he was a better

witness than a defendant. That obviously did not work. Having taken his statement

and deposition after he was indicted but before he knew he had been, they wanted

him to be both a defendant and a witness against himself.

On March 25, 2009, an Indictment was issued in this same court over the

same facts: 02:09-CR-132-RLH-RJJ (Crim. Doc. 1). There were six defendants in

25


that indictment: Edwards, Casavant, Gutierrez, Kinney, Bagley and Dvorak. The

indictment, however, was not unsealed until October 2009 when Dvorak was

arrested, and that’s the first he knew he was indicted. (Crim. Doc. 50) Dvorak was,

moreover, deposed by the SEC in Denver in July 2009 (the deposition he can’t1

afford to get a copy of), with the SEC almost certainly knowing that Dvorak was the

subject of a sealed indictment at the time. If Dvorak had been given the basic

courtesy of being told he’d been inducted, he could have, of course, moved to stay

the deposition pleading the Fifth Amendment. But he was kept in the dark by the

SEC and the Department of Justice, all to the SEC’s and DOJ’s advantage for their

respective cases. In a word, Dvorak was sandbagged by the government.

The Government obtained a Second Superseding Indictment on March 24,

2010 adding four defendants and charging Dvorak as the last named defendant with

co-defendants Jeffery Turino, John M. Edwards, Urban, Cassavant, Kickolaj,

Vissokovsky, Melissa Spooner, Helen Bagley, Jeffery Mitchell, Ginger Guiterrez,

James Kinney, with: Conspiracy to Sell Unregistered Securities, and to Commit

Securities Fraud in Violation of Title 15; Fraudulent Interstate Securities Transac-

tions; Securities Fraud; Conspiracy to Commit Securities Fraud in Violation of 18

U.S.C. § 1347; Conspiracy to Commit Money Laundering under 18 U.S.C. §§ 1956

Dvorak now lives in Boulder, Colorado, and he is inactive as a lawyer.1

26


& 1957; Conspiracy to Conduct or Participate in an Enterprise Engaged in a Pattern

of Racketeering Activity; and Tax Evasion. (Crim. Doc. 63)

In January 2011, a status hearing was held in the criminal case, and it was

continued to October-December 2011 later trial was continued in May 2011 to

April-July 2012 because of its complexity and lack of full discovery (about 500,000

pages) and two unarraigned defendants not yet in the country. (Crim. Doc. 156)2

C. The Argument Below

Dvorak alleged below that he anticipated in providing a defense in the

pending civil matter regarding his individual liability the need to call witnesses to

testify as to Dvorak’s participation, knowledge, duties, and responsibilities in

CMKM Diamonds, Inc. (i.e., non-sales related activities). It would be necessary for

him to call witnesses who may take the Fifth themselves, and that would potentially

require a severance for him. Two witnesses he needed to defend the civil case and

potentially exonerate him in the criminal case were fighting extradition at their own

peril because they could get back really close to the criminal trial date. Those same

Fifth Amendment implications also affected his ability to respond to the SEC’s

motion for summary judgment, as he alleged in his motion for stay. (Exc. 82-98)

As of this writing, Edwards is in custody in the U.K. fighting extradition and2

Casavant hasn’t been arrested by Canadian authorities. Neither has been arraignedin the criminal case.

27


Well-settled case law establishes that defendants named in a criminal indict-

ment have an undeniable and clearly recognized right to invoke their protections

against self-incrimination, which extends to any proceeding, civil or criminal,

formal or informal. See, e.g., Malloy v. Hogan, 378 U.S. 1 (1964); Lefkowitz v.

Turley, 414 U.S. 70, 77 (1973). Because of the pending criminal prosecution against

all these defendants and the jeopardy resulting therefrom, it is a reasonable assump-

tion and anticipation that most or all of the named defendants in the criminal matter

will potentially invoke their Fifth Amendment privilege against self-incrimination in

this civil case had then been asked to give an affidavit, sit for a deposition or appear

and testify. Dvorak was, in essence, left with no way to, on the one hand, protect his

constitutional rights, and on the hand, defend against the zealous pursuit of him by

the SEC.

If Dvorak were convicted in the criminal case, that would potentially be

collateral estoppel in this case. So, the Motion for Summary Judgment would have

no defense if that happened. However, if Dvorak is acquitted, the civil case against

him should logically just go away. Because human liberty is at stake in the criminal

case, it should take precedence, and the Defendant should not have to expend time

defending the civil case when he should be working on the criminal case.

Despite making those arguments to the District Court, his motion for stay was

denied, the District Court finding, remarkably, that because he had already given his

28


deposition “the incursion upon Dvorak’s Fifth Amendment rights are negligible.”

(Exc. 3) The District Court’s ruling included the following:

Here, the incursion upon Dvorak’s Fifth Amendment rights arenegligible. In this case, the situation is similar to that in Molinaro inthat Dvorak has already sat for a deposition upon which SEC relies inits motion for summary judgment, and nothing prevented him fromgiving information that did not tend to incriminate himself. Mollinaro,889 F.2d at 903. “A defendant has no absolute right not to be forced tochoose between testifying in a civil matter and asserting his FifthAmendment Privilege.” Keating, 45 F.3d at 326. The fact that Dvor-ak’s indictment was not unsealed until sometime after his depositionwas taken has no bearing on this civil case. There is nothing that indi-cates the SEC or any government entity used the civil deposition as apretext to gather evidence to be used in the criminal case. Even if theSEC had surreptitious motives while taking Dvorak’s deposition, thatfact would have no relevance in this case. Therefore, the implication ofDvorak’s Fifth Amendment rights do not require a stay of the civilcase.

*****In this case, the burden on Dvorak does not require the Court to

grant a stay on the civil case. As discussed above, the possible incur-sion upon Dvorak’s Fifth Amendment rights is negligible. Further-more, there is enough time for Dvorak to defend both cases. In Keat-ing, the Court refused to grant a stay where defendant had elevenmonths to prepare for the outcome determinative civil hearing andwhere there was six months between the end of the civil proceedingand the beginning of the criminal trial. Keating, supra. Keating wasalso a large case involving complex financial systems, fraud, and alarge sum of money. Keating, supra.

*****Here, a stay will not necessarily increase the efficiency of the

court. Even though two cases are parallel and involve similar factualoccurrences, they will not require the Court to perform duplicative orunnecessary work. Golden Quality Ice Cream, Co. v. Deerfield Speci-ality, 87 F.R.D. 53, 57 (E.D. Pa. 1980). Furthermore, the SEC has filedfour motions for summary judgement against other defendants in thiscase to date, three of which have already been granted. It would be

29


more efficient for the Court to make a decision as to the remainingMotion for Summary Judgment (#161) and then proceed from thatpoint, rather than waiting almost a year to proceed as to only oneDefendant who, in his own words, is a “small player.” The Civil casehas been pending before the Court for nearly three years and the Courthas an interest in clearing its docket. Molinario, 889 F.2d at 903;Golden Quality Ice Cream, supra.

Dvorak respectfully suggests the District Court was wrong because he was ham-

strung by the government.

D. U.S. District Courts Have Discretion to Stay Civil ProceedingsDuring the Pendency of a Parallel Criminal Action

U.S. District Courts have the discretionary authority to stay a civil action

pending the resolution of a parallel criminal proceeding. United States v. Kordel,

397 U.S. 1, 12 n. 27 (1972); Wehling v. Columbia Broadcasting System, 608 F.2d

1084, 1088 (5th Cir. 1979); Volmar Distributors, Inc. v. N.Y. Post Co., 152 F.R.D.

36, 39 (S.D. N.Y. 1993) (staying civil action until resolution of parallel criminal

proceeding to “avoid duplication of effort and unnecessary litigation costs” and

because “the outcome of the criminal case may encourage settlement” of the civil

case). See generally Annot., Pendency of Criminal Prosecution as Ground for

Continuance or Postponement of Civil Action to Which Government Is Party

Involving Facts or Transactions upon which Prosecution is Predicated-Federal

Cases, 33 A.L.R. Fed. 2d 111 (2008).

A court may decide in its discretion to stay civil proceedings “when the

30


interests of justice seem to require such an action.” Keating v. Office of Thrift

Supervision, 45 F.3d 322, 324 (9th Cir. 1995). Keating, at 324-25, said:

This decision whether to stay civil proceedings in the face of aparallel criminal proceeding should be made “in light of the particularcircumstances and competing interests involved in the case.” [FederalSav. And Loan Ins. Corp. v. Mollinaro, 889 F.2d 889, at 902 (9th Cir.1989)]. This means the decisionmaker should consider “the extent towhich the defendant’s fifth amendment rights are implicated.” Id. Inaddition, the decisionmaker should generally consider the followingfactors: (1) the interest of the plaintiffs in proceeding expeditiouslywith this litigation or any particular aspect of it, and the potentialprejudice to the plaintiffs of a delay; (2) the burden which any particu-lar aspect of the proceedings may impose on the defendants; (3) theconvenience of the court in the management of its cases, and the effi-cient use of judicial resources; (4) the interest of persons not parties tothe civil litigation; and (5) the interest of the public in the pending civiland criminal litigation. Id. at 903.

See also State Farm Lloyds v. Wood, 2006 WL 3691115, *1 (S.D. Tex. 2006);

Librado v. M.S. Carriers, Inc., 2002 WL 3149588 *2-3 (N.D. Tex. 2002) (stay

granted through sentencing).

Here, the indictment and civil complaint stem from exactly the same conduct.

The civil case was pending for two years and was apparently at least partially the

vehicle by which the government helped gather evidence for the indictment, even

going so far as the SEC taking Dvorak’s deposition while he was, unbeknownst to

him and counsel alone, under indictment. The SEC will, of course, claim no knowl-

edge of the date of the indictment, but a hearing might just reveal that they did in

fact know, particularly when the U.S. Attorney says that the SEC in Los Angeles

31


has 200 boxes of criminal case discovery and the trial needs to be pushed back nine

months to be able for defendants to prepare for trial, a clear sign the U.S. Attorney

and the SEC were in a joint venture in the drafting of the indictment. It doesn’t take

a linguistic expert to read the second superseding indictment to see that it came

from the SEC.

Dvorak’s part of both the civil and criminal cases arise from defendant Dvor-

ak’s alleged involvement in the CMKM Diamonds Inc. stock scheme. Dvorak has

always contended he was unwittingly being used by Cassavant, Edwards, and

others. The defense to the criminal case and the civil case are similar. But, when the

government chose to indict him for that same conduct, the stakes escalated consider-

ably. Instead of going from a case where a civil sanction could be imposed and then

mitigated for complete inability to pay, the government now wants to imprison him.

The Fifth Amendment came into play.

E. Defendant’s Fifth Amendment Rights are Implicated Becausethe Issues in the Civil and Criminal Cases Substantially Overlap

The similarity of the issues underlying the civil and criminal actions is

considered the most important threshold issue in determining whether to grant a

stay. “The strongest case for deferring civil proceedings is where a party under

indictment for a serious offense is required to defend a civil action [or testify in an

action] involving the same matter.” State Farm Lloyds, 2006 Wl 2691115 at *2,

32


citing Javier H. v. Garcia-Botello, 218 F.R.D. 72, 75 (W.D. N.Y, 2003); see also

Securities and Exchange Commission v. Dresser Industries, Inc., 202 U.S. App.

D.C. 345, 628 F.2d 1368, 1375-76 (1980).

The SEC’s civil complaint issues substantially overlap and directly relate to

the claims and allegations involved in the Criminal Complaint against the civil

defendants. (Crim. Doc. 63, Second Superseding Indictment) The claims and

allegations made in this civil action stem from the alleged sale of unregistered

securities; demonstrating a sufficiently close nexus between civil and criminal

cases. The claims in the two cases are virtually identical and rely on the same proof.

Surely it cannot be disputed that the anticipated witnesses’ and defendant’s

Fifth Amendment rights are implicated based on the factual and legal similarities

contained in the Indictment when compared with those raised in this action.

In determining whether to grant a stay, a court must also consider the status of

the related criminal proceedings, which can have a substantial effect on the balanc-

ing of the equities. State Farm Lloyds, 2006 WL 22358819 at *4 (E.D. Pa. May 13,

2003). Significantly, civil proceedings, if not deferred, will undermine an antici-

pated witnesses’ rights, including the privilege against self-incrimination under the

Fifth Amendment. See Javier H., 218 F.R.D. at 75:

“The strongest case for deferring civil proceedings until aftercompletion of criminal proceedings is where a party under indictmentfor a serious offense is required to defend a civil action involving the

33


same matter.” Dresser, 628 F.2d at 1376; see also LaBianca, 801 F.Supp. At 1011 (“Courts are more likely to grant civil discovery stayswhen an indictment has already been issued”); In re Par Pharm., Inc.Sec. Litig.,133 F.R.D. 12, 13-14 (S.D.N.Y. 1990) (“Courts will stay acivil proceeding when the criminal investigation has ripened into anindictment.”). If a grand jury indicts a party for conduct that is thesubject of a civil action, as they have in the instant matter, the court isobligated to prevent that criminal defendant from “using parallel civilproceedings to gain premature access to evidence and informationpertinent to the criminal case.” S.E.C. v. Doody, 186 F. Supp. 2d 379,381 (S.D.N.Y. 2002).

See also Heller Healthcare Finance, Inc. v. Boyes, 2002 WL 1558337, *3 (N.D.

Tex. July 15, 2002), citing Trustees of Plumbers and Pipe Fitters Nat’l Pension

Fund v. Transworld Mech., Inc., 886 F.Supp. 1134, 1139 (S.D. N.Y. 1995).

Before the civil case was filed, Dvorak cooperated with the SEC and gave

two statements under oath with the hope that he would not be sued. That did not

happen. After he was sued, the SEC wanted his deposition, and they came to Denver

to take his video deposition in July 2009 which, it so happens, was after the indict-

ment but before the government chose to tell Dvorak about it. It was as if the

government decided to unseal the indictment after they could get Dvorak to make

another statement under oath that they well knew they could not get from him if he

knew he had been indicted.

F. The Risk of Prejudice From Staying the Civil CaseDoes Not Weigh Against Granting the Stay

Normally, “in evaluating the plaintiff’s burden resulting from the stay, the

34


courts may insist that the plaintiff establish more prejudice than simply a delay in

his right to expeditiously pursue his claim.” See State Farm Lloyds, 2006 WL

3691115 at *2 citing Adelphia, 2003 WL 22358819 at *4. It seems apparent in this

case, though, that delay prejudice claims by the SEC swayed the District Court far

more than did Dvorak’s assertions of constitutional rights.

A stay will not cause any harm or prejudice to the SEC for several reasons.

First, the civil case was nearly thee years old. Until Dvorak filed his motion for a

stay the SEC had never before claimed it was “in a hurry.” Second, the SEC already

had $100,000,000 in judgments against all but three of the defendants. Third, a stay

in the proceedings to allow for the proper disposition of the criminal case would not

hamper the SEC in obtaining their remedy against Dvorak, if warranted. They have

judgments against most of the others, and a much smaller, virtually uncollectible

judgment. 3

Due to the criminal proceedings and charges against anticipated witnesses,

counsel for the anticipated witnesses will undoubtedly require them to invoke the

protections provided by the Fifth Amendment to the United States Constitution so

as to avoid any infringement of their rights in the criminal action. That is the point

of the Fifth Amendment. And, respecting Fifth Amendment rights are obviously

Note that Dvorak’s $157,000 is .00157 of $100,000,000.3

35


paramount to plaintiffs’ interests in the expeditious resolution of their cases, there-

fore justifying a stay during the pendency of a related criminal action.

In other cases, the government itself has requested a stay contending that a

stay would streamline discovery in the civil case because evidence obtained in the

criminal case would be available to the civil parties. See Bridgeport Harbour Place,

LLC v. Ganim, 269 F. Supp. 2d 6 (D. Conn. 2002).4

Staying the civil case is justified by due process concerns as well as concerns

for justice and fairness because it prevents exposure of the defense’s theory to the

prosecution in advance of the criminal trial and safeguards against prejudicing

Dvorak in the parallel criminal case. Facts between the two cases are identical, with

the SEC holding much of the discovery, and the risk to, and public need for, the fair

resolution of the criminal case outweighs the benefits of expedition in the civil case.

With 200 boxes of discovery waiting to be scanned and delivered to defense counsel

in the criminal case, there may be more Dvorak will be able to present to defeat

summary judgment.

The Fifth Amendment privilege against self-incrimination protects any person

See also the bizarre case of Stephen L. LaFrance Holdings, Inc. v. Sorensen,4

2011 WL 6176589 (E.D. Ark. Dec. 13, 2011), where the U.S. Attorney’s Officeinterceded in a state civil case removing it to federal court attempting to stay it toprotect its criminal case, and the U.S. Attorney’s Office ended up paying an attor-ney’s fee sanction.

36


from being compelled to speak against his penal interest. See Malloy v. Hogan, 378

U.S. 1 (1964). The anticipated witnesses for Dvorak are expected to continue to

assert their Fifth Amendment privilege during the pendency of the criminal proceed-

ing, and they sure will in the civil case. These issues would become moot if the civil

action was stayed during the pendency of the criminal proceeding and would

promote efficiency and avoid duplication.

G. Conclusion

The district court abused its discretion in denying a stay of this case pending

the outcome of the criminal case currently set for April-July 2012.

III.

The U.S. Magistrate Judge had no jurisdiction to solely decide the Mo-

tion for Stay without referral under 28 U.S.C. § 636, and this order violated

U.S. Const., Art. III.

The U.S. Magistrate Judge decided Dvorak’s Motion for Stay without notice

to the parties that it was a reference under 28 U.S.C. § 636(b). (Exc. 1; SEC v.

CMKM Diamonds, Inc., 2011 WL 1343004, 2011 U.S. Dist. LEXIS 41841 (D. Nev.

April 7, 2011).


Referral to a U.S. Magistrate Judge and the decision is subject to de novo

review on the law. United States v. Gamba, 483 F.3d 942, 944 (9th Cir. 2007).

37


B. Dvorak Was Entitled to Notice as a Matter of Due Process of LawThat There Was a Right of Appeal to the District Court Judge

The Magistrate Judge decided this motion, and the order never mentions that

it was a referral or that the district judge will enter a final order after considering the

finding. It just states “IT IS HEREBY ORDERED that the Defendant’s Motion for

Stay of This Civil Proceeding and Memorandum in Support (#172) is hereby

DENIED.” (Doc. 180; Exc. 7) The fact this was decided by a Magistrate Judge and

not the District Judge was not even noticed until working on this appeal brief.5

See D. Nev. LR IB 1-4. Findings and Recommendations – 28 U.S.C. § 636

(b)(1)(B):

When a district judge refers a motion, petition or application that amagistrate judge may not finally determine in accordance with 28U.S.C. § 636 (b)(1)(B) to a magistrate judge, the magistrate judge shallreview it, conduct any necessary evidentiary or other hearings and filefindings and recommendations for disposition by the district judge.Motions subject to such referral include, but are not limited to: ....

Lack of notice of a magistrate referral raises a Fifth Amendment due process

issue to any litigant. See, e.g., Wright v. Collins, 766 F.2d 841, 847 n. 3 (4th Cir.

1985), dealing with notice to pro se litigants:

Other courts have considered the question of adequate notice ofthe requirements of 28 U.S.C. § 636(b)(1) in cases involving litigants

Appellee’s counsel just missed it until this appeal. Not being a regular in the5

District of Nevada (also CJA appointed to Dvorak’s criminal case), the names of thejudicial officers is less noticeable. It just got by us until now.

38


who were represented by counsel. In United States v. Walters, 638 F.2d947, 950 (6th Cir. 1981), the Sixth Circuit required that “a party shallbe informed by the magistrate that objections must be filed within tendays or further appeal is waived.” The waiver rule was applied pro-spectively in Walters, so that the failure of the United States to objectdid not bar its appeal in that case. In Nettles v. Wainwright, 677 F.2d404 (5th Cir. 1982) (en banc) (Unit B), the Fifth Circuit also requiredexplicit notice, suggesting the following specific language:

Failure to file written objections to the proposed findings andrecommendations contained in this report within ten days fromthe date of its service shall bar an aggrieved party from attackingthe factual findings on appeal.

Id. at 408.

The one circuit that has ruled that failure to object to a magis-trate’s report does not constitute waiver of the right of appeal hasrested in part on its belief that

In a civilized system of justice, the norm should be todecide claims on their merits, and the mere inaction of a party orhis lawyer should not result in the loss of a hypothetically meri-torious claim, except in those limited instances, see e.g., Fed.R.Civ.P. 37, where clear notice is given in advance that a certainprocedural default will or might result in loss of a claim or de-fense.

Lorin Corp. v. Goto & Co., Ltd., 700 F.2d 1202, 1205–6 (8th Cir.1983) (quoting Johnson v. Boyd-Richardson Co., 650 F.2d 147, 149(8th Cir. 1981)).

Even if there is waiver of contesting the findings of fact, there is no waiver of

the conclusions of law. Robbins v. Carey, 481 F.3d 1143, 1146-47 (9th Cir. 2007):

“The failure to object in the district court to a magistrate’s find-ing of fact waives a challenge to that finding.” United States v. Torf,357 F.3d 900, 910 (9th Cir. 2004) (as amended) (citing Turner v. Dun-

39


can, 158 F.3d 449, 455 (9th Cir. 1998) (as amended)). However, thefailure to object to a magistrate judge’s conclusions of law does notautomatically waive a challenge on appeal. Turner, 158 F.3d at 455.Because determinations of law by the magistrate judge are reviewed denovo by both the district court and this court, “the failure to objectwould not, standing alone, ordinarily constitute a waiver of the issue.”Martinez v. Ylst, 951 F.2d 1153, 1156 (9th Cir. 1991). The failure toobject to a magistrate judge’s conclusion of law “is a factor to beweighed in considering the propriety of finding waiver of an issue onappeal.” Id. In Martinez, we held that when a party has failed both toobject to a magistrate judge’s legal findings and to raise the issue in itsopening appellate brief-raising the issue in a reply brief instead – waiv-er is appropriate unless there are circumstances suggesting that it willwork a substantial inequity.” Id. at 1157.

Accord: Richardson v. Sunset Science Park Credit Union, 268 F.3d 654, 656 (9th

Cir. 2001).

C. De Novo Review is an Art. III Requirement

In United States v. Shami, 754 F.2d 670, 672 (6th Cir. 1985), the Sixth Circuit

held:

“‘Since magistrates are not Article III judges, it is necessary toprovide for a redetermination by the Court, if requested, of mattersfalling within subsection (b)(1)(B).’” United States v. Walters, 638F.2d 947, 950 (6th Cir. 1981) (quoting Park Motor Mart, Inc. v. FordMotor Co., 616 F.2d 603 (1st Cir. 1980)). Consequently, de novoreview of a magistrate’s report is both statutorily and constitutionallyrequired.

However, this court has held that de novo review is not required unless requested by

the parties. United States v. Reina-Tapia, 328 F.3d 1114, 1116 (9th Cir. 2003).

40


And this brings us back to notice. We were not notified that this was a referral

to the Magistrate to solely make the final determination.

D. Conclusion

It was constitutional error under Art. III to delegate the motion to stay to a

U.S. Magistrate Judge non-Art. III judge without a reference by the District Judge6

and without notice that appellant had to seek review with the District Judge.

Incidentally, the one overseeing the criminal case, too.6

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CONCLUSION

The judgment of the District Court granting summary judgment to the SEC

should be reversed and the case remanded for trial.

The order of the district court refusing to stay this case pending the outcome

of the criminal case over the same facts should be reversed.

The order of the U.S. Magistrate Judge denying the stay should be reversed as

a violation of Art. III and 28 U.S.C. § 636.

Respectfully submitted,

JOHN WESLEY HALL, JR.1202 Main Street; Suite 210Little Rock, Arkansas 72202-5057501-371-9131 / fax [email protected]

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mailto:[email protected]

CERTIFICATE OF COMPLIANCE

Pursuant to Fed. R. App. P. 32(a)(7)(c)) and Ninth Circuit Rule 32-1, this

brief is proportionally spaced, has a typeface of 14 points, and contains 7,697

words, excluding the parts of the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii).

___________________________John Wesley Hall, Jr.Attorney for Brian Dvorak, Appellant

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STATEMENT OF RELATED CASES

There are two related cases involving appeals to this court. The first is an

appeal by 1st Global Stock Tansfer, LLC and Helen Bagley in docket number 11-

17021, which has been consolidated with this case for appeal purposes.

The other is an appeal previously taken by Harold P. Gewerter in docket

number 10-16384 in which this court entered judgment on August 26, 2011 and

issued the mandate on October 18, 2011. SEC v. CMKM Diamonds, Inc., 656 F.3d

829 (9th Cir. 2011).

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