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United States Commodity Futures Trading Commission v. Lake Shore Asset Management Limited

November 20, 2007

UNITED STATES COMMODITY FUTURES TRADING COMMISSION, PLAINTIFF,
v.
LAKE SHORE ASSET MANAGEMENT LIMITED, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Blanche M. Manning United States District Judge

MEMORANDUM AND ORDER

The court previously found Lake Shore Limited in civil contempt of court for failing to comply with the preliminary injunction order. The parties have briefed whether Philip Baker, Lake Shore Limited's Managing Director, Principal and President, should also be held in civil contempt of court based on his failure to comply with the preliminary injunction order. For the following reasons, the court answers this question in the affirmative and also finds that both Mr. Baker and Lake Shore Limited are in civil contempt of court for failure to comply with the receivership order.

The court will allow Mr. Baker to file a memorandum addressing the type and amount of sanctions to be issued against him for being in contempt of the preliminary injunction order, and will reserve the issue of sanctions against Lake Shore Limited based on the failure to comply with the preliminary injunction order until Mr. Baker files his memorandum or the date to do so has passed. The court will also reserve the question of sanctions against Mr. Baker and Lake Shore Limited based on their failure to comply with the receivership order until this matter is briefed. Finally, the court enters and continues the motion to substitute filed by James McGurk, proposed new counsel for Lake Shore Limited, and directs Mr. McGurk to advise the court, by November 26, 2007, if he still wishes to file an appearance on behalf of Lake Shore Limited.

I. Civil Contempt Based on the Failure to Comply with the August 28, 2007, Preliminary Injunction Order -- Philip Baker On November 9, 2007, the court found that Lake Shore Limited was in civil contempt of court based on its refusal to comply with the document production portions of the preliminary injunction order. In that order, the court issued a rule to show cause directed at Mr. Baker personally, noting that the rationale in its October 4, 2007, order which directed Lake Shore Limited to show cause why it should not be held in contempt based on its failure to comply with the preliminary injunction order appeared to apply with equal force to Mr. Baker. See Fed. R. Civ. P. 65(d) (a preliminary injunction is binding on "the parties to the action, their officers, agents, servants, employees, and attorney, and upon those persons in active concert or participation with them who receive actual notice of the order by personal service or otherwise").

The record shows that Mr. Baker is Lake Shore Limited's Managing Director, Principal and President. It further shows that he is aware of the preliminary injunction order and has refused to comply with it as, among other things, current counsel for Lake Shore Limited has advised the court that he promptly advised Mr. Baker, who is the only known person currently controlling Lake Shore Limited, when the stay of the preliminary injunction was denied, and told Lake Shore Limited that it was obliged to comply. Mr. Baker is subject to contempt sanctions in his individual capacity because he is responsible for Lake Shore Limited's refusal to comply with the preliminary injunction order. See Fed. R. Civ. P. 65(d); see also International Longshoremen's Ass'n v. Philadelphia Marine Trade Ass'n, 389 U.S. 64, 75-76 (1967).

The court gave Mr. Baker an opportunity to respond to the rule to show cause, but he declined to do so. The court thus holds that the findings in its November 9, 2007, order regarding Lake Shore Limited's failure to comply with the preliminary injunction order are equally applicable to Mr. Baker. He is, therefore, in civil contempt of the preliminary injunction order.

II. Civil Contempt Based on the Failure to Comply with the October 4, 2007, Receivership Order -- Lake Shore Limited and Philip Baker

A. Lake Shore Limited

This case has followed a disturbing trend: the court has ordered Lake Shore Limited to take specific actions and Lake Shore Limited, through Mr. Baker (and possibly others), has consistently and flatly refused to comply. The receivership order directed Lake Shore Limited to take actions necessary to effectuate the immediate turnover of books and records to the receiver and the transfer of investors' funds to the receiver. Current counsel for Lake Shore Limited forwarded copies of relevant documents, including the receivership order and correspondence from the receiver, to Mr. Baker and one of Lake Shore Limited's European lawyers (the record does not indicate the identity of the lawyer, but it appears to be Howard Kennedy, Lake Shore Limited's attorney in London). On November 5, 2007, Mr. Kennedy stated that Lake Shore Limited (through Mr. Baker) would not turn the London FCM assets over to the receiver but that he (Mr. Kennedy) would "write . . . again" once the Seventh Circuit issues its ruling on Lake Shore Limited's appeal from the preliminary injunction, which includes arguments about the reach of the Commodities Exchange Act. See Ex. L to the Receiver's Motion for a Rule to Show Cause (docket #290).

Thus, while compliance in the future is not completely foreclosed, compliance now is clearly not going to happen. This is completely unacceptable. The court will not repeat its previous statements, made in multiple orders, that when the Seventh Circuit denies a stay pending appeal, the losing party cannot use the pendency of its appeal to excuse non-compliance with this court's orders. Such a position would render the Seventh Circuit's order denying a stay pending appeal a nullity. In short, the only reason given for the refusal of Lake Shore Limited to comply with the receivership order is the pendency of the appeal from the preliminary injunction order, and this excuse is legally unfounded. Accordingly, the court finds that Lake Shore Limited is in civil contempt of the receivership order.

B. Philip Baker

Lake Shore Limited's decision not to comply with the receivership order was made by Mr. Baker (and possibly others, but that's an issue for another day as the evidence presented to date indicates that Mr. Baker is the responsible Lake Shore Limited principal). Under Rule 65(d), an injunction or restraining order is binding "upon the parties to the action, their officers, agents, servants, employees, and attorneys, and upon those in active concert or participation with them who receive actual notice of the order by personal service or otherwise." Fed. R. Civ. P. 65(d). According to the Supreme Court, Rule 65(d) is not limited to injunctions or restraining orders, as it also reaches "equitable decree[s] compelling obedience under the threat of contempt," such as "enforcement orders and affirmative decrees." International Longshoremen's Ass'n v. Philadelphia Marine Trade Ass'n, 389 U.S. at 75-76. Thus, even if the receivership order is not an injunction (an issue that the court need not consider), it binds Mr. Baker personally because he is a principal of Lake Shore Limited and because it expressly included him in its scope.

This conclusion is consistent with the Seventh Circuit's ruling in Central States Pension Fund v. Wintz Properties, Inc., 155 F.3d 868 (7th Cir. 1998). In that case, the district court ordered the defendant company to make interim withdrawal payments in an ERISA case and eventually found the company and its president in contempt of court after the company failed to make the required payments. 155 F.3d at 873. Both the company and its president appealed, and the Seventh Circuit held that the order was functionally equivalent to an injunction because it "instructs [the company] to do something -- pay the Fund what the statute requires -- which after all is the point of an injunction." Id. at 873-74.

The Seventh Circuit then observed that the order compelling payments was directed at the defendant company as well as the company's president. Id. at 876. It thus found "the underlying injunction applicable to [the president], and his company's failure to comply with it his problem too." Id.; see also Chicago Truck Drivers v. Brotherhood Labor Leasing, 207 F.3d 500, 507 (8th Cir. 2000) (payment orders directed at defendant company were binding upon its corporate officer and could be used as the basis for contempt proceedings against the officer even though the orders did not specifically refer to him because there was "no question that [the officer] had notice of the orders" and the orders were within the scope of Rule 65(d) since they "compelled . . . affirmative, prospective obedience"); State of Illinois by Illinois Dept. of Public Aid v. U.S. Dept. of Health and Human Services, 772 F.2d ...


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