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

December 10, 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's August 28, 2007, preliminary injunction order and October 4, 2007, receivership order imposed immediate obligations on defendant Lake Shore Asset Management Limited ("Lake Shore Limited") and Philip Baker, Lake Shore Limited's Managing Director, Principal and President. Lake Shore Limited has explicitly refused to comply with the court's orders and Mr. Baker has declined to participate personally in this litigation. The court previously held that Lake Shore Limited and Mr. Baker were in civil contempt of court based on their failure to comply with the preliminary injunction and receivership orders. The court hereby imposes remedial and coercive civil contempt sanctions, detailed below, against Mr. Baker and Lake Shore Limited.

I. Background

The court assumes familiarity with its prior orders in this case, and will thus provide only a brief recap of relevant facts.

A. The Statutory Injunction

On June 27, 2007, the court entered a statutory ex parte restraining order against Lake Shore Limited, and its agents, servants, attorneys, and employees that prohibited them from, among other things, "dissipating, withdrawing, transferring, removing, concealing or disposing of" any assets or property of Lake Shore Limited or any investors' funds. See Commodity Futures Trading Com'n v. Lake Shore Asset Management Ltd., No. 07 C 3598, Docket No. 12. This order also prohibited Lake Shore Limited from "destroying, mutilating, concealing, altering or disposing of" any books and records, wherever located. Id.

Nevertheless, on or about July 4, 2007, and in direct violation of the June 27th statutory restraining order, Lake Shore Limited directed the transfer of certain books and records from the offices of Roth Mosey & Partners LLP, a Canadian accounting firm that acted as Fund Administrator, to an undisclosed location in Bermuda. The receiver represents that these documents were subsequently shipped to an undisclosed location in Switzerland. To date, the receiver and CFTC's multiple requests to Lake Shore Limited requesting production of these documents have been either ignored or rebuffed.*fn1

B. The Preliminary Injunction

The CFTC moved for a preliminary injunction and in support of its opposition, Lake Shore Limited submitted multiple declarations from Mr. Baker. After conducting an evidentiary hearing, on August 28, 2007, the court entered an order granting in part and denying in part the CFTC's request for a preliminary injunction. See id. at Docket No. 118. In that order, the court, among other things, "restrained, enjoined and prohibited" the Lake Shore Common Enterprise from refusing to permit authorized representatives of the CFTC from inspecting and copying books, records or other property of the Lake Shore Common Enterprise. The court also restrained the Lake Shore Common Enterprise from "withdrawing, transferring, removing, dissipating, concealing or disposing of, in any manner, any assets related to Lake Shore Alternative Financial Asset Funds I, II, III and IV." See id. at 84.

Lake Shore Limited appealed and the Seventh Circuit denied its request to stay the preliminary injunction order until its appeal was resolved. Commodity Futures Trading Com'n v. Lake Shore Asset Management Ltd., No. 07-3057 & 07-3070 (Sept. 7, 2007) (unpublished order). Despite denial of its motion for a stay pending appeal, Lake Shore Limited and its principal, Mr. Baker, have to date refused to comply with the preliminary injunction order.

C. The Receivership Order

On October 4, 2007, the court entered a memorandum and order: (1) issuing a rule to show cause why Lake Shore Limited should not be sanctioned and held in civil contempt based on its failure to comply with the preliminary injunction order; (2) issuing a rule to show cause why Lake Shore Limited's counsel should not be sanctioned for engaging in evasive and dilatory tactics; (3) finding that documents relating to the segregated managed accounts ("SMAs") that are part of the Lake Shore Funds were discoverable and ordering Lake Shore Limited to produce these documents; and (4) appointing a receiver. See Commodity Futures Trading Com'n v. Lake Shore Asset Management Ltd., No. 07 C 3598, Docket No. 192.

The court also entered a separate order addressing the receiver's authority and responsibilities. See id. at Docket No. 194. This order required Lake Shore Limited to cooperate with the receiver by, among other things, taking actions necessary to effect the immediate turnover of books and records and to transfer investor funds to the receiver. In addition, it explicitly required the Lake Shore Common Enterprise and its agents, employees, independent contractors, attorneys and all other persons served with a copy of the order to "cooperate fully with and assist the Receiver in the performance of his duties." Id. at 5. The court will refer to Docket Nos. 192 and 194 collectively as the receivership order.

On October 15, 2007, the Seventh Circuit Court of Appeal denied Lake Shore Limited's emergency motion to stay the receivership order pending the outcome of Lake Shore Limited's appeal. Commodity Futures Trading Com'n v. Lake Shore Asset Management Ltd., No. 07-3408 (7th Cir. Oct. 15, 2007) (unpublished order). Despite denial of its motion for a stay pending appeal, Lake Shore Limited and its principal, Mr. Baker, have to date refused to comply with the receivership order.

D. Notice of the Court's Orders -- Lake Shore Limited & Mr. Baker

1. Lake Shore Limited

Lawyers at Sidley Austin, the firm that formerly represented Lake Shore Limited, have consistently stated that they advised Lake Shore Limited of its obligation to comply with the preliminary injunction and receivership orders upon the issuance of these orders but that Lake Shore Limited, via Mr. Baker, declined to do so. See Commodity Futures Trading Com'n v. Lake Shore Asset Management Ltd., No. 07 C 3598, Docket Nos. 286 (filing by Lake Shore Limited regarding its failure to comply with the preliminary injunction order) & 309 (same, regarding the receivership order); see also Docket No. 289 at Ex. K; Transcript of Proceedings of November 6, 2007 at 7:5-23) ("[W]e say to our client: You have an order. You should obey the order. Then our client says: We're not going to give them anything because we have these foreign laws . . . . Judge, I assure you as I stand in front of you, I assure you that when we've gotten an order, we have passed it on to our client and said: You are dutybound to obey the order").

The firm of Howard Kennedy in London represents Lake Shore Limited and has acknowledged that Lake Shore Limited is choosing to wait for the Seventh Circuit to rule on Lake Shore Limited's appeal of the preliminary injunction order before deciding whether to comply with this court's orders. See id. at Ex. L. Specifically, on November 5, 2007, counsel there (who signs as "Howard Kennedy") wrote to the attorneys for the London registered futures commission merchants ("FCMs") holding Lake Shore customer funds. In that letter, counsel noted that the professional directors of the Lake Shore entities (i.e., at the very least, Mr. Baker) believed that they had an obligation under the laws of the Turks & Caicos and the British Virgin Islands to challenge the right of any entity seeking to obtain assets held by the FCMs.*fn2 Counsel then went on to say that the Lake Shore entities had appealed the preliminary injunction and receivership orders and concluded that "[i]t is expected that the Judgment of the Court of Appeals will be delivered in the very near future. Accordingly, we shall write to you again once that Judgment has been handed down." Id.

Finally, Lake Shore Limited has filed a response addressing the issue of what sanctions should be imposed. See id. at Docket No. 342-1. Thus, Lake Shore Limited indisputably has notice regarding the ...


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