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

April 1, 2008

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

William Nissen is a partner at the Chicago law firm of Sidley Austin and is former counsel for defendant Lake Shore Asset Management Limited. The court previously observed that "there is a fine line between, on the one hand, a party's pursuit of a particular position and vigorous advocacy from that party's lawyer and, on the other hand, obstructionism. Lake Shore Limited and its lead counsel, William Nissen, may well find that they have landed far on the wrong side of this line." The court then issued a rule to show cause directed at Lake Shore Limited and Mr. Nissen. The rule to show cause against Mr. Nissen has been fully briefed and is presently before the court. The court also held a hearing to discuss the sanctions issue, afforded counsel an opportunity to present argument, and allowed counsel to file supplemental memoranda following oral argument.

Background

The court begins by noting that it takes its obligation to promote civility and collegiality between the bench and bar very seriously. The court issued the rule to show cause against Mr. Nissen and prepared this opinion after a great deal of reflection. Zealous advocacy is laudable, but at a certain point can turn into conduct that strikes at the heart of the court's core function of resolving disputes. The court thus regrets the need to issue this opinion, but does so because it cannot turn a blind eye to conduct that negatively impacts its ability to promote the orderly administration of justice and resolve disputes fairly. See In re Cooper, 821 F.2d 833, 843 (1st Cir. 1987) ("A judge who believes misconduct has occurred has a responsibility to act. If counsel oversteps his bounds, delay in issuing warnings or taking action may lead to matters getting further out of hand . . ."). With that said, the court turns to the question of whether Mr. Nissen should be sanctioned under Fed. R. Civ. P. 37(b)(2), 28 U.S.C. § 1927, and the court's inherent powers. In doing so, the court assumes familiarity with the record and will discuss specific facts in chronological order as necessary below.

Standard of Review

Under Rule 37(b)(2), the court may order "the party failing to obey the order or the attorney advising that party or both to pay the reasonable expenses, including attorney's fees, caused by the failure." In addition, 28 U.S.C. § 1927 provides that "[a]ny attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct." When deciding whether an attorney should be sanctioned under § 1927, the court must consider whether an attorney's conduct was objectively unreasonable. See Claiborne v. Wisdom, 414 F.3d 715, 721-22 (7th Cir. 2005) ("this court has upheld § 1927 sanctions . . . [when] counsel acted recklessly, counsel raised baseless claims despite notice of the frivolous nature of these claims, or counsel otherwise showed indifference to statutes, rules, or court orders").

The court may also impose attorney sanctions under its inherent powers. Chambers v. NASCO, Inc., 501 U.S. 32, 43 (1991). Based on these inherent powers, the court may sanction counsel for "willful disobedience of a court order" or "bad faith conduct." Schmude v. Sheahan, 420 F.3d 645, 649-50 (7th Cir. 2005), quoting Chambers v. NASCO, Inc., 501 U.S. at 45-46 (internal citations omitted). "Because these inherent powers are potent, they must be exercised with caution and restraint." Id. The exercise of restraint, however, does not mean that the court must ignore "irresponsible advocacy falling below minimum professional standards and deserving of penalty." Lepucki v. Van Wormer, 765 F.2d 86, 87 (7th Cir. 1985) (per curiam).

Events Following Lake Shore Limited's Appeal from the Statutory Injunction

On June 7, 2007, this court granted the CFTC's request for a statutory restraining order freezing Lake Shore's assets. See 7 U.S.C. § 13a-1. On August 2, 2007, the Seventh Circuit issued a typescript opinion finding that the Federal Rules of Civil Procedure applied to requests for statutory restraining orders issued pursuant to the Commodity Exchange Act and concluding that "[t]he ex parte order is vacated. The mandate will issue immediately." See Commodity Futures Trading Com'n v. Lake Shore Asset Management Ltd., 496 F.3d 769, 773 (7th Cir. 2007). The mandate issued later that afternoon.

During this time period, unbeknownst to the court, the National Futures Association ("NFA"), which is not a party to this action, was working to freeze Lake Shore's assets via a completely different route by filing a member responsibility action ("MRA"). See NFA Compliance Rule 3-15.*fn1 In the MRA, the NFA alleged that Lake Shore had violated NFA record-keeping rules and instructed all NFA members to institute an asset freeze on assets owned and controlled by Lake Shore pending resolution of the alleged violations.*fn2 The NFA ultimately issued an asset freeze on August 6, 2007. In re Lake Shore Asset Management Ltd., No. 07-MRA-007 (Aug. 6, 2007).

The court learned of the MRA and the NFA asset freeze on August 6, 2007, when Lake Shore Limited filed an "emergency motion to enforce mandate" with this court. The motion asserted that the NFA administrative action -- which Lake Shore Limited had previously never mentioned to either this court or the Seventh Circuit -- had been issued in violation of the Seventh Circuit's opinion. Lake Shore Limited's position appeared to be premised on the belief that the Seventh Circuit's statement that "there is no apparent reason why all of these businesses must be shut down" while the parties' dispute is being resolved, Commodity Futures Trading Com'n v. Lake Shore Asset Management Ltd., 496 F.3d at 773, meant that this court was required to vacate the NFA asset freeze.

The motion to enforce the mandate filed with this court did not indicate that the MRA was a separate administrative proceeding directly appealable to the Seventh Circuit. Instead, it characterized the NFA asset freeze as an unlawful effort by the CFTC to avoid the Seventh Circuit's order. Also on August 6th, the CFTC filed a motion for a temporary restraining order (Commodity Futures Trading Com'n v. Lake Shore Asset Management Ltd., No. 07 C 3598, Docket No. 64) and a motion for a preliminary injunction (id. at Docket No. 65) with this court based on new allegations of fraud.

The court held a hearing on Lake Shore Limited's motion to enforce the mandate on August 7th. During the hearing, the CFTC handed the court a response to Lake Shore Limited's motion to enforce the mandate. At the conclusion of the hearing, the court declined to rule from the bench, retired to chambers, and began to prepare a written order to ensure that the record clearly reflected the basis for its decision. Simultaneously, dissatisfied with the court's refusal to rule in its favor from the bench without reading the CFTC's response or conducting any research in light of counsels' arguments, Mr. Nissen prepared an emergency motion which he filed with the Seventh Circuit.*fn3 Attached to this motion was the motion to enforce the mandate that he had filed with this court as well as the CFTC's response, which the court had received during the motion hearing.

The motion to enforce the mandate filed with the Seventh Circuit suggested that this court had affirmatively refused to rule on the motion to enforce the mandate.*fn4 It also referred to the CFTC's new allegations of fraud raised in its motions for a temporary restraining order and preliminary injunction. Mr. Nissen was aware that the court and Magistrate Judge Mason were working with their schedules to ascertain who could fit in a prompt hearing on the CFTC's request for injunctive relief. He was also aware that the CFTC had filed a motion for a temporary restraining order and a motion for a preliminary injunction based on the new fraud allegations and that the court understood that a full evidentiary hearing would be held with respect to these allegations. See, e.g., Commodity Futures Trading Com'n v. Lake Shore Asset Management Ltd., No. 07 C 3598, Transcript of Proceedings, August 7, 2007, at 24-25 (stating "Well, we'll set this for a hearing on the preliminary injunction" in connection with what the CFTC had characterized as a motion for a temporary restraining order).

He nevertheless intimated that this court was willing to postpone a preliminary injunction hearing indefinitely. He also characterized the MRA as an action taken by the CFTC in an effort to avoid the Seventh Circuit's opinion*fn5 and did not address whether this court had the authority to issue an opinion reversing an interlocutory order issued by the NFA, despite an inquiry from the court.*fn6 See id. at 26. At the same time Mr. Nissen was filing his motion to enforce the mandate with the Seventh Circuit, the court sent the following order to be docketed:*fn7

Motion hearing held on defendant's motion to enforce mandate of the Court of Appeals [#63]. Plaintiff's emergency motions for TRO/preliminary injunction based on fraud [#64/65] are entered and continued to 8/9/2007 at 9:00 a.m., assuming that leave is granted to file an amended complaint [adding fraud allegations]. The court also notes that the TRO motion appears to be unnecessary in light of the imminent full evidentiary hearing. Plaintiff granted leave to file its brief in response to defendant's motion to enforce the mandate by 5:00 p.m. on 8/7/07. Defendant's motion to enforce the mandate is taken under advisement, and the court will rule very expeditiously. Defendant's response to plaintiff's request for injunctive relief shall be submitted to the court no later than 3:00 p.m. on 8/8/07.

Commodity Futures Trading Com'n v. Lake Shore Asset Management Ltd., No. 07 C 3598, Docket No. 78.

The court then turned to the Lake Shore Limited's motion to enforce the mandate without the knowledge that Lake Shore Limited had renewed that motion (which had not yet been ruled on) before the Seventh Circuit. As the court was finishing its order on August 8th (the day following oral argument on the motion) addressing Lake Shore Limited's motion to enforce the mandate, it received an order from the Seventh Circuit. This order reflected that the Seventh Circuit had grasped the inaccurate message that Mr. Nissen had tried to impart: that this court was not requiring compliance with the Seventh Circuit's mandate and, among other things, intended to hold an endless series of hearings on an endless series of motions for temporary restraining orders. Lake Shore Asset Management Ltd. v. Commodity Futures Trading Com'n, No. 07-2790 (7th Cir. Aug. 8, 2007) (unpublished order).*fn8

The Seventh Circuit's order clarified the obvious -- that it had vacated the statutory injunction -- and stated that it would enforce its rulings by issuing a writ of mandamus if necessary. Id. At this point, therefore, the Seventh Circuit had issued a ruling based on a filing from Mr. Nissen. Of course, however, without the benefit of a transcript (which Mr. Nissen did not attempt to obtain on an expedited basis) or a response from the CFTC, the Seventh Circuit would have no way of knowing that the summary of events provided by Mr. Nissen -- an officer of the court -- did not fairly represent what had occurred.*fn9

Shortly thereafter, also on August 8th, the court issued two orders (Docket Nos. 87 & 90). These orders are largely reproduced below as they provide helpful background with respect to the merits of Lake Shore Limited's arguments about the scope of the mandate and the proceedings before this court. The first order set forth the relevant facts and stated:

Lake Shore's motion to enforce the mandate is based on an overly broad understanding of the scope of the Seventh Circuit's mandate. On remand, a district court must follow the mandate of the appellate court, and the appellate court opinion sets forth the law of the case. See, e.g., Ohio-Sealy Mattress Mfg. Co. v. Sealy, Inc., 669 F.2d 490, 493 (7th Cir. 1982). It has long been established that "[w]hile a mandate is controlling as to matters within its compass, on the remand a lower court is free as to other issues." Sprague v. Ticonic National Bank, 307 U.S. 161, 168 (1939). Thus, this court must carefully read the Seventh Circuit's opinion to determine what issues are law of the case because they were decided expressly or by necessary implication. Pincus v. Pabst Brewing Co., 752 F.Supp. 871, 873 (E.D. Wis. 1990), citing Quern v. Jordan, 440 U.S. 332, 347 n.18 (1979), and Gertz v. Robert Welch, Inc., 680 F.2d 527, 533 (7th Cir. 1982).

According to Lake Shore, the Seventh Circuit held that Lake Shore is entitled to immediate access to its funds and the Seventh Circuit's opinion thus requires this court to enjoin any action by any entity which seeks to freeze Lake Shore's assets based on any theory whatsoever. This court has carefully studied the Seventh Circuit's ruling. Clearly, the Seventh Circuit believed that the statutory restraining order under 7 U.S.C. § 13a-1 which froze Lake Shore's assets could not last more than twenty days. It thus vacated that order and directed this court to hold a prompt preliminary injunction hearing (the CFTC, however, subsequently withdrew its motion for a statutory preliminary injunction). Therefore, as matters currently stand, the Seventh Circuit's order prevents the CFTC from continuing to freeze Lake Shore's assets based on the statute that formed the basis of the now-vacated statutory restraining order.

However, Lake Shore did not argue, and the Seventh Circuit did not consider, the propriety of the NFA's prior institution of an asset freeze based on NFA Compliance Rule 3-15. Instead, the Seventh Circuit held that the statutory injunction was improper because it lasted for more than twenty days and noted in dicta that "there is no apparent reason" why Lake Shore should not have access to its funds while the court hashes out the records dispute which caused the court to make findings which led to imposition of the now-vacated asset freeze. CFTC v. Lake Shore, No. 07-2970 at 5 (7th Cir. Aug. 2, 2007). This court cannot agree that the Seventh Circuit thereby ruled that Lake Shore automatically prevails if an entity seeks to freeze Lake Shore's assets based on a legal theory that was not presented to the Seventh Circuit.

Such a result would be particularly incongruous given that the NFA's asset freeze was in effect before the court granted the CFTC's request for a statutory injunction, yet Lake Shore never mentioned this key fact before this court or the Seventh Circuit when it briefed the statutory asset freeze. Lake Shore is thus responsible for this case's present procedural posture. The court also notes that Lake Shore's position, if adopted, would entitle it to immediate victory on the CFTC's upcoming motion for a preliminary injunction based on new allegations of fraud, which is presently scheduled to be heard on August 9, 2007. Indeed, Lake Shore acknowledged as much, stating at the argument yesterday on its motion to enforce the mandate that "it's the same TRO."

The court disagrees: although the CFTC sought an asset freeze in its motion for a statutory injunction as well as in its new motion for a preliminary injunction based on alleged fraud, the legal underpinnings of the motions are completely different. Indeed, the court does not even know the precise factual basis for the fraud preliminary injunction motion, since it has not yet held an evidentiary hearing on that motion. Similarly, although both the NFA and the CFTC want Lake Shore to produce records, the legal underpinning of the NFA's asset freeze is NFA Compliance Rule 3-15, while the now-vacated CFTC asset freeze was based on a statutory injunction. In short, the Seventh Circuit's holding regarding the statutory injunction does not control the CFTC's pending request for an asset freeze based on alleged fraud or the NFA's prior institution of an asset freeze based on its interpretation of Rule 3-15 because the Seventh Circuit's opinion did not decide these issues expressly or by necessary implication. Thus, the court finds that neither the NFA asset freeze nor the upcoming CFTC fraud TRO seeking an asset freeze are within the scope of the Seventh Circuit's opinion addressing the statutory injunction previously entered by this court.

This brings the court to Lake Shore's arguments regarding this court's ability to enjoin the NFA and the merits of Lake Shore's contentions about the propriety of the NFA's asset freeze. Although unremarked by the parties, in response to an inquiry from the court during oral argument on the motion to enforce the mandate, the parties agreed that at the conclusion of the administrative review process, an aggrieved party may file a petition for review with a federal court of appeals. See 7 U.S.C. § 21(i)(4) ("Any person aggrieved by a final order of the Commission entered under this subsection may file a petition for review with a United States court of appeals in the same manner as provided in Section 9 of this title"); 7 U.S.C. § 9 (review of final orders of the CFTC lies with the United States court of appeals of the circuit in which the petitioner is doing business); Clark v. Commodity Futures Trading Com'n, 170 F.3d 110, 113 (2d Cir. 1999) (7 U.S.C. § 21(i)(4) gives the courts of appeals jurisdiction over appeals based on "actions taken by entities known as registered futures associations" and "only one organization, the National Futures Association, ... has ever been designated a registered futures association").

Lake Shore has not provided any basis -- other than the scope of the mandate argument addressed above -- under which a district court may consider a request to waive the exhaustion requirement and review the NFA's decision. This is a threshold issue which must be resolved in Lake Shore's favor before this court may proceed further with respect to the merits of the NFA's asset freeze order. Accordingly, if Lake Shore wishes to proceed before this court regarding the NFA's asset freeze, it must file a brief memorandum addressing the court's jurisdiction to consider this issue. If Lake Shore does so, the court will consider this issue on an expedited basis.

Commodity Futures Trading Com'n v. Lake Shore Asset Management Ltd., No. 07 C 3598, Docket No. 90.

This court's second August 8th order -- the second court order at this point addressing events that had not transpired (i.e., the court's alleged refusal to rule on Lake Shore Limited's motion to enforce the mandate and to ...


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