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

June 10, 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

The CFTC's motion for sanctions -- specifically, the entry of default judgment -- against Lake Shore Asset Management Limited ("Lake Shore Limited") is before the court.*fn1 Lake Shore Limited's ongoing disregard of the court's orders and its obligations under the Federal Rules of Civil Procedure have been detailed in numerous orders issued in this case. Lake Shore Limited has not only flouted court orders and refused to participate in discovery, but also has taken affirmative steps to hide its books and records. Indeed, its willful misconduct resulted in the issuance of substantial civil contempt sanctions (which did not prompt compliance) and a referral to the United States Attorney's Office for consideration of criminal contempt charges against it and Philip Baker, its Managing Director, Principal and President. Based on the egregious nature of Lake Shore Limited's actions to date, a sanction other than the entry of default judgment would not be tailored to the facts of this case. Accordingly, the CFTC's motion for entry of a default judgment is granted and Lake Shore Limited's amended answer to the CFTC's second amended complaint is stricken.

Background

Discovery in this case has progressed to a certain degree as the CFTC and receiver have deposed and obtained documents from non-parties. However, Lake Shore Limited has flatly refused to turn over its books and records (except very nominal documents produced at the inception of this case), respond to written discovery, or produce a corporate representative for a deposition. It has brazenly defied a distressingly high number of court orders, including this court's preliminary injunction order (Docket No. 118), the original receivership order (Docket No. 192), and the amended receivership order (Docket Nos. 552 & 554), despite the Seventh Circuit's opinion affirming, among other things, that Lake Shore Limited was required to turn over its books and records, Lake Shore Asset Management Limited v. Commodity Futures Trading Com'n, 511 F.3d 762 (7th Cir. 2007).

The court has issued numerous orders in this case detailing the refusal of Lake Shore Limited to comply with court orders. See Docket Nos. 196, 285, 299, 323, 348, 364, 389, 403; see also Docket No. 495 (discharging rule to show cause against Lake Shore Limited's former counsel despite his obstructionist behavior). Substantial remedial and coercive civil contempt sanctions addressing these delicts -- including a fine of $25,000/day and an order barring Lake Shore Limited from using any documents that should have been produced under the injunction or receivership orders -- proved fruitless. See Docket No. 403.

Because even a civil contempt fine of $25,000/day did not coerce compliance, the court lifted the daily fine and referred this matter to the United States Attorney for possible criminal prosecution, explaining that, "[g]iven Lake Shore Limited's affirmative attempts to hide its records and its history of self-centered actions at the expense of investors . . . a fine -- no matter how high -- appears to lack any meaningful coercive effect." No. 403 at 4. Even with the threat of criminal proceedings looming, Lake Shore Limited still refused to comply with the court's orders or fulfill its obligations under the discovery rules.

Lake Shore Limited also took affirmative efforts to secrete its documents and computer server in a variety of overseas locations. As the court previously stated: documents [obtained from authorities in Bermuda] make for compelling reading and, among other things, detail the journey of Lake Shore Limited's books, records, and computer server from Canada (where they were held by Roth Mosey [a Canadian accounting firm that acted as Fund Administrator for Lake Shore Limited]) to Bermuda and then onto Switzerland in the care of Mr. Schwab. See [Docket No. 379] at Ex. 4 & 6. Lake Shore Limited appears to believe that if it transfers its documents to an entity that gives the documents to another entity that then gives the documents to yet another entity that sends the documents to Mr. Schwab, Lake Shore Limited's own attorney [in Switzerland], the documents are somehow beyond its control.

Courtesy of the authorities in Bermuda, the court has reviewed emails from Mr. Schwab authorizing the shipment of the Lake Shore Limited server and documents to him. See id. at 6, page 4 & 5; see also Ex. 4 at pp. 12-13 ("Lake Shore Box Delivery List" including, among other things, eighteen boxes of client files). On September 11, 2007 (the day after Lake Shore Limited learned of the Seventh Circuit's order denying Lake Shore Limited's motion for a stay of the preliminary injunction order), Mr. Schwab described the server and boxes as belonging to Pinnacle Ventures (a new Belize entity formed by Mr. Baker and staffed by Lake Shore employees, see id. at Ex. 1, 2 & 4) and asked the custodian to send them to him. Id. at Ex. 6, p. 4.

Thirty-four minutes later, he emailed the custodian again and clarified that the documents and server in fact belonged to Lake Shore Limited, stating, "I am acting on behalf of Lake Shore Asset Management Ltd. and therefore confirm the request of Pinnacles [sic] Ventures to have you send to my address below the server and all books and records of 'Lakeshore.'" Id. at p. 5. The documents and server were then mailed to Mr. Schwab via UPS. See id. at Ex. 8. No evidence suggests that the documents and server failed to reach their destination.

A lawyer is an agent of his client, so when an attorney possesses his client's business records, the client constructively possesses those records and must produce them. See Fisher v. U.S., 425 U.S. 391, 403-04 (1976) ("pre-existing documents which could have been obtained by court process from the client when he was in possession may also be obtained from the attorney by similar process following transfer by the client" even if the client transfers its pre-existing documents to seek legal advice); see also Avery Dennison Corp. v. UCB Films PLC, No. 95 C 6351, 1998 WL 293002, at *2 (N.D. Ill. May 28, 1998) (client documents held by an attorney are not shielded from production).

Lake Shore Limited has never suggested that it would have produced its documents (both paper and electronic) but was thwarted from doing so because Mr. Schwab or the custodian of the moment refused to comply with its directions to turn over its documents. To the contrary, nothing in the record even remotely supports such a theory, and all of the evidence flatly contradicts it. For example, Lake Shore Limited's brief opposing the imposition of civil contempt sanctions, its status reports post-dating the imposition of civil contempt sanctions, and its brief opposing a criminal contempt referral would have been excellent times to raise a defense of impossibility. Lake Shore Limited, however, simply reiterated its refusal to comply with the court's orders.

Moreover, even assuming hypothetically that Lake Shore Limited lacks control over its own documents now and thus cannot produce them, an alleged lack of control today does not translate into past lack of control. Anyone even remotely familiar with this case will recall that prior to the December 28, 2007, genesis of Lake Shore Limited's current and unsupported "lack of control" argument, Lake Shore Limited flatly refused to produce its documents based on arguments that had been previously rejected by this court and were recently rejected by the Seventh Circuit. It cannot go back in time and rewrite history to change its past claims that this court lacked authority to order it to produce its documents into an argument that it was always ready, willing, and able to produce its documents but was prevented from doing so by forces beyond its control.

In addition, again assuming for the moment that evidence showing that the documents and server are currently beyond Lake Shore Limited's control exists, in light of the preliminary injunction order's language, Lake Shore Limited was required to maintain control over its own documents. See Goluba v. School Dist. of Ripon, 45 F.3d 1035, 1037 (7th Cir. 1995) (the district court "may find a party in civil contempt if that party has not been reasonably diligent and energetic in attempting to accomplish what was ordered") (internal quotations omitted). Thus, even if Lake Shore Limited can produce evidence substantiating its alleged lack of control today, it cannot absolve itself from responsibility for its past actions by simply pointing a finger at someone else now.

Docket No. 389. The documents and server (as well as Philip Baker, who controls Lake Shore Limited and the related other Lake Shore entities at issue ...


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