Commodity Futures Trading Commission v. Equity Financial Group, LLC, et al., 2005 WL 2205789 (D.N.J. Sept. 9, 2005)
In April 2004, the U.S. Commodity Futures Trading Commission ("CFTC") filed an enforcement action against Equity Financial Group, LLC ("Equity") and others alleging fraud in connection with the solicitation of commodity pool participation interests in Shasta Capital Associates, LLC ("Shasta"). Tech Traders, Inc. ("Tech Traders"), which traded Shasta's funds, and Robert W. Shimer, counsel for Equity and Shasta, were charged with regulatory violations. Tech Traders allegedly traded Shasta funds in its own name and lost money for this hedge fund rather than making the "astonishing returns" claimed by Equity.
A Receiver was appointed to marshal, preserve, account for, and liquidate assets as well as direct, monitor, and supervise defendant's activities. Claimants include the Sterling entities, namely Sterling ACS, Ltd., Sterling Alliance Ltd., Sterling Casualty & Insurance, Ltd., Sterling Bank Ltd., Sterling (Anguilla) Trust, Ltd., Sterling Investment Management, Ltd., and Strategic Investment Portfolio, LLC (collectively "Sterling"). The CFTC objected to any distribution to Sterling until Sterling produces a backup tape. The Court held an evidentiary hearing on this matter, and ordered Sterling to produce the tape or its claims would remain on the disputed claims schedule.
The tape in question was created at the direction of named defendant J. Vernon Abernethy ("Abernethy"), and was a copy of data from the two desktop machines that he used in his home office. He claimed it was made in response to a request by the Receiver to preserve computer files relevant to the case. Abernethy used the computers (plus a laptop) in connection with his work for Tech Traders and Sterling, as well as for other matters.
Soon after Abernethy made the tape, some colleagues visited his home. Walter Hannen ("Hannen") worked on his desktops and was given the tape upon request. Abernethy asked for the tape back but was told that Hannen had given it to Vernice Woltz. Mr. Woltz, chief financial officer for Sterling, apparently took it to the Bahamas and Abernethy has not been able to retrieve it.
CFTC arguments for production of the tape included the following:
-Hannen may have altered or destroyed relevant evidence on Abernethy's desktops, and the tape may be the only remaining copy of that data.
-Removal of the tape is in violation of the Consent Order of the Preliminary Injunction to preserve Abernethy's property.
-The backup tape is not Sterling's property and it should be required to produce the tape.
Sterling's response to the CFTC included the following:
-Abernethy's computer was Sterling's property, and Sterling had agreed to have the machine analyzed and returned to it. The CFTC has been supplied with copies of all files on the machine and a report of deleted files.
-The tape is a copy of the Sterling computer which had already been analyzed, and Sterling had told the CFTC that any relevant documents would be forwarded.
-The CFTC had agreed to produce a copy of the deleted files report and Sterling agreed to produce any deleted files present on the tape, but the CFTC never produced the copy.
-The tape and computer belong to Sterling rather than Abernethy, so the Consent Order does not apply (besides, the tape was sent to the Bahamas before entry of that order.)
-Sterling is not a party to the action, is thus not subject to requests for production, and has not been issued a subpoena.
-Files on the tape are proprietary, confidential, and irrelevant.
The CFTC replied, claiming that the desktop computers and tape belong to Abernethy, only the laptop was analyzed by the CFTC so the contents of the desktops prior to the visit by Sterling principals is only to be found on the tape, and withholding of the tape is in violation of the Statutory Restraining Order.
The Court rejected Sterling's arguments, finding:
-The tape and computers belong to Abernethy. Sterling has no right to retain the property, even if the CFTC has copies of the files. Abernethy arranged for production of the tape with his own funds and equipment, and had purchased the computers himself (the laptop was purchased with Sterling funds, but these funds were used as an offset for travel expenses and the tape was a copy of the desktops rather than the laptop anyway.)
-It does not matter that Sterling is not a party to the action. Sterling has availed itself of the Court by filing claims and objecting to the proposed distribution.
-Testimony indicates that the tape may contain relevant information.