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Administrative Subpoenas of Securities and Exchange Commission v. Nicita

January 16, 2008


The opinion of the court was delivered by: Hon. Anthony J. Battaglia U.S. Magistrate Judge

Order Following Evidentiary Hearing Granting Petitioner's Motion to Compel Respondents Compliance With Administrative Subpoenas and Denying Respondents' Motion to Quash [Doc. Nos. 1 and 5]

The Securities and Exchange Commission ("SEC") seeks to enforce administrative subpoenas for documents and testimony served on Michael Nicita*fn1 and Edward Leonard*fn2 (collectively hereinafter "Respondents"). This matter involves the SEC's investigation of alleged fraudulent schemes to manipulate the earnings of Advanced Marketing Services ("AMS") from at least 2000 until 2003. Mr. Nicita was AMS's Chief Executive Officer and Mr. Leonard was AMS's Chief Financial Officer during this period.

In January of 2003, AMS management learned of the potential accounting fraud and undertook an internal investigation that resulted in a report stating that the accounting fraud was immaterial. That report was included in the FORM 10-K filed with the SEC on June 30, 2003. On July 23, 2003, the FBI executed a search warrant at AMS's Headquarters. AMS subsequently decided to cooperate with SEC's investigation, waived privilege and produced over six million pages of documents to the SEC. Respondents' contend that during this production, AMS produced documents that were attorney-client privilege based upon a joint defense agreement ("JDA") that was orally entered into between Respondents and AMS in August of 2003.

Respondents' move to quash these subpoenas on the basis that the SEC was in possession of documents Respondents' argue were attorney-client privileged and that the SEC's possession of these documents has irreparably tainted the SEC's investigation and issuance of the subpoenas. Respondents' move the Court for an Order requiring the SEC to return the materials listed on Respondents' privilege log to Advanced Marketing Services ("AMS") and disqualifying all SEC attorneys' and investigators who have had access to these materials. The Respondents requested an evidentiary hearing to further explore the depth of the taint to the SEC investigation and an interim stay on enforcement of these subpoenas pending this Court's findings from the evidentiary hearing. Respondents also requested that the Court find that they had proven the existence and terms of the Joint Defense Agreement ("JDA"). Alternatively, the Petitioner requested that the Court require Respondents to submit sworn affidavits from each of the members of the JDA and a Board resolution confirming AMS agreed to be bound by the

An evidentiary hearing was set for January 11, 2008 for Respondents to provide the Court with evidence demonstrating: 1) the parties, terms and duration of the JDA, and 2) that AMS's Board agreed that the company should be bound by the JDA. Respondents were further ordered to revise their privilege log and produce copies of the revised privilege log and any sworn affidavits Respondents intended to rely on at the evidentiary hearing to the Court and Petitioner on or before December 28, 2007. In addition to the declarations and revised privilege log, Respondents submitted categories of documents from the privilege log for in camera review by the Court.

I. Findings From the Evidentiary Hearing

The evidentiary hearing was held on the record before Judge Battaglia on January 11, 2008. Appearing on behalf of the Petitioner was Molly White and Ronnie Lasky. Charles La Bella and Teresa Gillis appeared on behalf of Respondent Michael Nicita and Christian Humphreys appeared on behalf of Respondent Edward Leonard.

Based upon the record*fn3 and the declarations*fn4 submitted by Respondents, the Court finds:

1. A JDA was orally entered into by and between AMS and Respondents Nicita and Leonard.

2. Respondents have failed to submit any evidence to support their prior contentions*fn5 that Kevan Lyon (represented by Hahn & Adema); Laurie Lingol (represented by Morrison & Forrester); Marty Vrable (also represented by OMM); Marcy Roke (represented by Frank Vecchione); Sandra Christie (represented by Fish & Richardson); and Steve Boyle (represented by OMM) were parties to the JDA.*fn6

3. The JDA was in effect from approximately August 2003 until February 2004.

II. Discussion

With the parties and terms of the JDA determined, the Court can now review 1) Respondents' claims of privilege with regard to the various categories of documents set forth in the privilege log; 2) Respondents' allegations of taint regarding the SEC's investigation and request for return of privileged documents and Respondents' request that the Court quash the administrative subpoenas and disqualify all SEC attorneys' and investigators who have ...

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