Petition for Writ of Certiorari — D. L. Cromwell Investments, Inc. v. NASD Regulation, Inc.

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O02 202 Auc - 6 2002

OFFICE OF THE CLERK

No. 02-

IN THE

Supreme Court of the United States

D.L. CROMWELL INVESTMENTS, INC., LLOYD BEIRNE,

DAVID S. DAVIDSON, ERIC S. THOMAS,

and MATTHEW GREENWALD,

Petitioners,

NASD REGULATION, INC.,

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

PETITION FOR A WRIT OF CERTIORARI

Martin P. Russo

ANpDREW J. GOODMAN*

Frep D. WEINSTEIN

KURZMAN EISENBERG CORBIN

LeveR & GoopMAN, LLP

Attorneys for Petitioners

675 Third Avenue, 18" Floor

New York, New York 10017

(212) 661-2150

* Counsel of Record

175438 g

COUNSEL PRESS

(800) 274-3321 * (800) 359-6859

QUESTIONS PRESENTED

Rule 65(a)(2) of the Federal Rules of Civil Procedure

permits consolidation of a preliminary injunction hearing

with a trial on the merits before or after the commencement

of the hearing. This court has held that such consolidation

cannot occur without clear and unambiguous notice given

either before the hearing commences or at a time which still

affords the parties a full opportunity to present their

respective cases. University of Texas v. Camenisch, 451 US.

390, 395, 101 S. Ct. 1830, 1834 (1981). Numerous courts

have interpreted the foregoing notice requirement to include

an allowance of time for parties to conduct discovery. In this

case, the Second Circuit held that notice of consolidation

was not required prior to the conclusion of the presentation

of all the evidence at a preliminary injunction hearing because

the petitioners were constructively on notice that the

disposition of the preliminary injunction application would

likely be dispositive of the entire case. The Second Circuit

further held that, by virtue of seeking preliminary injunctive

relief, the petitioners waived any rights they may have had

to conduct discovery upon consolidation.

The question presented is whether constructive notice

of consolidation of a preliminary injunction hearing with a

trial on the merits is in accord with Rule 65(a)(2) and prior

precedent of this court and other courts and whether formal

notice of consolidation given after the conclusion of

presentation of all the evidence at a preliminary injunction

hearing is properly given without leave to conduct discovery.

STATEMENT PURSUANT TO RULE 29.6

Petitioner D.L. Cromwell Investments, Inc. states that it

has no corporate parent and that no publicly held company

owns 10% or more of D.L. Cromwell Investments, Inc.’s

stock.

sna,

- wneen ores

TABLE OF CONTENTS

i vs a gaviess sect nese ne'es

Statement Pursuant To Rule 29.6 ...............

NT a ks a iy ae k 4 we 4 0.6) se 0% oe

me eee eee eee eee

CC Se eee eee ee

Opinions Entered In This Case .................

IE COE DURUM wis e's eda eseedecceccs

Statute Involved In This Matter ................

ere

Reasons For Granting The Wnit

Certiorari Is Warranted Because the Decision

below Conflicts with Decisions of this Court

EE a

a Ey EA ag a

TABLE OF CITED AUTHORITIES

Page

Cases:

Abraham Zion Corp. v. Lebow,

761 F.2d 93 (24 Cir. 1985) ......cceccececees 12

Air Line Pilots Ass'n, Intern.

v. Alaska Airlines, Inc.,

898 F.2d 1393 (9th Cir. 1990) ...........6.-- 6

American Federation of Goverr-ment Emp.

AFL-CIO, Local 3319, United States

Deputy Marshals v. Colburn,

$31 F.2d 314 (Sth Cir. 1976) .........022000- 6

Capital City Gas Company

v. Phillips Petroleum Company,

373 F.2d 128 (2d Cir. 1967) ........-.2eeeee- 6

Carribean Ferry Produce Exchange, Inc.

v. Secretary of Health and Human Services,

$93 F.2d 3 (ist Cir. 1969) .. 0. ccc cccsecceess 6

Gellman v. State of Maryland,

538 F.2d 603 (4th Cir. 1976) ..........-0-- passim

Irish Lesbian and Gay Organization v. Giuliani,

143 F.3d 638 (2d Cir. 1998) ............----. 12

Johnson v. White,

$28 F.2d 1228 (2d Cir. 1975) ......-.cscceeee 13

Cited Authorities

Page

Pughsley v. 3750 Lake Shore Drive C. o-op Bldg.,

463 F.2d 1055 (7th Cir. 1972) .............. passim

Reese Pub Co., Inc. v. Hamption Intern.

Communications, Inc.,

ope eer fe 8. ee 12

..M.T. Trailer Ferry Inc. v. Union De Tronquistas

De Puerto Rico, Local 901,

433 F.2d 1171 (ist Cir. 1971) ................ 6

University of Texas v. Camenisch,

451 U.S. 390, 101 S. Ct. 1830 (1981) ......... 1, 5

Wilson v. Zarhadnick,

3o8 F.40 So OM Ce 197) CS... oe 6

Woe v. Cuomo,

801 F.2d 627 (2d Cir. 1986) ................. 8,9

Rule:

Wale Th Cae. BOO gw i he &

Treatise:

11 Wnght and Miller Federal Practice and Procedure

DBP is at kbc ee 8

TABLE OFAPPENDICES

ini ited States

Appendix A — Opinion Of The Unite |

ah Of Appeals For The Second Circuit Dated

February 1, 2002 ....-----sererrrrer

inion Of The

Appendix B — Memorandum Opinion

United States District Court For The Southern

District Of New York Dated February 26, 2001 ...

ited States District

Appendix C — Order Of The United

ye For The Southern District Of New York

Dated March 12,2001 ...---++eese'? seeees

ited States Court

Appendix D — Order Of The United | )

Of Appeals For The Second Circuit Denying

Petition For Rehearing Dated And Filed May 8,

Pe Ee deca

Page

17a

34a

OPINIONS ENTERED IN THIS CASE

The order and opinion of the Court of Appeals for the

Second Circuit (Appendix (“App.”) la-16a) is officially

reported as: D.L. Cromwell Investments, Inc. Lloyd Beirne,

David S. Davidson, Eric S. Thomas and Matthew Greenwald

v. NASD Regulation, Inc., 279 F.3d 155 (2d Cir. 2002).

The order and opinion of the District Court for the

Southern District of New York (App. 17a-33a) is officially

reported as: D.L. Cromwell Investments, Inc., Lloyd Beirne,

David S. Davidson, Eric S. Thomas and Matthew Greenwald

v. NASD Regulation, Inc., 132 F. Supp. 248 (S.D.N.Y. 2001).

STATEMENT OF JURISDICTION

The Court of Appeals entered its order of affirmance on

February 1, 2001. A timely petition for rehearing en banc

was filed in this case on or about February 15, 2002. On

May 8, 2002, the Court of Appeals denied the application

for rehearing. The jurisdiction of this court is accordingly

invoked under 28 U.S.C. § 1254(1).

STATUTE INVOLVED IN THIS MATTER

The focus of this matter turns on the interpretation and

application of Rule 65(a)(2) of the Federal Rules of Civil

Procedure.

The statute provides:

Before or after the commencement of the hearing

of an application for a preliminary injunction, the

court may order the tral of the action on the merits

to be advanced and consolidated with the hearing

of the application. Even when this consolidation 1s

not ordered, any evidence received upon an

application for 4 preliminary injunction which would

be admissible upon the trial on the merits becomes

part of the record on the trial and need not be repeated

upon the trial. This subdivision (a){2) shall be so

construed and applied as to save to the parties any

rights they may have to trial by jury.

STATEMENT OF THE CASE

On January 30, 2001, Petitioners filed tie Complaint in

this action seeking a permanent injunction enjoining NASD

Regulation, Inc. (“Regulation”) from compelling their

testimony under the guise of its “private” status (when it

covertly was acting as an agent of the government) in

violation of Petitioners’ Fifth Amendment nights against self-

incrimination. The Petitioners simultaneously moved by

order to show cause for a preliminary injunction because

Regulation had scheduled on-the-record interviews for the

week of February 12, 2001, which made expedited relief

necessary. The district court ordered Regulation to show

cause at a hearing on February 9, 2001 why a temporary

restraining order and preliminary injunction should not issue.

After oral argument, the district court found that

Petitioners had made a showing sufficient to require

Regulation to present evidence at an evidentiary hearing on

the motion for a preliminary injunction. The Court

temporarily stayed the on-the-record interviews and ordered

Regulation to present its evidence on February 15, 2001.

The hearing was noticed solely as a preliminary injunction

hearing, no expedited discovery was ordered, and the

Petitioners were not advised that a consolidation was

contemplated.

On February 15, 2001, the district court required that

Regulation offer its evidence first to rebut the showing

previously made by Petitioners. Petitioners had no advance

disclosure of the substance of the testimony of Regulation’s

witnesses and were therefore limited in their ability to cross-

examine those witnesses. When Regulation rested, the district

court accepted the affidavits previously filed by the

Petitioners in the matter as their evidence. At that point, the

evidentiary hearing was completed. The district court then

announced for the first time its intention to consolidate the

trial on the merits with the preliminary injunction hearing

pursuant to FRCP Rule 65(a)(2) because it reasoned that a

denial of the preliminary injunction effectively would render

the action moot. Petitioners objected on the ground that they

had not had any discovery. The district court dismissed this

objection, commenting that “this litigation is not a discovery

proceeding.” A53.2.' Notwithstanding the district court’s

comment, Petitioners again requested that they be granted

two weeks to conduct expedited discovery and collect

evidence. A53.3-53.4. Since the on-the-record interviews

scheduled for the week of February 12, 2001 had been stayed,

Petitioners did not face irreparable harm until the next

scheduled on-the-record interview on March 8, 2001. A53.5.

The district court rejected this proposal. A53.4.

On February 26, 2001 — twenty seven days after the

complaint was filed and two weeks after the hearing — the

district court issued a Memorandum Opinion setting forth

findings of fact and rendering a final judgment against

Petitioners. The decision was entered on February 27, 2001.

On March 9, 2001, Petitioners filed a motion for a new trial

1. ReferencestoA___ are to the Joint Appendix filed with the

Second Circuit Court of Appeals.

based upon newly discovered evidence, and that motion was

denied by the district court on March 12, 2001. Petitioners

filed a notice of appeal with the clerk of the district court on

March 23, 2001. On March 26, 2001, Petitioners filed a

motion for a stay pending appeal. The Second Circuit denied

the motion for a stay on April 24, 2001.

On September 19, 2001 the Second Circuit heard oral

argument on the appeal. On February |, 2002 the Court of

Appeals issued a decision affirming the judgment of the

District Court. The Second Circuit held that petitioners had

constructive notice of the consolidation because, upon

seeking emergency relief, petitioners should have known thai

a denial of the motion for a preliminary injunction woulc

likely be dispositive of the case. Recognizing that suct

notice might have been “too ‘oblique’ to clear[ly] anc

unambiguous[ly] notice’ the hearing as a trial on the merits,’

the Court of Appeals further held that Petitioners were no

prejudiced by the consolidation because they could not poin

to specific evidence they were prevented from presenting

App. 10a. The Court also held that although Petitioner

objected to consolidation and repeatedly requested th:

opportunity to take discovery, the prejudice Petitioner

suffered from their inability to obtain discovery was brough

on by “[their] own tactical choice to pursue immediate relie!

not by the consolidation decision.” App. 11a.

REASONS FOR GRANTING THE WRIT

Certiorari Is Warranted Because the Decision

below Conflicts with Decisions of this Court

and of Other Circuits.

It is well settled that the consolidation of a hearing on a

preliminary injunction with a trial on the ultimate merits

cannot occur without “clear and unambiguous notice [of the

Court’s intent to consolidate the trial and the hearing] either

before the hearing commences or at a time which will still

afford the parties a full opportunity to present their respective

cases.” (Emphasis supplied) University of Texas vy.

Camenisch, 451 U.S. 390, 395, 101 S. Ct. 1830, 1834 (1981).

The requirement of timely, clear and unambiguous notice of

consolidation stems from the fact that the purpose of a

preliminary injunction is limited to preserving the status quo

and the evidentiary proof required at a preliminary injunction

is therefore “. . . less complete than in a trial on the merits.

A party thus is not required to prove his case in full at a

preliminary injunction hearing (citations omitted)”. Jd. at 394.

As a consequence of the substantial difference between the

evidentiary proof required at a preliminary injunction hearing

-and a trial on the merits, a party must be given a meaningful

opportunity to prepare for a trial on the merits if the Court

elects to consolidate the preliminary injunction hearing with

a trial. This, of course, necessitates advance, clear and

unambiguous notice and, if necessary, an opportunity

to conduct discovery. Pughsley v. 3750 Lake Shore Drive

Co-op Bldg., 463 F.2d 1055 (7th Cir. 1972).

In those instances where notice of consolidation of a

preliminary injunction with a trial on the merits is not given

prior to rendering a decision on the merits, the determination

of the trial court has consistently been reversed throughout

the various Circuits. 7.M.T. Trailer Ferry, Inc. v. Union

De Tronquistas De Puerto Rico, Local 901, 453 F.2d 1171

(1st Cir. 1971); Carribean Produce Exchange, Inc. v. Secretary

of Health and Human Services, 893 F.2d 3 (Ist Cir. 1989);

Capital City Gas Company v. Phillips Petroleam Company, 373

F.2d 128 (2d Cir. 1967); Wilson v. Zarhadnick, 534 F.2d 55 (Sth

Cir. 1976); Air Line Pilots Ass'n, Intern. v. Alaska Airlines, Inc.,

898 F.2d 1393 (9th Cir. 1990); American Federation of

Government Emp., AFL-CIO, Local 3319, United States Deputy

Marshalls v. Colburn, 531 F.2d 314 (Sth Cir. 1976).

Similarly, when notice of consolidation is either

insufficiently clear or is given without affording a party

adequate time and opportunity to present its case on the trial

of the merits, the notice is also legally insufficient and proper

ground for reversal. In Pughsley, which was cited by this

Court in its decision in Camenisch, the Seventh Circuit Court

of Appeals reversed the District Court’s determination to

dismiss the plaintiff’s complaint after the conclusion of a

preliminary injunction hearing because the District Court

failed to provide clear and timely notice of consolidation.

The District Court had stated at the conclusion of the first

day of a two day injunction hearing that the plaintiff

should put in its “total case”. However, no formal order of

consolidation was issued by the District Court and no

opportunity was ever given to the plaintiff to conduct

discovery. Judge Stevens, writing for the Seventh Circuit,

held that the reference by the Court to putting in the “total

case” was inadequate to afford the plaintiff sufficient

opportunity to prepare for a trial on the merits. Judge Stevens

further expressed the general view that consolidation should

not occur unless a party is given the opportunity to engage

in discovery and that a party applying for emergency relief

should not be deemed to have waived their right to discovery:

A litigant applying for a preliminary injunction

should seldom be required either to forego

discovery in order to seek emergency relief, or to

forego a prompt application for an injunction in

order to prepare adequately for trial.

Pughsley v. 3750 Lake Shore Drive Co-op Bldg.,463-F.2d at

1057-1058.

The opinion of Judge Stevens in Pughsley was not only

cited by this Court in Camenisch, but it has been the standard

by which a notice of consolidation has been evaluated in other

circuits as well. In Gellman v. State of Md, 538 F.2d 603

(4th Cir. 1976), the Fourth Circuit reversed the District

Court’s dismissal of a complaint upon the conclusion of a

preliminary injunction hearing because the Court failed to

provide adequate notice of consolidation and failed to permit

discovery by the plaintiff. The District Court had stated at

the end of the second day of a three day hearing that “if there

are other issues to be resolved, they will also be resolved”.

Citing Pughsley, the Fourth Circuit. found such notice was

inadequate and that it was inherently prejudicial to rule on

the merits of plaintiff’s action at the preliminary injunction

hearing when the plaintiff had not had an opportunity to

engage in discovery. The Court stated as follows:

[Tjhe plaintiff should have some reasonable

opportunity to develop additional evidence

through discovery, a right denied him by the

premature order terminating his action. To grant

judgment on the merits under Rule 65(a)(2)

without any notice of such intention until the

conclusion of the evidentiary hearing on the

motion for a preliminary injunction . . . without

requiring answers to interrogatories Or permitting

any discovery in a case which, on the pleadings

at least, is not frivolous, comes perilously close

to a violation of due process.

Gellman, 538 F.2d at 606.

The Fourth Circuit in Gellman, endorsed the following

procedure recommended by a leading text as the method by

which consolidation should take place:

Doubt as to the propriety of consolidation will be

minimized if the trial court gives the parties

advance notice of the proposed action or, if

consolidation is ordered at the hearing, the parties

are permitted to request additional time to

assemble their entire presentation on the merits.

11 Wright & Miller, F ederal Practice and Procedure § 2950,

p. 488.

The rule articulated in Pughsley and by this Court in

Camenisch was also cited with approval by the Second

Circuit in Woe v. Cuomo, 801 F.2d 627 (2d Cir. 1986) when

the Second Circuit reversed that portion of the District

Court’s decision which converted an application for a

preliminary injunction into a permanent disposition on the

merits. In the absence of the requisite clear and unambiguous

notice of consolidation, the plaintiffs’ counsel had proceeded

with a preliminary injunction hearing on the mistaken belief

that the Court was prepared to rule only on the question of

preliminary injunctive relief. This was manifested by the fact

that counsel presented no evidence at the hearing apart from

that obtained during cross-examination. The Second Circuit

found that the absence of clear and unambiguous notice of

consolidation was prejudicial and remanded the case for a

trial, reasoning as follows:

The District Court acted prematurely when it

granted permanent relief based upon what it

viewed as ‘undisputed evidence’ without notifying

appellants of its intent to do so. The giving of

formal notice ensures both that a party may avail

himself of every opportunity to present evidence

pertinent to his position and that all genuine issues

of fact are before the Court.

Woe v. Cuomo, 801 F.2d at 629.

In the instant case, it is beyond dispute that the District

Court did not indicate its intent to consolidate the preliminary

injunction hearing with the trial on the merits until after the

evidentiary hearing was already concluded. Up until that point

in time, the plaintiffs’ counsel had received no indication

from the Court that it would be consolidating the preliminary

injunction with a trial on the merits. However, once

confronted with the belatedly expressed intention of the

District Court to consolidate the proceeding, the plaintiffs’

counsel asked for a two week adjournment to engage in

expedited discovery. This request was in accord with the view

articulated in Pughsley, Camenisch, Gellman and set forth

in a leading treatise quoted above. Nonetheless, the Court

rejected the plaintiffs’ request.

In affirming the District Court’s dismissal of the

complaint upon consolidation, the Second Circuit Court of

Appeals ruled that it was the plaintiffs’ “own tactical choice

to pursue immediate relief,” not consolidation, that accounted

for plaintiffs’ inability to obtain discovery. Specifically, the

Court stated that the plaintiffs could not seek a two week

adjournment to engage in discovery since the plaintiffs had

previously contended that they required a preliminary

injunction due to the immediate irreparable harm that would

befall the plaintiffs unless the Court intervened immediately.’

This reasoning by the Court constituted a substantial

deviation from the rule articulated in Pughsley, Camenisch

and Gellman in that the Court concluded that the plaintiffs’

request for a preliminary injunction constituted a waiver of

the plaintiffs’ right to pursue discovery in the event of

consolidation.

The ruling of the Second Circuit also deviated from the

repeatedly stated rule that notice of consolidation must be

given clearly and unambiguously and in a sufficiently timely

manner to permit the plaintiffs an opportunity to prepare for

a trial on the merits. Although the District Court’s notice of

consolidation was not given until all of the evidence had

been presented at the preliminary injunction hearing, the

Second Circuit nonetheless found that the plaintiffs were

constructively on notice that the injunction hearing would

be the equivalent of a trial on the merits because the

2. The Second Circuit confused the irreparable harm issue with

the ultimate merits of the action. The absence of immediate

irreparable harm would, at best, justify a denial of the application

for a preliminary injunction. It could not justify the dismissal of the

entire action. By dismissing the entire action, the court precluded

the plaintiffs from ever having their day in court and litigating

the issue of the denial of their constitutional rights under the

Fifth Amendment.

determination of whether the NASD was a state actor would

necessarily be dispositive of the entire case. In further support

of this conclusion, the Second Circuit referred to the District

Court’s announcement six days before the hearing that “(t]he

issue is the state action issue; essentially, whether these

8210 requests are fairly attributable to the government”.

D.L. Cromwell Investments, Inc. vy. NASD Regulation, Inc.,

279 F.3d at 160. However, the contention that the plaintiffs

were constructively on notice of the consolidation of the

injunction with a trial on the merits is simply not in accord

with the prior ruling of this Court in Camenisch or the rulings

cited above, all of which provide that notice must be clear

and unambiguous, not oblique. Nor was the Court’s ruling

in accord with the portion of the Court’s holding in

Camenisch where this Court noted that the determination of

issues at a preliminary injunction hearing cannot, under any

circumstances, constitute a determination of the issues that

are ultimately to be tried on the merits.

The Second Circuit also departed from established

precedent when it concluded that the plaintiffs ultimately

could not establish prejudice due to the inadequate notice of

consolidation. The Second Circuit specifically reasoned that,

in order to establish such prejudice, the plaintiffs had to

demonstrate that they were precluded from presenting

specific evidence at the consolidated trial on the merits.

However, this conclusion was also not in accord with the

prior rulings of this Court and other Circuits in that, as noted

above, the Courts have determined that prejudice exists by

virtue of being deprived of the opportunity to engage in

discovery and to have a meaningful opportunity to present

one’s case at a trial on the merits. In fact, this point was

underscored by the authority cited by the Second Circuit

in support of its conclusion that no prejudice befell the

plaintiffs in this case by reason of the inadequate notice of

consolidation. Indeed, in Abraham Zion Corp. v. Lebow, 761

F.2d 93, 101 (2d Cir. 1985), for example, the plaintiff

objected to notice of consolidation given prior to the

conclusion of the hearing but after the presentation of

plaintiffs’ evidence. While the objection was overruled by

the Court, the plaintiffs were nonetheless given permission

to file an amended complaint, conduct additional discovery

during a thirteen day adjournment of the hearing, and to recall

a witness for additional testimony. /d. at 99-101. As a

consequence of the leave granted to the plaintiffs to amend

the complaint and conduct additional discovery as well as

recall a witness at the hearing, the Second Circuit concluded

that the plaintiff could not be prejudiced. In contrast, none

of those opportunities were afforded the plaintiffs in this case.

In Irish Lesbian and Gay Organization v. Giuliani, 143

F.3d 638, 646 (2d Cir. 1998), the Second Circuit found that

the appellant could have, but chose not to, appeal the District

Court’s dismissal of the case on the merits on the ground

that the District Court should not have consolidated the

preliminary injunction application with a trial on the merits.

Clearly then, the determination of the Second Circuit in Jrish

Lesbian and Gay Organization, could not be used as a

precedent for a rule permitting anything other than clear and

unambiguous notice of consolidation. Similarly, in Reese Pub

Co., Inc. v. Hamption Intern. Communications, Inc. 620 F.2d

7, 12 (2d Cir. 1980), the appellant repeatedly was given notice

of the District Court’s intention to consolidate the preliminary

injunction hearing with a trial on the merits prior to the close

of the hearing. Jd. at 12. At the close of the hearing, the judge

stated that the hearing had just occurred unless there was

some disputed question of fact. The appellant did not object;

rather it sought to introduce evidence of a “secondary

meaning” of a generic term to establish a trademark. The Court

held that appellant was not prejudiced by the District Court’s

refusal to allow the evidence on this point because the law is

clear that a generic term cannot be established as a trademark

by proof of secondary meaning. /d.

Finally, Johnson v. White, 528 F.2d 1228, 1231 (2d Cir.

1975), also is factually distinguishable from this case.

In Johnson, at the conclusion of the preliminary injunction

hearing, the district court ordered consolidation with the trial

on the merits. It did not provide any prior notice of its

intent to do so. The Second Circuit noted in dicta that the

appellants did not object to the District Court’s failure to

give timely notice of consolidation. /d. at 1231. However,

this Court reversed on other grounds and did not reach the

issue of whether the failure to provide timely notice was error.

Id.

Importantly, each of the cases which the Second Circuit

cited in its decision recognized the necessity of clear and

unambiguous notice prior to consolidation and highlights the

fact that the lack of such notice constitutes error. In this case,

the District Court did not give notice of consolidation until

after the hearing and failed to cure the late notice by affording

the petitioners a brief period of expedited discovery and

therefore the petitioners’ rights to due process were violated.

The determination of the Second Circuit affirming the District

Court’s acts as noted above is in conflict with established

United States Supreme Court precedent as well as the

precedent in other Circuits discussed above.

CONCLUSION

Based upon the foregoing, the petitioners respectfully

submit that the instant petition for a writ of certiorari should

be granted.

Respectfully submitted,

Martin P. Russo

AnprEW J. GOODMAN*

FreD D. WEINSTEIN

KURZMAN EISENBERG CORBIN

Lever & GoopMaN, LLP

Attorneys for Petitioners

675 Third Avenue, 18" Floor

New York, New York 10017

(212) 661-2150

* Counsel of Record

APPENDIX A — OPINION OF THE UNITED STATES

COURT OF APPEALS FOR THE SECOND CIRCUIT

DATED FEBRUARY |, 2002

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

August Term, 2001

(Argued: September 19,2001 Decided: February 1, 2002)

Docket No. 01-7301

D. L. CROMWELL INVESTMENTS, INC.,

LLOYD BIERNE, DAVID S. DAVIDSON,

ERIC S. THOMAS, and MATTHEW GREENWALD,

Plaintiffs-Appellants,

—VvV.—

NASD REGULATION, INC.,

Defendants-Appellees.

Before:

MESKILL, JACOBS, and CABRANES,

Circuit Judges.

Appeal from the judgment of the United States District

Court for the Southern District of New York (Kaplan, J.)

dismissing the complaint seeking an injunction. Appellants

argue that their Fifth Amendment rights were violated by

the demand made by NASD Regulation, Inc. that appellants

submit to on-the-record interviews, and that the district court

impermissibly consolidated the hearing of the preliminary

injunction motion with the trial on the merits.

Affirmed.

’

Appendix A

DENNIS JACOBS, Circuit Judge:

Plaintiffs-appellants D. L. Cromwell Investments, Inc.

(“Cromwell”) and individual Cromwell employees, all members

of the National Association of Securities Dealers, Inc.

(“NASD”), have been the subject of ongoing investigations

both by NASD Regulation, Inc. (“Regulation”), which is an

investigatory arm of the NASD, and by federal prosecutors.

They have sued to enjoin NASD Regulation from compelling

them — under threat of sanctions authorized by NASD

Rule 8210 — to submit to on-the-record interviews, arguing ©

that NASD Regulation is a willing tool of the prosecutors

and that the compelled interviews would therefore violate

their Fifth Amendment privilege against self-incrimination.

They appeal from the judgment of the United States

District Court for the Southern District of New York

(Kaplan, J.), rejecting the claim on the finding that Regulation

was not a state actor subject to constitutional restraint, but

was rather a private party conducting a private investigation.

The preliminary injunction hearing was consolidated with

the trial on the merits (over Cromwell’s objection) after the

district court heard testimony from witnesses for both

Cromwell and NASD, and before the rendering of the

decision.

On appeal, appellants argue essentially: (1) that they were

prejudiced by the consolidation because in so doing the court

denied their request for a necessary two-week delay to pursue

discovery, and erroneously employed the merits-based

“preponderance of the evidence” standard of proof rather than

the less onerous “serious questions” standard available in

Appendix A

preliminary injunction proceedings, and (2) that the district

court erroneously held that because Regulation is not a state

actor, it cannot be subject to the Fifth Amendment restraint.

Regulation is the regulatory arm of the NASD, a private,

not-for-profit, self-regulatory organization registered with the

Securities and Exchange Commission (“SEC”), of which

appellants are members. Regulation is responsible for

“conducting investigations and commencing disciplinary

proceedings against [NASD] member firms and their

associated member representatives relating to compliance

with the federal securities laws and regulations.” Datek

Securities Corp. v. National Ass'n of Securities Dealers, Inc.,

875 F. Supp. 230, 232 (S.D.N.Y. 1995). Regulation’s Division

of Enforcement (“DOE”) conducts regulatory investigations

and disciplinary hearings, and imposes sanctions that are

subject to multiple layers of administrative and judicial

review, including appeals within the NASD, and appeal to

the SEC under a de novo standard.

One group within the DOE — the Criminal Prosecution

Assistance Unit (“the Unit”) — assists federal and state

authorities in their investigations of securities matters.

The Unit’s activities are self-contained, and it performs no

other function. It is a small department consisting of a lawyer,

an examiner, and an investigator. It is sometimes granted

access (pursuant to court order) to grand jury materials, which

it is required to shield from the rest of the DOE and to not

divulge. Its one lawyer, Bruce Bettigole, is occasionally

designated a Special Assistant United States Attorney as part

Appendix A

of his duties. See 28 U.S.C. § 543 (providing for the

appointment of special attorneys to assist United States

attorneys).

Notwithstanding the separation of the Unit’s duties from

those of the DOE, there is some administrative overlap

between it and the rest of DOE: Bettigole is subordinate to

the Deputy Director and the Director of the DOE; Bettigole

shares a secretary with a DOE lawyer; the work-space of the

Unit’s examiner and its investigator is surrounded by DOE

staff; the Unit’s telephone, fax, and computer services are

shared with the rest of the DOE.

The facts as found by the district court and supported by

the record, demonstrate that in October 1998, the DOE

opened an investigation concerning Cromwell’s involvement

in the trading of shares in Pallet Management Systems, Inc.

(“Pallet”). Soon after, the United States Attorney for the

Eastern District of New York and the FBI opened their own

investigations into the same transactions.

In November 1998, the FBI (as part of its investigation)

asked the Unit for certain documents concerning Pallet, which

the Unit was aware related to Cromwell’s involvement in

Pallet. The Unit turned over the documents.

In March 1999, a DOE lawyer and a DOE examiner went

to Florida to inspect Cromwell’s books and gather documents.

Soon after, the FBI called the DOE lawyer, who conveyed

general information to the FBI concerning the contents of

the documents inspected in Florida. In response to a later

formal request, the DOE allowed the FBI access to the

Cromwell documents.

Appendix A

During the summer of 2000, the U.S. Attorney’s Office

for the Eastern District of New York and the DOE shared

details about the progress of their respective investigations.

Specifically, prosecutors-divulged to the DOE information

from a cooperating witness. Additionally, the DOE and

prosecutors learned from each other that they were both

investigating Pallet and Cromwell’s involvement in Pallet.

At this time, the Unit was assisting the U.S. Attorney’s

Office in the U.S. Attorney’s efforts to secure a search warrant

for Cromwell’s Brooklyn office. After execution of the

warrant by the U.S. Attorney, Bettigole and another Unit staff

member reviewed the seized documents to determine whether

any were relevant to a separate, long-standing, criminal

investigation in which the Unit was involved.

In November 2000, the DOE demanded certain documents

from Cromwell. Cromwell responded that many of the requested

documents had been seized by federal agents. A DOE staff

member then asked Cromwell and the U.S. Attorney’s Office

for an inventory of the seized documents. Cromwell supplied

an illegible copy of the inventory, and the U.S. Attorney’s

Office told the DOE that the Unit already had the list.

The DOE soon obtained a legible inventory from the Unit,

and later procured a number of the documents from the U.S.

Attorney’s Office.

In December 2000, the Unit helped the U.S. Attorney’s

Office prepare a grand jury subpoena for materials related to

Pallet to be served on an entity called Fiserv. The terms of

the subpoena allowed Fiserv to comply by electronic

transmission, but because of a technological incompatibility

Appendix A

between Fiserv and (both) the FBI and the U.S. Attorney’s

Office, Fiserv was allowed to comply by transmitting the

information to the Unit.

Subsequently, the DOE served demands (pursuant to NASD

Rule 8210) for on-the-record interviews of individual appellants.

NASD Rule 8210 grants the DOE “the right to... require a

member ... to provide information orally, in writing or

electronically. . . and to testify at a location specified by [DOE]

staff ... with respect to any matter involved in [an NASD]

investigation.” NASD Rule 8210(a)(1)(CCH). Appellants

commenced this suit to enjoin those demands.

We review the district court’s decision to consolidate

the hearing for a preliminary injunction with a trial of the

action on the merits under Rule 65(a)(2) for abuse of

discretion. Abraham Zion Corp. v. Lebow, 761 F.2d 93, 102

(2d Cir. 1985). We review the district court’s findings of fact

for clear error and its holdings of law de novo. White v. White

Rose Food, 237 F.3d 174, 178 (2d Cir. 2001).

Under Fed.R.Civ.P. 65(a)(2), “[b]efore or after the

commencement of the hearing of an application for a

preliminary injunction, the court may order the trial of the

action on the merits to be advanced and consolidated with

the hearing of the application.” Cromwell argues that in this

instance the consolidation of the preliminary injunction

hearing with the trial on the merits was an abuse of discretion.

See Abraham Zion Corp. v. Lebow, 761 F.2d 93, 102 (2d Cir.

1985).

Appendix A

In its strongest formulation, Cromwell’s argument is that

while it had a fair shot (even without discovery) at securing

preliminary relief by raising sufficiently serious questions

to show a balance of hardships tipping decidedly in its favor,

see Jolly v. Coughlin, 76 F.3d 468, 473 (2d Cir. 1996)

(internal quotations omitted), it would have needed further

weeks of discovery in order to support its heavier burden at

a trial on the merits, and that the district court, therefore, should

have put off its ultimate decision once the district court had

determined that preliminary relief was not warranted, and

granted Cromwell’s request for an opportunity to pursue its

discovery request.

The argument, however, is hard to square with Cromwell's

contention, prior to the preliminary injunction hearing,

that the question was urgent and could not be deferred. Thus,

when Cromwell was seeking a prompt hearing, it argued that

Regulation’s Rule 8210 demands would cause irreparable

harm — there and then — by forcing individual appellants

to choose between foregoing their Fifth Amendment privilege

(and risking criminal prosecution) or exposing themselves

to NASD sanctions.' See Bery v. City of New York, 97 F.3d

689, 693 (2d Cir. 1996) (holding that a movant for a

preliminary injunction “must first demonstrate that it is likely

to suffer irreparable harm in the absence of the requested

1. Specifically, Cromwell argued: “Plaintiffs irreparably will

be harmed if the preliminary injunction is not issued. . . . Regulation

does not deny that . . . [it] will swiftly move to have the individual

Plaintiffs barred [from the securities industry] if they do not testify.”

Plaintiffs’ Reply Memorandum of Law in Support of Motion

for Preliminary Injunction at 9, 9 n. 7, D. L. Cromwell v. NASD

Regulation, 01 Civ. 728 (S.D.N.Y. Feb. 8, 2001).

Appendix A

relief”). The irreparable harm was said to arise from

individual appellants’ refusal to submit to the impending

testimony; and the hearing sought was to decide what all

parties saw as the sole issue of the case: whether Regulation

is a state actor.

The district court, upon recognizing the state action issue

as “the whole ballgame,” exercised discretion to order

consolidation at the close of the hearing. Transcript of

Preliminary Injunction Hearing at 115, D. L. Cromwell v.

NASD Regulation, 01 Civ. 728 (S.D.N.Y. Feb. 15, 2001).

Cromwell, anticipating defeat, objected for the first time that

an adjudication on the merits would require a two-week delay

to pursue discovery, and argued that the delay for it would,

in fact, cause no immediate harm, because if individual

appellants refused to testify, the NASD itself would stay any

suspension during the protracted NASD appellate procedure.

Sound or not, this argument contradicted the claim of urgency

that evidently induced the court to immediately hear the

preliminary injunction motion in the first instance.

If the district court had been advised that Cromwell could

avoid testifying without immediate suspension while it

enjoyed an essentially automatic stay by virtue of the

administrative appeals process, the court might have afforded

additional time for discovery; at the same time, however,

the court might have put off consideration of preliminary

relief, or conducted a hearing under less urgent circumstances.

In denying a delay for discovery, the district court merely

credited Cromwell’s original position — based on its initial

claim of inflexible urgency — and rejected its later and

contradictory argument that the issue would keep almost

indefinitely. That decision was not an abuse of discretion.

Appendix A

Additionally, Cromwell maintains on appeal that the

district court failed to provide proper notice of its intent to

consolidate. Woe v. Cuomo, 801 F.2d 627, 629 (2d Cir. 1986)

(“Courts may consolidate a trial on the merits with a hearing

on a motion for preliminary injunctive relief only after

‘the parties . . . receive clear and unambiguous notice [of the

court’s intent to do so] either before the hearing commences

or at a time which will still afford the parties a full opportunity

to present their respective cases.’) (quoting Pughsley v.

3750 Lake Shore Drive Cooperative Bldg., 463 F.2d 1055,

1057 (7th Cir. 1972)) (alterations in original); Abraham Zion,

761 F.2d at 101 (citing University of Texas v. Camenisch,

451 U.S. 390, 395 (1981)).

Cromwell, however, was on notice from the outset that

its claim hinged on the issue to be decided at the preliminary

injunction hearing. The complaint emphasized the Fifth

Amendment state actor question and that resolution of that

discrete issue controlled disposition of what Cromwell, itself,

termed its “very narrow” claim for injunctive relief.

Complaint at 1, D. L. Cromwell v. NASD Regulation, 01 Civ.

728 (S.D.N.Y. Jan. 30, 2001) (emphasis in original).

Moreover, the district court provided additional notice

to Cromwell, announcing six days before the hearing that

“{t]he issue is the state action issue; essentially, whether these

8210 requests are fairly attributable to the government.”

Transcript at 22, D. L. Cromwell v. NASD Regulation,

01 Civ. 728 (S.D.N.Y. Feb. 9, 2001).

10a

Appendix A

In any event, even if the district court’s comments were

too “oblique” to “clear[ly] and unambiguous[ly] notice”

the hearing as a trial on the merits, Woe, 801 F.2d at 629

(citing Pughsley, 463 F.2d at 1057), Cromwell cannot

demonstrate that it suffered prejudice by consolidation.

Abraham Zion, 761 F.2d at 101 (“Given the broad discretion

accorded the district court by Rule 65(a)(2), the court’s order

of consolidation will not be overturned on appeal absent a

showing of substantial prejudice in the sense that a party

was not allowed to present material evidence.”); see also

Irish Lesbian and Gay Organization v. Giuliani, 143 F.3d

638, 646 (2d Cir. 1998) (“[A] failure to... notify a party

[of consolidation] which results in prejudice is grounds for

reversal.’’).

To show prejudice, Cromwell must point to some relevant

evidence that it was “prevented from presenting . . . because

of the consolidation.” Reese Pub. Co., Inc. v. Hampton

International Communications, Inc., 620 F.2d 7, 12 (2d Cir.

1980); see also Johnson v. White, 528 F.2d 1228, 1231

(2d Cir. 1975) (“[1]n order to obtain a reversal for such an

error, a party must show, not only surprise but ‘prejudice’

in the sense of having other material evidence to introduce.”).

On appeal, Cromwell points out that it rested on its affidavits

at the close of the hearing — before the district court

announced its decision to consolidate. However, Cromwell

has not alleged that it would have done otherwise had the

district court’s intent to consolidate been expressed more

clearly. Rather, Cromwell argues that consolidation allowed

no interval for subsequent discovery. See, e.g., Memorandum

of Law in Support of Plaintiffs’ Motion for New Trial

Pursuant to FRCP 59(a), D. L. Cromwell v. NASD Regulation,

lla

Appendix A

01 Civ. 728 (S.D.N.Y. Mar. 9, 2001). Any such prejudice,

however, was caused by Cromwell’s own tactical choice to

pursue immediate relief, not by the consolidation decision.

Moreover, Cromwell’s application for a two-week

discovery period before a hearing on the merits looks very

much like a fishing expedition. On appeal, Cromwell

specifies three witnesses it needed to depose: present and

former Regulation employees Roger Sherman, Linda Walters,

and John Long. However, it failed to make that specific

discovery request of the district court either at the hearing

on the motion for a preliminary injunction or in its motion

for a new trial. At the hearing on the motion for a preliminary

injunction, Cromwell asked generally for “two weeks to

conduct discovery of the Department of Enforcement and

[the Unit] so that we can gain the evidence.” Transcript of

Preliminary Injunction Hearing at 119, D. L. Cromwell v.

NASD Regulation, 01 Civ. 728 (S.D.N.Y. Feb. 15, 2001).

In its motion for a new trial, Cromwell raises only its alleged

recent discovery of the existence and timing of certain

cooperating witness statements given to federal prosecutors.

For the reasons stated, we hold that the district court

properly consolidated the preliminary injunction hearing with

a trial on the merits, and having done so, it correctly analyzed

the state actor question under the preponderance of the evidence

standard as opposed to the Jolly standard. See Inmates of Attica

Correctional Facility v. Rockefeller, 453 F.2d 12, 24 (2d Cir.

1971) (holding injunctive relief proper “if proved at trial by

a fair preponderance of the evidence”); Jolly, 76 F.3d at 473.

12a

Appendix A

To establish a Fifth Amendment violation, a plaintiff

must demonstrate “that in denying the plaintiff’s

constitutional rights, the defendant’s conduct constituted state

action.” Desiderio v. National Ass'n of Securities Dealers,

Inc., 191 F.3d 198, 206 (2d Cir. 1999), cert. denied, 121 S.Ct.

756 (2001); see also United States v. International Bd. of

Teamsters, 941 F.2d 1292, 1295 (2d Cir. 1991). That is

because the Fifth Amendment restricts only governmental

conduct, and will constrain a private entity only insofar as

its actions are found to be “fairly attributable” to the government.

See Lugar v. Edmondson Oil Co., 457 U.S. 922, 937 (1982);

Corrigan v. Buckley, 271 U.S. 323, 330 (1926).

Actions are “fairly attributable” to the government where

“there is a sufficiently close nexus between the State and the

challenged action of the regulated entity.” Jackson v.

Metropolitan Edison Co., 419 U.S. 345, 351 (1974). That nexus

exists either (1) where the state “has exercised coercive power

[over a private decision] or has provided such significant

encouragement, either overt or covert, that the choice must

in law be deemed to be that of the State”; or (2) where

“the private entity has exercised powers that are ‘traditionally

the exclusive prerogative of the State.’” Blum v. Yaretsky,

457 U.S. 991, 1004-05 (1982) (quoting Jackson, 419 U.S. at

351); see also Desiderio, 191 F.3d at 206.

Under the Blum test, even heavily-regulated private

entities generally are held not to be state actors. Desiderio,

191 F.3d, at 206 (“[T]he fact that a business entity is subject

to ‘extensive and detailed’ state regulation does not convert

13a

Appendix A

that organization’s actions into those of the state.”); see also

Jackson, 419 U.S. at 350, 95 S.Ct. 449 (holding that

extensively regulated public utilities are not state actors).

It has been found, repeatedly, that the NASD itself is

not a government functionary. See, e.g., Desiderio, 191 F.3d

at 206 (“The NASD is a private actor, not a state actor. It isa

private corporation that receives no federa! or state funding.

Its creation was not mandated by statute, nor does the

government appoint its members or serve on any NASD board

or committee.”); United States v. Shvarts, 90 F. Supp. 2d 219,

222 (E.D.N.Y. 2000) (“It is beyond cavil that the NASD is

not a government agency; it is a private, not-for-profit

corporation. It was not created by statute. None of its directors

.. . are government officials or appointees. It receives no

government funding . . ., [and] its actions cannot be imputed

to the government.”), abrogated on other grounds by, United

States v. Coppa, 267 F.3d 132 (2d Cir. 2001); United States

v. Szur, 1998 U.S. Dist. LEXIS 3519, *39-46 (S.D.N.Y. 1998)

(rejecting defendant’s claims that the NASD “acted pretextually

in conducting their investigations”); see also Marchiano v.

National Ass'n of Securities Dealers, Inc., 134 F. Supp. 2d

90, 95 (D.D.C. 2001) (“[T]he court is aware of no case...

in which NASD Defendants were found to be state actors

either because of their regulatory responsibilities or because

of any alleged collusion with criminal prosecutors.”).

Testimony in an NASD proceeding may entail exposure

to criminal liability, but that in itself is not enough to establish

the requisite governmental nexus. Shvarts, 90 F. Supp. 2d at

222 (holding that “questions put to the defendants by the

NASD in carrying out its own legitimate investigative

14a

Appendix A

purposes do not activate the privilege against self-

incrimination”). Cf, United States v. Solomon, 509 F.2d 863,

867-71 (2d Cir. 1975) (holding no violation of the Fifth

Amendment where the government relied on testimony

compelled in an earlier proceeding before the heavily-

regulated New York Stock Exchange). To prevail, Cromwell

must establish additional facts sufficient to satisfy the Blum

test and to distinguish the present appeal from the general

rule. See Marchiano, 134 F. Supp. 2d at 95 (finding no state

action in Rule 8210 demand for testimony absent actual

evidence of governmental encouragement).

Here, the district court found “no direct evidence of such

governmental involvement,” and that finding is not clearly

erroneous. D. L. Cromwell Inv., Inc. v. NASD Regulation,

Inc., 132 F. Supp. 2d 248, 252 (S.D.N.Y. 2001). Cromwell

invites a contrary inference from the chronology of certain

events: (1) that the Rule 8210 demands followed shortly after

individual appellants contested grand jury subpoenas; and

(2) that the DOE refused to delay the Rule 8210 interviews

until after completion of the Eastern District’s criminal

investigation. Similarly, Cromwell invites inferences of state

involvement based on: (1) the administrative overlap between

the Unit and the DOE; (2) the statement of an unidentified

FBI agent to an individual appellant that “we are working

with the NASD — they know exactly what is going on”;

(3) questions posed by the DOE regarding two documents

that Cromwell believes had been seized previously by the

FBI; (4) the DOE’s knowledge of certain government

witnesses; and (5) the provision of the Fiserv grand jury

subpoena permitting delivery of responsive documents

directly to the Unit.

15a

Appendix A

The district court, however, noted that these circum-

stantial inferences “perhaps would not be drawn so readily

by those whose judgment is not tinged with self interest.”

D. L. Cromwell Inv., Inc., 132 F. Supp. 2d at 252. The district

court found that the DOE and the authorities pursued similar

evidentiary trails because their independent investigations

were proceeding in the same direction: the possibly improper

trading in Pallet. The court was not surprised that federal

investigators would say they were working with the NASD,

or that the Unit occasionally served as a point of transfer for

subpoenaed parties (to deliver requested documents to the

FBI when the subpoenaed parties experienced technical

computer difficulties): the Unit was in fact working with the

government, and when it does it may well be a state actor.

But though the Unit is a subdivision of Regulation, the district

court found that the Unit’s role (if and when it is a state actor)

cannot fairly and automatically be imputed to the rest of the

DOE, which, according to the district court, was effectively

“walled off” from the Unit. Jd. at 253. True, the district court

found that the administrative wall was not impermeable;

but it accepted Regulation’s proffered indicia of good faith,

and found no sinister counter-indications.

The Unit and the DOE staff members testified consistently

that the Rule 8210 demands issued directly from the DOE as

a product of its private investigation, and that none of the

demands was generated by governmental persuasion or

collusion — either directly or through the Unit. As Cromwell

recognizes, the DOE has a regulatory duty to investigate

questionable securities transactions. See, e.g, Plaintiffs’ Reply

- Memorandum of Law in Support of Motion for Preliminary

Injunction at 9, 9 n. 7, D. L. Cromwell v. NASD Regulation,

16a

Appendix A

01 Civ. 728 (S.D.N.Y. Feb. 8, 2001) (“As associated persons

active in the securities industry, [appellants] are well aware

of... Regulation’s lawful policing of the industry . . . [and]

do not seek to have this Court exempt them from the

regulation of Defendant.”); see also Szur, 1998 U.S. Dist

LEXIS 3519, at *39 (finding such a duty). The finding that

it fulfilled that duty independent of governmental influence

was not clearly erroneous. We need not address whether the

record would have supported contrary findings, inferences

and conclusions.

CONCLUSION

The judgment of the district court is affirmed.

17a

APPENDIX B — MEMORANDUM OPINION OF THE

UNITED STATES DISTRICT COURT FOR THE

SOUTHERN DISTRICT OF NEW YORK

DATED FEBRUARY 26, 2001

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

01 Civ. 0728 (LAK)

D. L. CROMWELL INVESTMENTS, INC., et al.,

Plaintiffs,

-against-

NASD REGULATION, INC.,

Defendant.

: MEMORANDUM OPINION

Lewis A. Kapian, District Judge.

Plaintiffs, all targets or subjects of a grand jury investigation

in the Eastern District of New York, brought this action for

an injunction barring NASD Regulation, Inc. (“Regulation”),

the regulatory arm of the National Association of Securities

Dealers, Inc. (“NASD”), from compelling the individual

plaintiffs to testify in an investigation regarding the issuance

and trading of shares in Pallet Management Systems, Inc.

(“Pallet”), commencing any proceeding to punish the

individual plaintiffs for asserting their privileges against self-

incrimination in response to questions relating to Pallet, and

18a

Appendix B

misusing federal grand jury materials to further its private

disciplinary investigation. The case rests on the premise that

Regulation is acting as the agent of federal prosecutors.

The Court held an evidentiary hearing on plaintiffs’ motion

for a preliminary injunction at the conclusion of which it

consolidated the trial on the merits with the hearing pursuant

to Rule 65(a)(2) and with the consent of the parties.’

This memorandum opinion contains the Court’s findings of

fact and conclusions of law.

Facts

Parties

Plaintiff D.L. Cromwell Investments, Inc. (“Cromwell”)

is a registered securities broker-dealer and a member of

the NASD. The four individual plaintiffs all are employed

by Cromwell.

Regulation is the regulatory arm of the NASD. Its Division

of Enforcement (“DOE”) conducts private investigations to

ensure compliance with NASD rules and institutes disciplinary

proceedings before professional hearing officers and regional

District Business Conduct Committees (“DBCC”) where

appropriate. Sanctions imposed as a result of disciplinary

proceedings are subject to many layers of review. Decisions

of a DBCC may be appealed to the National Adjudicatory

Committee (“NAC”) of Regulation. NAC decisions in turn

are subject to discretionary review by the NASD Board of

Governors. Decisions may be reviewed further by the

1. Tr., Feb. 15, 2001 (“Tr.”), at 117.

19a

Appendix B

Securities and Exchange Commission,’ which applies a

de novo standard. The SEC’s decisions in turn are reviewable

in the United States Courts of Appeals.’

In 1998, Regulation formed a Criminal Assistance

Prosecution Unit (“CPAG”) within the DOE to provide

assistance and advice to federal and state law enforcement

authorities investigating securities matters. CPAG consists

of one attorney, Bruce Bettigole, and an examiner and an

investigator. CPAG staff are assigned to work exclusively in

CPAG; they conduct no investigations or other enforcement

activities on behalf of Regulation. Mr. Bettigole from time

to time is designated a Special Assistant United States

Attorney in one or another district to facilitate his cooperation

with and participation in law enforcement activities.

On occasion, and pursuant to court order, CPAG staff may

be given access to grand jury materials pursuant to Federal

Rule of Criminal Procedure 6(e). In those cases, CPAG staff

members are not to disclose or discuss grand jury material

with non-CPAG Regulation staff or, for that matter, with

anyone not listed on the Rule 6(e) order. CPAG asserts that

it does not use NASD rules to compel firms or associated

persons to turn over documents to CPAG for the purpose of

passing them on to law enforcement authorities.

Although the professed policy of Regulation with respect

to CPAG and the rest of the DOE is one of complete separation

of activities, the physical circumstances and administrative

arrangements are not consistent with the policy. The head of

2. 15 U.S.C. § 78s(d)(2).

3. Id. § 78y(a)(1).

20a

Appendix B

the CPAG unit reports to a superior who supervises the DOE’s

investigatory functions as well. He shares a secretary with

another lawyer who works on DOE private investigations.

The CPAG examiner and investigator each have office

cubicles in six-cubicle clusters, the other five occupants of

each of which work on DOE investigations. CPAG shares

telephone, fax and computer systems with the DOE. It has

no locked file cabinets save a file drawer in the desk of the

CPAG attorney. In short, the physical circumstances of CPAG

and the DOE provide no assurance that confidential material

in the hands of CPAG does not come to the attention of DOE

investigators or that information concerning DOE

investigations does not come to the attention of CPAG

personnel. One is left to trust the good faith and judgment of

the personnel involved.

The Hanover Indictment

Some time ago, a grand jury in the Eastern District of

New York returned an indictment entitled United States v.

Cataggio, a 53-defendant case relating to a firm called

Hanover Securities. Mr. Bettigole of CPAG is serving as a

Special Assistant United States Attorney in connection with

that matter, and CPAG staff are assisting the U.S. Attorney’s

office. Two of the defendants, Thomas Plamenco and Joel

Nazareno, are or were Cromwell brokers.

The Cromwell Investigations

In October 1998, the Market Regulation Department at

Regulation referred Cromwell to the DOE for investi gation.‘

4. Tr. 80.

2la

Appendix B

The DOE assigned Scott Smith, an attorney, and John Lang,

an examiner, to the matter.’ Their inquiry related, at least in

part, to trading activities in Pallet, and their first step ' was to

seek trading records.°

Soon afterward, Pallet and, apparently, Cromwell became

subjects of interest to the FBI and the United States Attorney

for the Eastern District of New York. On November 16, 1998,

investigative files regarding Pallet, a request which some

CPAG personnel appear to understand to have related to

Cromwell.’ A few days later, Ms. Walters of CPAG responded

with a letter granting access and enclosing a number of

documents relating to Pallet.*

In March 1999, after DOE obtained the Pallet trading

records, it conducted an on-site inspection of Cromwell’s

books and records at its Boca Raton office.’ Messrs. Smith and

Long spent three days there and returned to their offices with

Cromwell documents relating to Pallet.'°

5. Id. at 80-82.

6. Id.

7. DX I, Nov. 16, 1998 letter; see Tr. at 19, 40-41, 58.

8. DX I, Nov. 20, 1998 letter.

9. Tr. 80-83.

10. Id. at 83-84.

22a

Appendix B

Not long after Messrs. Smith and Long returned from

Florida, Mr. Smith received a call from the FBI during

which he gave the agent a “general overview” of DOE’s

investigation and described the documents that had been

gathered during the on-site inspection." The agent asked for

access to the documents, which resulted in Smith learning

of the November 1998 letter from the FBI.'2 Once Smith was

satisfied that the FBI had made a formal access request and

that DOE had granted it, Long sent the FBI copies of a number

of documents relating to Pallet and Cromwell,'* documents

that appear to have been obtained by DOE during its on-site

inspection.

By the summer of 2000, matters had moved along.

Prosecutors in the Eastern District had located a cooperating

witness and, in July 2000, briefed the DOE on what the

witness had to say.'‘ In addition, the prosecutors and the DOE

staff exchange general descriptions of their respective

investigations, each learning that both were looking into

matters relating to Pallet, albeit for different time periods.’°

Some time later, the U.S. Attorney’s office sought CPAG

assistance in preparing an affidavit in support of an application

11. Jd. at 85.

12. Id. at 85-86; DX I.

13. DXA.

14. Tr. at 99-101.

15. Id.

23a

Appendix B

for a warrant to search Cromwell’s New York office.

Mr. Bettigole assigned Mr. Melley, a CPAG staff member,

to the task, and Melley provided the prosecutors with

information from Regulation’s central registration depository."®

Following execution of the search warrant on September 7,

2000, Mr. Bettigole and the other of his CPAG subordinates,

Ms. Manuel, went to Brooklyn to review the seized

documents for the purpose of finding any material that related

to Messrs. Nazareno and Plamenco, the defendants in the

Cataggio case on which they were working.'’ Ms. Manuel

returned to Washington with an inventory of what the FBI

collected in the search of Cromwell’s New York office and

copies of some commission runs seized at that time.'*

In November 2000, the DOE made a number of requests

to Cromwell and associates for the production of documents."

By letter dated November 17, 2000, counsel for Cromwell

and the others responded in part by stating that federal agents

had seized many of Cromwell’s business records, thus making

it impossible to respond to most of the DOE’s requests.”

This prompted Mr. Scott, who was handling the DOE

investigation, to request an inventory of the documents that

had been seized both from the U.S. Attorney’s office and

16. Id. at 19-20.

17. Id. at 19-21.

18. Id. at 70.

19. DX B-C; see DX E.

20. DX D; Tr. at 89.

24a

Appendix B

from Cromwell.2! The U.S. Attorney’s office responded that

CPAG already had the inventory and, after Cromwell’s

counsel provided a copy of the inventory that was illegible

or difficult to read, one of Mr. Smith’s subordinates requested

and received a legible copy from CPAG.”

Review of the inventory by DOE led to the conclusion

that the U.S. Attorney’s office had many of the documents

that DOE had sought unsuccessfully from Cromwell. DOE

staff obtained permission to review the product of the search

warrant and, in January 2001, obtained copies of a substantial

quantity of seized documents.”

In the meantime, in December 2000, prosecutors in the

Eastern District obtained the assistance of Mr. Melley of

CPAG in preparing a grand jury subpoena requiring an entity

named Fiserv to produce trading data regarding Pallet.

The subpoena, which was issued by a grand jury separate

21. PX 2, Ff 15-16.

Before asking for inventories of the seized

documents, Mr. Scott, who had heard that CPAG’s

Ms. Manuel had gone to Brooklyn to review them,

described the nature of the DOE investigation to her

and asked her whether she thought that the documents

in Brooklyn were pertinent to it. Ms. Manuel referred

him to her superior who in turn referred Scott to the

U.S. Attorney’s office. Tr. at 69-73.

22. E.g., id. $f 17-19; Tr. at 64, 107-08.

23. Id. Jf 20-21; PX 2, § 21.

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25a

Appendix B

from the one that was involved with Hanover Securities,

permitted the respondent to comply by producing the

information to Mr. Melley rather than to the grand jury.

Mr. Melley explained that this was done because the

subpoenaed information can be supplied electronically to

Regulation but cannot be so supplied to the U.S. Attorney’s

office or the FBI due to computer system differences.”

Recently, the DOE served Rule 8210 demands on

Cromwell and the individual plaintiffs which purport to require

them to submit to on-the-record interviews. As Regulation

maintains that it is a private actor, it does not recognize the

invocation of the privilege against self-incrimination by

persons subject to its regulatory powers. Accordingly, there

is a substantial likelihood that the invocation of the privilege

by the individual plaintiffs to avoid giving evidence to DOE

would result in disciplinary action against them, perhaps

ultimately resulting in their permanent bar from the securities

industry.

Plaintiffs’ Claims

The individual plaintiffs contend that the Rule 8210

demands have been issued by Regulation as an agent for the

government in order to coerce them into surrendering their

privileges against self-incrimination by threatening them with

permanent banishment from the securities industry if they

decline to testify in the NASD investigation. All plaintiffs

contend also that government criminal investigators have

shared grand jury materials with Regulation in violation

of Rule 6(e).

24. PX 4, 4 6; Tr. at 60-62; see also id. at 36-38.

26a

Appendix B

Discussion

The Rule 8210 Demands

The individual plaintiffs claim that they are faced with a

Hobson’s choice. If they invoke their privileges against self-

incrimination to avoid testifying in Regulation’s ostensibly

private investigation, they claim that they will be barred from

the securities industry or, at least, subjected to administrative

sanctions. If they comply with the Rule 8210 demands, they

risk incriminating themselves in the pending grand jury

investigation. This dilemma, they claim, is unlawful because

the Rule 8210 demands violate their Fifth Amendment rights.

The Fifth Amendment prohibits only governmental

action.2° The NASD and Regulation are private entities”® save

that Regulation is a state actor with respect to Mr. Bettigole’s

conduct in his capacity as a special assistant United States

Attorney. Hence, even if the individual plaintiffs are being

compelled to give evidence against themselves by the threat

of NASD sanctions, Regulation’s actions raise no Fifth

Amendment issue unless it fairly may be said that its actions

are fairly attributable to the government.” This in turn

25. Corrigan v. Buckley, 271 U.S. 323, 330 (1926).

26. See, e.g., Desiderio v. National Ass 'n of Securities Dealers,

Inc., 191 F.3d 198, 207 (2d Cir. 1999), cert. denied, 121 S.Ct. 756

(2001).

27. Id. (“A state is responsible for a private decision only where

it exercised coercive power or provided significant encouragement.”)

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27a

Appendix B

requires that the government have “exercised coercive power

or... provided such significant encouragement, either overt

or covert, that the choice must in law be deemed to be that

of the” government or, at least, that “the private entity has

exercised powers that are ‘traditionally the exclusive

prerogative of the State.’ ””*

There is no direct evidence of such governmental involve-

ment. Indeed, all of the relevant Regulation personnel — i.e.,

all of those involved with the DOE investigation and every

member of CPAG — flatly deny that the Rule 8210 demands

are the product of any urging or suggestion by the United

States Attorney’s office or any other governmental agency.

Plaintiffs nevertheless argue the Court should not credit that

testimony and should infer that DOE is acting as the cat’s

paw of the government from a series of circumstances:

¢ Regulation issued Rule 8210 demands to two of

the individual plaintiffs for personal financial

records shortly after they and Cromwell received

Eastern District grand jury subpoenas.

¢ In September 2000, during the search of one of

Cromwell’s offices pursuant to a search warrant,

one of the individual plaintiffs expressed a desire

to call the NASD to explain why the firm was

not answering telephone calls of other market

makers. An unidentified FBI agent is said to have

stated that “we are working with the NASD —

they know exactly what is going on.”

28. Blum v. Yaretsky, 457 U.S. 991, 1004-05 (1982) (quoting

Jackson v. Metropolitan Edison Co., 419 U.S. 345, 353 (1974)).

‘s

28a

Appendix B

» In January 2001, during investigational

testimony of another Cromwell employee,

the employee was questioned regarding two

documents that plaintiffs “believe” were seized

by the FBI and surmise were not produced by

them to Regulation.

¢ The Fiserv grand jury subpoena gave the witness

the opportunity to respond by delivering

responsive documents to Mr. Melley at the

NASD Washington office.

¢ Regulation has refused to adjourn the interviews

until the completion of the criminal investigation.

One can appreciate the apprehension felt by those facing

parallel civil and criminal investigations and the consequent

tendency to draw inferences that perhaps would not be drawn

so readily by those whose judgment is not tinged with self

interest. One can appreciate also the wisdom of the old saw

that sometimes even paranoids have people after them. But

plaintiffs would have the Court draw conclusions from these

circumstances that simply are unreasonable, especially in light

of the uncontroverted explanations offered by Regulation.

Regulation has an independent obligation to investigate

the matters at issue and is conducting its own investigation.

While at first blush it appeared more than curious that a grand

jury subpoena permitted compliance by delivery of the

documents to Mr. Melley, the fact is that Mr. Melley works

in CPAG, is working with the United States Attorney’s office

on the grand jury investigation, is designated to have access

29a

Appendix 8B

to grand jury materials, and in any case was made the recipient

of the documents only because the material subpoenaed was

trading records that could be transmitted electronically to

him at Regulation but could not be transmitted electronically

to the FBI or the United States Attorney because of differences

in computer systems.

Similarly, the alleged comment by the FBI agent during

the execution of the search warrant, assuming that it was

made, was benign given the context. The NASD —

specifically CPAG — is working with the FBI on the grand

jury investigation. No doubt those CPAG personnel detailed

to that matter did know exactly what was going on. But that

does not even remotely establish that there is any connection

between the Rule 8210 demands and the government.

Regulation has submitted extensive proof that its regulatory

investigation is being carried out by the DOE, that there is

no connection between that investigation and the grand jury

investigation, and that the CPAG personnel are, figuratively

speaking, “walled off” from the other activities of the DOE.

The Court credits that evidence and finds that the Rule 8210

demands are not the product of any government coercion,

suggestion or other action. Rather, they are the product of

entirely independent action by the DOE staff conducting

Regulation’s private investigation of Cromwell and the

trading in Pallet.

In a final bid to keep his case alive, plaintiffs’ counsel

referred at trial to cases disqualifying law firms from suing a

former client where there is a risk of inappropriate use of the

confidences of the former client,” an allusion to what now

29. Tr. at 119-20.

30a

Appendix B

is Canon 4 of the Code of Professional Responsibility and the

substantial relationship test employed in its implementation.

The substantial relationship test was formulated by Judge

Weinfeld in 7.C. Theatre Corp. v. Warner Bros. Pictures,

Inc.>° “to determine whether a lawyer’s suit against a former

client would risk violation of what is now Canon 4’s protection

of a client’s confidences.” *! Reasoning that inquiry into

whether and to what extent a current representation has

compromised, or threatens to compromise, the secrecy of

confidences of a former client — and thus destroy the very

confidences the inquiry is designed to preserve — the Court

presumed that confidences are threatened whenever counsel

sues a former client on a matter that bears a substantial

relationship to the prior representation.”

The analogy plaintiffs would draw between this situation

and the substantial relationship test is flawed. The hard reality

underlying the substantial relationship test is that the adoption

of a presumption of abuse of former client confidences is

the only manner in which the lawyer’s duty to respect those

confidences may be enforced without disclosing the very

confidences the rule is designed to protect. There is no

comparable difficulty here. Judicial inquiry into whether the

Rule 8210 requests were the product of government

suggestion or coercion did not require the disclosure of any

30. 113 F. Supp. 265 (S.D.N.Y.1953).

31. Glueck v. Jonathan Logan, Inc., 653 F.2d 746, 749 (2d Cir.

1981).

32. 113 F. Supp. at 268-69.

31a

Appendix B

information in which plaintiffs or, for that matter, Regulation

had a legitimate interest of confidentiality. Thus, there is no

basis whatever for enjoining the Rule 8210 interviews.

Grand Jury Secrecy

Plaintiffs contend that if the Court determines, as it has,

that Regulation is not a “state actor” with respect to its

regulatory investigation, then there must have been a

violation of Criminal Rule 6(e) because Regulation has used

two documents seized by the FBI in questioning one of its

employees.

There are a good many difficulties with this contention,

but there is no need to deal with all of them. It suffices to say

only this: there simply is no credible proof that any materials

subject to Rule 6(e) have been disclosed to or used by

Regulation personnel who have not been authorized by court

order to have them. Plaintiffs’ case rests on the belief of

Cromwell’s Ms. Monte that two documents she was shown

during her NASD testimony had been seized during the

execution of the search warrants and her inability to find a

record of having produced those two documents pursuant to

any Rule 8210 request. It is entirely likely that she in fact

was shown documents seized pursuant to the warrant.*’ But

plaintiffs have failed to show that those documents, seized

pursuant to the warrant, were “matters occurring before the

grand jury” and therefore within the protection of Rule 6(e).™

33. See PX 2, { 23.

34. See Fep. R. Crim. P. 6(e)(2). Information obtained

independently of a grand jury examination does not come within the

(Cont'd)

32a

Appendix B

As there is no evidence that Ms. Monte was shown any grand

jury materials®> or that any grand jury materials ever were

disseminated beyond CPAG personnel authorized by court

order to receive them, plaintiffs’ Rule 6(e) argument fails.*°

(Cont'd)

secrecy provisions of Rule 6(e) “simply because it may be presented

to a grand jury in the future,” see United States v. Eastern Air Lines,

Inc., 923 F.2d 241, 244 (2d Cir. 1991). Accordingly, in ordinary

circumstances, information obtained pursuant to a search warrant,

at least prior to any presentation of it to a grand jury, is not covered

by the Rule. See In re Grand Jury Subpoena ( Under Seal), 920 F.2d

235, 241-43 (4th Cir. 1990) (information produced by a criminal

investigation that parallels but is independent of grand jury investi-

gation not subject to Rule 6(e)); Anaya v. United States, 815 F.2d

1373, 1379-80 (10th Cir. 1987) (same); Jn re Grand Jury Matter,

682 F.2d 61, 64-65 (3d Cir. 1982) (same); see also In re Grand Jury

Subpoena, 103 F.3d 234, 238, 239 (2d Cir. 1996).

35. Id.

36. The foregoing assumes that plaintiffs sued the right party

on their claim of a Rule 6(e) violation, which by no means is clear.

Given the lack of proof of any violation, however, there is no need

to address this issue.

33a

Appendix B

Conclusion

As the foregoing demonstrates, there was a certain amount

of contact between and among the government, CPAG and

DOE staff concerning Cromwell in a period during which

both the U.S. Attorney’s office and DOE were conducting

investigations of the company. While the Court has found

that Regulation’s DOE was not an instrumentality of the

government in seeking these Rule 8210 interviews and that

there was no violation of grand jury secrecy in this case,

Regulation may wish to give careful attention to its arrangements

concerning assistance to criminal investigations and to the

relationships, both physical and administrative, between

CPAG and the DOE. The present arrangements left doubt

sufficient to require a trial as to the independence of DOE’s

8210 requests in this matter, a situation that perhaps could

have been avoided by more careful controls.

SO ORDERED.

Dated: February 26, 2001

s/ Lewis A. Kaplan

Lewis A. Kaplan

United States District Judge

34a

APPENDIX C — ORDER OF THE UNITED STATES

DISTRICT COURT FOR THE SOUTHERN DISTRICT

OF NEW YORK DATED MARCH 12, 2001

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

01 Civ. 0728 (LAK)

D. L. CROMWELL INVESTMENTS, INC., et al.,

Plaintiffs,

-against-

NASD REGULATION, INC.,

Defendant.

ORDER

Lewis A. KaPLan, District Judge.

Plaintiffs’ motion for a new trial on the basis of alleged

newly discovered evidence is denied. Assuming arguendo that

the evidence is newly discovered notwithstanding due diligence

on the part of plaintiffs and their counsel, it quite clearly would

not have altered the result in this case. There has been no error

of fact or law and no manifest injustice. See LiButti v. United

States, 178 F.3d 114, 118 (2d Cir. 1999).

SO ORDERED.

Dated: March 12, 2001

s/ Lewis A. Kaplan

Lewis A. Kaplan

United States District Judge

35a

APPENDIX D — ORDER OF THE UNITED STATES

COURT OF APPEALS FOR THE SECOND CIRCUIT

DENYING PETITION FOR REHEARING

DATED AND FILED MAY 8, 2002

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

* * *

At a stated term of the United States Court of Appeals

for the Second Circuit, held at the United States Courthouse,

Foley Square, in the City of New York, on the 8th day of

May two thousand two.

01-7301

D.L. CROMWELL INVESTMENTS, INC.,

LLOYD BIERNE, DAVID S. DAVIDSON,

ERIC S. THOMAS, and MATTHEW GREENWALD,

Plaintiffs-Appellants,

NASD REGULATION, INC.,

Defendants-Appellees.

A petition for panel rehearing and a petition for rehearing

en banc having been filed herein by the appellant D.L. Cromwell,

et al.

Upon consideration by the panel that decided the

appeal, it is Ordered that said petition for rehearing

is DENIED.

36a

Appendix D

It is further noted that the petition for rehearing en banc has

been transmitted to the judges for the court in regular active

service and to any other judge that heard the appeal and that

no such judge has requested that a vote be taken thereon.

FOR THE COURT

ROSEANN B. MACKECHNIE, Clerk

By: s/ Arthur M. Heller

Arthur M. Heller,

Administrative Attorney

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.