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United States Commodity Futures Trading Commission v. U.S. Bank, N.A.

United States District Court, N.D. Iowa, Eastern Division

June 4, 2014

UNITED STATES COMMODITY FUTURES TRADING COMMISSION, Plaintiff,
v.
U.S. BANK, N.A., Defendant.

RULING ON MOTION TO COMPEL

JON STUART SCOLES, Magistrate Judge.

I. INTRODUCTION

On the 29th day of May 2014, this matter came on for hearing on the Motion to Compel (docket number 36) filed by Defendant U.S. Bank National Association ("U.S. Bank" or "the Bank") on April 16, 2014. The Bank was represented by its attorneys, Kristina Carlson and Megan Flynn. Plaintiff United States Commodity Futures Trading Commission ("the CFTC" or "the Commission") was represented by its attorneys, Robert Howell and Susan Gradman.

II. PROCEDURAL HISTORY

On June 5, 2013, the CFTC filed a Complaint against U.S. Bank, seeking a permanent injunction, civil monetary penalties, restitution, and disgorgement. The Commission alleges that the Bank's actions regarding Peregrine Financial Group, Inc. ("PFG") and its CEO, Russell Wasendorf, Sr., violated the Commodity Exchange Act.

On August 5, 2013, U.S. Bank filed a motion to dismiss, claiming there was no statutory violation and asking that the complaint be summarily dismissed. The Court denied the Bank's motion to dismiss in an order filed on November 5, 2013.

On November 19, 2013, U.S. Bank filed its answer. The Bank denied the material allegations and asserted certain affirmative defenses, including the "doctrine of unclean hands." The CFTC responded with a motion to strike, filed on December 3, 2013, asking that the Bank's "unclean hands" defense be dismissed. On January 27, 2014, the Court entered an order denying the Commission's motion to strike the unclean hands defense.

Meanwhile, on September 26, 2013, the Court adopted a proposed Scheduling Order and Discovery plan submitted by the parties. Among other things, the parties agreed to a June 3, 2014 deadline for completion of discovery, with dispositive motions filed not later than July 3, 2014. In reliance on those deadlines, the case has been scheduled for trial before Chief Judge Linda R. Reade beginning on January 5, 2015.

Acting on the Commission's motion, the Court entered an Order on December 23, 2013, extending the deadlines for disclosure of expert witnesses. The Order stated that the deadlines for completion of discovery and filing dispositive motions remained unchanged, and the parties were reminded that "January 5, 2015 remains a firm trial date." See Order Extending Deadline for Disclosure of Expert Witnesses (docket number 23) (emphasis in original).

On January 23, 2014, the Commission filed an unresisted motion asking that the expert witness deadlines be extended again, and asking for an extension of the discovery deadline and dispositive motions deadline. The Commission conceded that "this extension will affect the current discovery completion date (June 3, 2014) and the trial date (January 5, 2015)." The motion noted that "[d]ue to the lack of a protective order, neither party exchanged documents in this matter prior to January 22, 2014." The motion was granted in part and denied in part in an Order filed the following day. The Court extended the pretrial deadlines, with all discovery to be completed not later than August 3, 2014. The parties were further advised: "No further extensions will be granted. The parties are reminded that January 5, 2015 remains a firm trial date." See Order Resetting Pretrial Deadlines (docket number 30) (emphasis in original).

On April 16, 2014, U.S. Bank filed the instant motion to compel. The CFTC filed its resistance on April 30. The Bank filed a reply on May 12.

III. RELEVANT FACTS

On October 22, 2013, the CFTC served U.S. Bank with its initial disclosures pursuant to FED.R.CIV.P.26(a)(1). The Commission identified 24 persons likely to have discoverable information, including two CFTC investigators and a former CFTC employee. The Commission's initial disclosures also identified 11 categories of documents in the Commission's possession, including transcripts of CFTC investigative testimony, and documents received from third parties. Regarding a computation of damages, the CFTC referred to civil monetary penalties, disgorgement, and restitution, together with costs and fees.

On December 6, 2013, U.S. Bank served the CFTC with its first set of requests for production of documents and first set of interrogatories. The Commission responded to the requests on January 15, 2014. Believing the responses were inadequate, one of the Bank's attorneys (Kristina Carlson) wrote to one of the Commission's attorneys (Susan Gradman) on February 13, 2014, describing the alleged deficiencies. Ms. Gradman responded in a letter dated February 26, 2014. When further communications were unable to resolve the issues, the Bank filed the instant motion to compel.

The CFTC has produced approximately 2.8 million documents. It is the Court's understanding that the production represents those documents described in the Commission's initial disclosures. That is, the Commission conducted an investigation after Wasendorf's wrongdoing came to light in July 2012, and has produced "transcripts of CFTC investigative testimony." CFTC has also apparently produced documents which it received from Peregrine Financial Group, Inc., the National Futures Association, the Department of Justice and/or the Federal Bureau of Investigation, Veraja-Snelling and Company, Russell Wasendorf, Jr., Douglas Boe, Lisa Rolinger, Hope Timmerman, U.S. Cellular, and U.S. Bank.

The discovery dispute, however, involves the CFTC's own records and documents. Apparently, the parties were able to identify 22 document custodians within the CFTC whose records were searched for relevant documents. U.S. Bank provided the Commission with a list of search terms, which resulted in the capture of about 115, 000 documents.[1] It is the Court's understanding that those documents have now been placed in a database for further review. At the time of hearing, CFTC's counsel represented to the Court that of the 115, 000 documents in the database, there are "about 15, 000 left for us to review, and then we need to do the privilege log." According to Mr. Howell, the other 100, 000 documents have been reviewed, with about 3, 000 documents produced. When asked why the other 97, 000 had not been produced, Mr. Howell advised the Court they were either nonresponsive or privileged. Mr. Howell estimated it would take another two months to review the remaining 15, 000 documents and prepare a privilege log.

IV. DISCUSSION

In its motion to compel, the Bank identifies seven requests for production of documents and three interrogatories where it believes the Commission has failed to fully comply with its discovery obligation. Broadly speaking, much of the dispute revolves around the question of whether the Bank is entitled to discover "what the CFTC knew regarding Wasendorf's wrongdoing, and when they knew it."

In its complaint, the CFTC asserts that U.S. Bank violated the Commodity Exchange Act when it permitted PFG and Wasendorf to spend customer funds, which had been deposited in a "customer segregated account, " for personal use. While the Bank denies any knowledge of Wasendorf's wrongdoing, the Commission argues that there were numerous "red flags" which should have alerted the Bank to the problem. In seeking additional discovery, the Bank wants to determine what "red flags, " if any, were known to the CFTC. That is, the Bank argues that if similar information of wrongdoing was available to the CFTC and, as a regulatory commission, it did not connect-the-dots, then it is unreasonable to require the Bank to connect-the-dots based on similar information.

In response, the Commission argues that the information available to it was different than the information available to the Bank and, in any event, the CFTC's regulatory role differed significantly from the Bank's obligation to monitor PFG's activities. The Court finds the first argument is circular. That is, the Commission argues that the information available to it was not the same information which was available to the Bank and, therefore, is not discoverable. That assertion can only be verified, however, by comparing the information available to the Commission. Regarding the second argument, the CFTC asserts U.S. Bank violated the Commodity Exchange Act when it failed to discover Wasendorf's wrongdoing, and intervene appropriately. If the Commission had similar information which raised "red flags" that Wasendorf was violating the Commodity Exchange Act and it did not act on that information, then the information is relevant to rebut the claim that a reasonable person should have concluded from similar information that a violation had occurred.

The parties also disagree on how far back the discovery should be permitted. "The CFTC has agreed to produce non-privileged documents responsive to U.S. Bank's Document Requests dating back to June 5, 2008." CFTC's Brief (docket number 44) at 10. Because of the statute of limitations, the complaint seeks recovery for damages starting in 2008. U.S. Bank argues, however, that because the complaint includes allegations regarding the relationship between the bank ...


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