Case of the Day: SEC v. Knox

The case of the day is SEC v. Knox (D. Mass. 2022). The SEC brought a fraud case against Roger Knox. Knox had used entities allegedly owned by Michael Gastauer to launder the proceeds of the fraud. Michael had transferred some of the laundered money to his father, Raimund Gastauer, and to entities the SEC claimed Raimund Gastauer controlled. Raimund, a German national residing in Germany, had moved, unsuccessfully, to dismiss for lack of personal jurisdiction. When that failed, he argued that he did not have an interest in some of the transferred property in question and thus was improperly named as a defendant. But he failed to participate in discovery, and as a remedy, the court ordered him to testify at a deposition. Gastauer refused, and the SEC sought sanctions. In today’s decision, the court granted the motion for sanctions and awarded summary judgment to the SEC as a sanction.

Gastauer argued that the court was wrong to order him to sit for a deposition without complying with the Hague Evidence Convention. The court considered the Aerospatiale factors and rejected the argument for several reasons in a fairly typical analysis. One point that was odd was the court’s assertion that Gastauer had not identified another way the SEC could have obtained the evidence. This seems plainly wrong; the alternative was a deposition conducted in accordance with the Convention.

Overall, I am sympathetic to Gastauer’s position, but not for the reasons he offered to the court. Gastauer argued, in essence, that the court was wrong to conclude that it had jurisdiction over him. Because it had no jurisdiction, it couldn’t order him to do anything, and so “at a minimum,” the SEC should have to “comply with the required Hague Convention procedures for voluntary depositions in Germany,” which as longtime readers know means obtaining German government permission and arranging for a consular deposition. The argument is incoherent. On the one hand, Gastauer was saying that the court lacked the power to order him to appear. On the other hand, he was suggesting that he was willing to appear voluntarily, if only the SEC would jump through the requisite hoops. And Gaustauer doesn’t mention the key point that gives his position its legs: it is contrary to German law to proceed with the deposition, even if it’s voluntary, without obtaining German government permission. Now, that’s mostly a problem for the SEC, whose lawyers would be violating German law by taking the deposition. I am not sure whether Gastauer himself would be violating German law by testifying voluntarily. (I leave to the side issues arising from the taking of the deposition by video link). But in any case, the issue of personal jurisdiction isn’t really the key point, and it was unlikely to persuade the court in any case, as the court had already ruled on the jurisdictional question. Gastauer didn’t put his best foot forward, and so it’s not surprising that the court rejected his argument.

Gastauer’s papers suggest that he is really thinking about a future enforcement action in Germany. I think there is a significant risk, on the facts of this case, that a German court might not recognize the US judgment, based on a sanction imposed for Gastauer’s refusal to testify in Germany contrary to German law. A German lawyer would be able to say more. But the SEC might find its victory Pyrrhic. You have to wonder why folks are so averse to jumping through the Convention’s hoops.

Update: One more thought occurs to me. Is this case, brought by the government, “civil or commercial,” so as to bring the Convention into play? From an American perspective, obviously yes. From a German perspective, not so obvious, at least to me (although I understand the German courts have liberalized their thinking on this issue).

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