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11-17025
____________ UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT ____________ SECURITIES AND EXCHANGE COMM. v. BRIAN DVORAK ____________ Appellant Appellee

APPEAL FROM THE UNITED STATES DISTRICT COURT DISTRICT OF NEVADA AT LAS VEGAS No. 2:08CV00437-LRH-RJJ Robert J. Johnson, U.S.M.J. Larry R. Hicks, U.S.D.J. ____________

OPENING BRIEF OF APPELLANT DVORAK __________

JOHN WESLEY HALL, JR. 1202 Main Street; Suite 210 Little Rock, Arkansas 72202-5057 501-371-9131 / fax 501-378-0888 forhall@aol.com Attorney for Brian Dvorak

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TABLE OF CONTENTS Table of Authorities.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Jurisdictional Statement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 State of the Issues Presented for Review. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Statement of the Case. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Statement of the Facts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Summary of the Argument. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Argument. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 I. The District Courts Disgorgement Order finds no basis in the facts presented by Plaintiff nor in the supporting documentation presented to the District Court. Further, to the extent the Disgorgement Order is in reality a summary judgment it was entered while there remained disputed issues of material fact. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A. Standard of Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Disgorgement Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. Issue of Material Fact. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The District Courts refusal to stay these proceedings was error.. . . . . . . . A. Standard of Review.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. The Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. The Argument Below. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. U.S. District Courts Have Discretion to Stay Civil Proceedings During the Pendency of a Parallel Criminal Action.. . . . . . . . . . . . . E. Defendants Fifth Amendment Rights are Implicated Because the Issues in the Civil and Criminal Cases Substantially Overlap .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F. The Risk of Prejudice From Staying the Civil Case Does Not Weigh Against Granting the Stay.. . . . . . . . . . . . . . . . . . . . . . . . . . . G. Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17 17 18 21 24 24 24 25 27 30

II.

32 34 37

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III.

The U.S. Magistrate Judge had no jurisdiction to solely decide the Motion for Stay without referral under 28 U.S.C. 636, and this order violated U.S. Const., Art. III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A. Standard of Review.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. Dvorak Was Entitled to Notice as a Matter of Due Process of Law That There Was a Right of Appeal to the District Court Judge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C. De Novo Review is an Art. III Requirement. . . . . . . . . . . . . . . . . . . D. Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

37 37

38 40 40

Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Certificate of Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Statement of Related Cases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

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TABLE OF AUTHORITIES CASES: Anderson v. Liberty Lobby, 477 U.S. 242 (1986). . . . . . . . . . . . . . . . . . . . . . . . . . 23 Balint v. Carson City, 180 F. 3d 1047 (9th Cir. 1999) (en banc). . . . . . . . . . . . . . 23 Bridgeport Harbour Place, LLC v. Ganim, 269 F.Supp. 6 (D. Conn. 2002). . . . . 36 Campbell v. Rice, 408 F. 3d 1166 (9th Cir. 2005). . . . . . . . . . . . . . . . . . . . . . . . . 22 Dependable Highway Express, Inc. v. Navigators Ins. Co., 489 F. 3d 1059 (9th Cir. 2007). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 FTC v. Stefanchik, 559 F. 3d 924 (9th Cir. 2009).. . . . . . . . . . . . . . . . . . . . . . . . . 17 Hateley v. SEC, 8 F. 3d 653 (9th Cir. 1993). . . . . . . . . . . . . . . . . . . . . . . . . . . 18, 19 Heller Healthcare Finance, Inc. v. Byes, 2002 WL 1558337 (N.D.Tex. 2002).. . 34 Javier H. v. Garcia-Botello, 218 F.R.D. 72 (W.D.N.Y. 2003).. . . . . . . . . . . . 33, 34 Johnson v. Boyd-Richardson Co., 650 F.2d 147 (8th Cir. 1981) . . . . . . . . . . . . . 39 Keating v. Office of Thrift Supervision, 45 F. 3d 322 (9th Cir. 1995). . . . . . . . . . 31 Lefkowitz v. Turley, 414 U.S. 70 (1973). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Librato v. M.S. Carriers, Inc., 2002 WL 3149588 (N.D. Tex. 2002). . . . . . . . . . 31 Litton Indus., Inc. v. Lehman Bros., 734 F. Supp. 1071 (S.D.N.Y. 1990). . . . . . . 20 Lorin Corp. v. Goto & Co., Ltd., 700 F.2d 1202 (8th Cir. 1983) . . . . . . . . . . . . . 39 Malloy v. Hogan, 378 U.S. 1 (1964). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28, 37 Martinez v. Ylst, 951 F.2d 1153 (9th Cir. 1991). . . . . . . . . . . . . . . . . . . . . . . . . . . 40

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Nettles v. Wainwright, 677 F.2d 404 (5th Cir. 1982) (en banc) (Unit B).. . . . . . . 39 Park Motor Mart, Inc. v. Ford Motor Co., 616 F.2d 603 (1st Cir. 1980). . . . . . . 40 Richardson v. Sunset Science Park Credit Union, 268 F.3d 654 (9th Cir. 2001). 39 Robbins v. Carey, 481 F.3d 1143 (9th Cir. 2007).. . . . . . . . . . . . . . . . . . . . . . . . . 45 SEC v. CMKM Diamonds, Inc., 656 F.3d 829 (9th Cir. 2011). . . . . . . . . . . . . . . . 44 SEC v. CMKM Diamonds, Inc., 2011 WL 1343004, 2011 U.S. Dist. LEXIS 41841 (D. Nev. April 7, 2011). . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 12, 14, 37 SEC v. CMKM Diamonds, Inc., 2011 WL 3047476, 2011 U.S. Dist. LEXIS 41841, Fed. Sec. L. Rep. P 96,364 (D. Nev. July 25, 2011). . . . . . . 8, 12, 14 SEC v. Colello, 139 F. 3d 674 (9th Cir. 1998). . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SEC v. First City Fin. Corp., 890 F. 2d 1215 (D.C.Cir. 1989).. . . . . . . . . . . . . . . 18 SEC v. First Jersey Sec., Inc., 101 F. 3d 1450 (2d Cir. 1996). . . . . . . . . . . . . . . . 19 SEC v. First Pac. Bancorp, 142 F. 3d 1186 (9th Cir. 1998).. . . . . . . . . . . 17, 18, 19 SEC v. Happ, 329 F. 3d 12 (1st Cir. 2004). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SEC v. Lorin, 76 F. 3d 458 (2d Cir. 1996) (per curiam). . . . . . . . . . . . . . . . . . . . . 18 SEC v. JT Wallenbrock & Assoc., 440 F. 3d 1109 (9th Cir. 2006).. . . . . . . . . 17, 18 SEC v. Thomas James Assocs., Inc., 738 F. Supp. 88 (W.D.N.Y. 1990). . . . . . . . 20 Securities and Exchange Commission v. Dresser Industries, 202 U.S.App. D.C. 345, 628 F. 2d 1368 (1980).. . . . . . . . . . . . . . . . . . . . . 33 Simeonoff v. Hiner, 249 F. 3d 883 (9th Cir. 2001). . . . . . . . . . . . . . . . . . . . . . . . . 19 State Farm Lloyds v. Wood, 2006 WL 3691115 (S.D. Tex. 2006).. . . . . . 31, 33, 35

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Stephen L. LaFrance Holdings, Inc. v. Sorensen, 2011 WL 6176589 (E.D. Ark. Dec. 13, 2011).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Trustees of Plumbers and Pipe Fitters Natl Pension Fund v. Tansworld Mech., Inc., 886 F.Supp. 1134 (S.D.N.Y. 1995). . . . . . . . . . . . 34 Turner v. Duncan, 158 F.3d 449 (9th Cir. 1998) .. . . . . . . . . . . . . . . . . . . . . . 39, 40 United States v. Gamba, 483 F.3d 942 (9th Cir. 2007). . . . . . . . . . . . . . . . . . . . . 37 United States v. Kordel, 397 U.S. 1 (1972).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 United States v. Reina-Tapia, 328 F.3d 1114 (9th Cir. 2003). . . . . . . . . . . . . . . . 40 United States v. Shami, 754 F.2d 670 (6th Cir. 1985). . . . . . . . . . . . . . . . . . . . . . 40 United States v. Torf, 357 F.3d 900 (9th Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . 39 United States v. Walters, 638 F.2d 947 (6th Cir. 1981). . . . . . . . . . . . . . . . . . 39, 40 Volmar Distributors, Inc. v. N.Y. Post Co., 152 F.R.D. 36 (S.D.N.Y. 1993).. . . . 30 Wehling v. Columbia Broadcasting System, 608 F. 2d 1084 (5th Cir. 1979). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Wright v. Collins, 766 F.2d 841 (4th Cir. 1985). . . . . . . . . . . . . . . . . . . . . . . . . . . 38

CONSTITUTIONAL PROVISIONS: U.S. Const., Art. III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 16, 37, 40, 41 U.S. Const., Fifth Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21, 35

STATUTES AND RULES: 15 U.S.C. 77(e). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

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15 U.S.C. 77t(b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 25 15 U.S.C. 77t(d)(1).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 25 15 U.S.C. 77v(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 25 15 U.S.C. 78u(d)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 25 15 U.S.C. 78u(d)(3)(A). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 25 15 U.S.C. 78u(e). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 25 15 U.S.C. 78aa. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 25 18 U.S.C. 1347. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 18 U.S.C. 1956. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 18 U.S.C. 1957. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 28 U.S.C. 636. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 37, 38 28 U.S.C. 1291. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Fed. R. App. P. 32(a)(7)(B).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Fed. R. App. P. 32(a)(7)(C).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 F.R.C.P. 56(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 F.R.C.P. 56(c-d).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Ninth Circuit Rule 32-1.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

TREATISES AND MISCELLANEOUS: ABA Model Rules of Professional Conduct Rule 3.3(a)(4). . . . . . . . . . . . . . . . . . 23 6

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Pendency of Criminal Prosecutions as Ground for Continuance or Postponement of Civil Action to Which Government is Party Involving Facts or Transactions upon which Prosecution is Predicated Federal Cases, 33 A.L.R. Fed. 2d 111 (2008). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

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JURISDICTIONAL STATEMENT The U.S. District Court for the District of Nevada had original subject matter jurisdiction over this case pursuant to 20(b), 20(d)(1), and 22(a) of the Securities Act of 1933 (Securities Act), 15 U.S.C. 77t(b), 77t(d)(1), & 77v(a), and 21 (d)(1), 21(d)(3)(A), 21(e) and 27 of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. 78u(d)(1), 78u(d)(3)(A), & 78aa because the claims for relief were alleged to have, directly or indirectly, made use of the means or instrumentalities of interstate commerce, of the mails, or of the facilities of a national securities exchange, in connection with the transactions, acts, practices and courses of business alleged in the complaint. By Order issued April 7, 2011, the District Court denied Brian Dvoraks motion to stay these proceedings pending resolution of a parallel criminal case. (Exc. 1; SEC v. CMKM Diamonds, Inc., 2011 WL 1343004, 2011 U.S. Dist. LEXIS 41841 (D. Nev. April 7, 2011)) Then, by Order issued July 25, 2011 the District Court granted the Motion by Plaintiff Securities and Exchange Commission for Summary Judgment against various defendants including Appellant Dvorak. (Exc. 8; SEC v. CMKM Diamonds, Inc., 2011 WL 3047476, 2011 U.S. Dist. LEXIS 41841, Fed. Sec. L. Rep. P 96,364 (D. Nev. July 25, 2011)) Also on July 25, 2011, the District Court filed a Judgment in a Civil Case. (Exc. 16) Finally, On August 1, 2011, the District Court filed its Final Judgment of Permanent Injunction and Other 8

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Relief Against Defendants. (Exc. 17) Defendant Dvorak timely filed his Notice of Appeal on August 23, 2011. (Exc. 22) This Court has jurisdiction over this appeal pursuant to 28 U.S.C. 1291 because the Final Judgment constitutes a final decision of a District Court disposing of all matters.

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STATEMENT OF THE ISSUES PRESENTED FOR REVIEW

I. The District Courts Disgorgement Order finds no basis in the facts presented by Plaintiff nor in the supporting documentation presented to the District Court. Further, to the extent the Disgorgement Order is in reality a summary judgment it was entered while there remained disputed issues of material fact.

II. The District Courts refusal to stay these proceedings was error.

III. The U.S. Magistrate Judge had no jurisdiction to solely decide the Motion for Stay with a reference under 28 U.S.C. 636, and this violated U.S. Const., Art. III.

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STATEMENT OF THE CASE On April 7, 2008, the SEC initiated the present civil action against CMKM Diamonds, Inc. and various defendants. (Docket No. 1) This action involves what the SEC alleges to be a complex scheme to illegally issue and sell stock of Defendant CMKM, a diamond and gold mining company, in an unregistered distribution. 1st Global Stock and Transfer, LLC was the stock transfer agent for CMKM. Helen Bagley was the owner of 1st Global and Brian Dvorak was an attorney. 1st Global and Bagleys appeal are consolidated in 11-17021. The SEC alleged that CMKM and its principle made materially false and fraudulent representations regarding why certain restricted shares of stock should have been reissued as free trading unrestricted securities. CMKM and its principals then obtained legal opinion letters confirming the entitlement of the shareholders to receive unrestricted shares. Said opinion letters and supporting corporate resolutions were submitted to 1st Global and Bagley by Dvorak, thus his involvement in this case. Following issuance of the shares, the SEC alleges that various defendants, not including Dvorak, manipulated CMKMs stock price and volume, making materially false and misleading representations regarding the company during the period from January 2003 through May 2005. Those defendants then sold billions of the wrongfully issued free trading shares to an unsuspecting public. 11

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On December 23, 2010 the SEC filed a motion for summary judgment in Docket No. 161. (Exc. 256-659) Dvorak filed a motion to stay these proceedings, asserting Fifth and Sixth Amendment rights because of the parallel criminal proceedings involving the same subject matter. (Exc. 82; 26) The District Court refused to stay the proceedings as to Dvorak and an order to that effect was entered on April 7, 2011. (Exc. 1; SEC v. CMKM Diamonds, Inc., 2011 WL 1343004, 2011 U.S. Dist. LEXIS 41841 (D. Nev. April 7, 2011)) Thereafter, the District Court found that no genuine issue of material fact existed as to Dvorak being a necessary participant and substantial factor in an unregistered distribution. (Exc. 8) The District Court entered a Final Judgment consistent with the July 25, 2011 Order. (Exc. 17; SEC v. CMKM Diamonds, Inc., 2011 WL 3047476, 2011 U.S. Dist. LEXIS 41841, Fed. Sec. L. Rep. P 96,364 (D. Nev. July 25, 2011)) In that final judgment the SEC was granted an order of disgorgement against Dvorak, including pre-judgment interest, or more than $400,000. (Exc. 17-21)

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STATEMENT OF FACTS Dvorak was a Las Vegas attorney at the time who was retained by CMKH Diamonds, Inc. to perform legal services for the corporation in connection with the issuance of securities. According to Dvoraks pleadings in this case, he was paid roughly $157,500 for the legal services he provided. On April 7, 2008, the SEC initiated the present civil action against Dvorak and other defendants for violation of the Securities Act of 1933 (the Securities Act), 15 U.S.C. 77(e). (Docket No. 1.) Thereafter, the government initiated criminal proceedings as well against Dvorak and the other defendants in this case. On December 23, 2010, more than two years and eight months after this case was commenced, Plaintiff filed a motion for summary judgment as to Dvorak. (Exc. 256-659) Dvorak moved for a stay of the proceedings in the civil case pending resolution of the parallel criminal proceedings, asserting that making him go forward with the civil case would implicate his Fifth and Sixth Amendment rights. (Exc. 82) He supplemented that motion with the contention that he was indigent, Plaintiff was being less than candid with the District Court because it knew Dvorak could not afford to present some of the evidence which was available to Plaintiff but which it would not provide to him without incurring substantial costs and that, thus, he was being denied a fair proceeding. (Exc. 24) The District Court denied Dvoraks motion for a stay in an opinion issued on 13

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April 7, 2011. (Exc. 1; SEC v. CMKM Diamonds, Inc., 2011 WL 1343004, 2011 U.S. Dist. LEXIS 41841 (D. Nev. April 7, 2011)) The court ruled the affects upon Dvoraks Fifth Amendment rights were negligible, pointing to the fact he had already given a deposition in the civil case, but failing to point out Plaintiff had obtained that deposition from Dvorak without bothering to mention to him he had already been indicted in the case or that the indictment was no unsealed until after the deposition was taken. (Exc. 1-7) In an Order issued July 25, 2011 the District Court granted the Motion by Plaintiff SEC for Summary Judgment against various defendants including Dvorak. (Exc. 8) Also on July 25, 2011 the District Court filed a judgment in a civil case. (Exc. 16; SEC v. CMKM Diamonds, Inc., 2011 WL 3047476, 2011 U.S. Dist. LEXIS 41841, Fed. Sec. L. Rep. P 96,364 (D. Nev. July 25, 2011)) On August 1, 2011, the District Court filed its Final Judgment of Permanent Injunction and Other Relief Against Defendants 1st Global Stock Transfer, LLC, Helen Bagley, Sergey Rumyantsev and Brian Dvorak. (Exc. 17-21) Among other things, the Final Judgment included an order of disgorgement against the defendants, including a judgment against Dvorak of $318,843 and prejudgment interest of $90,795.31, for a total of $409,638.11. (Exc. 17-21)

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SUMMARY OF THE ARGUMENT I. The District Court erred in granting summary judgment for the SEC in

this case because disputed material facts of the amount owed by Dvorak were in dispute. Dvorak was financially incapable of even buying a copy of his own deposition that the SEC took when, unbeknownst to Dvorak but likely known to the SEC, he had been indicted in the District Court for criminal securities fraud. He was deposed when, had he been told the all facts and the SEC been candid with him, he would have known he was already indicted three months earlier but it was still under seal. Still, in the deposition, Dvorak put into evidence his trust account records that showed that the SEC was high in what it claimed he owed by over $200,000. When the SEC moved for summary judgment, it alluded to them, but it failed to put it in evidence when it knew the truth. This violated the SECs duty of candor to the district court. Also, the district court erred in not ordering the SEC to produce it for the motion for summary judgment. II. The district court erred in refusing to stay this action pending resolu-

tion of the criminal case. Dvorak has a Fifth Amendment right not to aid the government in the criminal case by testifying in this civil case with identical fact issues. There was no prejudice to the SEC by granting the stay where Dvoraks judgment 15

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was less than two-tenths of one per cent of the total judgments already obtained. III. The U.S. Magistrate Judge had no jurisdiction to solely decide the

motion for stay in this case without a referral under 28 U.S.C. 636. Therefore, the order on the motion to stay violated U.S. Const., Art. III on the jurisdiction of the U.S. District Judges. Moreover, Dvorak was entitled to written notice of his need to appeal to the U.S. District Judge as a matter of Fifth Amendment due process of law to be bound by it.

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ARGUMENT I. The District Courts Disgorgement Order finds no basis in the facts presented by Plaintiff nor in the supporting documentation presented to the District Court. Further, to the extent the Disgorgement Order is in reality a summary judgment it was entered while there remained disputed issues of material fact. A. Standard of Review This court reviews the district courts order of disgorgement for abuse of discretion. SEC v. First Pac. Bancorp, 142 F.3d 1186, 1190 (9th Cir. 1998); SEC v. JT Wallenbrock & Assocs., 440 F.3d 1109, 1113 (9th Cir. 2006). To the extent the disgorgement order in this case flows from the District Courts grant of summary judgment to the SEC, this court reviews the issues de novo. FTC v. Stefanchik, 559 F. 3d 924, 927 (9th Cir. 2009). B. Disgorgement Law A district court has broad equity powers to order the disgorgement of illgotten gains obtained through the violation of the securities laws. Disgorgement is designed to deprive a wrongdoer of unjust enrichment, and to deter others from violating securities laws by making violations unprofitable. SEC v. First Pac. Bancorp, 142 F.3d 1186, 1191 (9th Cir. 1998) (quotation marks and citations omitted). The amount of disgorgement should include all gains flowing from the

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illegal activities. JT Wallenbrock, 440 F.3d at 1114 (quotation marks omitted). Disgorgement need be only a reasonable approximation of profits causally connected to the violation. First Pac. Bancorp, 142 F.3d at 1192 n. 6. The SEC bears the ultimate burden of persuasion that its disgorgement figure reasonably approximates the amount of unjust enrichment. SEC v. First City Fin. Corp., 890 F.2d 1215, 1232 (D.C. Cir. 1989); see also First Pac. Bancorp, 142 F.3d at 1192 n. 6. Once the SEC establishes a reasonable approximation of defendants actual profits, however, the 9th Circuits join its sister circuits and hold that the burden shifts to the defendants to demonstrate that the disgorgement figure was not a reasonable approximation. First City Fin., 890 F.2d at 1232; see also SEC v. Happ, 329 F.3d 12, 31 (1st Cir. 2004); SEC v. Lorin, 76 F.3d 458, 462 (2d Cir. 1996) (per curiam). In Hateley v. SEC, 8 F.3d 653, 655-56 (9th Cir. 1993), a broker dealer and two officers of a securities firm were ordered to disgorge 100% of the profits obtained based on an illegal agreement, even though the agreement itself appropriated to them only 10% of the profits as a commission. The Court held that it was error to order disgorged more than the amount the individuals ultimately received, because, the very agreement that was the source of their liability also limited their ill-gotten gains, and courts must view the agreement as a whole and cannot single out the aspects of it that are favorable to the SECs position and disregard the parts 18

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that are not. Id. Prejudgment interest awards are also reviewed for an abuse of discretion. Simeonoff v. Hiner, 249 F.3d 883, 894 (9th Cir. 2001). In Simenoff the Court wrote: The defendants still further argue that the district court improperly calculated prejudgment interest from the date of the sales of securities to the public, rather than from the date the SEC filed its complaint. We hold that the district court did not abuse its discretion by imposing prejudgment interest from the date the securities were sold in violation of Section 5. Even if defendants were correct that the present litigation was protracted through some fault of the SEC, defendants plainly had the use of their unlawful profits for the entire period... Given the remedial purpose of the statute, the goal of depriving culpable defendants of their unlawful gains, and the lack of any unfairness to defendants, we see no abuse of discretion in the courts order. First Jersey Sec., 101 F.3d at 1477. As was made clear in First Pac. Bancorp, the district court has broad equity powers to order the disgorgement of ill-gotten gains obtained through the violation of federal securities laws. 142 F.3d at 1191; see also SEC v. Colello, 139 F.3d 674, 679 (9th Cir. 1998) (To order disgorgement, the district court ... need find only that the defendant has no right to retain the funds illegally taken from the victims.). Disgorgement is designed to deprive a wrongdoer of unjust enrichment, and to deter others from violating securities laws by making violations unprofitable. First Pac. Bancorp, supra (citing Hateley v. SEC, 8 F.3d 653, 655 (9th Cir. 1993)). The district court also has broad discretion in calculating the amount to be disgorged. See, e.g., SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1474-75 (2d Cir.

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1996). Under some circumstances, the broker might be entitled to offset expenses customarily incurred in the purchase and sale of such stock if the investor would have had to pay for such expenses in any legitimate transaction. For example, in SEC v. Thomas James Assocs., Inc., 738 F. Supp. 88, 89-90 (W.D. N.Y. 1990), the district court ordered the defendants (including a brokerage firm) to disgorge the illegal profits reaped by their manipulation of the market to charge excessive markups in the initial aftermarket of four initial public offerings. In assessing disgorgement, the court deducted certain business expenses, such as commissions, telephone charges and underwriting expenses. Id. at 92, 94-95. The court explained that markups are a function of the way a securities firm does business, and thus have corresponding costs and expenses related to them. Id. at 95. Given that the customers would have had to factor these expenses into their returns regardless of the defendants scheme, the court concluded that a reduction was appropriate to reflect a fair setoff for necessary business expenses. Id. at 92 (emphasis added); see also Litton Indus., Inc. v. Leham Bros., 734 F. Supp. 1071, 1077 (S.D.N.Y. 1990) (allowing deductions for various transaction costs, including brokerage commissions paid to third party brokers as part of an agreement for services customarily rendered in connection with the transactions at issue).

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C. Issue of Material Fact The triable issue in this case is the amount of money received by Dvorak which represented ill-gotten gains subject to disgorgement. The SEC failed to mention or explain to the court that it purposely did not present the court with the entire Dvorak deposition which included the exhibits that would show its damages claim is, and always has been, controverted by Dvorak. That was the entire point of Dvoraks cross-examination during which he clearly controverted the SECs damages claim. While that deposition certainly reflects he had money go into and out of his various accounts, had the court seen the entire deposition it would have had the benefit of Dvoraks explanation of why much of the money so flowing had no nexus with this case. But, did the SEC file that part with the Court? No. The SEC should have fulfilled its duty of candor to the court and filed the entire deposition and all its exhibits as an exhibit to its motion for summary judgment so Mr. Dvorak could get it off of PACER for $2.40. (The SEC refused to provide Dvorak with a copy of his own deposition unless he paid $800, a sum of money which he did not and still does not have.) The granting of the Motion for Summary Judgment and the entry of a judgment of disgorgement based on the SECs summary proof, without considering the entire deposition which the SEC purposely withheld from the district court and from him, denies Dvorak due process of law and equal protection of the law based 21

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on his financial status in violation of the Fifth Amendment. Dvorak didnt need additional discovery because he simply cannot afford to do it. He just want the government to fulfill its duty of candor to the court, to not oppress persons who cannot afford to pay $800 a copy for its deposition of him and then not make it all available to the court. Instead, the SEC picked just the parts it wanted the court to read, knowing Dvorak could not submit the other parts because of his indigency. In Campbell v. Rice, 408 F.3d 1166, 1175 (9th Cir. 2005) the court noted: A prosecutor, like all attorneys, also owes a duty of candor toward a court. In particular in an ex parte proceeding, a lawyer shall inform the tribunal of all material facts known to the lawyer which will enable the tribunal to make an informed decision, whether or not the facts are adverse. ABA Model Rules of Professional Conduct Rule 3.3(a)(4)(d) (2002) (emphasis added). That same duty of candor should have placed on the SEC and its lawyers. There is no factual dispute that Dvorak received about $157,500 for writing the letters, but the SEC and the U.S. Attorney in the criminal indictment argue that it was over $400,000. The SEC only wants the court to read that which supports its conclusion and not provide a fair summary of the controverted facts. In fact, the SEC amazingly goes so far to mention Dvoraks bank records being a basis for part of its motion, but then it remarkably failed its duty of candor to the court and Dvorak to even include the part of Dvoraks own bank records that

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he put into evidence at the deposition during his cross-examination which is nowhere in the SECs filing, including the testimony relating to the records showing that approximately $200,000 went through Dvoraks lawyers trust account for an unrelated purpose within a matter of days. The government in the criminal prosecution, too, claims it was $495,000, and the SEC makes the same mistake. To compound the mistake, it has purposely kept from the court parts of Dvoraks deposition which it knows creates an issue of fact on the amount Dvorak received for his work for CMKM Diamonds, Inc. The District Court in its decision does not set out a single factual finding as to the amounts supposedly wrongfully received by Dvorak, other than the total amount of the disgorgement order. Much of the evidence available was withheld from the court by the SEC. It goes almost without saying that summary judgment cannot be granted where there remain genuine issues of material fact. F.R.C.P. 56(a); Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986). The evidence before the District Court, via the SECs motion for summary judgment, pointed out there was a dispute as to the amount of ill-gotten gains received by Dvorak. Obviously, when the District Court picked a number somewhere between what Dvorak claimed was correct and the amount sought by the SEC there must have been a weighing of the evidence by the District Court, and that, too, is improper. Balint v. Carson City, 180 F.3d 1047 (9th Cir. 1999) (en banc). The district court did not even note the 23

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dispute Dvorak pointed out. See F.R.C.P. 56(c-d): (c) PROCEDURES. ... (3) Materials Not Cited. The court need consider only the cited materials, but it may consider other materials in the record. ... (d) WHEN FACTS ARE UNAVAILABLE TO THE NONMOVANT. If a nonmovant shows by affidavit or declaration that, for specified reasons, it cannot present facts essential to justify its opposition, the court may: (1) defer considering the motion or deny it; (2) allow time to obtain affidavits or declarations or to take discovery; or (3) issue any other appropriate order. D. Conclusion Dvorak submits the entire procedure by virtue of which the SEC sought and obtained a judgment for disgorgement in this case was tainted and that the District Court abused its discretion in granting disgorgement and erred as a matter of law in determining the amount owed by Dvorak. He asks that the disgorgement judgment be reversed and the matter remanded for a reconsideration of the proof of the proper amount. II. The District Courts refusal to stay these proceedings was error. A. Standard of Review A District Courts decision on an application for a stay of the proceedings is

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reviewed for an abuse of discretion, but the review is somewhat less deferential than in other abuse of discretion cases. Dependable Highway Express, Inc. v. Navigators Ins. Co., 498 F. 3d 1059, 1066 (9th Cir. 2007). B. The proceedings The Securities and Exchange Commission filed this case in the District asserting claims against all these defendants in April 2008, for: (1) Issuance of Sale of Stock in an Unregistered Distribution, (2) Fraud in the Issuance of Unlegened Stock Certificate Shares of Purportedly Unrestricted Stock, (3) Fraudulently Inducing Investors to buy CMKM Stock, and (4) Violation of the Broker-Dealer registration Provisions, pursuant to Securities Act of 1933 (Securities Act), 15 U.S.C. 77t(b), 77(d)(1), and 77v(a), and 21(d)(1), 21(d)(3)(A), 21(e), and 27 of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. 78u(d)(1), 78u(d)(3)(A), 78u(e), and 78aa. (Complaint, Doc. 1) Before the civil case and the indictment, Dvorak cooperated with the SEC and the U.S. Attorney in the obviously futile hope that they would decide he was a better witness than a defendant. That obviously did not work. Having taken his statement and deposition after he was indicted but before he knew he had been, they wanted him to be both a defendant and a witness against himself. On March 25, 2009, an Indictment was issued in this same court over the same facts: 02:09-CR-132-RLH-RJJ (Crim. Doc. 1). There were six defendants in 25

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that indictment: Edwards, Casavant, Gutierrez, Kinney, Bagley and Dvorak. The indictment, however, was not unsealed until October 2009 when Dvorak was arrested, and thats the first he knew he was indicted. (Crim. Doc. 50) Dvorak was, moreover, deposed by the SEC in Denver1 in July 2009 (the deposition he cant afford to get a copy of), with the SEC almost certainly knowing that Dvorak was the subject of a sealed indictment at the time. If Dvorak had been given the basic courtesy of being told hed been inducted, he could have, of course, moved to stay the deposition pleading the Fifth Amendment. But he was kept in the dark by the SEC and the Department of Justice, all to the SECs and DOJs advantage for their respective cases. In a word, Dvorak was sandbagged by the government. The Government obtained a Second Superseding Indictment on March 24, 2010 adding four defendants and charging Dvorak as the last named defendant with co-defendants Jeffery Turino, John M. Edwards, Urban, Cassavant, Kickolaj, Vissokovsky, Melissa Spooner, Helen Bagley, Jeffery Mitchell, Ginger Guiterrez, James Kinney, with: Conspiracy to Sell Unregistered Securities, and to Commit Securities Fraud in Violation of Title 15; Fraudulent Interstate Securities Transactions; Securities Fraud; Conspiracy to Commit Securities Fraud in Violation of 18 U.S.C. 1347; Conspiracy to Commit Money Laundering under 18 U.S.C. 1956

Dvorak now lives in Boulder, Colorado, and he is inactive as a lawyer. 26

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& 1957; Conspiracy to Conduct or Participate in an Enterprise Engaged in a Pattern of Racketeering Activity; and Tax Evasion. (Crim. Doc. 63) In January 2011, a status hearing was held in the criminal case, and it was continued to October-December 2011 later trial was continued in May 2011 to April-July 2012 because of its complexity and lack of full discovery (about 500,000 pages) and two unarraigned defendants not yet in the country.2 (Crim. Doc. 156) C. The Argument Below Dvorak alleged below that he anticipated in providing a defense in the pending civil matter regarding his individual liability the need to call witnesses to testify as to Dvoraks participation, knowledge, duties, and responsibilities in CMKM Diamonds, Inc. (i.e., non-sales related activities). It would be necessary for him to call witnesses who may take the Fifth themselves, and that would potentially require a severance for him. Two witnesses he needed to defend the civil case and potentially exonerate him in the criminal case were fighting extradition at their own peril because they could get back really close to the criminal trial date. Those same Fifth Amendment implications also affected his ability to respond to the SECs motion for summary judgment, as he alleged in his motion for stay. (Exc. 82-98)

As of this writing, Edwards is in custody in the U.K. fighting extradition and Casavant hasnt been arrested by Canadian authorities. Neither has been arraigned in the criminal case. 27

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Well-settled case law establishes that defendants named in a criminal indictment have an undeniable and clearly recognized right to invoke their protections against self-incrimination, which extends to any proceeding, civil or criminal, formal or informal. See, e.g., Malloy v. Hogan, 378 U.S. 1 (1964); Lefkowitz v. Turley, 414 U.S. 70, 77 (1973). Because of the pending criminal prosecution against all these defendants and the jeopardy resulting therefrom, it is a reasonable assumption and anticipation that most or all of the named defendants in the criminal matter will potentially invoke their Fifth Amendment privilege against self-incrimination in this civil case had then been asked to give an affidavit, sit for a deposition or appear and testify. Dvorak was, in essence, left with no way to, on the one hand, protect his constitutional rights, and on the hand, defend against the zealous pursuit of him by the SEC. If Dvorak were convicted in the criminal case, that would potentially be collateral estoppel in this case. So, the Motion for Summary Judgment would have no defense if that happened. However, if Dvorak is acquitted, the civil case against him should logically just go away. Because human liberty is at stake in the criminal case, it should take precedence, and the Defendant should not have to expend time defending the civil case when he should be working on the criminal case. Despite making those arguments to the District Court, his motion for stay was denied, the District Court finding, remarkably, that because he had already given his 28

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deposition the incursion upon Dvoraks Fifth Amendment rights are negligible. (Exc. 3) The District Courts ruling included the following: Here, the incursion upon Dvoraks Fifth Amendment rights are negligible. In this case, the situation is similar to that in Molinaro in that Dvorak has already sat for a deposition upon which SEC relies in its motion for summary judgment, and nothing prevented him from giving information that did not tend to incriminate himself. Mollinaro, 889 F.2d at 903. A defendant has no absolute right not to be forced to choose between testifying in a civil matter and asserting his Fifth Amendment Privilege. Keating, 45 F.3d at 326. The fact that Dvoraks indictment was not unsealed until sometime after his deposition was taken has no bearing on this civil case. There is nothing that indicates the SEC or any government entity used the civil deposition as a pretext to gather evidence to be used in the criminal case. Even if the SEC had surreptitious motives while taking Dvoraks deposition, that fact would have no relevance in this case. Therefore, the implication of Dvoraks Fifth Amendment rights do not require a stay of the civil case. ***** In this case, the burden on Dvorak does not require the Court to grant a stay on the civil case. As discussed above, the possible incursion upon Dvoraks Fifth Amendment rights is negligible. Furthermore, there is enough time for Dvorak to defend both cases. In Keating, the Court refused to grant a stay where defendant had eleven months to prepare for the outcome determinative civil hearing and where there was six months between the end of the civil proceeding and the beginning of the criminal trial. Keating, supra. Keating was also a large case involving complex financial systems, fraud, and a large sum of money. Keating, supra. ***** Here, a stay will not necessarily increase the efficiency of the court. Even though two cases are parallel and involve similar factual occurrences, they will not require the Court to perform duplicative or unnecessary work. Golden Quality Ice Cream, Co. v. Deerfield Speciality, 87 F.R.D. 53, 57 (E.D. Pa. 1980). Furthermore, the SEC has filed four motions for summary judgement against other defendants in this case to date, three of which have already been granted. It would be 29

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more efficient for the Court to make a decision as to the remaining Motion for Summary Judgment (#161) and then proceed from that point, rather than waiting almost a year to proceed as to only one Defendant who, in his own words, is a small player. The Civil case has been pending before the Court for nearly three years and the Court has an interest in clearing its docket. Molinario, 889 F.2d at 903; Golden Quality Ice Cream, supra. Dvorak respectfully suggests the District Court was wrong because he was hamstrung by the government. D. U.S. District Courts Have Discretion to Stay Civil Proceedings During the Pendency of a Parallel Criminal Action U.S. District Courts have the discretionary authority to stay a civil action pending the resolution of a parallel criminal proceeding. United States v. Kordel, 397 U.S. 1, 12 n. 27 (1972); Wehling v. Columbia Broadcasting System, 608 F.2d 1084, 1088 (5th Cir. 1979); Volmar Distributors, Inc. v. N.Y. Post Co., 152 F.R.D. 36, 39 (S.D. N.Y. 1993) (staying civil action until resolution of parallel criminal proceeding to avoid duplication of effort and unnecessary litigation costs and because the outcome of the criminal case may encourage settlement of the civil case). See generally Annot., Pendency of Criminal Prosecution as Ground for Continuance or Postponement of Civil Action to Which Government Is Party Involving Facts or Transactions upon which Prosecution is Predicated-Federal Cases, 33 A.L.R. Fed. 2d 111 (2008). A court may decide in its discretion to stay civil proceedings when the

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interests of justice seem to require such an action. Keating v. Office of Thrift Supervision, 45 F.3d 322, 324 (9th Cir. 1995). Keating, at 324-25, said: This decision whether to stay civil proceedings in the face of a parallel criminal proceeding should be made in light of the particular circumstances and competing interests involved in the case. [Federal Sav. And Loan Ins. Corp. v. Mollinaro, 889 F.2d 889, at 902 (9th Cir. 1989)]. This means the decisionmaker should consider the extent to which the defendants fifth amendment rights are implicated. Id. In addition, the decisionmaker should generally consider the following factors: (1) the interest of the plaintiffs in proceeding expeditiously with this litigation or any particular aspect of it, and the potential prejudice to the plaintiffs of a delay; (2) the burden which any particular aspect of the proceedings may impose on the defendants; (3) the convenience of the court in the management of its cases, and the efficient use of judicial resources; (4) the interest of persons not parties to the civil litigation; and (5) the interest of the public in the pending civil and criminal litigation. Id. at 903. See also State Farm Lloyds v. Wood, 2006 WL 3691115, *1 (S.D. Tex. 2006); Librado v. M.S. Carriers, Inc., 2002 WL 3149588 *2-3 (N.D. Tex. 2002) (stay granted through sentencing). Here, the indictment and civil complaint stem from exactly the same conduct. The civil case was pending for two years and was apparently at least partially the vehicle by which the government helped gather evidence for the indictment, even going so far as the SEC taking Dvoraks deposition while he was, unbeknownst to him and counsel alone, under indictment. The SEC will, of course, claim no knowledge of the date of the indictment, but a hearing might just reveal that they did in fact know, particularly when the U.S. Attorney says that the SEC in Los Angeles 31

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has 200 boxes of criminal case discovery and the trial needs to be pushed back nine months to be able for defendants to prepare for trial, a clear sign the U.S. Attorney and the SEC were in a joint venture in the drafting of the indictment. It doesnt take a linguistic expert to read the second superseding indictment to see that it came from the SEC. Dvoraks part of both the civil and criminal cases arise from defendant Dvoraks alleged involvement in the CMKM Diamonds Inc. stock scheme. Dvorak has always contended he was unwittingly being used by Cassavant, Edwards, and others. The defense to the criminal case and the civil case are similar. But, when the government chose to indict him for that same conduct, the stakes escalated considerably. Instead of going from a case where a civil sanction could be imposed and then mitigated for complete inability to pay, the government now wants to imprison him. The Fifth Amendment came into play. E. Defendants Fifth Amendment Rights are Implicated Because the Issues in the Civil and Criminal Cases Substantially Overlap The similarity of the issues underlying the civil and criminal actions is considered the most important threshold issue in determining whether to grant a stay. The strongest case for deferring civil proceedings is where a party under indictment for a serious offense is required to defend a civil action [or testify in an action] involving the same matter. State Farm Lloyds, 2006 Wl 2691115 at *2,

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citing Javier H. v. Garcia-Botello, 218 F.R.D. 72, 75 (W.D. N.Y, 2003); see also Securities and Exchange Commission v. Dresser Industries, Inc., 202 U.S. App. D.C. 345, 628 F.2d 1368, 1375-76 (1980). The SECs civil complaint issues substantially overlap and directly relate to the claims and allegations involved in the Criminal Complaint against the civil defendants. (Crim. Doc. 63, Second Superseding Indictment) The claims and allegations made in this civil action stem from the alleged sale of unregistered securities; demonstrating a sufficiently close nexus between civil and criminal cases. The claims in the two cases are virtually identical and rely on the same proof. Surely it cannot be disputed that the anticipated witnesses and defendants Fifth Amendment rights are implicated based on the factual and legal similarities contained in the Indictment when compared with those raised in this action. In determining whether to grant a stay, a court must also consider the status of the related criminal proceedings, which can have a substantial effect on the balancing of the equities. State Farm Lloyds, 2006 WL 22358819 at *4 (E.D. Pa. May 13, 2003). Significantly, civil proceedings, if not deferred, will undermine an anticipated witnesses rights, including the privilege against self-incrimination under the Fifth Amendment. See Javier H., 218 F.R.D. at 75: The strongest case for deferring civil proceedings until after completion of criminal proceedings is where a party under indictment for a serious offense is required to defend a civil action involving the 33

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same matter. Dresser, 628 F.2d at 1376; see also LaBianca, 801 F. Supp. At 1011 (Courts are more likely to grant civil discovery stays when an indictment has already been issued); In re Par Pharm., Inc. Sec. Litig.,133 F.R.D. 12, 13-14 (S.D.N.Y. 1990) (Courts will stay a civil proceeding when the criminal investigation has ripened into an indictment.). If a grand jury indicts a party for conduct that is the subject of a civil action, as they have in the instant matter, the court is obligated to prevent that criminal defendant from using parallel civil proceedings to gain premature access to evidence and information pertinent to the criminal case. S.E.C. v. Doody, 186 F. Supp. 2d 379, 381 (S.D.N.Y. 2002). See also Heller Healthcare Finance, Inc. v. Boyes, 2002 WL 1558337, *3 (N.D. Tex. July 15, 2002), citing Trustees of Plumbers and Pipe Fitters Natl Pension Fund v. Transworld Mech., Inc., 886 F.Supp. 1134, 1139 (S.D. N.Y. 1995). Before the civil case was filed, Dvorak cooperated with the SEC and gave two statements under oath with the hope that he would not be sued. That did not happen. After he was sued, the SEC wanted his deposition, and they came to Denver to take his video deposition in July 2009 which, it so happens, was after the indictment but before the government chose to tell Dvorak about it. It was as if the government decided to unseal the indictment after they could get Dvorak to make another statement under oath that they well knew they could not get from him if he knew he had been indicted. F. The Risk of Prejudice From Staying the Civil Case Does Not Weigh Against Granting the Stay Normally, in evaluating the plaintiffs burden resulting from the stay, the

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courts may insist that the plaintiff establish more prejudice than simply a delay in his right to expeditiously pursue his claim. See State Farm Lloyds, 2006 WL 3691115 at *2 citing Adelphia, 2003 WL 22358819 at *4. It seems apparent in this case, though, that delay prejudice claims by the SEC swayed the District Court far more than did Dvoraks assertions of constitutional rights. A stay will not cause any harm or prejudice to the SEC for several reasons. First, the civil case was nearly thee years old. Until Dvorak filed his motion for a stay the SEC had never before claimed it was in a hurry. Second, the SEC already had $100,000,000 in judgments against all but three of the defendants. Third, a stay in the proceedings to allow for the proper disposition of the criminal case would not hamper the SEC in obtaining their remedy against Dvorak, if warranted. They have judgments against most of the others, and a much smaller, virtually uncollectible judgment.3 Due to the criminal proceedings and charges against anticipated witnesses, counsel for the anticipated witnesses will undoubtedly require them to invoke the protections provided by the Fifth Amendment to the United States Constitution so as to avoid any infringement of their rights in the criminal action. That is the point of the Fifth Amendment. And, respecting Fifth Amendment rights are obviously

Note that Dvoraks $157,000 is .00157 of $100,000,000. 35

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paramount to plaintiffs interests in the expeditious resolution of their cases, therefore justifying a stay during the pendency of a related criminal action. In other cases, the government itself has requested a stay contending that a stay would streamline discovery in the civil case because evidence obtained in the criminal case would be available to the civil parties. See Bridgeport Harbour Place, LLC v. Ganim, 269 F. Supp. 2d 6 (D. Conn. 2002).4 Staying the civil case is justified by due process concerns as well as concerns for justice and fairness because it prevents exposure of the defenses theory to the prosecution in advance of the criminal trial and safeguards against prejudicing Dvorak in the parallel criminal case. Facts between the two cases are identical, with the SEC holding much of the discovery, and the risk to, and public need for, the fair resolution of the criminal case outweighs the benefits of expedition in the civil case. With 200 boxes of discovery waiting to be scanned and delivered to defense counsel in the criminal case, there may be more Dvorak will be able to present to defeat summary judgment. The Fifth Amendment privilege against self-incrimination protects any person

See also the bizarre case of Stephen L. LaFrance Holdings, Inc. v. Sorensen, 2011 WL 6176589 (E.D. Ark. Dec. 13, 2011), where the U.S. Attorneys Office interceded in a state civil case removing it to federal court attempting to stay it to protect its criminal case, and the U.S. Attorneys Office ended up paying an attorneys fee sanction. 36

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from being compelled to speak against his penal interest. See Malloy v. Hogan, 378 U.S. 1 (1964). The anticipated witnesses for Dvorak are expected to continue to assert their Fifth Amendment privilege during the pendency of the criminal proceeding, and they sure will in the civil case. These issues would become moot if the civil action was stayed during the pendency of the criminal proceeding and would promote efficiency and avoid duplication. G. Conclusion The district court abused its discretion in denying a stay of this case pending the outcome of the criminal case currently set for April-July 2012. III. The U.S. Magistrate Judge had no jurisdiction to solely decide the Motion for Stay without referral under 28 U.S.C. 636, and this order violated U.S. Const., Art. III. The U.S. Magistrate Judge decided Dvoraks Motion for Stay without notice to the parties that it was a reference under 28 U.S.C. 636(b). (Exc. 1; SEC v. CMKM Diamonds, Inc., 2011 WL 1343004, 2011 U.S. Dist. LEXIS 41841 (D. Nev. April 7, 2011). A. Standard of Review Referral to a U.S. Magistrate Judge and the decision is subject to de novo review on the law. United States v. Gamba, 483 F.3d 942, 944 (9th Cir. 2007). 37

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B. Dvorak Was Entitled to Notice as a Matter of Due Process of Law That There Was a Right of Appeal to the District Court Judge The Magistrate Judge decided this motion, and the order never mentions that it was a referral or that the district judge will enter a final order after considering the finding. It just states IT IS HEREBY ORDERED that the Defendants Motion for Stay of This Civil Proceeding and Memorandum in Support (#172) is hereby DENIED. (Doc. 180; Exc. 7) The fact this was decided by a Magistrate Judge and not the District Judge was not even noticed until working on this appeal brief.5 See D. Nev. LR IB 1-4. Findings and Recommendations 28 U.S.C. 636 (b)(1)(B): When a district judge refers a motion, petition or application that a magistrate judge may not finally determine in accordance with 28 U.S.C. 636 (b)(1)(B) to a magistrate judge, the magistrate judge shall review it, conduct any necessary evidentiary or other hearings and file findings and recommendations for disposition by the district judge. Motions subject to such referral include, but are not limited to: .... Lack of notice of a magistrate referral raises a Fifth Amendment due process issue to any litigant. See, e.g., Wright v. Collins, 766 F.2d 841, 847 n. 3 (4th Cir. 1985), dealing with notice to pro se litigants: Other courts have considered the question of adequate notice of the requirements of 28 U.S.C. 636(b)(1) in cases involving litigants

Appellees counsel just missed it until this appeal. Not being a regular in the District of Nevada (also CJA appointed to Dvoraks criminal case), the names of the judicial officers is less noticeable. It just got by us until now. 38

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who were represented by counsel. In United States v. Walters, 638 F.2d 947, 950 (6th Cir. 1981), the Sixth Circuit required that a party shall be informed by the magistrate that objections must be filed within ten days or further appeal is waived. The waiver rule was applied prospectively in Walters, so that the failure of the United States to object did not bar its appeal in that case. In Nettles v. Wainwright, 677 F.2d 404 (5th Cir. 1982) (en banc) (Unit B), the Fifth Circuit also required explicit notice, suggesting the following specific language: Failure to file written objections to the proposed findings and recommendations contained in this report within ten days from the date of its service shall bar an aggrieved party from attacking the factual findings on appeal. Id. at 408. The one circuit that has ruled that failure to object to a magistrates report does not constitute waiver of the right of appeal has rested in part on its belief that In a civilized system of justice, the norm should be to decide claims on their merits, and the mere inaction of a party or his lawyer should not result in the loss of a hypothetically meritorious claim, except in those limited instances, see e.g., Fed.R. Civ.P. 37, where clear notice is given in advance that a certain procedural default will or might result in loss of a claim or defense. Lorin Corp. v. Goto & Co., Ltd., 700 F.2d 1202, 12056 (8th Cir. 1983) (quoting Johnson v. Boyd-Richardson Co., 650 F.2d 147, 149 (8th Cir. 1981)). Even if there is waiver of contesting the findings of fact, there is no waiver of the conclusions of law. Robbins v. Carey, 481 F.3d 1143, 1146-47 (9th Cir. 2007): The failure to object in the district court to a magistrates finding of fact waives a challenge to that finding. United States v. Torf, 357 F.3d 900, 910 (9th Cir. 2004) (as amended) (citing Turner v. Dun39

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can, 158 F.3d 449, 455 (9th Cir. 1998) (as amended)). However, the failure to object to a magistrate judges conclusions of law does not automatically waive a challenge on appeal. Turner, 158 F.3d at 455. Because determinations of law by the magistrate judge are reviewed de novo by both the district court and this court, the failure to object would not, standing alone, ordinarily constitute a waiver of the issue. Martinez v. Ylst, 951 F.2d 1153, 1156 (9th Cir. 1991). The failure to object to a magistrate judges conclusion of law is a factor to be weighed in considering the propriety of finding waiver of an issue on appeal. Id. In Martinez, we held that when a party has failed both to object to a magistrate judges legal findings and to raise the issue in its opening appellate brief-raising the issue in a reply brief instead waiver is appropriate unless there are circumstances suggesting that it will work a substantial inequity. Id. at 1157. Accord: Richardson v. Sunset Science Park Credit Union, 268 F.3d 654, 656 (9th Cir. 2001). C. De Novo Review is an Art. III Requirement In United States v. Shami, 754 F.2d 670, 672 (6th Cir. 1985), the Sixth Circuit held: Since magistrates are not Article III judges, it is necessary to provide for a redetermination by the Court, if requested, of matters falling within subsection (b)(1)(B). United States v. Walters, 638 F.2d 947, 950 (6th Cir. 1981) (quoting Park Motor Mart, Inc. v. Ford Motor Co., 616 F.2d 603 (1st Cir. 1980)). Consequently, de novo review of a magistrates report is both statutorily and constitutionally required. However, this court has held that de novo review is not required unless requested by the parties. United States v. Reina-Tapia, 328 F.3d 1114, 1116 (9th Cir. 2003).

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And this brings us back to notice. We were not notified that this was a referral to the Magistrate to solely make the final determination. D. Conclusion It was constitutional error under Art. III to delegate the motion to stay to a U.S. Magistrate Judge non-Art. III judge6 without a reference by the District Judge and without notice that appellant had to seek review with the District Judge.

Incidentally, the one overseeing the criminal case, too. 41

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CONCLUSION The judgment of the District Court granting summary judgment to the SEC should be reversed and the case remanded for trial. The order of the district court refusing to stay this case pending the outcome of the criminal case over the same facts should be reversed. The order of the U.S. Magistrate Judge denying the stay should be reversed as a violation of Art. III and 28 U.S.C. 636.

Respectfully submitted,

JOHN WESLEY HALL, JR. 1202 Main Street; Suite 210 Little Rock, Arkansas 72202-5057 501-371-9131 / fax 501-378-0888 forhall@aol.com

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CERTIFICATE OF COMPLIANCE Pursuant to Fed. R. App. P. 32(a)(7)(c)) and Ninth Circuit Rule 32-1, this brief is proportionally spaced, has a typeface of 14 points, and contains 7,697 words, excluding the parts of the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii).

___________________________ John Wesley Hall, Jr. Attorney for Brian Dvorak, Appellant

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STATEMENT OF RELATED CASES There are two related cases involving appeals to this court. The first is an appeal by 1st Global Stock Tansfer, LLC and Helen Bagley in docket number 1117021, which has been consolidated with this case for appeal purposes. The other is an appeal previously taken by Harold P. Gewerter in docket number 10-16384 in which this court entered judgment on August 26, 2011 and issued the mandate on October 18, 2011. SEC v. CMKM Diamonds, Inc., 656 F.3d 829 (9th Cir. 2011).

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