The U.S. Department of Justice ("DOJ") has sought to intervene in the civil enforcement action brought against TelexFree by the Securities and Exchange Commission on the basis that a stay of civil discovery is appropriate pending resolution of parallel criminal proceedings against certain former TelexFree principals. In an 18-page motion filed today, the DOJ argued that the existence of parallel criminal proceedings based on the same alleged misconduct warranted the stay of civil discovery for several reasons, including that defendants James Merrill and Carlos Wanzeler might use the civil discovery process "in a manner that impairs proper administration of the criminal case." Of the nine civil defendants, at least seven - including Wanzeler - assent to a stay of discovery.
In the Motion, the DOJ elaborates on the history of the case, indicating that the criminal investigation began in June 2013 after a tip from the Department of Homeland Security. The Commission allegedly began its investigation six months later in January 2014, also on the suspicion that TelexFree was an illegal Pyramid scheme. The DOJ suggests that TelexFree was somehow aware of its "covert" investigation due to TelexFree's surprise decision to declare bankruptcy in April 2013 - a decision that immediately prompted authorities to execute search warrants on TelexFree headquarters based on fears that evidence would be destroyed. That same day, the Commission filed its emergency enforcement action and Wanzeler, a TelexFree principal, fled the country to Canada to catch a flight to Brazil.
The focal point of the DOJ's Motion turns on the fear that Merrill and/or Wanzeler could use the more expansive discovery permitted in a civil case to circumvent the more limited scope of discovery available in a criminal case. For example, in criminal cases there are typically no automatic disclosure requirements by the government except that any exculpatory evidence must be turned over. In contrast, Rule 26 of the Federal Rules of Civil Procedure requires the parties in a civil proceeding to exchange basic information and discovery at an early stage of the case. Additionally, whereas in criminal proceedings the Jencks act prohibits the turnover of any witness statements until that witness has testified and the defense has requested those statements, a defendant in a civil case is usually free to use depositions and other discovery techniques to gather information about a potential witness.
In considering requests to stay civil proceedings, courts evaluate several factors including (a) the extent to which the civil and criminal cases overlap; (b) the public interest; (c) any potential prejudice to the civil parties if that matter is stayed; (d) the court’s interest in managing dockets and resources; and (e) the current status of the criminal case. The DOJ argues that the two cases will rely on identical witnesses and evidence, that the public interest favors preventing a criminal defendant from evading discovery rules, that the civil defendants will not be prejudiced by the stay and will in fact save money, and that a stay would promote judicial efficiency.
According to the DOJ, Merrill is currently considering the DOJ's request to stay civil discovery and has reserved his right to oppose such a stay. As highlighted by the DOJ, Merrill has raised issues with the estimated cost of defending the criminal cases and has claimed he has no funds available for his defense.
A copy of the Motion is below (thanks to ASDUpdates):