Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_04-cv-02239/USCOURTS-cand-3_04-cv-02239-1/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:77 Securities Fraud

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United States District Court

For the Northern District of California

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UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

CHARLES O. BRADLEY TRUST, et al.,

Plaintiffs,

v.

ZENITH CAPITAL LLC, et al.,

Defendants.

___________________________________/

No. C-04-2239 JSW (EMC)

ORDER GRANTING IN PART

PLAINTIFFS’ MOTION TO OBTAIN

DISCOVERY OF FINANCES OF

DEFENDANTS

(Docket Nos. 47, 53)

Having considered the parties’ briefs and accompanying submissions as well as the oral

argument of counsel, and good cause appearing therefor the Court hereby GRANTS that portion of

Plaintiffs’ motion seeking to compel net worth discovery from all Defendants. The Court also

provides in this order guidance to the parties regarding the remaining discovery disputes. 

I. FACTUAL & PROCEDURAL BACKGROUND

In this motion to compel, Plaintiffs seek discovery from the following Defendants: (1) the

entities Zenith Capital LLC; Tasker Cooper Smith/Zenith Group Ltd.; Tasker Cooper Smith/Zenith

Group LLC; and Pisenti & Brinker LLP, and (2) the individuals Rick Lane Tasker, Martel Jed

Cooper, Gregg Smith, and Irwin S. Rothenberg. Essentially, Plaintiffs are seeking discovery from

Zenith Capital LLC, all of its predecessor entities, and the individuals or entities who were, are, or

might have been managing members of or in positions of control over Zenith Capital LLC.

In their complaint, Plaintiffs allege that Defendants -- acting as Plaintiffs’ investment

advisors -- invested their money in a hedge fund, Global Money Management L.P. (“GMM”) from

1998 through 2003. Plaintiffs claim, inter alia, that Defendants fraudulently misrepresented GMM’s

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assets and returns, received “secret kickbacks” from GMM, and failed to tell Plaintiffs that an

operator of GMM had been disciplined by the National Association of Securities Dealers (“NASD”). 

According to Plaintiffs, because of Defendants’ actions, they lost $16,200,000 in principal

investments. Plaintiffs have filed suit against Defendants for violations of the following: (1) the

Federal Securities Act, 15 U.S.C. § 77(q)(a); (2) the Exchange Act, 15 U.S.C. § 78j(b), 17 C.F.R. §

240.10b-5; (3) the Advisers Act, 15 U.S.C. § 80b-6(1) & (2); (4) the Civil Rico Act, 18 U.S.C. §

1962; (5) the California Unfair Business Practices Act, Cal. Bus. Prof. Code § 17200; (6) the

California Corporations Code, §§ 25503, 27101; and (7) the common law (more specifically,

constructive fraud, negligent misrepresentation, breach of fiduciary duty, negligence, and breach of

contract). 

Plaintiffs now move to compel discovery of Defendants’ finances, arguing that the

information is relevant to (1) punitive damages (state law), (2) control person status (federal law),

and (3) alter ego status (state law).

II. DISCUSSION

A. Punitive Damages

Defendants do not dispute that punitive damages are available to Plaintiffs pursuant to their

state law claims. Moreover, Defendants do not dispute that information as to net worth and financial

condition is generally relevant to the issue of punitive damages (at least current net worth and

financial condition). See City of Newport v. Fact Concerts, Inc., 453 U.S. 247, 270 (1981)

(“[E]vidence of a tortfeasor’s wealth is traditionally admissible as a measure of the amount of

punitive damages that should be awarded . . . .”). Instead, Defendants argue that the discovery

should not proceed because (1) information on their net worth and financial condition is privileged

and (2) punitive damages discovery should be delayed. Defendants Pisenti & Brinker and Mr.

Rothenberg also make an independent argument which is addressed below.

1. Privilege

According to Defendants, information on their net worth and financial condition is privileged

as a matter of privacy under Article I, Section I of the California Constitution. However, federal law

on privilege, and not state, applies to the instant case. See Religious Tech. Ctr. v. Wollersheim, 971

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F.2d 364, 367 n.10 (9th Cir. 1992) (holding that federal privilege law applies in a case involving

both federal and pendent state claims); see also Hancock v. Hobbs, 967 F.2d 462 (11th Cir. 1962)

(applying federal rule of privilege to both federal and state claims, on the ground that federal rules

control federal claims and “it would be impractical to apply two different rules of privilege to the

same evidence before a single jury”).

Under federal law, Defendants do have a constitutional right to privacy – more specifically, a

constitutional right to nondisclosure of their personal information. See Whalen v. Roe, 429 U.S. 589,

599 (1977); Nixon v. Adm’r of Gen. Serv., 433 U.S. 425, 457 (1977). However, that right is not

absolute. See Crawford v. United States Trustee, 194 F.3d 954, 959 (9th Cir. 1999). Courts that

have considered whether a disclosure of financial information might violate a constitutional right to

privacy have employed a balancing test to determine whether there has been a violation. See, e.g.,

Denius v. Dunlap, 209 F.3d 944, 958 (7th Cir. 2002); Am. Fed’n of Gov’t Employees, AFL-CIO v.

Dep’t of HUD, 118 F.3d 786, 793 (D.C. Cir. 1997); Barry v. City of New York, 712 F.2d 1554, 1559-

62 (2d Cir. 1983); Plante v. Gonzales, 575 F.2d 1119, 1136 (5th Cir. 1978). 

Following those courts and applying a balancing test, the Court concludes that information

on Defendants’ net worth and financial condition should be disclosed because the interests favoring

disclosure (e.g., ascertaining the truth, addressing potentially severe wrongdoing by Defendants,

ensuring enforcement of rights) outweigh the interests favoring nondisclosure, especially since the

information on net worth and financial condition is sought only from 2004 to the present, see Pls.’

Mot. at 1-2, and Defendants’ interests in maintaining their privacy can be protected through a

protective order. Cf. Borzillieri v. Am. Nat’l Red Cross, 139 F.R.D. 284, 288 (W.D.N.Y. 1991)

(noting that “properly framed protective order will permit plaintiff to question donor X without at

the same time violating his or her constitutional right to privacy”); Whalen, 429 U.S. at 607

(Brennan, J., concurrence) (suggesting that widespread dissemination of medical information to

public might constitute a constitutional violation but not limited disclosure to small number of

public health officials with legitimate interest in information). Accordingly, this Court will order the

production of these documents under a strict protective order, e.g., limiting disclosure to counsel

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1 While federal law is controlling on the matter of privilege, the Court can also, as a matter of

comity, take into account relevant state law that pertains to Defendants’ right to privacy. See

Northwestern Mem’l Hosp. v. Ashcroft, 362 F.3d 923, 932-33 (7th Cir. 2004) (noting that state privilege

does not apply in federal court but that, as matter of comity, such privilege would be considered where

no significant interference with federal proceeding). As Defendants point out, there is a right to privacy

under Article I, Section I of the California Constitution. However, privacy under the California

Constitution is “not an absolute right, but a right subject to the invasion depending upon the

circumstances. Moreover, the courts have frequently found that a party’s need for the information may

outweigh whatever privacy rights, if any, another party may have.” Oakes v. Halvorsen Marine Ltd., 179 F.R.D. 281, 284 (C.D. Cal. 1998). In other words, state law also requires a balancing test in

assessing when privacy rights can be invaded. See Hill v. Nat’l Coll. Athletic Ass’n, 7 Cal. 4th 1, 37

(1994); see also Hooser v. Superior Court, 84 Cal. App. 4th 997, 1004 (2000) (listing the following

factors used to balance privacy and disclosure needs: “the purpose of the information sought, the effect

that disclosure will have on the affected persons and parties, the nature of the objections urged by the

party resisting disclosure and availability of alternative, less intrusive means for obtaining the requested

information”). 

Even taking into account state law on privacy, the Court still concludes that the interest in

disclosure outweighs Defendants’ privacy interests, especially as there will be a protective order in this

case. See Oakes, 179 F.R.D. at 284 (noting that, while a party does have an interest in confidentiality

of financial statements and net worth reports, this interest can be adequately addressed via a protective

order). 

Plaintiffs note in passing that any privileges may have been waived by Defendants because they

have not provided Plaintiffs with any privilege log. See Burlington Northern & Santa Fe Railway Co.

v. Kapsner, No. 04-72134, 2005 U.S. App. LEXIS 5150, at *10 (9th Cir. Mar. 31, 2005). The Court

need not address this argument as it concludes that the information on current net worth and financial

condition should be produced pursuant to the above analysis.

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only (i.e., no dissemination to Plaintiffs-clients, let alone the public unless and until ordered

otherwise) and requiring destruction of all information (including copies) at the end of litigation.1

2. Delay

Defendants argue that, even if their financial information is not privileged, it should not be

produced until Plaintiffs have made out a prima facie case on the issue of punitive damages. While

some federal courts have required a prima facie showing, the majority have not. See 6-26 Moore’s

Fed. Practice – Civ. § 26.41 (taking note of position of majority of federal courts); see also United

States v. Matusoff Rental Co., 204 F.RD. 396, 399 (S.D. Ohio 2001), Christy v. Ashkin, 972 F. Supp.

253, 253 (D. Vt. 1997); CEH, Inc. v. FV “Seafarer”, 153 F.R.D. 491, 498 (D. R.I. 1994); Mid

Continent Cabinetry, Inc. v. George Koch Sons, Inc., 130 F.R.D. 149, 151 (D. Kan. 1990). 

The Court acknowledges that, under California law, a prima facie showing is required. 

California Civil Code § 3295 provides in part that 

[n]o pretrial discovery by the plaintiff shall be permitted with respect

to the evidence [of a defendant’s profits gained by virtue of its

wrongdoing or its financial condition] unless the court enters an order

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2 “While Erie questions arise most frequently in diversity cases, the Supreme Court has made

clear that the doctrine applies equally to state law claims . . . that are brought to the federal courts

through supplemental jurisdiction under 28 U.S.C. § 1367.” Houben v. Telular Corp., 309 F.3d 1028,

1032 (7th Cir. 2002); see also United Mine Workers v. Gibbs, 383 U.S. 715; Bass v. First Pac.

Networks, Inc., 219 F.3d 1052, 1055 n.2 (9th Cir. 2000).

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permitting such discovery pursuant to this subdivision. . . . Upon

motion by the plaintiff supported by appropriate affidavits . . . , the

court may at any time enter an order permitting the discovery

otherwise prohibited by this subdivision if the court finds, on the basis

of the supporting and opposing affidavits presented, that the plaintiff

has established that there is a substantial probability that the plaintiff

will prevail on the [punitive damages] claim.

Cal. Civ. Code § 3295(c); see also Cobb v. Superior Court, 99 Cal. App. 3d 543, 550 (1979) (“[T]he

trial court should consider the advisability of requiring a prima facie showing into the right to

punitive damages . . . .”). 

However, “discovery is a procedural matter governed in the federal courts by the Federal

Rules of Civil Procedure. Thus, state discovery practices are usually irrelevant.”2

 CEH, 153 F.R.D.

at 497-98; see also Oakes, 179 F.R.D. at 285 (finding that § 3295(c) “is clearly a procedural law”);

6-26 Moore’s Fed. Practice -- Civ. § 26.41 (taking note of state statutes similar to § 3295 and

commenting that “[i]t is doubtful that these types of provisions are binding on a federal court, even

when its subject matter jurisdiction rests on diversity of citizenship”).

Under federal law, “a district court has unquestioned authority to control the sequence of

discovery.” Id. This Court concludes that it is not appropriate to delay discovery on punitive

damages because, as suggested by one court, such information is valuable to both parties in making

a realistic appraisal of the case and may lead to settlement and avoid protracted litigation. See Mid

Continent, 130 F.R.D. at 152; cf. Matusoff, 204 F.R.D. at 401 (noting that to delay discovery on net

worth and financial condition until after liability had been established could put plaintiff in the

position of “being required either to prove punitive damages to a different jury than the one which

had found the Defendants liable, or to seek such damages from the same jury, after it had been away

from the trial for a number of weeks (or months), while the parties conducted discovery on the

financial condition of the Defendants”).

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3. Defendants Pisenti & Brinker and Mr. Rothenberg

As noted above, Defendants Pisenti & Brinker and Mr. Rothenberg make a separate

argument from the other Defendants as to punitive damages discovery. More specifically, they

argue that they should not be compelled to provide any such discovery because they did not

personally engage in any wrongdoing and thus there is no basis for finding liability for punitive

damages. According to Pisenti & Brinker and Mr. Rothenberg, because they did not merge with

Zenith Capital LLC’s predecessor until 2001, they personally did not cause any wrong to Plaintiffs -

- i.e., they never provided investment advice to Plaintiffs, received any funds from Plaintiffs, or had

any contact with Plaintiffs. However, the Court does not agree that there is no possibility that

Pisenti & Brinker and Mr. Rothenberg did not engage in personal wrongdoing, thus precluding even

discovery into punitive damages.

Under California law, liability can extend to individuals or entities in their personal

capacities if they “specifically authorized, directed or participated in the allegedly tortious conduct;

or that although they specifically knew or reasonably should have known that some hazardous

condition or activity under their control could injure plaintiff, they negligently failed to take or

order appropriate action to avoid the harm.” Frances T. v. Vill. Green Owners Ass’n, 42 Cal. 3d

490, 508-09 (1986) (emphasis added). According to Plaintiffs, Pisenti & Brinker and Mr.

Rothenberg -- both listed as controlling persons in Zenith Capital LLC’s registration with the NASD

in January 2002, see Compl. ¶ 8; Pls.’ Mot. at 4, Ex. 4 -- knew about the “secret kickbacks” but

failed to take any action to protect Plaintiffs. See Compl. ¶¶ 17, 18; Pls.’ Mot. at 5, Ex. 8

(highlighting an email that Mr. Rothenberg received denoting the nature of Zenith’s disputed feebased compensation from GMM). According to Plaintiff, the alleged “kickbacks” occurred well into

2003, long after Pisenti & Brinker and Mr. Rothenberg became involved with Zenith. Also, Pisenti

& Brinker and Mr. Rothenberg allegedly knew but failed to tell Plaintiffs that a GMM operator had

been disciplined multiple times by the NASD. See Compl. ¶ 20; Pls.’ Mot. at 5, Ex. 7. Although

potential exposure to personal liability as a result of e.g., negligence does not necessarily establish

exposure to punitive damages under Civil Code § 3294, the Court cannot make such a determination

at this stage. The extent of culpability, if any, is likely to turn on facts. Unless and until a

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determination that there is no such exposure is made by the trial judge herein, this Court is not in a

position to preclude the possibility of punitive damages. Consequently, Plaintiffs are entitled to

punitive damages discovery from Pisenti & Brinker and Mr. Rothenberg under the terms of the strict

protective order described above.

B. Income and Expense Reports

In addition to information on Defendants’ net worth and financial condition, Plaintiffs also

seek what they call income and expense reports from Defendants. Plaintiffs argue that this

information is relevant to two issues: (1) control person under federal law and (2) alter ego under

state law. The following reiterates the Court’s comments at the hearing and shall inform the further

meet and confer ordered.

1. Control Person

Plaintiffs seek Defendants’ income and expense reports to prove that the individual

defendants, along with Pisenti & Brinker, are control persons of Zenith Capital LLC and/or its

predecessors under federal securities law.

Title 15 U.S.C. § 78t(a) provides:

Every person who, directly or indirectly, controls any person liable

under any provision of this chapter or of any rule or regulation

thereunder shall also be liable jointly and severally with and to the

same extent as such controlled person to any person as such controlled

person is liable, unless the controlling person acted in good faith and

did not directly or indirectly induce the act or acts constituting the

violation or cause of action.

15 U.S.C. § 78t(a). The Ninth Circuit has stated that 

[w]hether [defendant] is a controlling person is an intensely factual

question, involving scrutiny of the defendant’s participation in the

day-to-day affairs of the corporation and the defendant’s power to

control corporate actions. Control is defined in the regulations as the

possession, direct or indirect, of the power to direct or cause the

direction of the management or policies of a person, whether through

the ownership of voting securities, by contract, or otherwise.

No. 84 Employer-Teamster v. Am. W. Holding, 320 F.3d 920, 945 (9th Cir. 2003). 

While, given Plaintiffs’ allegations, who is a control person is a relevant matter, see Compl. ¶

13; Pls.’ Mot. at 8-9, Plaintiffs’ document requests are overbroad and not specifically targeted to

seeking information that would reflect whether the individual defendants and/or Pisenti & Brinker

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are control persons. For example, although documents showing e.g., the exercise of influence or

decision-making power over Zenith may be relevant, it is not clear why income and expense reports

of the individual defendants would be telling of their management or involvement in the day-to-day

affairs of an entity. The parties should further meet and confer to determine if they can reach

agreement on a narrowed request for documents relevant to the issue of control person.

2. Alter Ego

Plaintiffs also seek Defendants’ income and expense reports to prove that the entity

defendants are the alter ego of the individual defendants, along with Pisenti & Brinker, under state

law. Pursuant to the alter ego doctrine, when a corporation is the mere instrumentality or shell of

another corporation or person, a court will disregard the corporate entity and hold the “underlying”

corporations or individuals responsible for their acts knowingly and intentionally done in the name

of the corporation. See Fletcher Cyclopedia of Private Corp. § 41.10. To prove that an entity is an

alter ego under California law, two requirements must be met: (1) there must “be such unity of

interest and ownership that the separate personalities of the corporation and the individual no longer

exist,” and (2) “if the acts are treated as those of the corporation alone, an inequitable result will

follow.” Mesler v. Bragg Mgmt. Co., 39 Cal. 3d 290, 300 (1985); see also McLouglin v. L. Bloom

Sons Co., 206 Cal. App. 2d 848, 851 (1962) (finding the same two requirements when the entity

sought to be held liable is another corporation instead of an individual). 

For the first requirement, courts have considered the following factors: (1) commingling of

funds and other assets; (2) failure to segregate funds of the separate entities; (3) the unauthorized

diversion of corporate funds or assets to other than corporate uses; (4) the total absence of corporate

assets; (5) the use of a corporation as a mere shell, instrumentality or conduit for a single venture or

the business of an individual or another corporation; (6) concealment of personal business activities;

(7) the diversion of assets from a corporation by or to a stockholder or other person or entity, to the

detriment of the creditors; (8) the manipulation of assets and liabilities between entities so as to

concentrate te assets in one and the liabilities in another; and (9) the use of a corporation as a

subterfuge of illegal transactions. See Assoc. Vendors, Inc. v. Oakland Meat Co., 210 Cal. App. 2d

825, 838-840 (1962).

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Given Plaintiffs’ allegations, there is reason to pursue discovery relevant to the issue of alter

ego. See Compl ¶ 13, Pls.’ Mot. at 9-10. Again, however, the document requests as they currently

stand are overbroad. Although documents of financial transactions or exchange of value between

Zenith and individual Defendants may be relevant to e.g., co-mingling of funds, it is unclear how

income and expense of Pisenti & Brinker and Mr. Rothenberg, as a general matter, are relevant to

Plaintiffs’ alter ego claim. The parties should further meet and confer to determine if they can reach

agreement on a narrowed request for documents relevant to the issue of alter ego.

III. CONCLUSION

The Court therefore orders as follows:

1. Defendants, including Pisenti & Brinker and Mr. Rothenberg, shall produce to

Plaintiffs documents sufficient to establish their net worth and financial condition from 2004 to

present. Defendants shall complete their production no later than 21 days from this Order. The

documents should be produced subject to a protective order as described herein.

2. The parties shall further meet and confer regarding documents relevant to the issues

of control person and alter ego. The requests should be narrowed both in terms of subject matter and

time.

3. As discussed at the hearing on Plaintiffs’ motion to compel, to the extent that

Plaintiffs seek financial information from Defendants to track down where Plaintiffs’ money went,

the Court notes that Plaintiffs are entitled to such information but that such information should be

narrowed, e.g., to documents that reflect monetary exchanges between GMM and Defendants,

between the entity defendants, and between the entity and individual defendants.

IT IS SO ORDERED.

Dated: May 3, 2005

 /s/ 

EDWARD M. CHEN

United States Magistrate Judge

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