Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_07-cv-03798/USCOURTS-cand-5_07-cv-03798-0/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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NOT FOR CITATION

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

SECURITIES AND EXCHANGE

COMMISSION,

Plaintiff,

 v.

KENNETH L. SCHROEDER,

Defendant. /

No. C07-03798 JW (HRL)

ORDER GRANTING IN PART

DEFENDANT’S MOTION FOR

PROTECTIVE ORDER

[Re: Docket No. 18]

On January 15, 2008, this court heard the motion for protective order filed by defendant

Kenneth L. Schroeder. The Securities and Exchange Commission (SEC) opposed the motion. 

Upon consideration of the papers filed by the parties, as well as the argument of counsel, this

court grants the motion in part.

I. BACKGROUND

This is a civil enforcement action for alleged improper stock option backdating at KLATencor. Defendant Kenneth Schroeder is KLA-Tencor’s former Chief Executive Officer. The

SEC contends that he was a key participant in a fraudulent scheme to backdate stock options,

resulting in the concealment of millions of dollars in executive and employee compensation and

significant overstatement of the company’s income.

Before filing the instant action, the SEC and the Department of Justice (DOJ)

investigated KLA-Tencor’s option granting practices. In the course of its investigation, the

*E-FILED 1/15/2008*

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SEC obtained memoranda of approximately 55 witness interviews conducted by counsel for a

Special Committee of KLA-Tencor’s Board of Directors. The Special Committee also

interviewed Schroeder on September 1, 2006; and, that interview was recorded in a 73-page

memorandum. The SEC produced these memoranda to Schroeder as part of its initial

disclosures in the instant action.

The DOJ’s investigation of KLA-Tencor is ongoing. Although he has not yet been

indicted, Schroeder says that the U.S. Attorney’s Office has advised that he is a possible target

of the investigation and that criminal charges have not been ruled out.

Discovery is set to close on March 31, 2009. The SEC has noticed Schroeder’s

deposition for February 5, 2008. Schroeder now seeks a protective order precluding the SEC

from deposing him until the last three months of discovery – that is, no earlier than January

2009. He argues that, by noticing his deposition early in discovery, the SEC is trying to force

him to prematurely choose between testifying or asserting his Fifth Amendment rights (and,

consequently, risking the possibility of having adverse inferences drawn against him). The SEC

argues that Schroeder’s Fifth Amendment concerns are merely speculative because he has not

been indicted and it is not clear when, or if, he will face criminal charges. It further asserts that

the government and public have an overriding interest in the expeditious resolution of these

proceedings and that it will be prejudiced if Schroeder cannot be deposed until the very end of

the discovery period.

II. DISCUSSION

“The Constitution does not ordinarily require a stay of civil proceedings pending the

outcome of criminal proceedings.” Keating v. Office of Thrift Supervision, 45 F.3d 322, 324

(9th Cir. 1995) (citing Federal Savings & Loan Ins. Corp. v. Molinaro, 889 F.2d 899, 902 (9th

Cir. 1989)). Absent substantial prejudice to the parties involved, simultaneous parallel civil

and criminal actions are unobjectionable. Id. Nonetheless, a court may exercise its discretion

to stay civil proceedings when the interests of justice so require. Id. “The 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.’” Id. (quoting

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Molinaro, 889 F.2d at 902). In making its determination, the court should consider several

factors, including: (1) the extent to which the defendant’s Fifth Amendment rights are

implicated; (2) plaintiff’s interests in proceeding expeditiously with the litigation; (3) the

burden which any particular aspect of the proceedings may impose on the defendants; (4) the

convenience of the court in the management of its cases, and the efficient use of judicial

resources; (5) the interests of persons not parties to the civil litigation; and (6) the public’s

interest in the pending civil and criminal litigation. Id. at 325.

In the instant case, as discussed above, no criminal charges have been brought against

Schroeder. “The case for staying civil proceedings is ‘a far weaker one’ when ‘[n]o indictment

has been returned[, and] no Fifth Amendment privilege is threatened.’” Molinaro, 889 F.2d at

903 (quoting Securities & Exchange Comm’n v. Dresser Indus., Inc., 628 F.2d 1368, 1376 (D.

D.C. 1980)).

However, Schroeder does not request a stay of the instant action or even of all

discovery. Instead, he seeks the less drastic relief of having his deposition postponed so that he

may make a more informed decision as to whether to assert his constitutional rights. He has

made some showing as to the possibility of criminal indictments and advises that the DOJ has

requested and obtained a tolling agreement as to any criminal charges which may be brought. 

(See Coopersmith Decl., ¶ 5). And, there is no dispute as to the significant overlap between the

instant action and the subject matter of the DOJ’s ongoing investigation of KLA-Tencor. This

court is not persuaded that the instant action will be unduly delayed or hampered if Schroeder’s

deposition is postponed for a time. See, e.g., Securities & Exchange Comm’n v. Power

Securities Corp., 142 F.R.D. 321, 323 (D. Co. 1992) (granting defendant’s request to postpone

his deposition until after the time when the grand jury reached a decision as to indictments);

Favaloro v. S/S Golden Gate, 687 F. Supp. 475, 482 (N.D. Cal. 1987) (denying defendant’s

request to stay civil action where no indictments had been filed, but directing the parties to

nonetheless develop a discovery plan that would be least likely to intrude on defendants’ Fifth

Amendment rights).

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At the same time, however, the court is not persuaded that the SEC should be precluded

from deposing Schroeder for a year until the very end of discovery. The SEC acknowledges

that, by virtue of the Special Committee interview memoranda, it does have some inkling as to

what Schroeder and other witnesses may have to say. Nevertheless, the memoranda in question

apparently are not sworn testimony, but rather, attorney summaries of what witnesses said. 

Assuming Schroeder elects to testify substantively, his testimony might well point to the need to

take other or further discovery. Moreover, there currently is no indication as to when the DOJ’s

investigation will be completed or if any criminal charges will be filed. And, Schroeder readily

acknowledges that the SEC is entitled to depose him and that he may well have to choose

between testifying and asserting his Fifth Amendment rights at some point.

Under the circumstances presented, this court concludes that an appropriate balance will

be achieved if Schroeder’s deposition is postponed for four months.

III. ORDER

Based on the foregoing, IT IS ORDERED THAT defendant’s motion for protective

order is GRANTED IN PART. His deposition shall be postponed until after May 15, 2008.

Dated:

 

HOWARD R. LLOYD

UNITED STATES MAGISTRATE JUDGE

January 15, 2008

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5:07-cv-3798 Notice has been electronically mailed to: 

Judith L. Anderson andersonju@sec.gov, alcairoe@sec.gov, johnstonj@sec.gov 

Jeffrey Bruce Coopersmith jeff.coopersmith@dlapiper.com, stephanie.tucker@dlapiper.com 

Marc J. Fagel fagelm@sec.gov 

Mark Philip Fickes fickesm@sec.gov 

Stuart L. Gasner slg@kvn.com, dxc@kvn.com, efiling@kvn.com, mcianfrani@kvn.com 

Susan F. LaMarca lamarcas@sec.gov, alcairoe@sec.gov, johnstonj@sec.gov 

Elliot Remsen Peters epeters@kvn.com, aap@kvn.com, alm@kvn.com, efiling@kvn.com,

mak@kvn.com 

David Allen Priebe david.priebe@dlapiper.com, stacy.murray@dlapiper.com 

Elena Ro roe@sec.gov 

Steven Keeley Taylor skt@kvn.com, efiling@kvn.com 

Shirli Fabbri Weiss shirli.weiss@dlapiper.com 

Counsel are responsible for distributing copies of this document to co-counsel who have

not registered for e-filing under the court’s CM/ECF program.

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