The opinion of the court was delivered by: LOUIS F. OBERDORFER
On February 27, 1991, this Court issued a Memorandum and Order granting judgment for plaintiff on all claims in this matter. The Court found that injunctive relief was warranted. Pursuant to that Order, the parties have submitted proposed injunctions and comments regarding the proposed injunctions. Meanwhile, defendants have filed a notice of appeal. In conjunction with their appeal, defendants move for a stay of the injunction pending resolution of the appeal.
Determination of whether a stay is warranted pending appeal requires consideration of "(1) the likelihood that the party seeking the stay will prevail on the merits of the appeal; (2) the likelihood that the moving party will be irreparably harmed absent a stay; (3) the prospect that others will be harmed if the court grants the stay; and (4) the public interest in granting the stay." Cuomo v. United States Nuclear Regulatory Commission, 772 F.2d 972, 974 (D.C. Cir. 1985), citing WMATA v. Holiday Tours, Inc., 559 F.2d 841, 843 (D.C. Cir. 1977). To decide whether to grant a stay, courts weigh these factors. Thus, "[a] stay may be granted with either a high probability of success and some injury, or vice versa." Cuomo, 772 F.2d at 974.
Defendants argue that, pursuant to Section 9(a) of the Investment Company Act of 1940, 15 U.S.C. § 80a-9(a), an injunction will force defendants Charles Steadman and the Steadman Security Corporation (SSC) to terminate their investment-advisory business. Defendants further assert that the SEC is considering pursuing administrative proceedings against them after the injunction is entered that would bar them from acting as transfer agents.
The SEC opposes defendants' motion for a stay of the injunction. First, plaintiff argues that defendants failed to demonstrate any likelihood of success on the merits. Second, it argues that a stay will not serve the public interest in preventing securities violations. In addition, the SEC notes that defendants' violation of the securities laws harmed the Funds' shareholders. Citing the Court's finding that an injunction was necessary to prevent future violations, the SEC argues that a stay would disserve shareholders' interest in that prevention now. In addition, the SEC argues that defendants will not be injured by being barred from serving as investment advisors or transfer agents because any such bar is a direct result of defendants actions, which this Court found to have violated the securities laws.
The SEC further argues that the shareholders have an interest in obtaining new management of the Funds because of the Funds' poor performance. Defendants move to strike all arguments based on the Funds' alleged performance, arguing persuasively that this issue is not relevant. The purpose of the injunction to be entered is to prevent any further violation of securities laws by defendants, not to provide for improved management of the Funds' assets. Therefore, regardless of whether or not the SEC's concern about defendant's management of the Funds' assets is justified for reasons unrelated to this lawsuit, defendants' management and any injury suffered by shareholders as a result of it has no direct bearing on whether a stay of the injunction is appropriate here.
Defendants' request for a stay is justified based on the criteria identified in Cuomo. As to defendants' prospect of success on appeal, while this Court is naturally satisfied that its decision on the merits and with respect to relief were correct and that none of the arguments available to defendants on appeal have merit, the result on an appeal in a matter of this complexity is difficult to predict.
Furthermore, the SEC's contentions that defendants will not be severely injured by this injunction and that the public will be harmed by a stay are not convincing. Defendants, who have served as investment advisors and transfer agents in the mutual fund industry for decades, will be seriously injured by an injunction that results in a bar to their continued service in the industry. That injury will be irreparable because, once defendants are shut out of the industry, it is doubtful that, should the injunction be lifted, they would be able to regain positions in the industry as investment advisers, much less the positions they hold today. Finally, while an injunction is required long-term to assure defendants' future compliance with the securities laws, the risk to shareholders and to the public interest that they would violate those laws while their appeal is pending is an acceptable one.
Accordingly, an accompanying Order grants defendants' motion for a stay pending appeal.
UNITED STATES DISTRICT JUDGE
ORDER - May 1, 1991, Filed
For the reasons stated in the accompanying Memorandum, it is this 1st day ...