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Monday, May 14, 2012

Federal Judge Issues Contempt Order Over Subpoenas

Jailed Executive Found in Contempt for Failing to Answer Divorce Subpoenas
The New York Law Journal by Brendan Pierson  -  May 3, 2012

Global Net Inc. founder Myron Gushlak, who pleaded guilty to securities fraud in 2003 and has been ordered to pay $42 million in fines and restitution, now has been held in contempt of court for failing to respond to subpoenas served on him and his alleged girlfriend by his wife, who is in the process of divorcing him in the Cayman Islands.  Eastern District Judge Nicholas Garaufis on April 30 ordered Mr. Gushlak and the alleged girlfriend, Yelena Furman, each to pay $250 per day until they have complied with subpoenas served by Gushlak's wife, Debbie Gushlak. If they do not comply within 30 days, they will face "more coercive" sanctions, which could include confinement.  The order adopted a Jan. 30 report and recommendation from Magistrate Judge James Orenstein.  The judge also ordered one of Mr. Gushlak's lawyers, Alan Futerfas, to show cause within 10 days why he should not be sanctioned for making arguments that Garaufis said were frivolous and made in bad faith.  The case, In re Application of Debbie Gushlak, 1:11-mc-00218, began when Ms. Gushlak applied to the Eastern District for leave to serve subpoenas on Mr. Gushlak and Furman. Mr. Gushlak was serving a six-year prison sentence for securities fraud at the Metropolitan Detention Center in Brooklyn, and Furman, who had allegedly helped Mr. Gushlak with several illegal transactions, lived in Brooklyn. Ms. Gushlak was seeking information about Mr. Gushlak's finances and business ventures to help with her divorce proceeding.  Garaufis, who also presided over the criminal case against Mr. Gushlak, granted Ms. Gushlak's application, and she served subpoenas. He said that if Mr. Gushlak wanted to oppose the subpoenas, he would have to do so by filing a motion to quash them. Instead, Mr. Gushlak appealed Garaufis' decision granting Ms. Gushlak's application to the U.S. Court of Appeals for the Second Circuit, where it remains pending. Mr. Gushlak and Furman never responded to the subpoenas, and in October 2011, Ms. Gushlak moved to hold them in contempt.  Mr. Gushlak raised several arguments in his defense, all of which Garaufis rejected in his order granting the contempt motion. Among other things, Mr. Gushlak said he should not have to respond to the subpoena because his wife had stolen his phone records to use while preparing it. The judge found this irrelevant.  "At issue here is whether Respondents should be held in contempt for failing to comply with the terms of a court-ordered subpoena," the judge wrote. "It is therefore irrelevant whether Ms. Gushlak stole Mr. Gushlak's phone records. To the extent that this alleged fact somehow undermines the merits of Ms. Gushlak's application, then the appropriate time and place for such an argument was in a motion to quash the subpoenas."  The judge also rejected Mr. Gushlak's argument that he had never been heard on the merits of Ms. Gushlak's application to serve the subpoenas, writing that this "simply has no bearing" on whether he must respond to them.  "The court expressly invited Mr. Gushlak to file a motion to quash the subpoenas…but, for reasons known only to Mr. Gushlak and his counsel, he declined to exercise this right," the judge wrote. "It is now too late for him to litigate the validity of Ms. Gushlak's application."  Mr. Gushlak also had asked the court to stay enforcement of the subpoenas pending his appeal to the Second Circuit, but Garaufis refused, saying his likelihood of success on appeal was "remote."  "To begin with, by failing to challenge the subpoenas in this court, Mr. Gushlak may have waived his right to contest them on appeal," the judge wrote. "Moreover, even if the Court of Appeals does reach the merits of Mr. Gushlak's arguments, the court considers these arguments to be weak."  Furthermore, the judge wrote, granting a stay would prejudice Ms. Gushlak, who "has already waited almost a year for Respondents to comply with two facially valid subpoenas.  He continued, "The discovery she seeks is likely time-sensitive as it is needed to help prevent Mr. Gushlak from secreting assets to which Ms. Gushlak may have a claim. Every day that Respondents remain noncompliant expands the opportunity for Mr. Gushlak to hide his assets."

'Frivolous' Objection

Finally, Garaufis said that one of the objections made by Futerfas, one of Mr. Gushlak's lawyers—that the court had no jurisdiction to enforce the subpoenas while the appeal was pending—"is frivolous and may be sanctionable."  "Absent a stay, district courts retain jurisdiction to enforce their orders while review of those orders is pending on appeal," the judge wrote. "In the event that Respondents' own legal research did not reveal this well-settled principle, the nearly two pages of accurate supporting citations" appearing in the report and recommendations "should have put them on notice."  The judge further said that the argument was likely made in bad faith because Mr. Gushlak had simultaneously asked the circuit for a stay.  "On the record as it stands now, the court cannot credit counsel's certification that he believed his argument on jurisdiction was 'warranted by existing law,'" the judge said. He ordered Futerfas to show cause within seven days why he should not be sanctioned for making the argument.  In imposing the sanctions against Mr. Gushlak and Furman, Garaufis said he was "tempted" to go further and order them confined, which in Mr. Gushlak's case would mean adding time to his prison sentence. He said he agreed with Ms. Gushlak that monetary sanctions would likely have little effect on Mr. Gushlak because he already owes $42 million to the government and investors.  "In short, there is a legitimate risk that a monetary sanction will not affect Mr. Gushlak because he will sense that he is paying the sanction with other people's money," the judge wrote. "Nevertheless, the court will for now give him the benefit of the doubt." The judge added that after 30 days he would consider more coercive sanctions.  Brian Rosner of Rosner & Napierala, another attorney for Mr. Gushlak, said he was unable to reach his client immediately to talk about the order because he was being transferred to a new room in prison, but expected to talk to him soon about how to proceed.  Futerfas declined to comment.  Gerald Lefcourt, Ms. Gushlak's counsel, also declined to comment.  Mr. Gushlak, who was a director of telecommunications company Global Net Inc., has admitted that in 1999 and 2000 he worked to inflate the value of Global Net stock, partly by paying kickbacks to brokers who bought the stock for their clients, in order to enrich himself.  When the fraud came to an end in 2000, Global Net's stock lost value and investors suffered losses. But the scheme did not come to light until after the company stopped trading publicly in 2002, soon after Global Net was acquired by The Titan Corp. (Titan was in turn acquired by L-3 Communications Corp. in 2005.)  In November 2010, Mr. Gushlak was ordered to pay a $25 million fine and sentenced to six years in prison. In April, he was ordered to pay $17 million in restitution to investors (NYLJ, April 24).  Brendan Pierson can be contacted at bpierson@alm.com.

3 comments:

Anonymous said...

We need more orders like this one. Too many people are ignoring discovery orders and nothing happens. It makes a joke of all proceedings. Hit them where it hurts.

Anonymous said...

She has a connection, while he doesn't. Allthose orders directing repayment of millions are nice show pieces without any real expectation of success. The lawyers are picking the carcasses clean.

Anonymous said...

Key Words - 'Cayman Islands' and those my friends are bankable, no pun intented!

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