United States District Court, D. New Jersey, Camden Vicinage
September 9, 2005.
COMMODITY FUTURES TRADING COMMISSION, Plaintiff,
EQUITY FINANCIAL GROUP, LLC, et al., Defendants.
The opinion of the court was delivered by: ANN MARIE DONIO, Magistrate Judge
REPORT AND RECOMMENDATION
This matter comes before the Court for a Report and
Recommendation concerning an issue relating to the claims of
Sterling ACS, Ltd., Sterling Alliance Ltd., Sterling Casualty &
Insurance, Ltd., Sterling Bank Limited, Sterling (Anguilla)
Trust, Ltd., Sterling Investment Management, Ltd., and Strategic
Investment Portfolio, LLC (collectively the "Sterling entities")
in the above action.*fn1 Specifically, Plaintiff, Commodity
Futures Trading Commission (hereinafter "CFTC"), objected to any
distribution to the Sterling entities until such entities
responded to the CFTC's requests for discovery. See Objection
of the Commodity Futures Trading Commission to the Claims of the
Sterling Entities  (hereinafter "CFTC Objection "), at
2. The Court previously recommended approval of the interim distribution
as proposed by the Receiver with modifications as set forth in
the Report and Recommendation dated September 2, 2005.*fn2
This Report and Recommendation serves to address certain
objections raised by the CFTC to Sterling's claims. Specifically,
the CFTC seeks from Sterling the backup tape of two of the three
computers of Defendant J. Vernon Abernethy that Abernethy stated
he made in response to the Receiver's request to preserve the
computer files relevant to this case.*fn3 Id. at 3-4;
see also Declaration under Penalty of Perjury of J. Vernon
Abernethy Pursuant to 28 U.S.C. § 1746 (hereinafter "Abernethy
Decl.") at ¶ 4, attached as Exhibit F to CFTC's Reply to the
Sterling Entities' Response to CFTC's Objections . The Court
conducted an evidentiary hearing with respect to the tape issue
on May 13, 2005. For the reasons set forth herein, Sterling shall
produce the backup tape to the CFTC, and failure to do so will
result in Sterling's claims remaining on the disputed claims
schedule.*fn4 I. BACKGROUND
This dispute centers around the production of a computer backup
tape relating to two desktop computers and a laptop computer
located in Abernethy's home office. Abernethy, a named defendant,
testified during the evidentiary hearing that all three computers
were used in his capacity as an agent for Tech Traders, a named
defendant. He also testified that he used the computers as
President of Sterling Casualty & Insurance, Ltd., as a member of
Strategic Investment Portfolio, and as an agent of the Sterling
Companies. See Transcript of Hearing on May 13, 2005
(hereinafter "Transcript"), at 14-15, 33; see also Abernethy
Decl. at ¶¶ 5-6. He further testified that within twenty-four
hours after meeting with the Receiver and counsel for the CFTC on
April 7, 2004, he had an external backup tape media device
created to image the two desktop computers. See Transcript at
15-16; see also Abernethy Decl. at ¶ 7. He testified that the
tape contains electronic files pertaining not only to Tech
Traders and the other parties in this matter, but also electronic
files pertaining to Abernethy's work in his capacity as President
of Sterling Casualty & Insurance, Ltd. and as a member of Strategic Investment Portfolio, as well as
electronic files pertaining to his general tax practice,
including confidential personal and financial information of his
customers, and personal electronic files. See Transcript at 15,
17, 45; see also Abernethy Decl. at ¶ 15. Abernethy further
testified that on or about April 13, 2004 he was visited in his
home office by Walter Hannen, Coyt E. Murray (a named defendant
in this matter), Howell Woltz, and Vernice Woltz, and that he
observed Walter Hannen during the visit installing programs and
downloading and creating files from the two desktop computers.
See Transcript at 17, 20; see also Abernethy Decl. at ¶ 9.
Abernethy further testified that he gave Walter Hannen the backup
tape of the desktop computers in response to Hannen's request for
a copy of the computer files. See Transcript at 21; see
also Abernethy Decl. at ¶ 9. Abernethy also testified that
Walter Hannen came to his office on another day during the week
of April 12, 2004 and worked on both of the desktop computers.
See Transcript at 23; see also Abernethy Decl. at ¶ 11.
Abernethy stated that on April 22, 2004 he requested that Walter
Hannen return the backup tape but was told that Vernice Woltz,
the chief financial officer for the Sterling entities, had taken
the tape to the Bahamas. See Transcript at 24; see also
Abernethy Decl. at ¶ 12. Abernethy testified that between April
2004 and August 2004 he repeatedly requested that Walter Hannen
return the backup tape, but the tape has not yet been returned.
See Transcript at 24, 26; see also Abernethy Decl. at ¶ 13.
The CFTC contends that Abernethy's computers contained relevant evidence and that Walter Hannen may have altered or
destroyed that evidence. See CFTC's Reply to the Sterling
Entities' Response to CFTC's Objections  (hereafter "CFTC
Reply ") at 14. As the backup tape was created before
Hannen's visit to Abernethy's home, the CFTC asserts that the
tape "may contain the only remaining copy of that evidence."
Id. The CFTC argues that the tape is necessary so that the CFTC
can compare the files on the tape to those files on the computers
from which the tape was made. See CFTC Objection  at 3-4.
The CFTC further argues that the removal of the tape is in direct
violation of the Consent Order of Preliminary Injunction Against
J. Vernon Abernethy, which provides in relevant part that
Abernethy and "each firm, corporation, partnership, association
or other person or entity which holds or is a depository of his
funds, securities, assets or other property of any kind, are
prohibited from directly or indirectly transferring, withdrawing,
removing or disposing of any such funds, securities, assets or
other property." Id. at 3 (quoting Consent Order of Preliminary
Injunction Against J. Vernon Abernethy dated August 23, 2004, at
¶ 4). The CFTC asserts that it has attempted to obtain the backup
tape since August 2004 and was promised the tape during the
deposition of Howell Woltz on December 10, 2004. Id. The CFTC
further states that on March 21, 2005, Sterling informed the CFTC
that it will only produce "hard copies of documents `which relate
to the deposit or withdrawal of funds to or from Tech Traders.'"
Id. The CFTC argues that the backup tape is not the property of
the Sterling entities and that Sterling should be required to turn over the tape. CFTC Reply  at
In response to the CFTC's objections, the Sterling Entities
contend that they only learned of the CFTC's interest in the
backup tape in or about September 2004. See Memorandum of Law
and Fact in Response to the Objections Filed by the CFTC 
(hereinafter "Sterling Br.") at 3. Sterling states that
Abernethy's computer was the property of Sterling Casualty &
Insurance and that Sterling agreed to have the computer analyzed,
tested, and returned to Sterling. Id. at 4. Sterling thus
argues that the CFTC has a copy of every file existing on the
computer as well as a report of which files have been deleted
over time. Id. Further, with regard to the tape, Sterling
argues that the tape was a copy of the Sterling computer that the
CFTC already analyzed, and Sterling asserts that it informed the
CFTC that it would forward "documents in any way relevant to"
this action to the CFTC. Id. In addition, Sterling asserts that
the CFTC agreed to produce a copy of the "deleted files" report
created during the CFTC's analysis of the computer and that
Sterling agreed to produce any of the deleted files which existed
on the backup tape. Id. at 5. Sterling contends that the CFTC
never produced such report. Id. Moreover, Sterling disputes
that it has violated the Consent Order of August 23, 2004.
Sterling first argues that the backup tape is the property of
Sterling and is a copy of the hard drive of a computer that
belongs to Sterling, and thus the Consent Order allegedly does
not apply. Id. at 12-13. Moreover, Sterling contends that the
tape was sent to the Sterling offices in the Bahamas in April 2004, before the
entry of the Consent Order. Id. at 13. Sterling argues that
because the entities are not parties to this action, they are not
subject to requests for production and have never been served
with a subpoena. Id. Finally, Sterling objects to production of
the remaining files on the tape because they are allegedly
proprietary, confidential, and not relevant to this matter. Id.
The CFTC filed a reply to Sterling's response disputing the
representation by Sterling that the backup tape was a copy of a
computer owned by Sterling. Specifically, the CFTC states that
the laptop computer that is claimed to be Sterling property was
not backed up, but rather Abernethy directed the imaging of his
two desktop computers. CFTC Reply  at 13-14. The CFTC thus
argues that the tape is not the property of Sterling and that the
tape contains Abernethy's personal files. Id. at 14-15.
Further, as the CFTC only analyzed the laptop computer, the CFTC
contends that it does not have copies or reports of what
information was on the two desktop computers prior to the visit
by the Sterling principals. Id. at 15. To the extent the backup
tape contains some documents that the CFTC already has, the CFTC
argues that it is still entitled to those documents. Id.
Finally, the CFTC argues that in addition to Sterling's violation
of the Consent Order entered in August 2004, Sterling's taking
and retention of the backup tape is also a violation of the
Statutory Restraining Order, which "prohibits Defendants' agents
and `all persons insofar as they are acting in active concert or
participation with [defendants]' from directly or indirectly `[d]estroying,
altering, concealing or disposing of any books, records,
electronically stored data or other documents, wherever stored
concerning the Defendants. . . .'" CFTC Reply  at 15. The
CFTC thus asserts that Sterling should be required to turn over
the tape. Id. at 16.
II. FINDINGS OF FACT
The Court held an evidentiary hearing in this matter on May 13,
2005 in which Abernethy gave sworn testimony with regard to the
backup tape. After reviewing all of the evidence submitted by the
parties and considering the evidence received at the evidentiary
hearing, for purposes of deciding the CFTC's objection to
Sterling's claim for distribution, and for purposes of resolution
of this discovery issue, the Court makes the following findings
1. J. Vernon Abernethy ("Abernethy") resides at 413 South
Chester Street, Gastonia, North Carolina and has a home office at
the same address. Transcript of Hearing on May 13, 2005, at
2. Abernethy used three computers, one Hewlett Packard laptop
computer, one Acer 56 Max desktop computer, and one Acer 36X
desktop computer, in his home. Transcript of Hearing on May 13,
2005, at 14.
3. Shortly after meeting with Elizabeth Streit, Esquire,
counsel for the CFTC, and Stephen Bobo, Esquire, the Equity
Receiver, Abernethy arranged for Ken Houser at Southeastern
Systems to make a Colorado backup tape of the two desktop
computers, identified as "JVA" and "JVERNON". Transcript of Hearing on May
13, 2005, at 15-16, 46.
4. Abernethy paid for the tape, and his own tape drive was used
to make the tape. Transcript of Hearing on May 13, 2005, at
5. Abernethy also placed files of the laptop computer on a CD.
Transcript of Hearing on May 13, 2005, at 17, 39-40.
6. After the backup tape of the two desktop computers was
created, Abernethy was visited on or about April 12, 2004 by
Walter Hannen, Harold Woltz, Vernice Woltz, and Coyt Murray.
Transcript of Hearing on May 13, 2005, at 17.
7. Abernethy gave the backup tape to Walter Hannen on the day
Walter Hannen, Howell Woltz, Vernice Woltz, and Coyt Murray
visited Abernethy in his home. Transcript of Hearing on May 13,
2005, at 21.
8. Abernethy requested in April 2004 that Walter Hannen return
the backup tape but the tape was never returned. Transcript of
Hearing on May 13, 2005, at 23-24, 26.
9. Abernethy acquired one of his desktop computers, identified
as "JVA," prior to the year 2000. Transcript of Hearing on May
13, 2005, at 33-34.
10. Abernethy paid for the "JVA" desktop computer. Transcript
of Hearing on May 13, 2005, at 34-35.
11. Abernethy acquired the "JVERNON" desktop computer in 2002.
Transcript of Hearing on May 13, 2005, at 34.
12. Abernethy paid for the "JVERNON" desktop computer.
Transcript of Hearing on May 13, 2005, at 35.
13. Abernethy performed work for Tech Traders on the "JVA"
computer. Transcript of Hearing on May 13, 2005, at 34-35.
14. Abernethy performed work for Tech Traders on the "JVERNON"
computer. Transcript of Hearing on May 13, 2005, at 34, 36.
15. Abernethy used the "JVERNON" computer to prepare 2002 tax
returns. Transcript of Hearing on May 13, 2005, at 35.
16. Abernethy performed work for Sterling Insurance and
Casualty on all three of the computers. Transcript of Hearing on
May 13, 2005, at 36-37.
17. Abernethy used the "JVERNON" computer to access his
electronic mail. Transcript of Hearing on May 13, 2005, at 37.
18. After the April 7, 2004 visit, in or about August 2004
Abernethy provided the laptop computer to the Receiver.
Transcript of Hearing on May 13, 2005, at 41-42.
19. In or about September or October 2004, Abernethy provided
the two desktop computers to the Federal Bureau of Investigation.
Transcript of Hearing on May 13, 2005, at 67.
Sterling has objected to production of the backup tape on four
grounds. First, Sterling argues that the tape is a backup of a
Sterling computer and is itself Sterling property. Sterling also
contends that the CFTC already has the documents on the tape and
therefore the tape need not be produced. In addition, Sterling
states that the tape was sent to the Bahamas in April 2004 and
thus was not the subject of the August 23, 2004 Consent Order.
Finally, Sterling asserts that the files on the tape contain proprietary
information that will not be produced. In light of the above
findings of fact and for the reasons that follow, the Court
concludes that the Colorado backup tape is the property of
Abernethy. Accordingly, Sterling's remaining arguments are
unavailing, as Sterling has failed to demonstrate that it has the
right to retain such property.
The Court notes Sterling's contention that the backup tape is a
backup of a Sterling computer and that the tape itself is
Sterling property. See Sterling Br. at 4, 12-13. Through
cross-examination of Abernethy, Sterling raised the issue of
ownership of the laptop computer, and Abernethy testified that
Sterling funds were in fact used to pay for the laptop, although
he claimed that the payments from Sterling's funds were used as
an offset against travel expenses incurred by him.*fn5
Transcript of Hearing on May 13, 2005, at 37-38. The Court need
not address the ownership issue with respect to the laptop at
this time because the testimony was uncontroverted that the hard
drive of the laptop was not copied onto the Colorado backup tape
at issue here. The uncontroverted evidence offered at the
evidentiary hearing demonstrates that Abernethy backed up on the
Colorado tape only the two desktop computers, "JVA" and "JVERNON." In addition, Abernethy testified
that he paid for these two computers with his own funds, and
there is no other evidence to the contrary. Although Sterling
argues in its brief that it "confirmed that the back-up was not
of Mr. Abernethy's computer; rather, it was of the Sterling
Casualty & Insurance computer that the CFTC already had
analyzed," see Sterling Br. at 4, Sterling has presented no
evidence to demonstrate that either of the two desktop computers
were Sterling property, nor has Sterling demonstrated that the
tape at issue is a backup of another computer that is Sterling
property. In light of Abernethy's unrefuted testimony that the
desktop computers were his property and having no evidence to
support a finding otherwise, the Court concludes that the backup
tape is a copy of the hard drives of the two desktop computers
that were the property of Abernethy. The fact that Abernethy used
the computers for other accounting work, including work for
Sterling, does not alter the Court's finding that the tape
belongs to Abernethy and must be produced to the CFTC.
Moreover, the Court further concludes that the tape itself is
the property of Abernethy. Although Abernethy could not recall
during the evidentiary hearing whether he was billed by Ken
Houser at Southeastern Systems for making the tape, the testimony
is uncontroverted that Abernethy arranged to have the tape made,
that he paid for the tape, and that his own tape drive was used
to make the tape. See Transcript of Hearing on May 13, 2005, at
15-16, 46. Sterling has presented no evidence that supports its
claim that the tape is Sterling property. As Abernethy has testified that he
arranged for the tape to be made, that he paid for the tape, and
that the tape is a copy of the hard drives of computers owned by
Abernethy, the Court finds, for the purpose of determining this
issue, that the tape is also the property of Abernethy and
therefore shall be immediately turned over to the CFTC.
Having so found, the Court rejects Sterling's argument that it
need not produce the tape because the CFTC already obtained
copies of the files contained therein through forensic analysis
and/or may request that Sterling produce any deleted files that
exist on the tape. The Court notes that the CFTC disputes that it
has copies of such files, as only the laptop computer and not
the two desktop computers was purportedly the subject of
forensic analysis. Even assuming that the CFTC has copies of the
files contained on the tape, the fact remains that the tape is
the property of Abernethy and he has demanded its return from
Sterling. Sterling cites no authority to support its assertion
that it is entitled to retain such property. In this regard, the
Court finds Sterling's argument unavailing. The Court likewise
rejects Sterling's argument that it need not produce the tape
because it has not been served with a formal discovery request.
Sterling has availed itself of this Court by filing claims to the
receivership estate and by objecting to the Receiver's proposed
distribution, and the Court finds that Sterling shall be
compelled to turn over the tape. Failure to do so will preclude
Sterling from having its claims for distribution considered.*fn6
The Court further notes the CFTC's assertion that Sterling's
taking and retention of the backup tape is a violation of the
Statutory Restraining Order of April 1, 2004 and the Consent
Order of August 23, 2004. Having already determined that the tape
is not Sterling property and must be produced to the CFTC, in the
context of addressing the CFTC's objections to Sterling's claims
for distribution, the Court need not make a finding with regard
to whether Sterling is in violation of the Court's prior orders.
To the extent any party believes that an entity or individual is
in violation of a court order, such party may file a motion for
contempt in accordance with the Federal Rules of Civil Procedure.
Finally, the Court rejects Sterling's argument that the files
on the tape contain proprietary information that is not relevant
to this case and that Sterling is entitled to retain the tape on
that basis. The Court has found that the tape is the property of
Abernethy and is therefore subject to the Statutory Restraining
Order of April 1, 2004 and the Consent Order of Preliminary
Injunction dated August 23, 2004. The case relied upon by
Sterling, Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340,
351-52 (1978), stands only for the general proposition that
discovery from a party may be denied where it is not relevant to
the issues in the case. In light of Abernethy's testimony that he worked on matters
involving Tech Traders on the computers, and given the testimony
that the Sterling principals used Abernethy's computers after the
tape was made, the Court cannot conclude that the tape contains
no information relevant to this litigation. Consequently, the
Court finds that the tape must be turned over to the CFTC.
I am filing this Report and Recommendation with the Clerk of
the Court and sending a copy of same to all counsel of record.
Any objections to this Report and Recommendation must be filed
within ten (10) days of service pursuant to L. Civ. R. 72.1(c)(2)
and Fed.R.Civ.P. 72(b). ORDER
This matter having come before the Court concerning an issue
relating to the claims of Sterling ACS, Ltd., Sterling Alliance
Ltd., Sterling Casualty & Insurance, Ltd., Sterling Bank Limited,
Sterling (Anguilla) Trust, Ltd., Sterling Investment Management,
Ltd., and Strategic Investment Portfolio, LLC (collectively the
"Sterling entities") and the objection by Plaintiff, Commodity
Futures Trading Commission, to any distribution of the
receivership estate to the Sterling entities until these entities
responded to the CFTC's requests for discovery; and the CFTC
specifically seeking from Sterling the Colorado backup tape of
two of the three computers of Defendant J. Vernon Abernethy that
Abernethy made; and the Court having considered the arguments
submitted by the CFTC and Sterling's responses thereto, and the
Report and Recommendation submitted by the Honorable Ann Marie
Donio, United States Magistrate Judge, pursuant to
28 U.S.C. § 636(b)(1)(B) and (C); and the Court having made a de novo
review; and for good cause shown: IT IS on this ____ day of September, 2005
ORDERED that the Report and Recommendation is ADOPTED; and
it is further
ORDERED that the Sterling entities shall turn over the
Colorado backup tape to the CFTC no later than September ____,
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