Preview
FILED: NEW YORK COUNTY CLERK 12/30/2022 10:12 AM INDEX NO. 652190/2021
NYSCEF DOC. NO. 175 RECEIVED NYSCEF: 12/30/2022
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
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ZHENGJUN DONG, WEN LIN, KAIXIN HONG
and CHENGLONG WANG, individually, and
on behalf of all others similarly situated,
Plaintiffs, Hon. Andrew Borrok
-against- Index No. 652190/2021
GTV MEDIA GROUP, INC., SARACA MEDIA
GROUP INC., and WENGUI GUO,
Defendants.
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MEMORANDUM OF LAW IN SUPPORT OF NONPARTY’S
MOTION TO QUASH NONPARTY SUBPOENAS AND FOR
PROTECTIVE ORDER AND SANCTIONS
Brian Witthuhn
Justin S. Weddle
Weddle Law PLLC
250 West 55th Street
30th Floor
New York, NY 10019
Attorneys for Nonparty G-Club Operations LLC
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TABLE OF CONTENTS
Introduction ................................................................................................ 1
Background ................................................................................................. 1
A. The Complaint................................................................................ 2
B. Plaintiffs’ Prior Attempts to Obtain Discovery about Nonparty
G-Club ........................................................................................ 2
1. First Citibank Crane Subpoena ................................................ 3
2. Quashed Crane Subpoena ......................................................... 4
3. G-Club Subpoena and Pending Motion to Quash .................... 6
4. September 2022 Crane Citibank Subpoena ............................. 8
C. Current Signature and Morgan Stanley Subpoenas .................... 9
Argument .................................................................................................. 12
I. Plaintiffs Seek Utterly Irrelevant Information ................................. 12
A. No Plaintiff Has Standing with Respect to G-Club ................... 13
B. The Undisputed Facts Foreclose Any Purported Relevance to
Discovery about Nonparty G-Club .......................................... 15
II. Plaintiffs Seek Improper Pre-Class Certification Discovery ............ 20
A. Applicable Law ............................................................................. 21
B. The Scope of the Nonparty Subpoena to G-Club Severely
Violates the Limits of Pre-Class Certification Discovery ...... 24
III. The Court Should Issue a Protective Order and Sanction Plaintiffs25
A. Applicable Law ............................................................................. 26
B. Plaintiffs’ Repeated Misconduct .................................................. 28
1. Misuse of Subpoenas ............................................................... 28
2. Frivolous Legal and Factual Claims....................................... 32
C. Substantial Sanctions Are Warranted ........................................ 36
Conclusion................................................................................................. 37
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TABLE OF AUTHORITIES
Cases
Arch Ins. Co. v. Delric Constr. Co.,
174 A.D.3d 560 (2d Dept. 2019) ........................................................... 28
Barnes v. Osofsky,
373 F.2d 269 (2d Cir. 1967) .................................................................. 14
Burdick v. Tonoga, Inc.,
60 Misc. 3d 1212(A), 2018 WL 3355239 (Sup. Ct., Rensselaer County,
July 3, 2018) .......................................................................................... 24
Chang v. Westside 309 LLC,
206 A.D.3d 491 (1st Dept. 2022) .......................................................... 25
Chang v. Westside 309 LLC,
Decision & Order on Motion, Ind. No. 153031/2018 (Sup. Ct., N.Y.
County, March 2, 2022) ........................................................................ 24
Chimenti v. Am. Express Co.,
97 A.D.2d 351 (1st Dept. 1983) ............................................................ 21
Gewanter v. Quaker State Oil Refining Corp.,
87 A.D.2d 970 (4th Dept. 1982) ............................................................ 23
In re Beiny,
129 A.D.2d 126 (1st Dept. 1987) .............................................. 29, 33, 35
In re Hoppenstein,
209 A.D.3d 492 (1st Dept. 2022) .......................................................... 32
Reiken v. Nationwide Leisure Corp.,
75 A.D.2d 551 (1st Dept. 1980) ............................................................ 23
Rodriguez de Quijas v. Shearson/Am. Express, Inc.,
490 U.S. 477 (1989) ............................................................................... 18
Rodriguez v. Metro. Cable Commc’ns,
79 A.D.3d 841 (2d Dept. 2010) ............................................................. 22
Smith v. Atlas Int’l Tours,
80 A.D.2d 762 (1st Dept. 1981) ............................................................ 22
Velez v. Hunts Point Multi-Service Center,
29 A.D.3d 104 (1st Dept. 2006) ............................................................ 31
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Statutes
C.P.L.R. § 3103(a) ................................................................... 26, 29, 33, 36
C.P.L.R. § 3120(3) ............................................................................... 26, 32
Other Authorities
Patrick M. Connors, Practice Commentaries, C.P.L.R. § 3120 (2018) ... 27
Rules
22 N.Y.C.R.R. § 130-1.1...................................................................... 28, 33
Treatises
7 Carmody-Wait 2d § 42:229 (Sept. 2022 Update) ................................. 21
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INTRODUCTION
Almost one year ago, nonparty G-Club Operations LLC (“G-Club”)
requested a protective order to avoid burdening G-Club with plaintiffs’
abusive discovery practices in this litigation, in which G-Club is not a
party and has no involvement. Plaintiffs have since repeatedly taken G-
Club’s prediction as an invitation to issue improper discover demands
rather than as a warning. In their most recent round of demands,
plaintiffs seek irrelevant financial information concerning G-Club and its
members from nonparty banks, and plaintiffs have done so covertly in
dereliction of their statutory obligations. The subpoenas should be
quashed, and plaintiffs should be sanctioned.
BACKGROUND
Nonparty G-Club is a limited liability company organized under the
laws of Puerto Rico. G-Club operates “G|CLUBS,” a luxury concierge
service that is provided to customers on a paid membership basis.
G|CLUBS members have access to, among additional services, a 24/7
concierge service center, an exclusive membership ID, discounted prices
on fashion collections, music, and various events.
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A. The Complaint
Plaintiffs brought this action on April 1, 2021. They brought it
against defendants GTV Media Group, Inc. (“GTV”), Saraca Media
Group, Inc. (“Saraca”), and Wengui Guo, on April 1, 2021, “under Sections
5, 12 and 15 of the [Securities Act of 1933], 15 U.S.C. §§ 77e, 77l, and 77o
. . . on behalf of all investors (‘Class’) who purchased or otherwise invested
in securities of Defendant GTV in the offering (‘GTV Offering’) conducted
by Defendants between approximately April 1, 2020 and the present.”
NYSCEF 1 (Complaint) ¶ 1. G-Club is not a party.
B. Plaintiffs’ Prior Attempts to Obtain Discovery about
Nonparty G-Club
Plaintiffs allege that defendant Guo, in a social media livestream
in 2021, said that individuals who purchased G-Club memberships
“would be entitled to receive” shares in GTV. NYSCEF 66 (Plaintiffs’
Motion) at 4. Plaintiffs, however, do not allege that G-Club sold GTV
shares to anyone. Nor do plaintiffs dispute that every G-Club member
agreed: that their membership was not an investment (in GTV or any
entity); that any statements by defendant Guo about G-Club were void
and not part of the terms of membership; and that G-Club members
agreed to mandatory arbitration and to waive the right to participate in
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a class action. NYSCEF 150 (Membership Agreement); NYSCEF 143
(Disclaimer); see NYSCEF 152-55 (Plaintiffs’ Opp.) (nowhere contesting
those irrefutable facts).
Nonetheless, plaintiffs have repeatedly used this litigation against
defendants, over the course of more than one year, to attempt to obtain
irrelevant, confidential, and extensive information about nonparty G-
Club and its members through improper nonparty subpoenas.
1. First Citibank Crane Subpoena
Another nonparty, Crane Advisory Group LLC (“Crane”), used a
bank account at Citibank (“Crane Citibank Account”) to perform escrow
agent services on behalf of G-Club. That is, Crane received membership
payments from G-Club customers into the Crane Citibank Account
pursuant to a written Payment Facilitation Agreement. G-Club and
Crane had a comprehensive Non-Disclosure Non-Circumvention
Agreement (NYSCEF 74) in place to protect the confidentiality of G-
Club’s financial information, and of the personal identity and financial
information of G-Club members.
On September 27, 2021, plaintiffs subpoenaed Citibank to obtain
information about G-Club members and the Crane Citibank Account.
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NYSCEF 42 (“September 2021 Citi Crane Subpoena”). Plaintiffs defined
the “Relevant Period” for the subpoena as “January 1, 2019 to the
present,” i.e., as starting more than one year before the “GTV Offering”
allegedly began. Id. at 5. Plaintiffs demanded, among multiple other
blanket requests, “[a]ll documents sufficient to identify all wire transfers
received into [the Crane Citibank Account] during the Relevant Period,
including but not limited to the identity of the sender of the wire, the
sending bank, sending account number, and the amount of the wire.” Id.
at Doc. Request No. 3.
On October 29, 2021, Crane moved to quash plaintiffs’ September
2021 Citi Crane Subpoena because it demanded irrelevant and
confidential information. NYSCEF 41. Plaintiffs thereafter withdrew
their subpoena, and Crane therefore withdrew its motion on November
23, 2021. NYSCEF 47.
2. Quashed Crane Subpoena
On or about January 5, 2022, plaintiffs issued another subpoena
demanding blanket access to irrelevant, confidential personal identity
and financial information of G-Club and its members. NYSCEF 75
(“January 2022 Crane Subpoena”). This time, plaintiffs subpoenaed
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Crane, demanding financial records regarding the Crane Citibank
Account, as well as communications involving Crane. Id. G-Club learned
of the subpoena only indirectly; plaintiffs did not provide it to G-Club.
On February 2, 2022, G-Club, as a nonparty, moved to quash the
subpoena and for a protective order to block plaintiffs from further
improper subpoenas seeking to obtain information about G-Club and its
members. Motion Seq. 005.1 G-Club demonstrated that the subpoena
failed to provide notice why the material sought was relevant, and sought
improper pre-class certification discovery; and that plaintiffs improperly
sought confidential financial and personal identity information of G-Club
and its members. NYSCEF 76.
Plaintiffs opposed, arguing that the subpoena was not defective,
that a discovery stipulation into which the parties entered (not
nonparties, such as G-Club) alleviated confidentiality concerns, and that
because the subpoena demanded information purportedly relevant to
merits and damages issues, it was properly issued prior to class
certification. NYSCEF 89. Plaintiffs also argued that G-Club had no
1 Crane separately moved to quash. Motion Seq. 007.
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standing to move to quash the subpoena or for a protective order because
plaintiffs issued it to Crane, not to G-Club. Id. at 8, 14 n.6.
On September 16, 2022, the Court granted G-Club’s motion and
quashed the January 2022 Crane Subpoena. The Court agreed that the
subpoena was defective on its face, and that G-Club had standing to
object to the subpoena. NYSCEF 123 at 3. The Court quashed the
subpoena because plaintiffs failed to comply with a basic requirement of
nonparty subpoenas—a statement providing notice of why the material
was purportedly relevant. Even though the plaintiffs provided no such
articulation—which would provide the starting point for litigating the
propriety of the subpoena or the relevance of the material sought—the
Court sua sponte posited that the documents were necessary for class
certification and on the merits. Id.
3. G-Club Subpoena and Pending Motion to Quash
On September 16, 2022, the same day the Court’s decision quashing
the January 2022 Crane Subpoena was entered, plaintiffs issued a
subpoena directly to nonparty G-Club. Plaintiffs demanded near total
access to G-Club’s records and to the personal and financial information
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of G-Club members, as well as for a G-Club representative to testify at a
deposition (“September 2022 G-Club Subpoena”). NYSCEF 142.
G-Club moved to quash and for a protective order, explaining that:
the subpoenaed information was irrelevant because no plaintiff or
prospective plaintiff had standing based on any actual or purported
purchase of a G-Club membership; plaintiffs are seeking improper pre-
class certification discovery; and the subpoena, in any event, is
overbroad. NYSCEF 141.
Plaintiffs opposed, claiming that the information was relevant
because on March 11, 2021, defendant Guo said in a social media
livestream that individuals “who ‘purchased’ G-Club memberships would
be entitled to receive 10 GTV shares per dollar spent ‘purchasing’ G-Club
memberships.” NYSCEF 155 at 4. Plaintiffs also claimed that they are
“entitled to seek both merits and class certification discovery,” and that
the subpoena is not overbroad. Id. at 10-13.
The motion to quash the September 2022 G-Club Subpoena and for
a protective order is pending. Motion Seq. 010.
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4. September 2022 Crane Citibank Subpoena
Unbeknownst to G-Club, on or about September 19, 2022, plaintiffs
once again subpoenaed Citibank to obtain blanket access to the
confidential financial and personal identity information of G-Club and its
members through the Crane Citibank Account (“September 2022
Citibank Subpoena”).
Plaintiffs provided no notice to G-Club of the subpoena seeking
information about G-Club and its members. It also does not appear that
plaintiffs provided any notice to Crane—plaintiffs failed to include G-
Club or Crane on an email to defendants linking the subpoena, and
unlike prior subpoenas, Crane has filed no motion to quash. Exhibit 1
(Sept. 19 email from plaintiffs’ counsel to defendants’ counsel attaching
September 2022 Citibank Subpoena; not sent to G-Club or Crane). G-
Club first learned of the September 2022 Citibank Subpoena more than
three months later, on December 21, 2022, when counsel for defendant
Guo forwarded an email (Exhibit 1) with an expired link to the subpoena
to counsel for G-Club. Witthuhn Aff. ¶ 4a. Neither counsel for defendants
GTV and Saraca nor counsel for defendant Guo was able to provide G-
Club with a copy of the actual September 2022 Citibank Subpoena. Id.
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In addition, it appears that plaintiffs did not provide defendants
with the subpoena return from Citibank until November 29 and
December 21, 2022, at least forty-one days or more than two months after
plaintiffs received the documents from Citibank. Exhibits 2 & 3 (Nov.
29 and Dec. 21 emails from plaintiffs to defendants purporting to attach
documents produced by Citibank).2 Plaintiffs also did not notify G-Club
(nor, apparently, Crane) of the documents produced by Citibank.
C. Current Signature and Morgan Stanley Subpoenas
Now with blanket information in hand from Citibank regarding the
Crane Citibank Account, as a result of their surreptitious September
2022 Citibank Subpoena, plaintiffs issued yet two more nonparty
subpoenas to Signature Bank and Morgan Stanley Smith Barney LLC
(“Morgan Stanley”) seeking to trace funds from the Crane Citibank
Account to accounts at those banks (“Signature Subpoena” and “Morgan
2 In their emails to defendants, plaintiffs’ counsel stated merely that they had
“recently received” the documents from Citibank, without specifying the date when
Citibank produced them. Exhibits 2 & 3. G-Club, of course, has been kept in the
dark about the September 2022 Citibank Subpoena, but if we assume plaintiffs issued
it on September 19, the same day plaintiffs provided it to defendants rather than
earlier (which is not a safe assumption, given plaintiffs’ repeated failures to comply
with C.P.L.R. § 3120(3)), then the return date for the subpoena would have been
October 19.
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Stanley Subpoena”). Plaintiffs aver that these are G-Club funds. See, e.g.,
Exhibit 5 (Signature and Morgan Stanley Subpoenas) at pdf 4, 62.
Plaintiffs served Signature and Morgan Stanley with the respective
subpoenas on December 1, 2022. Exhibit 5 at pdf 60, 118. Nonetheless,
plaintiffs did not provide notice of the subpoenas to defendants until
eleven days later, on December 12, 2022. Exhibit 4 (Dec. 12 email from
plaintiffs to defendants linking Signature and Morgan Stanley
Subpoenas). Plaintiffs never provided notice of the subpoenas to G-Club,
about whom they are seeking information.3 G-Club learned of the
subpoenas only because counsel for defendants Saraca and GTV
forwarded them to G-Club on December 12. Witthuhn Aff. ¶ 4d.
In the Morgan Stanley Subpoena, plaintiffs demand comprehensive
information about a purported $60 million transfer of funds Crane
received on behalf of G-Club from the Crane Citibank Account to an
account at Morgan Stanley, information about that account, and
information about any other Morgan Stanley accounts of Crane. Exhibit
5 at pdf 4. Plaintiffs also claim, “[b]ased on Citibank’s records for the
3 It also appears that plaintiffs never served Crane with the Signature and Morgan
Stanley Subpoenas, as Crane, like G-Club, was not copied on plaintiffs’ belated email
to defendants. Exhibit 4.
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Citibank Crane Account,” that “over $9 million was transferred to an
account . . . held at Signature Bank by [Crane],” Exhibit 5 at pdf 62, and
demand similar information from Signature. Plaintiffs defined the
“Relevant Period” for both subpoenas as beginning January 1, 2019, i.e.,
more than one year before the alleged “GTV Offering” took place.
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ARGUMENT
I. PLAINTIFFS SEEK UTTERLY IRRELEVANT INFORMATION
Plaintiffs’ latest subpoenas fail on every level to seek relevant
information. Plaintiffs are pursuing an action based on the alleged
improper sale of unregistered securities (shares in defendant GTV), but
no one purchased securities from nonparty G-Club. Plaintiffs do not even
allege otherwise. The most plaintiffs claim regarding G-Club is that
defendant Guo mentioned G-Club in a social media post, but the express
terms of G-Club’s membership agreement provide that a G-Club
membership is just that: a membership, not an investment of any sort,
let alone in shares of GTV. Furthermore, individuals purchasing G-Club
memberships also expressly acknowledged and agreed to a disclaimer
stating that no one could rely on statements of defendant Guo referencing
G-Club. And, even if a dispute arises between a G-Club member and G-
Club, whether related to purported securities-related conduct or
otherwise, each G-Club member specifically agreed to arbitrate any
claims, and not to participate in a class action.
Plaintiffs’ counsel, on some level, seems to understand all that.
After all, they did not name G-Club as a defendant in their lawsuit. (Nor
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was G-Club subject to, nor even mentioned in, the SEC enforcement
action against defendants GTV and Saraca from which plaintiffs’ counsel
cribbed their lawsuit). Nonetheless, plaintiffs’ counsel has treated
G-Club like a defendant, issuing subpoenas, one after another, seeking
extensive, confidential, and burdensome discovery about G-Club and its
members.
Plaintiffs’ counsel’s repeated, backdoor attempts to use their
lawsuit against defendants GTV, Saraca, and Guo, to obtain information
about nonparty G-Club and its members are a paradigmatic abuse of the
discovery process. The most recent subpoenas, to Morgan Stanley and
Signature Bank, should be quashed, and an order protecting G-Club from
all such future attempts should enter.
A. No Plaintiff Has Standing with Respect to G-Club
The first insurmountable hurdle facing plaintiffs is standing. A
person may not offer or sell nonexempt, unregistered securities, 15 U.S.C.
§ 77e, and anyone who does is liable “to the person purchasing such
security from him” in the amount of “the consideration paid for such
security . . . or for damages if he no longer owns the security,” id. § 77l
(emphasis added); see also id. § 77o (holding a person who “controls any
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person liable under” Section 77l jointly-and-severally liable). Thus, it is
axiomatic—and clear from the plain statutory language—that only those
individuals who purchased a security offered in violation of Section 77e
have standing to obtain damages under Sections 77l and 77o, as plaintiffs
seek here. Accord Barnes v. Osofsky, 373 F.2d 269, 271-72 (2d Cir. 1967)
(holding that only plaintiffs who could prove they purchased shares
issued under defective registration statement had standing under
Section 77k, not individuals who purchased in secondary offering).
It is undisputed that no one purchased unregistered GTV shares
from G-Club. Neither plaintiffs nor the proposed plaintiffs allege that
they did so. At most, they claim that they purchased G-Club
memberships, and that (according to a Guo social media post) G-Club
members “would be entitled to receive 10 GTV shares per dollar spent
purchasing G-Club memberships.” See Exhibit 5 (Signature and Morgan
Stanley Subpoenas) at pdf 4, 62. But plaintiffs do not claim that they
actually purchased GTV shares from G-Club, as required for standing
under Section 77l. Therefore, plaintiffs’ vague claim—that “the
documents sought . . . are material and necessary to establish Plaintiffs’
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allegations that Defendants violated Sections 5 and 12(a)(1) of the
Securities Act,” Exhibit 4 at pdf 4, 62—is not and cannot be true.
Plaintiffs’ counsel’s repeated efforts to pry into G-Club’s finances
and confidential membership information can therefore have no
relevance to this action for damages, under the federal securities laws, on
behalf of individuals who allegedly bought unregistered GTV shares (not
G-Club memberships) from defendants GTV, Saraca, and Guo (not from
nonparty G-Club). See 15 U.S.C. § 77l.
B. The Undisputed Facts Foreclose Any Purported Relevance
to Discovery about Nonparty G-Club
In their fishing expedition, the only line plaintiffs’ counsel has cast
toward G-Club is the allegation that in 2021, defendant Guo said in a
social media livestream that G-Club members “would be entitled to
receive 10 GTV shares per dollar spent ‘purchasing’ G-Club
memberships.” See NYSCEF 66 (Plaintiffs’ Memo of Law in Support of
Motion for Class Certification) at 4. Even accepting that allegation, the
uncontested facts regarding G-Club memberships also foreclose any
relevance to demanding nonparty discovery from or about G-Club.
Each individual who purchased a G-Club membership agreed to a
Membership Agreement, and to having “reviewed, underst[ood], and
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agree[d] to” a disclaimer. See NYSCEF 140 (Witthuhn Aff.) ¶¶ 5-6.
Plaintiffs do not dispute that. See NYSCEF 152-55 (Plaintiffs’ Opposition
to Motion to Quash). The Membership Agreement specifically states that
the agreement provides just that (membership in G-Club), and that “the
membership is not an investment” in any entity. NYSCEF 150
(Membership Agreement) ¶ 12(e) (emphasis added). Plaintiffs do not
contest that either.
Plaintiffs’ counsel also do not dispute that any proposed named
plaintiffs who purchased G-Club memberships necessarily signed a
disclaimer stating that they understood and agreed that they could not
rely on any statement by defendant Guo (or anyone else) about G-Club:
NO ONE CAN RELY ON ANY EARLIER DESCRIPTION
BY MR. GUO OR ANY OTHER PERSON OF (I) THE
BENEFITS THAT COULD OR WOULD BE AVAILABLE
TO [G-CLUB] MEMBERS OR (II) ANY OTHER ASPECT
OF THE STRUCTURE OR TERMS OF [G-CLUB].
NYSCEF 143 (Disclaimer). Thus, nonparty discovery about G-Club and
its customers is irrelevant because it is uncontested that G-Club
members (including the proposed plaintiffs who joined G-Club)4 agreed
4 See NYSCEF 141 (Memo of Law in Support