Lines Overseas Management and its managing director Scott Lines have asked a US District Court to stay an order to comply with four subpoenas for information which pertain to two US Securities and Exchange Commission investigations of alleged securities fraud. In handing down the order for compliance last month, Magistrate Judge Alan Kay of the US District Court for the District of Columbia also ordered LOM and Mr. Lines to follow-up the submission of documents by appearing before the SEC in Washington, D.C. to give testimony on all matters.

The Bermuda-based company and its managing director applied for the stay late last month as it seeks a review of Judge Kay's order. The SEC, which has opposed the stay, served the four subpoenas on Mr. Lines last in April at Miami International Airport. They relate to trading engaged in by LOM's accountholders in securities of Sedona Software Solutions Inc., SHEP Technologies Inc. and Hienergy Technologies Inc.

Lawyers for LOM and Mr. Lines said in their joint application that they are entitled to the stay on the basis that “they are likely to succeed [in having the Judge's decision overturned on their merits of their claims”.

They argue that Judge Kay's order suffers from “numerous fatal deficiencies” which include his failure to “provide a reasoned explanation for his decision to resolve a number of disputed factual issues against the respondents”.

LOM lawyers also call his ruling regarding personal jurisdiction “enormously and erroneously broad, in that it would subject any foreign broker-dealer that executes trades in the US markets to the full scope of the SEC's regulatory authority, as well as subject Scott Lines to the Court's authority based solely on his status as Managing Director and his ownership interest in trading proceeds.”

They say that Judge Kay also failed to explain how the respondents could comply with the subpoenas in the face of legal obligations imposed by the countries in which they conduct business.

The lawyers for LOM and Mr. Lines argue that a stay will neither harm the SEC nor the public - the SEC already has in its possession “the great majority of the material it seeks” and the public will not be harmed as the investigation relates to events that occurred nearly two years ago. However they argue that their clients would be “irreparably injured” because complying with the subpoenas will cause them to breach their duty of confidentiality to their customers and expose them to the threat of civil and criminal liability” in their won countries.

The SEC lawyers argue that an indefinite stay “would hold in limbo the effective date for the Order pending appeal before this Court and beyond.”

In their documents opposing the stay, SEC lawyers said the request for a stay is “merely another tactic to obstruct the SEC's ongoing investigation”. The SEC argues that the respondents cannot meet the “threshold requirement” of “showing likelihood of success on the merits of the appeal.”

They argued that Judge Kay had “painstakingly evaluated the qualitative and quantitative nature” of LOM's contacts in the US to find that the exercise of jurisdiction on LOM and Mr. Lines was proper. They point out that Judge Kay also ruled that despite the fact that that respondents had the burden of showing conflict of foreign law, the court remained “unconvinced that an order of enforcement would subject the respondents to foreign legality”.

The SEC also argued that a stay is not in the public interest and will “undermine the SEC's mission of investigating potential securities violations and protecting the investing public from further violations.”

The SEC court document said: “LOM, its officers (including Scott Lines) and clients have apparently violated, and are in a position to continue violating, the United States' federal securities laws by trading millions of shares of United States' securities over the United States' securities markets. The SEC has been unable to fully investigate the Respondents' conduct because they refuse to comply with the SEC's subpoenas in an effort to shield LOM and its senior officers from the SEC's investigations.”

The SEC is not the only foreign authority that has dealings with LOM. Last month the British Columbia Securities Commission panel dismissed a staff request for cease trade orders and other sanctions against LOM on alleged non-compliance with BCSC information requests concerning alleged securities fraud.

However the panel said it could not “turn a blind eye” to an additional issue arising from the evidence presented during the staff hearing.

The panel ordered LOM to show cause why it would not be in the public interest for the BCSC to order that LOM cease trading securities in British Columbia until it provides all dealers in BC having accounts for LOM with the appropriate know-your-client information about those having a financial interest in those accounts.