Securities and Exchange Commission v. Zouvas et al

REPLY to Response to Motion re: 104 MOTION for Issuance of Letters Rogatory

D. Ariz.December 7, 2017

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Patrick R. Costello Securities and Exchange Commission 100 F Street N.E. Washington, DC 20549-5985 Email: costellop@sec.gov Florida Bar No. 75034 Telephone: (202) 551-3982 Facsimile: (202) 772-9245 Attorney for Plaintiff IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA Securities and Exchange Commission, Plaintiff, vs. Luke C. Zouvas, et al., Defendants. No. CV-17-00427-PHX-SPL PLAINTIFF’S REPLY MEMORANDUM IN SUPPORT OF ITS MOTION FOR ISSUANCE OF A LETTER OF REQUEST FOR INTERNATIONAL JUDICIAL ASSISTANCE PURSUANT TO THE HAGUE CONVENTION Case 2:17-cv-00427-SPL Document 109 Filed 12/07/17 Page 1 of 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 2 - Plaintiff Securities and Exchange Commission files this reply memorandum pursuant to LRCiv 7.2(d) in further support of its Motion for Issuance of a Letter of Request for International Judicial Assistance pursuant to the Hague Convention (Doc. 104) (the “Motion”). The SEC responds below to the arguments raised by Defendants Christopher D. Larson, Jason M. Schiprett and Robert D. Jorgenson in their Memorandum in opposition to the Motion (Doc. 107) (the “Opposition”). I. Preliminary Statement The SEC notes that the concerns raised in the Opposition are precisely the reason why we attempted to work with Defendants on alternatives to incurring the time and expense of traveling to Israel to take 28 separate depositions of foreign nationals. In the spirit of promoting the “just, speedy, and inexpensive determination” of this case, as required by Fed. R. Civ. P. 1, and mindful of the proportionality considerations for discovery set forth in Fed. R. Civ. P. 26(b), we were hopeful Defendants would agree to one or more stipulations in lieu of having to pursue these depositions. Instead, however, Defendants refused to cooperate, and the SEC was left with no choice but to file its Motion. As noted below, the information sought in the depositions is relevant to the SEC’s claims in this matter. Absent a stipulation of some kind, the SEC is unaware of any other way to obtain the information. As much as Defendants would like to have it both ways - on the one hand refusing to stipulate, and on the other opposing the SEC’s request to take the depositions - they simply cannot. Accordingly, the SEC’s Motion should be granted. II. Factual Background As described in more detail in the Motion, many of the 28 Israeli nominees we seek to depose participated in the SEC’s investigation that led to the filing of this case. There, the nominees either responded to a questionnaire concerning their purported investments in Crown Dynamics Corp. (“Crown”) (the company at issue in this case), or were interviewed by the Israeli Securities Authority on the SEC’s behalf. Case 2:17-cv-00427-SPL Document 109 Filed 12/07/17 Page 2 of 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 3 - In sum, many of these individuals confirmed that they never owned Crown stock, never sold any stock to the purported purchasers as alleged in the SEC’s Complaint, and never received any consideration for the sale of stock that was done in their names.1 We would expect to elicit the same information from them in the depositions (which we would anticipate being relatively short in length). Procedurally, because each of the nominees would be beyond the subpoena power of the Court for trial, taking their depositions would result in admissible testimony the SEC would proffer for use in court. Given the similarities between the information contained in the questionnaires and interviews and the expected deposition testimony, the SEC consulted with Defendants and proposed three different factual stipulation options as an alternative to having to pursue the depositions: (i) stipulate to the facts of the Complaint that involve the nominees; (ii) stipulate to the facts set forth in the questionnaires and interviews (such that the questionnaires and transcripts would then not need to be introduced at trial); or (iii) stipulate that the questionnaires and transcripts would be treated as if they were a deposition of an unavailable trial witness such that the questionnaires and transcripts, being considered a deposition, would then take the place of the witness’ trial testimony (with the parties reserving the rights they ordinarily would have when faced with a deposition transcript being offered at trial in place of live testimony, minus any objections about the taking of the deposition). Defendants swiftly rejected the first two alternatives outright. There seemed to be some appetite for the third alternative,2 but despite the SEC’s continued follow-up requests, Defendants eventually went dark. The SEC thus had no choice but to file the Motion. 1 None of the nominees who were interviewed or provided questionnaire responses stated that they had been Crown shareholders. Rather, all of them denied any knowledge of Crown and did not even know that share certificates had been issued in their names. 2 Defendant Cameron Robb also expressed interest in the third alternative. Defendant Luke Zouvas’ prior counsel never took a formal position on the issue. Notably, neither Robb nor Zouvas has opposed the SEC’s instant Motion before the Court. Case 2:17-cv-00427-SPL Document 109 Filed 12/07/17 Page 3 of 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 4 - III. Argument 1. Rule 30 Limit Defendants first contend the taking of 28 depositions in Israel would exceed the 10-deposition limit set forth in Fed. R. Civ. P. 30. (Opposition, at 2.) Implicit in the Motion, however, was the request that the Court grant the SEC “leave of court” as stated in Fed. R. Civ. P. 30 to take these depositions. If the same was not obvious to Defendants from the Motion, the SEC now makes explicit its request for leave from the Court to take these additional depositions. 2. The Depositions will Yield Relevant Information Contrary to what Defendants argue, the information the Israeli nominees will provide is relevant to the claims the SEC has brought in this case. Defendants note, and the SEC agrees, that the depositions also would provide information the SEC could have used in its separate companion case against Asher Zwebner in the Southern District of California - had that case not already concluded.3 But Defendants seem to be suggesting that if the information is relevant to the Zwebner case, it cannot also be relevant here. It may come as a surprise for Defendants to learn, however, that information can be relevant to more than one case at a time. Indeed, while the SEC has not specifically alleged in this case that Defendants participated alongside Zwebner in creating the original Crown shell and installing the 28 Israeli nationals as nominees, the SEC has alleged that:  Defendant Larson purportedly purchased all of the outstanding Crown shares, which necessarily involved sales of those shares from all 28 of the nominees;  Defendants Jorgenson and Schiprett signed a purported share transfer agreement with seven of the nominees;  One of the nominees purportedly sold her shares to Defendant Larson’s brother, Andrew Larson; 3 The Southern District of California entered a final judgment by default against Zwebner on January 10, 2017. See SEC v. Zwebner, Case No. 16-cv-1013-CAB-DHB (S.D. Cal.). Case 2:17-cv-00427-SPL Document 109 Filed 12/07/17 Page 4 of 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 5 -  Another of the nominees purportedly sold her shares to Defendant Zouvas;  Several of the nominees purportedly sold their shares to five third-party companies; and  Zouvas sent attestation letters to brokerages and the transfer agent, representing that these share transactions took place and that he sent the sales proceeds to the nominees. (Motion, at 4-5.) The SEC is confused as to how Defendants can claim in their Opposition that testimony from the nominees has no bearing on these allegations. If the nominees testify that (i) they never invested in Crown to begin with; (ii) they never purchased any shares of the company; (iii) they never sold any shares of the company; (iv) and they never received any consideration, then that directly impacts the corollary issues of how Larson could legitimately have purchased the Crown shell if none of the nominees sold it to him; how Jorgenson, Schiprett and Zouvas could have purchased their shares if nobody sold the shares to them;4 and how Zouvas could properly have represented to third parties that the purchases were lawful and that consideration for the purchases was remitted, when all of the nominees, who were interviewed or who responded to questionnaires, have denied ever receiving any consideration or even communicating with Zouvas. It is hard to fathom how these matters are not relevant to the SEC’s claims. 3. The Depositions Are Now the Only Way to Obtain the Information Finally, Defendants contend that the depositions the SEC seeks are disproportional to the needs of this case and would result in “discovery overuse.” (Opposition, at 3-4.) The SEC repeats again what it stated at the outset of this Reply - we endeavored to work with Defendants to alleviate the precise concerns they have raised. But the parties are in the current posture because it was Defendants who refused to stipulate to a more streamlined and cost-effective way to handle the information sought to be obtained 4 This also raises the separate question of how Jorgenson, Schiprett and Zouvas were able to purchase any shares, if Larson had already purchased all of the outstanding shares. Case 2:17-cv-00427-SPL Document 109 Filed 12/07/17 Page 5 of 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 6 - from the deponents. And it is Defendants who have now come before the Court seeking to block the SEC from the only available way of obtaining the information. Defendants simply cannot have it both ways. The SEC also notes that Defendants are silent in their Opposition about the specific alternatives the SEC suggested above in Section II. Defendants have offered no reason why they cannot agree to any of the three stipulation options. Moreover, Defendants have not put forward any competing proposals themselves. It would seem a perfectly suitable solution for Defendants to accept one of the SEC’s proposals, considering that Defendants have disavowed any knowledge of Zwebner’s actions and claim to be victims of his game. (Opposition, at 3.) The refusal to stipulate therefore suggests that Defendants intend to dispute what the nominees have already said in their questionnaires and interviews and what we expect them to confirm in their depositions. If that is true, then the only means to counter the Defendants’ assertions on these issues is to present the nominees’ testimony. Defendants further contend that the depositions are inappropriate because the amount in controversy here is only $865,000. (Opposition, at 3.) This argument is not a good barometer for the analysis, not only because the amount at issue actually would be substantially higher if civil penalties are factored into the mix, with the potential fine of $150,000 per act or instance of wrongdoing (see 17 C.F.R. § 201.1001), but also because it ignores the significance and intricacy of the misconduct the Defendants perpetrated in this case. Indeed, under Fed. R. Civ. P. 26(b), the amount in controversy is but one factor to be considered in the totality of the circumstances. And as for Defendants’ argument concerning the depositions the SEC already took in this case over the summer,5 it is not the SEC’s fault that the third parties who were deposed (which included, among others, Defendant Larson’s brother; the transfer agent; the promotional firm that touted Crown’s stock; and one of the other Israeli nominees 5 With respect to the two depositions the SEC set in Phoenix, Defendants are hard- pressed to complain, considering that this case is pending in Phoenix and Defendants themselves reside there. Case 2:17-cv-00427-SPL Document 109 Filed 12/07/17 Page 6 of 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 - 7 - who fortunately happened to relocate to New York from Israel) reside in different places across the country. It is also not the SEC’s fault that the shell company Defendant Larson chose to purchase to initiate the scheme in this case was set up in Israel. Perhaps it would have been less complicated for Defendants to have selected only locally-based third parties in their plans and a locally-created shell with Arizona residents as nominees. Admittedly, that would have been easier from a proportionality perspective. But given Defendants’ position with respect to the Motion, it is not hard to comprehend why a foreign-based shell with nominees who are beyond the subpoena power of the court would be an attractive target. Nevertheless, like any litigant, the SEC must take the facts as they are and where they are, and we have done the best we can to prepare our case. All of these arguments aside, and further in the spirit of promoting the “just, speedy, and inexpensive determination” of this case, as required by Fed. R. Civ. P. 1, the SEC would welcome the opportunity to participate in a conference with the Court and Defendants, if the Court would be willing to offer guidance on how best to proceed in these circumstances and how to balance the need for the nominees’ testimony with the proportionality considerations set forth in Fed. R. Civ. P. 26(b). IV. Conclusion For the reasons set forth above and in the Motion, the SEC respectfully requests the Court grant the Motion. DATED: December 7, 2017 Respectfully submitted, SECURITIES AND EXCHANGE COMMISSION By: /s/ Patrick R. Costello Patrick R. Costello Attorney for Plaintiff Case 2:17-cv-00427-SPL Document 109 Filed 12/07/17 Page 7 of 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 CERTIFICATE OF SERVICE I certify that on December 7, 2017, I caused to be served the foregoing PLAINTIFF’S REPLY MEMORANDUM IN SUPPORT OF ITS MOTION FOR ISSUANCE OF A LETTER OF REQUEST FOR INTERNATIONAL JUDICIAL ASSISTANCE PURSUANT TO THE HAGUE CONVENTION either by (i) using the CM/ECF system, which will send notification of such filing to counsel for Defendants at the following addresses; or (ii) sending via electronic mail to those counsel not yet registered on the CM/ECF system at the following addresses: Luke C. Zouvas, pro se 977 Windflower Way San Diego, CA 92106 lzouvas@zouvaslaw.com Roger L. Scott Greenberg Traurig, LLP 3161 Michelson Drive, Ste. 1000 Irvine, CA 92612 scottro@gtlaw.com Jason S. Lewis Jason M. Hopkins Greenberg Traurig, LLP 2200 Ross Avenue, Ste. 5200 Dallas, TX 75201 lewisjs@gtlaw.com hopkinsjm@gtlaw.com David R. Clouston Leslye E. Moseley Sessions Fishman Nathan & Israel, LLP 901 Jackson Street, Suite 440 Dallas, Texas 75202 dclouston@sessions.legal lmoseley@sessions.legal Damian P. Richard Sessions Fishman Nathan & Israel, LLP 1545 Hotel Circle South, Ste. 150 San Diego, CA 92108 drichard@sessions.legal /s/ Patrick R. Costello Patrick R. Costello Case 2:17-cv-00427-SPL Document 109 Filed 12/07/17 Page 8 of 8