Securities and Exchange Commission v. Zouvas et al

REPLY to Response to Motion re: 145 MOTION for Partial Summary Judgment as to Defendant Luke C. Zouvas

D. Ariz.March 4, 2019

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 Ann H. Petalas Securities and Exchange Commission 100 F Street N.E. Washington, DC 20549-5985 Email: costellop@sec.gov petalasa@sec.gov Florida Bar No. 75034 (Costello) Texas Bar No. 24012852 (Petalas) Telephone: (202) 551-3982 Facsimile: (202) 772-9245 Attorneys 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 PARTIAL SUMMARY JUDGMENT AS TO DEFENDANT LUKE C. ZOUVAS Oral Argument Requested Case 2:17-cv-00427-SPL Document 182 Filed 03/04/19 Page 1 of 16 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 - i - TABLE OF CONTENTS I. INTRODUCTION………………………………………………………….…… 1 II. ARGUMENT………………………………………………….………………... 1 A. Zouvas Failed to Comply with the Local Rules………......…...………… 1 B. Zouvas’ Objections Should be Overruled………..……………………… 2 C. Zouvas Has Not Proffered Any Evidence to Show a Genuine Dispute that He Acted Negligently………………………..…….…….… 4 1. Zouvas’ Burden on Summary Judgment……………...………….. 5 2. The SEC’s Uncontroverted Evidence Shows Zouvas was Negligent at a Minimum in this Case……………………….. 5 D. Zouvas Contradicts his Own Prior Testimony…………………………... 10 III. CONCLUSION…………………………………...…………………….………. 11 Case 2:17-cv-00427-SPL Document 182 Filed 03/04/19 Page 2 of 16 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 - ii - TABLE OF AUTHORITIES Cases Page B2B CFO Partners LLC v. Kaufman 856 F. Supp. 2d 1084 (D. Ariz. 2012)…………………………………. Carson v. Depuy Spine, Inc. 365 F. App’x 812 (9th Cir. 2010)……………………………………… Christensen v. Georgia-Pacific Corp. 279 F.3d 807 (9th Cir. 2002)………….……………………………….. FDIC v. O’Melveny & Myers 969 F.2d 744 (9th Cir. 1992), rev’d on other grounds, 512 U.S. 79 (1994)…………………………………………………….. FTC v. Publ’g Clearing House, Inc. 104 F.3d 1168 (9th Cir. 1997)…………………………………………. Flying Diamond Corp. v. Pennaluna & Co. 586 F.2d 707 (9th Cir. 1978)…………………………………………... Gallant v. US 392 F. Supp. 2d 1077 (D. Alaska 2005)……………………………….. Keenan v. Allan 91 F.3d 1275 (9th Cir. 1996)………………………………………….. Matsushita Elec. Indus. Co. v. Zenith Radio Corp. 475 U.S. 574 (1986)…………………………………………………… McDevitt v. Guenther 522 F. Supp. 2d 1272 (D. Haw. 2007)………………………………… Morganroth & Morganroth v. DeLorean 213 F.3d 1301 (10th Cir. 2000), overruled on other grounds, 661 F.3d 495 (10th Cir. 2011)……………………………….. Primiano v. Cook, No. 06-15563 2010 U.S. App. LEXIS 8859 (9th Cir. Apr. 27, 2010)………………… Robinson v. Adams 847 F.2d 1315 (9th Cir. 1987)…………………………………………. 11 3, 4 9 7 8 10 4 5 5 4 4 4 3, 4 Case 2:17-cv-00427-SPL Document 182 Filed 03/04/19 Page 3 of 16 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 - iii - SEC v. Frank 388 F.2d 486 (2d Cir. 1968)…………………………………………… SEC v. Greenstone Holdings, Inc., No. 10-1302 2012 U.S. Dist. LEXIS 44192 (S.D.N.Y. Mar. 28, 2012)……………... SEC. v. Hughes Cap. Corp. 124 F.3d 449 (3d Cir. 1997)…………………………………………… SEC v. Janus Spectrum LLC, No. 15-609 2017 U.S. Dist. LEXIS 126231 (D. Ariz. Aug. 8, 2017)……………… SEC v. Todd 642 F.3d 1207 (9th Cir. 2011)…………………………………………. Slaughter v. S. Talc. Co. 919 F.2d 304 (5th Cir. 1990)…………………………………………... Strong Coll. Students Moving v. Coll. Hunks Hauling Junk, No. 12-1156 2015 U.S. Dist. LEXIS 191833 (D. Ariz. May 15, 2015)…….……….. US v. Knight 25 F. Supp. 3d 1104 (W.D. Ark. 2014)………………………………... Villiarimo v. Aloha Island Air, Inc. 281 F.3d 1054 (9th Cir. 2002)…………………………………………. W. Alliance Bank v. Jefferson, No. 14-0761 2015 U.S. Dist. LEXIS 136949 (D. Ariz. Oct. 7, 2015)………………. Weiss v. SEC 468 F.3d 849 (D.C. Cir. 2006)………………………………………… 7 7 5 5 4 4 1 8 8 1 7 Statutes and Rules Page Securities Act Section 17(a)(3) 15 U.S.C. § 77q(a)(3)……………………………..…………………… Fed. R. Civ. P. 36(a)(3)……………………………………………………….. D. Ariz. LRCiv 7.2(d)………………..………………………………………... D. Ariz. LRCiv 7.2(m)(2)……………………………………………………... D. Ariz. LRCiv 56.1(b)………………………………………………………... 4, 10 7 1 1 1 Case 2:17-cv-00427-SPL Document 182 Filed 03/04/19 Page 4 of 16 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 - 1 - Plaintiff Securities and Exchange Commission files this reply memorandum pursuant to LRCiv 7.2(d) and this Court’s Order of January 22, 2019 (Doc. 176) in further support of its Motion for Partial Summary Judgment (Doc. 145) (the “SEC’s Motion”). The SEC responds to the arguments raised by Defendant Luke C. Zouvas (“Zouvas”) in his opposition to the SEC’s Motion (Doc. 179) (the “Opposition”) and in his Controverting Statement of Facts (Doc. 180) (“CSOF”).1 I. INTRODUCTION As described further below, Zouvas has not met his burden to refute summary judgment in the SEC’s favor. In fact, he repeats many of the same self-serving arguments raised by the co-defendants in their respective oppositions, and relies on evidence that directly contradicts his sworn deposition testimony. He also misstates the applicable law in several material respects. Candidly, he has done nothing to raise a genuine dispute that would show he did not act negligently in this case with respect to Crown Dynamics Corp. (“Crown”). Accordingly, the SEC’s Motion should be granted. II. ARGUMENT A. Zouvas Failed to Comply with the Local Rules Much like the co-defendants Larson, Jorgenson and Schiprett, Zouvas too has ignored the express prohibition in LRCiv 7.2(m)(2) and made substantive objections with argument directly in the CSOF instead of stating the objections “summarily” and reserving argument for his Opposition. See CSOF Nos. 3-4, 19-20, 38-39, 41, 50, 63, 132. Accordingly, these portions of the CSOF should be stricken outright. Strong Coll. Students Moving Inc. v. Coll. Hunks Hauling Junk Franchising LLC, No. 12-1156, 2015 U.S. Dist. LEXIS 191833, at *4 (D. Ariz. May 15, 2015); W. Alliance Bank v. Jefferson, No. 14- 0761, 2015 U.S. Dist. LEXIS 136949, at *3-4 (D. Ariz. Oct. 7, 2015). Zouvas also did not comply with LRCiv 56.1(b). In CSOF Nos. 23-25, 29-30, 43, 52-57, 59-60, 64, 67-75, 77-88, 90-94, 97-100, 103-12, 128, 130-31, he claims that he 1 With the filing of this reply, briefing on summary judgment in this matter is now complete as to all parties. Case 2:17-cv-00427-SPL Document 182 Filed 03/04/19 Page 5 of 16 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 - “does not have direct personal knowledge regarding this statement and thus disputes it.” The Local Rule, however, requires the responding party either to admit or dispute the fact, and if disputed, to cite supporting materials in the record. Because Zouvas failed to do that, the Court should deem those facts admitted. B. Zouvas’ Objections Should be Overruled Even if Zouvas had properly complied with the Local Rules, the objections he has raised should be overruled. First, in CSOF Nos. 5 and 11, Zouvas cites portions of the deposition of one of the SEC’s experts, James Cangiano, for the proposition that Zouvas’ reliance on the SEC’s declaration of effectiveness of Crown’s Form S-1 registration statement was appropriate because such a declaration means the SEC approved the accuracy of the information in the Form S-1. Not surprisingly, Zouvas has taken Mr. Cangiano’s testimony out of context. In his Second Declaration, Mr. Cangiano has clarified his testimony (even though no clarification was necessary) and notes the accuracy of the contents of a Form S-1 and supporting materials remains with a registrant (like Crown) and not with the SEC. See Second Declaration of Patrick R. Costello filed contemporaneously herewith (“Costello Dec.”), at Ex. 1. This is consistent with Mr. Cangiano’s testimony later in the deposition where he compared the role of FINRA in its review of a Rule 15c2-11 application with the SEC’s review of a Form S-1: “[T]he criteria is that they must be up-to-date in their financial reporting. I don’t believe [FINRA] go[es] into the accuracy or the quality or the analysis of the financials, just that they’re current in their filings.” See Doc.164-3, at 71:10-24. In choosing to misinterpret Mr. Cangiano’s testimony, Zouvas also conveniently ignores the report of the SEC’s other expert, Robert Robbins (a securities attorney with over 40 years of experience who currently serves as the global head of the corporate practice at Pillsbury Winthrop) who opined specifically that: Zouvas was not entitled to rely on the fact that the [SEC] had declared the Crown S-1 effective, as evidence that the statements of fact contained in the S-1 were correct. It is an elementary principle of securities law that SEC review provides no assurance of the accuracy of the contents of a filed document. An attorney of Zouvas’ experience would know this, but in any Case 2:17-cv-00427-SPL Document 182 Filed 03/04/19 Page 6 of 16 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 - case the Crown S-1 expressly said so on the front cover: “NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.” See Doc. 148-8, at 7. As noted in Section II.C below, the fact that Zouvas blindly relied on Crown’s Form S-1 (and continues even today to maintain the propriety of doing that) is proof he was negligent at a minimum in reviewing the Crown transaction. Second, concerning Mr. Robbins’ report in particular,2 Zouvas raises baseless objections to the portions of the report on which the SEC has relied on summary judgment. See CSOF Nos. 19-20, 38-39, 41, 50, 63. Those portions address the due diligence obligations that Zouvas had as the securities attorney involved with Crown. Zouvas claims in each of these instances that (i) “there is no evidence [he] was obligated to take any such steps to comply with the federal securities laws,” and (ii) “Zouvas disputes the credibility of the expert witness report and resolution of such a dispute is inappropriate for summary judgment.” See id. Contrary to these contentions, there most certainly is evidence that Zouvas had those obligations – the evidence is Mr. Robbins’ expert testimony. The Ninth Circuit has held a party cannot “simply question the credibility” of an expert witness in order to defeat a motion for summary judgment. Carson v. Depuy Spine, Inc., 365 F. App’x 812, 814 (9th Cir. 2010). Instead, “there is no issue for trial unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party. If the evidence is merely colorable, or is not significantly probative, summary judgment may be granted.” Robinson v. Adams, 847 F.2d 1315, 1316 (9th Cir. 1987). Where the opposing party proffers no expert of his own or any competent evidence to establish what the proper standard of care is, and instead merely challenges the credibility of the moving party’s expert without evidence to place the expert’s credibility in doubt, the same is “merely colorable” and not significantly probative to defeat summary judgment. Id. at 1317. 2 Mr. Robbins’ full report is in the record as Doc. 148-8. Case 2:17-cv-00427-SPL Document 182 Filed 03/04/19 Page 7 of 16 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 - Here, Zouvas has not set forth any evidence, or even articulated a reason, to place Mr. Robbins’ credibility in doubt. He could have elected to depose Mr. Robbins and cross- examine him on the information or methodology in his report, but he chose not to do that. Attempting to punt that examination until trial is insufficient as a matter of law because “[n]either a desire to cross-examine an affiant nor an unspecified hope of undermining his or her credibility suffices to avert summary judgment.” Id. In addition, Zouvas has not proffered any competent evidence to show a competing standard of care to explain the actions he took as a securities attorney in the Crown transaction. He failed to designate any experts of his own (or even seek to qualify himself as an expert) and has not pointed to any law that would establish such a competing standard. As a result, Mr. Robbins’s testimony on that front is uncontroverted and should be accepted by the Court. See Carson, 365 F. App’x at 814 (affirming summary judgment where opposing party failed to dispute the moving party’s expert or otherwise introduce evidence of the applicable standard); Morganroth & Morganroth v. DeLorean, 213 F.3d 1301, 1312 (10th Cir. 2000) (same); see also Gallant v. US, 392 F. Supp. 2d 1077, 1081 (D. Alaska 2005) (granting summary judgment to the government because plaintiff “submitted no expert report and so created no issues of material fact.”).3 C. Zouvas Has Not Proffered Any Evidence to Show a Genuine Dispute that He Acted Negligently The SEC’s Motion is based on Section 17(a)(3) of the Securities Act. To prevail, the SEC must show that Zouvas negligently engaged in fraudulent or deceitful transactions, practices or courses of business with respect to Crown. Negligence in this context is 3 The cases Zouvas cites in the Opposition on this issue are off topic. Neither SEC v. Todd, 642 F.3d 1207 (9th Cir. 2011), nor Primiano v. Cook, No. 06-15563, 2010 U.S. App. LEXIS 8859 (9th Cir. Apr. 27, 2010), was a summary judgment case. Instead, Todd involved a post-trial motion for judgment as a matter of law where, unlike here, both parties had proffered competing expert testimony at trial for the jury’s consideration. Primiano was an appeal of the trial court’s exclusion of an expert on Daubert grounds. Zouvas also cites McDevitt v. Guenther, 522 F. Supp. 2d 1272 (D. Haw. 2007), but that case actually involved a pre-trial motion to strike the expert. And Slaughter v. S. Talc. Co., 919 F.2d 304 (5th Cir. 1990) affirmed the district court’s grant of summary judgment against a party who relied on an expert because, unlike here, the expert’s opinion was not properly supported by the facts and amounted to a bare conclusion. Notably, Zouvas has not moved to strike Mr. Robbins’ report nor has he presented a Daubert challenge. Case 2:17-cv-00427-SPL Document 182 Filed 03/04/19 Page 8 of 16 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 - measured by reasonable prudence, which looks objectively at Zouvas’ actions in light of what a reasonable person would do under like circumstances. See SEC v. Hughes Cap. Corp., 124 F.3d 449, 454 (3d Cir. 1997); SEC v. Janus Spectrum LLC, No. 15-609, 2017 U.S. Dist. LEXIS 126231, at *24 (D. Ariz. Aug. 8, 2017). 1. Zouvas’ Burden on Summary Judgment Zouvas has done nothing in his Opposition to refute the SEC’s claims on summary judgment. Not only has he failed to challenge Mr. Robbins’ qualifications or the substance of the expert report, but he also has not introduced any competing evidence of the standard of care applicable to a securities attorney in like circumstances or otherwise demonstrated how he complied with his due diligence obligations in connection with Crown. It is not enough for him simply to say that competing inferences or questions of fact may be drawn from the evidence. Instead, on summary judgment, the issue of fact must be “genuine.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). That means as the party opposing summary judgment, Zouvas must do more than simply show there is “some metaphysical doubt as to the material facts.” Id. Instead, he must identify “with reasonable particularity the evidence that precludes summary judgment” because the duty of the courts is not to “scour the record in search of a genuine issue of triable fact.” Keenan v. Allan, 91 F.3d 1275, 1279 (9th Cir. 1996). As noted further below, Zouvas has not identified any factual dispute that would merit sending this case to the trier of fact. 2. The SEC’s Uncontroverted Evidence Shows Zouvas was Negligent at a Minimum in this Case Mr. Robbins opines in his report that Zouvas failed to exercise the required duty of reasonable care as the securities attorney responsible for vetting the Crown transaction. Among other things, Zouvas was confronted with numerous red flags that should have prompted further inquiry on his part, rather than blindly taking Zwebner at his word and assuming the subscribers were in fact bona fide investors in Crown. See Doc. 148-8, at 6. In his Opposition, Zouvas notes that his review of the transaction consisted of looking at Crown’s Form S-1 and periodic filings as well as a variety of other materials Case 2:17-cv-00427-SPL Document 182 Filed 03/04/19 Page 9 of 16 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 - that Zwebner brought him in a suitcase, which he contends were subscription agreements, copies of cancelled checks from the subscribers, stock certificates and powers, foreign bank signature guarantees, and the subscribers’ passports and identification cards.4 He then claims in CSOF No. 17 that it was “reasonable to conclude, based on the plethora of authentic information in front of him, that Zwebner represented the original subscribers and that Crown as a company was above board.” The SEC is not disputing Zouvas’ contention that he reviewed this information. The point here is not whether Zouvas reviewed it, but that a review of the information, standing alone, is insufficient for a reasonably prudent securities attorney in like circumstances to discharge his due diligence obligations.5 Mr. Robbins opines that Zouvas was not justified in taking Zwebner at his word that he represented the interests of the Israeli subscribers, given that he and Zwebner had no prior course of dealing together. See Doc. 148-8, at 7. In addition, Zouvas should have done more to confirm the subscribers were in fact bona fide investors, such as contacting them directly to verify Zwebner’s representations and the authenticity of the documents. Id. Had he done that, he would have learned that none of these individuals was a legitimate investor, as they each testified emphatically that they have never even heard of Crown. See Doc. 149-1, 149-2, 149-3. And yet, Zouvas continues to this day to ignore this testimony and just point in the CSOF to the various subscription agreements bearing the subscribers’ names as support for his argument the transactions were legitimate. Notably, as with the other defendants, Zouvas 4 Despite his claim in the Opposition that he reviewed the “original” passports and identification cards, Zouvas actually testified at his deposition that he reviewed copies of those documents. See Doc. 154-8, at 48:9-14. On a related topic, Samson Gelles (one of the subscribers) testified separately at his deposition that in Israel, it is actually quite easy for someone to obtain a copy of another’s passport or identification card, considering that most institutions and businesses have electronic images of both credentials readily on hand for security purposes. See Costello Dec., at Ex. 2 (Gelles Tr., at 49:9-11). 5 With respect to the bank signature guarantees in particular, Mr. Robbins has opined that it was not sufficient for Zouvas to rely on them because Zouvas knew nothing about the banks themselves, and thus was not in a position to verify whether the banks even were qualified to guarantee the signatures as required by the stock certificates, and he also was unfamiliar with international banking regulations and only assumed what the guarantees represented. See Doc. 148-8, at 7. Zouvas has done nothing in his Opposition to challenge Mr. Robbins’ assessment. Case 2:17-cv-00427-SPL Document 182 Filed 03/04/19 Page 10 of 16 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 - too chose not to depose the subscribers to challenge their testimony, which therefore stands uncontroverted.6 Moreover, Zouvas never bothered to respond to the SEC’s First Request for Admission (“RTA”) wherein he was asked to admit that he did not conduct any due diligence to determine whether the subscribers were legitimate, and that he knew at the time of the Crown transaction that the subscribers’ investment was a sham. See Costello Dec., at ¶ 5, and Ex. 3, Nos. 8-14. Because he failed to answer the requests, they are deemed admitted as a matter of law. See Fed. R. Civ. P. 36(a)(3). Mr. Robbins states further that “[i]t is not sufficient for an attorney to rely solely on a client’s representations about the facts that form the basis for the opinion.” Doc. 148-8, at 6. This is consistent with the Ninth Circuit’s view. In FDIC v. O’Melveny & Myers, 969 F.2d 744, 749 (9th Cir. 1992), the court held that “[a]ttorneys, in rendering opinions relating to the securities laws, are not justified in assuming facts as represented to them by the client and in basing their opinion on the assumption that such facts are correct. Rather the attorney must make a reasonable effort to independently verify the facts on which the opinion is based.” See also SEC v. Frank, 388 F.2d 486, 489 (2d Cir. 1968) (“[A] lawyer, no more than others, can escape liability for fraud by closing his eyes to what he saw and could readily understand.”); Weiss v. SEC, 468 F.3d 849, 855 (D.C. Cir. 2006) (holding that an attorney’s opinion must be preceded by “a reasonable investigation into the facts underlying the opinion”); SEC v. Greenstone Holdings, Inc., No. 10-1302, 2012 U.S. Dist. LEXIS 44192, at *22 (S.D.N.Y. Mar. 28, 2012) (attorney’s “avoidance of the true facts [is] reckless at best”). Zouvas also claims in his Opposition that he cannot be held accountable for not concluding that Zwebner was a criminal. This argument completely misses the mark and ignores the entire point of the SEC’s Motion. The question here is not what Zouvas 6 This includes Crown’s two purported initial officers, Amir Rehavi and Chanah Zehavi. It is mind-boggling that Zouvas would contend on summary judgment with respect to Rehavi and Zehavi in particular (see CSOF 18) that they legitimately sold their Crown shares to Aninye, when it was Zouvas who directed the transfer agent to retire Rehavi’s and Zehavi’s shares to Crown’s treasury rather than issue them to Aninye. See Doc. 154-8, at 165:23- 25; 167:18-21. Case 2:17-cv-00427-SPL Document 182 Filed 03/04/19 Page 11 of 16 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 - 8 - himself believed or what he did, but what a reasonably prudent attorney in like circumstances would have done.7 And Mr. Robbins analyzes that issue at length in his report, and has observed that Zouvas did not act reasonably in vetting Crown. As noted above, Zouvas has not proffered any evidence to dispute the standard of care or otherwise show that his actions were justified. Instead, he just relies on self-serving testimony that it was “reasonable to conclude” that Crown was in order. The same, however, is insufficient to defeat summary judgment. See Villiarimo v. Aloha Island Air, Inc., 281 F.3d 1054, 1061 (9th Cir. 2002) (“[T]his court has refused to find a ‘genuine issue’ where the only evidence presented is ‘uncorroborated and self-serving’ testimony.”); FTC v. Publ’g Clearing House, Inc., 104 F.3d 1168, 1171 (9th Cir. 1997) (“A conclusory, self-serving affidavit, lacking detailed facts and any supporting evidence, is insufficient to create a genuine issue of material fact.”). The same holds true for Zouvas’ failure to verify that the funds he wired to Zwebner were dispersed to the subscribers. Putting aside the fact that the subscribers never were bona fide investors to begin with, all Zouvas claims on summary judgment is that he “reasonably believes, but does not know for sure, that Zwebner forwarded the proceeds to the sellers.” See CSOF No. 47. This self-serving testimony is insufficient to overcome Mr. Robbin’s expert opinion that Zouvas could not rely solely on Zwebner about the disbursement of funds or the bank accounts where Zouvas was directed to send the wire. Instead, Zouvas should have made inquiry about the accounts to satisfy himself as to the substance of the transaction, and also should have taken other steps to confirm receipt of the disbursements, such as contacting the subscribers directly. See Doc. 148-8, at 7, 10. And Mr. Robbins reaches a similar conclusion with respect to Shira Mizrahi (the subscriber from whom Zouvas supposedly purchased his own Crown shares and whom he considered to be a purported client). Zouvas freely admits on summary judgment that he 7 Zouvas’ citation to US v. Knight, 25 F. Supp. 3d 1104 (W.D. Ark. 2014) for this principle is inapposite. There, the defendant-attorney was being charged with assisting his client in committing bankruptcy fraud, which is a specific intent crime. Here, however, the issue is negligence and whether Zouvas should have done more to confirm the representations Zwebner made to him. Case 2:17-cv-00427-SPL Document 182 Filed 03/04/19 Page 12 of 16 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 - 9 - never communicated with Ms. Mizrahi (see CSOF 49), but then attempts to legitimize the transaction with her by again pointing to the share purchase agreement bearing her name. As noted above, the subscribers, including Ms. Mizrahi, have testified emphatically that they never were bona fide investors in Crown. Had Zouvas acted like a reasonably prudent securities attorney in his due diligence review and contacted the subscribers as Mr. Robbins has opined a prudent attorney would have done, then Zouvas would have learned that his own personal transaction with Ms. Mizrahi was a sham. Given that he supposedly was purchasing shares from a client, a phone call to verify some information would most definitely have been appropriate, as Mr. Robbins has noted the whole transaction between Zouvas and Ms. Mizrahi was a red flag and a conflict of interest deserving of further inquiry and disclosure. See Doc. 148-8, at 8-9. In sum, it was Zouvas’ negligence at the outset that substantially assisted the other defendants in this case because had Zouvas not turned his back on his due diligence obligations, the truth about the illegitimacy of Crown would have come to light, and the other defendants would not have been able to make use of Crown in their eventual market manipulation. It was not sufficient for Zouvas, as a securities attorney, to rely solely on assurances from Zwebner without further inquiry. Instead, Zouvas was negligent at best, and this substantially enabled the other defendants to acquire Crown shares and eventually dump them into the market at enormous profits. Zouvas failed to discharge his duties in this case at the level expected of a securities attorney in like circumstances. He has not proffered any testimony concerning a competing standard of care,8 and has not introduced any evidence to challenge Mr. Robbins’ report or any reason to doubt Mr. Robbins’ opinions. While it is true as a general matter, as Zouvas notes in the Opposition, that negligence usually is a matter for the trier of fact, the Ninth Circuit has held nevertheless that “summary judgment is proper where the facts are undisputed and only one conclusion may reasonably be drawn from them. 8 Zouvas’ citation to Christensen v. Georgia-Pacific Corp., 279 F.3d 807 (9th Cir. 2002) is off-point because there, the party opposing summary judgment actually did introduce competing evidence as to the standard of care. Case 2:17-cv-00427-SPL Document 182 Filed 03/04/19 Page 13 of 16 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 - 10 - Negligence then becomes a matter of law.” Flying Diamond Corp. v. Pennaluna & Co., 586 F.2d 707, 713 (9th Cir. 1978). Here, the only conclusion to be drawn is that Zouvas was negligent at a minimum and violated Section 17(a)(3) of the Securities Act. Accordingly, the Court should grant summary judgment in favor of the SEC. And furthermore, the Court also should enter injunctive relief and disgorgement plus prejudgment interest against Zouvas, as he failed to offer any evidence (or even any argument at all in his Opposition) as to the propriety of those remedies or the SEC’s calculation of monetary relief. The same holds true for Zouvas’ claimed “advice of client” affirmative defense, to which he offers no argument or opposition against the SEC’s request for summary judgment. See Doc. 145, at § III.D. D. Zouvas Contradicts his Own Prior Testimony As with the other defendants, Zouvas too has directly contradicted his own prior testimony. First, he now claims that a “subsequent investigation” revealed that the $25,000 wire he received from Larson on December 15, 2011 was for the purchase of Jorgenson’s and Schiprett’s Crown shares, and that he remitted those funds to Zwebner. See CSOF Nos. 35 and 121. At his deposition, however, he testified specifically that he did not know the purpose of that $25,000 wire. See Doc. 154-8, at 118:1-8. He offers no indication about what the supposed “subsequent investigation” involved, other than perhaps to make his story on summary judgment consistent with Larson’s, who similarly backtracked on his own deposition testimony about the wire. See Doc. 171, at 6. Moreover, the story contradicts the evidence from a timeline perspective. Indeed, the wire came into Zouvas’ trust account after he already had sent the funds for the Crown acquisition to Zwebner. See Doc. 154-8, at 111:8-24 (Zouvas noted he last sent funds to Zwebner on December 14, 2011). And the story also is inconsistent with the SEC’s RTAs, in which Zouvas is deemed to have admitted (i) he did not remit any additional funds to Zwebner pertaining to Crown; and (ii) because of that, Jorgenson, Schiprett and the rest of Larson’s and Robb’s investor group to whom the free-trading shares were allocated never paid for those shares. See Costello Dec., at Ex. 3, Nos. 5-6. Accordingly, the Court should Case 2:17-cv-00427-SPL Document 182 Filed 03/04/19 Page 14 of 16 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 - 11 - strike Zouvas’ contradictory statements as a sham. See B2B CFO Partners LLC v. Kaufman, 856 F. Supp. 2d 1084, 1088 (D. Ariz. 2012) (holding it is appropriate to strike evidence that contradicts prior deposition testimony). And second, Zouvas now claims on summary judgment that Jorgenson, Schiprett and the rest of the investor group were not “Larson’s and Robb’s investors” but merely people they introduced to the deal, and that when it came to allocating the Crown shares to the group, Zouvas never took direction from Larson or Robb. See CSOF No. 44. This contradicts not only what Zouvas said at his deposition, but also what he specifically represented to the State Bar of California in their investigation relating to Crown: Q. So does that refresh your recollection as to whether Mr. Larson and Mr. Robb in fact gave you directions to transfer the shares? A. Yes. And, you know, when I say that, like, transfer, the information is what I was – you know, I would direct because I’m authorized. I would get the information from them. That’s what I mean when I say that. See Doc. 154-8, at 89:13-20. Zouvas told the California Bar that Crown shares were “transferred to investors of Chris Larson and Cameron Robb.” Id. at 89:7-9. He further described these individuals as investors Robb and Larson “were bringing into the company.” Id. at 86:13-19. The Court therefore should strike the contradictory statements on summary judgment. See B2B, 856 F. Supp. 2d at 1088. III. CONCLUSION For the reasons set forth above and in the SEC’s Motion, the SEC respectfully requests the Court grant summary judgment in its favor. DATED: March 4, 2019 Respectfully submitted, SECURITIES AND EXCHANGE COMMISSION By: /s/ Patrick R. Costello ________________________ Patrick R. Costello Ann H. Petalas Attorneys for Plaintiff Case 2:17-cv-00427-SPL Document 182 Filed 03/04/19 Page 15 of 16 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 March 4, 2019, I caused to be served the foregoing PLAINTIFF’S REPLY MEMORANDUM IN SUPPORT OF ITS MOTION FOR PARTIAL SUMMARY JUDGMENT AS TO DEFENDANT LUKE C. ZOUVAS 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: Alan S. Baskin Baskin Richards PLC 2901 N. Central Ave., Ste. 1150 Phoenix, AZ 85012 alan@baskinrichards.com Roger L. Scott Greenberg Traurig, LLP 3161 Michelson Drive, Ste. 1000 Irvine, CA 92612 scottro@gtlaw.com Jason M. Hopkins Jason S. Lewis DLA Piper LLP 1717 Main Street, Ste. 4600 Dallas, TX 75201 jason.hopkins@dlapiper.com jason.lewis@dlapiper.com Anthony B. Bingham Bingham Law 1423 South Higley Road Building 4, Suite 110 Mesa, AZ 85206 tony@binghamlawaz.com /s/ Patrick R. Costello Patrick R. Costello Case 2:17-cv-00427-SPL Document 182 Filed 03/04/19 Page 16 of 16