Securities and Exchange Commission v. Trabulse et al

RESPONSE in Support re MOTION to Dismiss

N.D. Cal.November 21, 2007

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 DEFENDANTS’ RESPONSE TO PLAINTIFF’S OBJECTIONS TO EVIDENCE, AND REPLY IN SUPPORT OF DEFENDANTS’ REQUEST FOR JUDICIAL NOTICE CASE NO. C-07-4975 WHA 406826.01 KEKER & VAN NEST, LLP MICHAEL D. CELIO - #197998 CLEMENT S. ROBERTS - #209203 JO F. WEINGARTEN - #246224 710 Sansome Street San Francisco, CA 94111-1704 Telephone: (415) 391-5400 Facsimile: (415) 397-7188 Email: mcelio@kvn.com croberts@kvn.com jweingarten@kvn.com Attorneys for Defendants ALEXANDER JAMES TRABULSE, FAHEY FUND, L.P., FAHEY FINANCIAL GROUP, INC., INTERNATIONAL TRADE & DATA, and ITD TRADING UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. ALEXANDER JAMES TRABULSE, Defendant, and FAHEY FUND, L.P., FAHEY FINANCIAL GROUP, INC., INTERNATIONAL TRADE & DATA, and ITD TRADING, Relief Defendants. Case No. C-07-4975 WHA DEFENDANTS’ RESPONSE TO PLAINTIFF’S OBJECTIONS TO EVIDENCE, AND REPLY IN SUPPORT OF DEFENDANTS’ REQUEST FOR JUDICIAL NOTICE Date: December 6, 2007 Time: 8:00 a.m. Dept. Courtroom 9, 19th Floor Judge: Hon. William Alsup Date Action Filed: September 26, 2007 Case 3:07-cv-04975-WHA Document 48 Filed 11/21/2007 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 1 DEFENDANTS’ RESPONSE TO PLAINTIFF’S OBJECTIONS TO EVIDENCE, AND REPLY IN SUPPORT OF DEFENDANTS’ REQUEST FOR JUDICIAL NOTICE CASE NO. C-07-4975 WHA 406826.01 In response the SEC’s Objections to Defendant’s Evidence and Opposition to Defendant’s Request for Judicial Notice (“Objections”), the defendants offer the following responses to the objections and reply in support of the request for judicial notice. I. RESPONSE TO PLAINTIFF’S OBJECTIONS TO EVIDENCE The SEC states that it objects to Exhibits 1, 2, and 3 of the Declaration of Clement S. Roberts (“Roberts Decl.”). In fact, the SEC lists objections to all four of the exhibits attached to the Roberts Decl., and the defendants offer the following responses to the objections: EVIDENCE OBJECTION RESPONSE Exhibit 1: Fahey Fund (Limited ) Partnership Agreement, dated January 2002. Exhibit 1 is hearsay and there is no foundation that the document qualifies for an exception. Federal Rules of Evidence (“FRE”) §§ 801, 802, 803(6). In addition, Exhibit 1 has not been authenticated. FRE § 901(a). The specific version of the Partnership Agreement attached to the Declaration of Clement S. Roberts was relied upon by the SEC in opposition to the motion to dismiss. See Opp. at 16 (“Section 6.06 of the Partnership Agreement Trabulse attached to his motion states . . . .”). The SEC cannot simultaneously rely on the document and claim that it is inadmissible hearsay or inauthentic. This specific version of the Partnership Agreement also was the subject of correspondence between the parties, during which the SEC made no challenge to authenticity. The Partnership Agreement was specifically cited in the Complaint. See Complt. at ¶¶ 22, 33 (“Trabulse misappropriated fund assets by spending more than he was entitled to under the terms of the fund’s limited partnership agreement[];” “[t]he limited partnership agreement for Fahey Fund, L.P. gave Trabulse complete and exclusive control of the fund in all respects.”). But there is no discussion of different versions in the Complaint. Case 3:07-cv-04975-WHA Document 48 Filed 11/21/2007 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 2 DEFENDANTS’ RESPONSE TO PLAINTIFF’S OBJECTIONS TO EVIDENCE, AND REPLY IN SUPPORT OF DEFENDANTS’ REQUEST FOR JUDICIAL NOTICE CASE NO. C-07-4975 WHA 406826.01 The SEC’s alleged basis for challenging authenticity rests on a logical fallacy. The SEC claims to doubt authenticity because this version of the Agreement was not produced by an unidentified number of third- party respondents to the SEC’s subpoena. But nothing about the fact that those third-parties did not keep this document in their files casts doubt on the document’s authenticity. Finally, the challenged document was produced from the Fund’s files in response to an SEC subpoena calling for this specific document. Exhibit 2: Newspaper article by Kathleen Pender, Net Worth: Hedge Funds Need a Careful Look, S.F. Chronicle, September 27,2007, at C1. Exhibit 2 is hearsay and there is no foundation that the document qualifies for an exception. FRE §§ 801, 802, 803. In addition, Exhibit 2 has not been authenticated. FRE § 901(a). Exhibit 2 is irrelevant because in a motion to dismiss, the Court is limited generally to the allegations of the Complaint. FRE §§ 410, 402; Branch v. Tunnell, 14 F.3d 449, 453 (9th Cir. 1994) (In ruling on a motion to dismiss, a district court generally “may not consider any material beyond the pleadings.”). Exhibit 2 is also irrelevant because it is offered in support of defendant’s contention that investors were not harmed by his fraud. The Commission is not required to prove harm or damages. SEC v. Rana Research, Inc., 8 F.3d 1358,1363, fn. 4 (9th Cir. 1993); SEC v. Rind, 991 F.2d 1496, 1490 (9th Cir. 1993) (injury it not an element of an SEC claim for disgorgement of profits under rule 10b-5); SEC v. The newspaper article is a public record, qualifying for an exception from the hearsay rule. See Fed. R. Evid. 803(8). Counsel’s statement in the newspaper article is an admission by a party-opponent, and is, therefore, non-hearsay. See Fed. R. Evid. 801(d)(2). The newspaper article is self- authenticating. See Fed. R. Evid. 902(6) (specifically listing newspapers and periodicals as self-authenticating). The newspaper article is also relevant because the SEC’s statements to the public conflict with its representations to the Court. See Opp. at 1 n.1. Finally, the SEC’s argument that the article is irrelevant merely because the SEC is not required to prove harm misses the point. A fact may be relevant without being an element of a claim. See Fed. R. Evid. 401 (“‘Relevant evidence’ means evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or Case 3:07-cv-04975-WHA Document 48 Filed 11/21/2007 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 3 DEFENDANTS’ RESPONSE TO PLAINTIFF’S OBJECTIONS TO EVIDENCE, AND REPLY IN SUPPORT OF DEFENDANTS’ REQUEST FOR JUDICIAL NOTICE CASE NO. C-07-4975 WHA 406826.01 Capital Gains Research Bureau, Inc., 375 U.S. 180, 195 (1963) (the SEC need not prove injury in an action to enjoin violation of Section 206 of the Advisers Act). less probable than it would be without the evidence.”). Exhibit 3: Letter from Michael Celio to Erin Schneider. Exhibit 3 is hearsay and there is no foundation that the document qualifies for an exception. FRE §§ 801, 802, 803. Exhibit 3 is irrelevant because in a motion to dismiss, the Court is limited generally to the allegations of the Complaint. FRE §§ 410, 402; Tunnell, 14 F.3d at 453. Exhibit 3 is also irrelevant because it is offered in support of defendant’s contention that he was permitted to “invest” in items such as jewelry. The issue in this litigation, however, is not whether defendant was permitted to make certain purchases. The issue is whether such purchases were disclosed to investors prior to their investments in the fund and whether these purchases are reflected in the investors’ account statements. The letter from Michael Celio to Erin Schneider, attached as Exhibit 3 to the Declaration of Clement S. Roberts, is not hearsay, because it is not offered for the truth of the matter asserted. See Fed. R. Evid. 801(c). It is offered, instead, to show notice of the document to the SEC and the SEC’s failure to read the documents produced in response to its subpoena. The letter is relevant because it bears directly upon the allegations of the complaint. The SEC claims that the defendants’ investments were unauthorized, despite having access to the document that clearly shows that the investments were proper under the Partnership Agreement. See Motion at 10. n.10. Finally, while the SEC argues here that “[t]he issue in this litigation, however, is not whether defendant was permitted to make certain purchases,” the SEC argued exactly the opposite position throughout its Complaint. See, e.g., Complt. ¶ 22 (“Trabulse used Fahey Fund bank accounts to pay for a wide variety of personal, and unauthorized, expenses.”). Exhibit 4: Chart of the Dow Jones Industrial Average returns. Exhibit 4 is irrelevant because in a motion to dismiss, the Court is limited generally to the allegations of the Complaint. FRE §§ 410, 402; Tunnell, 14 F.3d at 453 (9th Cir. 1994). Exhibit 4 is also irrelevant because it is offered in support of defendant’s contention that investors were not harmed by Under Rule 201, “[a] court may take judicial notice of ‘matters of public record’ without converting a motion to dismiss into a motion for summary judgment,” as long as the facts noticed are not “subject to reasonable dispute.” Lee, 250 F.3d at 689 (citation omitted); Fed. R. Evid. 201. The Dow Jones Industrial Case 3:07-cv-04975-WHA Document 48 Filed 11/21/2007 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 4 DEFENDANTS’ RESPONSE TO PLAINTIFF’S OBJECTIONS TO EVIDENCE, AND REPLY IN SUPPORT OF DEFENDANTS’ REQUEST FOR JUDICIAL NOTICE CASE NO. C-07-4975 WHA 406826.01 his fraud. The Commission is not required to prove harm or damages. Rana Research, Inc., 8 F.3d at 1363, fn. 4; Rind, 991 F.2d 1496 at 1490; Capital Gains Research Bureau, Inc., 375 U.S. at 195 (the SEC need not prove injury in an action to enjoin violation of Section 206 of the Advisers Act). Average annual returns for the period from 2000 to 2006 are a matter of public record and are not subject to reasonable dispute. These facts and documents are, therefore, suitable for judicial notice. See SEC v. Bilzerian, 814 F. Supp. 116, 123, n.19 (D.D.C. 1993), aff’d, 29 F.3d 689 (1994) (taking judicial notice of common stock closing prices); Trevino v. U.S., 804 F.2d 1512 (9th Cir. 1986) (taking judicial notice of economic trends and inflation rates). Further, the Dow Jones chart is relevant because the undisputed facts therein are used in the defendants’ motion to show that the SEC’s inferences are unreasonable. See Motion at 11- 12. The Court need not accept unreasonable inferences on a motion to dismiss. See W. Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981); SEC v. Yuen, 221 F.R.D. 631, 634 (C.D. Cal. 2004). II. REPLY IN SUPPORT OF REQUEST FOR JUDICIAL NOTICE Without citing any law or making any cogent arguments, the SEC opposes the defendants’ request that the Court take judicial notice of the Fahey Fund (Limited) Partnership Agreement, dated January 2002, and the newspaper article by Kathleen Pender, Net Worth: Hedge Funds Need a Careful Look, S.F. Chron., Sept. 27, 2007 at C1.1 The Court should reject these objections and grant the defendants’ request. While the Court cannot consider matters outside the pleadings on a motion to dismiss under Rule 12(b)(6), there are “two exceptions to the requirement that consideration of extrinsic evidence converts a 12(b)(6) motion to a summary judgment motion.” Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir. 2001). The first of these exceptions is that a court “may 1 The SEC states that it opposes defendants’ Request for Judicial Notice of Exhibits 1, 2, and 4 but then only argues against the first two of the exhibits. See Objections at 2. Nonetheless, the defendants will also address the propriety of granting judicial notice regarding Exhibit 4. Case 3:07-cv-04975-WHA Document 48 Filed 11/21/2007 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 5 DEFENDANTS’ RESPONSE TO PLAINTIFF’S OBJECTIONS TO EVIDENCE, AND REPLY IN SUPPORT OF DEFENDANTS’ REQUEST FOR JUDICIAL NOTICE CASE NO. C-07-4975 WHA 406826.01 consider ‘material which is properly submitted as part of the complaint’” or, if “the documents are not physically attached to the complaint, they may be considered if the documents’ ‘authenticity . . . is not contested’ and ‘the plaintiff's complaint necessarily relies’ on them.” Id. (quoting Branch v. Tunnell, 14 F.3d 449, 453 (9th Cir. 1994); Parrino v. FHP, Inc., 146 F.3d 699, 705-06 (9th Cir. 1998)). Second, under Rule 201, a court may take judicial notice of “matters of public record.” Id. at 689 (citing Mack v. South Bay Beer Distrib., 798 F.2d 1279, 1282 (9th Cir. 1986)). The SEC contends that the Partnership Agreement should not be granted judicial notice because the SEC disputes the authenticity of the document. See Objections at 4. Specifically, the SEC complains that, in response to their subpoena, “some investors produced partnership agreements for the Fahey Fund,” and none of those agreements were the January 2002 Agreement. Objections at 4. But that assertion, even if true, does not provide a factual basis to doubt the authenticity of the document—it means only that “some investors” only had earlier versions of the Agreement in their files. It says nothing about whether this version is what it purports to be. Perhaps more importantly, the SEC itself relies upon this version of the Partnership Agreement in its Opposition to the Motion to Dismiss. See Opp. at 16:4-8. The SEC cannot both rely upon the document and, simultaneously, challenge its authenticity. See id. at 16 n.10. The challenged document was produced to the SEC pursuant to a subpoena calling specifically for this document. And this precise document was discussed in the parties’ correspondence, without the SEC ever raising a challenge to its authenticity. The SEC has, therefore, no factual basis to dispute the document’s authenticity and is raising the challenge purely for strategic reasons. It is axiomatic that under Rule 201, documents whose contents are alleged in a complaint but which are not physically attached to the pleading, may be considered in ruling on a Rule 12(b)(6) motion to dismiss. See Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir. 1994), overruled on other grounds by Galbraith v. County of Santa Clara, 307 F.3d 1119 (9th Cir. 2002); see also Parks Sch. of Bus., Inc. v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995) (holding that Case 3:07-cv-04975-WHA Document 48 Filed 11/21/2007 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 6 DEFENDANTS’ RESPONSE TO PLAINTIFF’S OBJECTIONS TO EVIDENCE, AND REPLY IN SUPPORT OF DEFENDANTS’ REQUEST FOR JUDICIAL NOTICE CASE NO. C-07-4975 WHA 406826.01 documents attached to the complaint and incorporated therein by reference are treated as part of the complaint for purposes of Rule 12(b)(6).); In re Autodesk, Inc. Sec. Litig., 132 F. Supp. 2d 833, 837-38 (N.D. Cal. 2000) (“Thus, the court may consider the full text of a document the complaint quotes only in part.”). On this basis, the Court may take judicial notice of the Fahey Fund (Limited) Partnership Agreement explicitly referenced in the Complaint. See Complt. ¶¶ 22, 33 (“Trabulse misappropriated fund assets by spending more than he was entitled to under the terms of the fund’s limited partnership agreement[]”; “The limited partnership agreement for Fahey Fund, L.P. gave Trabulse complete and exclusive control of the fund in all respects.”) (emphasis added). Second, the SEC half-heartedly argues that “there is nothing in the article [that] meets the criteria of Federal Rule of Evidence 201(b).” Objections at 5. The SEC fails to explain what those criteria are or how the contents of the article fail to meet said criteria, nor does the SEC refer to any legal authority in making this argument. Indeed, the Court has “discretion to take judicial notice under Rule 201 of the existence and content of published articles.” U.S. v. W.R. Grace, ___ F.3d ___, 2007 WL 2728767, at *17 (9th Cir. Sept. 20, 2007) (citing Bell Atlantic Corp. v. Twombly, ___ U.S. ___, 127 S. Ct. 1955, 1973 n.13 (2007); U.S. v. Rutgard, 116 F.3d 1270, 1278 (9th Cir. 1997)). And, because the newspaper article from the San Francisco Chronicle is a matter of public record, it is suitable for judicial notice. See Ritter v. Hughes Aircraft Co., 58 F.3d 454, 458-59 (9th Cir. 1995) (taking judicial notice of a newspaper article). Finally, while the SEC fails to present any arguments regarding the fourth exhibit attached to the Roberts Decl., the SEC does state that it opposes the defendants’ request for judicial notice of this exhibit. See Objections at 2, 5. Exhibit 4 is the chart of the Dow Jones Industrial Average’s returns. Under Federal Rule of Evidence 201, “[a] court may take judicial notice of ‘matters of public record’ without converting a motion to dismiss into a motion for summary judgment,” as long as the facts noticed are not “subject to reasonable dispute.” Lee v. City of L.A., 250 F.3d 668, 689 (9th Cir. 2001) (citation omitted). The Dow Jones Industrial Average annual returns for the period from 2000 to 2006 are a matter of public record and are not subject to reasonable dispute. The chart is, therefore, suitable for judicial notice. See SEC v. Case 3:07-cv-04975-WHA Document 48 Filed 11/21/2007 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 7 DEFENDANTS’ RESPONSE TO PLAINTIFF’S OBJECTIONS TO EVIDENCE, AND REPLY IN SUPPORT OF DEFENDANTS’ REQUEST FOR JUDICIAL NOTICE CASE NO. C-07-4975 WHA 406826.01 Bilzerian, 814 F. Supp. 116, 123, n. 19 (D.D.C. 1993), aff’d, 29 F.3d 689 (1994) (taking judicial notice of common stock closing prices); Trevino v. U.S., 804 F.2d 1512 (9th Cir. 1986) (taking judicial notice of economic trends and inflation rates). Having failed to offer any argument against taking judicial notice of the chart, the SEC’s cursory opposition to this exhibit should be ignored. Accordingly, based on the arguments above, the Court should reject the SEC’s arguments and should grant the defendants’ request for judicial notice. Dated: November 21, 2007 KEKER & VAN NEST, LLP By: /s/ Jo Weingarten _________________ JO F. WEINGARTEN Attorneys for Defendants ALEXANDER JAMES TRABULSE, FAHEY FUND, L.P., FAHEY FINANCIAL GROUP, INC., INTERNATIONAL TRADE & DATA, and ITD TRADING Case 3:07-cv-04975-WHA Document 48 Filed 11/21/2007 Page 8 of 8