Defendants' Motion for Sanctions and Brief in Support

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TEXAS

AUSTIN DIVISION

SECURITIES AND EXCHANGE COMMISSION, :

Plaintiff,

v.

LIFE PARTNERS HOLDINGS, INC., BRIAN PARDO,R.SCOTTPEDEN,AND DAVID M. MARTIN,

Defendants.

Civil Action No.: 1-12-cv-00033

DEFENDANTS' MOTION FOR SANCTIONS AND BRIEF IN SUPPORT

LOCKE LORD LLP Jason S. Lewis State Bar No. 24007551 Email: [email protected] David W. Klaudt State Bar No. 00796073 Email: [email protected] Adam Tyler State Bar No. 24070777 [email protected] 2200 Ross A venue, Suite 2200 Dallas, Texas 75201 Tel: (214) 740-8000 Fax: (214) 756-8414 ATTORNEY FOR DEFENDANT BRIAN D. PARDO

PATTON BOGGS LLP S. Cass Weiland State Bar No. 21081300 Robert A. Hawkins State Bar No. 00796726 2000 McKinney Ave, Suite 1700 Dallas, Texas 75201 Ph: (214)578-1500 Fax: (214) 578-1550 Email: [email protected] Email: [email protected] ATTORNEY FOR DAVID M. MARTIN

BAKER & McKENZIE LLP Elizabeth L. Yingling State Bar No. 16935975 E-Mail: [email protected] Laura J. O'Rourke State BarNo. 24037219 E-Mail: [email protected] Will R. Daugherty State Bar No. 24053170 E-Mail: [email protected] 2300 Trammell Crow Center, 2001 Ross Avenue Dallas, TX 75201 Tel.: (214) 978-3000 Fax: (214) 978-3099

LAW OFFICES OF J PETE LANEY J Pete Laney State Bar No. 24036942 E-Mail: [email protected] 1122 Colorado Street, Suite 111 Austin, TX 78701-2159 Tel: (512) 473-0404 Fax: (512) 672-6123

ATTORNEYS FOR DEFENDANTS, LIFE PARTNERS HOLDINGS, INC. AND R. SCOTT PEDEN

Case 1:12-cv-00033-JRN Document 30 Filed 07/02/12 Page 1 of 15

TABLE OF CONTENTS

I. PRELIMINARY STATEMENT ......................................................................................... 1

II. FACTUAL BACKGROUND .............................................................................................. 1

III. ARGUMENTS AND AUTHORITIES ............................................................................... 3

IV. RELIEF SOUGHT ............................................................................................................ 10

v. PRAYER " ... " """." .. """ ..... "." ... "." ... """."." .......... " ..... """" ..... "" ....... " .. " ...... " ... 10

-1-


TABLE OF AUTHORITIES

Page(s) CASES

Mick Haig Prods. v. Does 1-670, No. 3:10-CV-1900-N, 2011 U.S. Dist. LEXIS 128366 (N.D. Tex. Sept. 9, 2011) ........ .4, 6, 10

SEC v. Blinder, Robinson & Co., Nos. 83-K-668, 83-B-668, 1987 U.S. Dist. LEXIS 14741 (D. Colo. Dec. 2. 1987) ........... 9, 10

Silva v. Karlsen, No. 97-3793, 1997 U.S. Dist. LEXIS 13272 (E.D. Pa. Aug. 29, 1997) .................................... 6

OTHER AUTHORITIES

Fed. R. Civ. P. 26(d)(1) ................................................................................................................... 4

Fed. R. Civ. P. 45(a)(1)(A) .............................................................................................................. 4



AUSTIN DIVISION


Plaintiff,

v.

LIFE PARTNERS HOLDINGS, INC., BRIAN PARDO,R.SCOTTPEDEN,AND DAVID M. MARTIN

Defendants.


DEFENDANTS' MOTION FOR SANCTIONS AND BRIEF IN SUPPORT

Defendants, Life Partners Holdings, Inc. ("LPHI"), R. Scott Peden ("Peden"), Brian

Pardo ("Pardo"), and David M. Martin ("Martin") (collectively "Defendants"), file this Motion

for Sanctions, pursuant to Rules 26, 30 and 45 of the Federal Rules of Civil Procedure, and

respectfully show the Court as follows:

I. PRELIMINARY STATEMENT

Without prior notice to Defendants or Defendants' counsel, Plaintiff issued an SEC

subpoena and obtained testimony from a non-party witness after this case was filed, and prior to

the parties' Rule 26(f) conference. Because Plaintiffs conduct knowingly violated the Federal

Rules of Civil Procedure, as well as Defendants' Constitutional Due Process rights, Defendants

seek sanctions against Plaintiff in order to (1) prohibit the use, in any manner, of the improperly-

obtained testimony, (2) determine if additional premature and improper discovery has taken

place or is taking place, and (3) prevent any additional violative conduct.

II. FACTUALBACKGROUND

Plaintiff commenced an informal inquiry of LPHI and its subsidiary, non-party Life

DEFENDANTS' MOTION FOR SANCTIONS AND BRIEF IN SUPPORT- Page 1


Partners, Inc., in June, 2010. 1 Thereafter, on September 3, 2010, Plaintiff issued a Formal Order

of Investigation, styled In the Matter of Life Partners, Inc. and Life Partners Holdings, Inc., FW-

3501? After a eighteen (18) months of investigation, Plaintiff initiated this action on January 3,

2012. [Dkt No. 1] On January 9, 2012, Plaintiff issued a Notice of a Lawsuit and Request to

Waive Service of a Summons to each Defendant. [Dkt Nos. 6, 8-10] Defendants, by and

through their respective counsel, executed the Waivers of Service and, thereby, extended the

time period for the filing of their respective responsive pleadings. [Dkt Nos. 6, 8-10] On

February 29, 2012, Defendants LPHI and Peden filed a Motion to Dismiss. [Dkt No. 12] On

March 1, 2012, Defendant Pardo filed his Motion to Dismiss. [Dkt No. 13] And, on March 9,

2012, Defendant Martin filed his Motion to Dismiss. [Dkt No. 16] On April 2, 2012, Plaintiff

filed oppositions to both Pardo's and LPHI's and Peden's Motions to Dismiss. [Dkt Nos. 19, 21]

Thereafter, on April 10, 2012, Plaintiff filed an opposition to Defendant Martin's Motion to

Dismiss. [Dkt No. 22] The Court denied the Motions to Dismiss by Order dated April 19, 2012,

ordered the Defendants to file their respective responsive pleadings by May 4, 2012, and ordered

the parties to submit their proposed scheduling orders by June 4, 2012. [Dkt No. 23] On May

31, 2012, the parties conducted their Rule 26(f) conference.3 Thereafter, on June 4, 2012, the

parties jointly filed a proposed Scheduling Order. [Dkt No. 28] The Court issued a Scheduling

Order on June 28, 2012. [Dkt No. 29]

Pursuant to the agreement reached during the Rule 26( f) conference, the parties

exchanged their respective Initial Disclosures on June 8, 2012.4 On June 4, 2012, Plaintiff sent

Defendants' counsel a CD containing the transcripts of testimony taken by the SEC during its

1 Affidavit of Elizabeth Yingling, ("Yingling Aff."), ~4, included in the Appendix as Exhibit A. 2 !d. at ~5. 3 !d. at ~8. 4 !d. at ~9.



investigation, as well as the exhibits related thereto.5

Unbeknownst to Defendants, as revealed by Plaintiffs foregoing production of

documents, on January 10, 2012- seven days after Plaintiff initiated this action- Plaintiff issued

a Subpoena for the testimony of Peter T. Cangany, Jr., a partner with Ernst & Young LLP who

was previously in charge of LPHI's audits.6 The Subpoena was issued "In the Matter of Life

Partners, Inc. and Life Partners Holdings, Inc. (FW-3501)."7 In addition, the Subpoena

commanded that Mr. Cangany appear at Plaintiffs Fort Worth office on January 18, 2012 at 9:00

a.m. 8 Defendants were not served with a copy of the Subpoena and were not provided with

notice of its issuance prior to Plaintiffs June 4, 2012 production.9

Mr. Cangany did, in fact, appear for testimony in Plaintiffs Forth Worth office on

January 18,2012. 10 One of the attorneys of record for the Plaintiff in this case, Michael King,

was present at Mr. Cangany's testimony. 11 In addition, Mr. Cangany produced, either at or prior

to his testimony, an "Abbreviated Background Questionnaire," dated January 17, 2012, and

marked as Exhibit 135 to his testimony. 12 Mr. Cangany's testimony commenced at 9:05 a.m. on

January 18, 2012, and concluded at 5:00p.m. that same day. 13 Defendants were not provided the

opportunity to appear at Mr. Cangany's testimony, as they had no knowledge of same. 14

III. ARGUMENTS AND AUTHORITIES

The Federal Rules of Civil Procedure are clear: "A party may not seek discovery from

5 Id at ~10. 6 A true and correct copy of the Subpoena is attached to the Yingling Aff. as Exhibit 1. 7/d 8 Id 9 Yingling Aff., ~7; Affidavit of Jason Lewis ("Lewis Aff."), ~4, included in the Appendix as Exhibit B; Affidavit of S. Cass Weiland ("Weiland Aff."), ~4, included in the Appendix as Exhibit C. 10 Yingling Aff., ~13; Pages from Cangany testimony included as Exhibit 3 to Yingling Aff. 11 Exhibit 3 to Yingling Aff. 12 Yingling Aff., ~12; Redacted Questionnaire included as Exhibit 2 to Yingling Aff. 13 Exhibit 3 to Yingling Aff. 14 Yingling Aff., ~7; Lewis Aff., ~4; Weiland Aff., ~4.



any source before the parties have conferred as required by Rule 26(f) ... except when

authorized by these rules, by stipulation, or by court order." Fed. R. Civ. P. 26(d)(l). In

addition, Rule 30(a)(2)(A)(iii) requires that leave of court must be sought before a deposition can

be taken before the time specified in Rule 26(d). Further, Rule 30(b)(1) requires that "[a] party

who wants to depose a person by oral questions must give reasonable written notice to every

other party." Plaintiff violated each ofthe foregoing rules by obtaining discovery, without court

permission, prior to the parties' Rule 26(f) conference and without notice to Defendants.

In addition, Plaintiff violated Rule 45 because the Subpoena, on its face, was insufficient

in that it did not (1) state the court from which it was issued; (2) state the proper title of the court

action with the proper civil-action number; and (3) set out the text of Rule 45(c) and (d). Fed. R.

Civ. P. 45(a)(1)(A)Y Further, the Subpoena violated Rule 45(a)(3) because it was not signed by

the clerk of court or an attorney; rather, it was signed by a non-attorney employee ofPlaintiff. 16

Plaintiffs conduct is inexcusable, highly prejudicial to Defendants, and indisputably

sanctionable.

"Because attorneys use subpoenas to further discovery, sanctions in the subpoena context

often implicate the sanction provisions in both Rules 26 and 45." Mick Haig Prods. v. Does 1-

670, No. 3:10-CV-1900-N, 2011 U.S. Dist. LEXIS 128366, at *9 (N.D. Tex. Sept. 9, 2011).

Rule 26(g) of the Federal Rules of Civil Procedure provides, in pertinent part, as follows:

[E]very discovery request, response, or objection must be signed by at least one attorney of record in the attorney's own name- or by the party personally, if unrepresented .... By signing, an attorney or party certifies that to the best of the person's knowledge, information, and belief formed after reasonable inquiry:

(B) with respect to a discovery request, response or objection, it is:

15 Exhibit 1 to Yingling Aff. 16 See Exhibit 1 to Yingling Aff., and the signature block for David R. King.



(i) consistent with these rules and warranted by existing law or by a nonfrivolous argument for extending, modifying, or reversing existing law, or for establishing new law;

(ii) not interposed for any improper purpose, such as to harass, cause unnecessary delay, or needlessly increase the cost of litigation; and

(iii) neither unreasonable nor unduly burdensome or expensive, considering the needs of the case, prior discovery in the case, the amount in controversy, and the importance of the issues at stake in the action.

(Emphasis added). Further, Rule 26(g)(3) provides:

If a certification violates this rule without substantial justification, the court, on motion or on its own, must impose an appropriate sanction on the signer, the party on whose behalf the signer was acting, or both. The sanction may include an order to pay the reasonable expenses, including attorney's fees, caused by the violation. (Emphasis added).

Similarly, Rule 45(c)(l) provides, in relevant part, as follows:

A party or attorney responsible for issuing and serving a subpoena must take reasonable steps to avoid imposing undue burden or expense on a person subject to the subpoena. The issuing court must enforce this duty and impose an appropriate sanction - which may include lost earnings and reasonable attorneys' fees- on a party or attorney who fails to comply.

The Subpoena at issue was signed by David R. King - a non-attorney employed by

Plaintiff. It is clear that David King was signing the Subpoena on behalf of Plaintiff, and thus,

Rule 26(g) clearly applies. Further, Plaintiff unquestionably violated Rule 26(g) because the

issuance of the Subpoena (1) violated, and thus was not consistent with, the Rules, (2) was issued

for an improper purpose, i.e., to obtain ex parte discovery, and (3) was unreasonable in light of

the numerous violations of the Federal Rules of Civil Procedure. Finally, Plaintiff was wholly

unjustified in issuing the Subpoena and obtaining the discovery. Therefore, Rule 26(g)(3)

mandates the imposition of sanctions against Plaintiff.



In addition, the Subpoena unquestionably violated Rule 45 and, as such, was invalid. By

issuing and serving an invalid subpoena, Plaintiff imposed an undue burden and expense on a

non-party, thereby also requiring the imposition of sanctions under Rule 45( c )(1 ).

On these issues, the Mick Haig Productions case is instructive. In that copyright

infringement case, plaintiffs counsel filed a motion for leave to take discovery prior to the

parties' Rule 26(f) conference. 2011 U.S. Dist. LEXIS 128366, at *3. Before ruling on

plaintiffs motion, the court issued a document preservation order "pending resolution of the

Discovery Motion." !d. Soon thereafter, plaintiff dismissed its case with prejudice. !d. at *6.

Subsequently, Ad Litem counsel for defendants learned that plaintiff had, in fact, issued

subpoenas during the pendency of its motion and prior to its dismissal ofthe lawsuit. !d. at *7-8.

As a result, defendants sought sanctions. !d.

In granting sanctions, the court found that plaintiff had violated both Rules 26 and 45. As

to Rule 26, the court "explicitly disagreed" with plaintiffs contention that the need to obtain a

court order to seek discovery prior to a Rule 26(f) conference was a "mere procedural formality."

!d. at * 12. Thus, the court held that the issuance of the subpoenas was not "objectively

reasonable" and was "inconsistent with Rule 26(d)'s prediscovery conference requirement." !d.

at *13-14. Further, the court found that plaintiff violated Rule 45 because, "[b]y serving invalid

subpoenas, [plaintiff] necessarily 'impos[ ed] an undue burden or expense' on each [subpoenaed

party] and the putative Does." !d. at *14 (quoting Fed. R. Civ. P. 45(c)(l)). Indeed, the court

held that "'[t]o knowingly abuse [the subpoena] power is an affront to the fair and impartial

administration of justice and is subject to sanctions under the inherent power of the court,' and

the Federal Rules." !d. at *17 (quoting In re Air Crash at Charlotte, NC., 982 F. Supp. 1092,

1101 (D.S.C. 1997))(emphasis added). See also Silva v. Karlsen, No. 97-3793, 1997 U.S. Dist.



LEXIS 13272, at *2-7 (E.D. Pa. Aug. 29, 1997)(granting defendants' motion for attorneys' fees

for plaintiffs' violations of Rules 26 and 45 based upon plaintiffs' issuance of a subpoena,

without notice to defendants, three days after the lawsuit was filed and before defendants were

served).

In addition to the foregoing, Plaintiff is subject to sanctions under Rule 30( d)(2):

The court may impose an appropriate sanction - including the reasonable expenses and attorney's fees incurred by any party - on a person who impedes, delays, or frustrates the fair examination of the deponent. (Emphasis added).

Because Plaintiff failed to seek leave of Court to take Mr. Cangany's testimony and because

Plaintiff failed to provide notice to Defendants of same such that they could attend and cross-

examine the witness, Plaintiff unquestionably "frustrate[ d] the fair examination of the deponent."

Thus, for this additional reason, sanctions are appropriate.

Defendants anticipate that Plaintiff may attempt to excuse its wrongful conduct by

asserting that the testimony was taken in connection with the investigation of Defendants, and

not in connection with this lawsuit. However, even a cursory review of Mr. Cangany's testimony

establishes, beyond refute, that the clear purpose was to "lock in" Mr. Cangany's testimony for

use in this litigation. 17 Indeed, in Plaintiffs Initial Disclosures provided to Defendants, Plaintiff

specifically represented that the testimony may be used in support of its claim - a clear

admission ofthe testimony's purpose. 18

In similar circumstances, Plaintiffs improper attempts to obtain "investigative" testimony

for use in a quasi-judicial proceeding were rejected. For example, in In Matter of Morgan Asset

Mgrnt., Inc., Admin. Proceeding File No. 3-13847, at 1 (July 12, 2010), the SEC issued an Order

17 To the extent the Court wishes to review Mr. Cangany's testimony, Defendants will submit same to the Court for in camera review. 18 Yingling Aff., ~9.



Instituting Proceedings ("OIP") on April 7, 2010 against the respondents, following nearly two

years of investigation. 19 Eight days after issuing the OIP, the SEC commenced a second

investigation and issued six subpoenas for documents and testimony. Id. The respondents

sought relief under Rule 230(g) of the Rules of Practice of the Securities and Exchange

Commission and asserted that the second investigation was "functionally identical" to the

pending administrative proceedings, and that the second investigation was authorized "for the

impermissible purpose of gathering additional evidence for use at the hearing in the present

proceeding." I d. The Administrative Law Judge ("ALJ") found that there was substantial overlap

between the OIP and the second investigation. As such, the ALJ found, "[i]t is evident that the

Division would benefit from taking investigative testimony from the six directors at this juncture.

By doing so, it could lock the witnesses into their respective stories, and a tentative or potentially

hostile witness who changed his/her testimony at the hearing would then risk impeachment." I d.

at 2. Thus, the ALJ concluded, "[f]or reasons not explained on the record, the Division elected to

follow a high-risk strategy: it asked the Commission to issue the OIP before it had completed the

relevant parts of its investigation. The Division is free to take this sort of risk, of course, but it

cannot now ask for a ruling that, in effect, guarantees that it will suffer no adverse

consequences." Id. at 2-3. As a result, the ALJ issued various prohibitions on the use of

documents and information derived from the second investigation. Id. at 4.

In this case, Plaintiff did not even attempt to camouflage its "investigation" by instituting

a new investigation, as it issued the Subpoena and conducted the testimony under the same

Formal Order of Investigation it used to investigate this matter before filing suit.20 However,

like the circumstances in the Morgan Asset Management matter, it is clear that Plaintiff fully

19 A true and correct copy of the Order issued in the Administrative Proceeding is included in the Appendix as Exhibit D. 2° Compare Yingling Aff., ~5, with Exhibits 1 and 3 to Yingling Aff.



intended to use Mr. Cangany's testimony in this matter at the time it took his testimony. Plaintiff

should not be rewarded for employing this "high-risk strategy."

What is perhaps most troubling about the testimony at issue is the following statement

made by Plaintiffs employee prior to the questioning of Mr. Cangany:

BY MR. D. KING:

Q . . . . This is an investigation by the Commission in the matter of Life Partners, Inc., and Life Partners Holdings, Inc., number FW-3501, to determine whether there have been violations of certain provisions of the federal securities laws. . . . (Emphasis added).

Thus, according to Plaintiff, fifteen (15) days after this lawsuit was filed, Plaintiff still had not

determined whether or not there had been violations of "certain provisions of the federal

securities laws." Such an admission clearly calls into question whether Plaintiff, when it filed

this action, had "evidentiary support" for the "factual contentions" it made in the Complaint.

Obviously, if it did not, and was (and is) still in search of violations, Plaintiff failed to satisfy

Rule 11 from the outset of this case.

In any event, however, Plaintiff cannot seriously dispute that discovery in this matter is

subject to the provisions of the Federal Rules of Civil Procedure. As Rule 1 so clearly provides:

These rules govern the procedure in all civil actions and proceedings in the United States district courts . . . . (Emphasis added).

Thus, Plaintiff cannot, on the one hand, utilize the judicial system in the furtherance of its

enforcement purposes while, on the other hand, evade the application of the rules governing that

very same judicial system. As one court has so aptly stated, when addressing the SEC's

proclivities to avoid compliance with a court's order: "[B]asic principles underlying the judiciary

do not allow the executive branch to overrule the courts in matters properly within the courts'

jurisdiction." SEC v. Blinder, Robinson & Co., Nos. 83-K-668, 83-B-668, 1987 U.S. Dist.



LEXIS 14741, at *13 (D. Colo. Dec. 2. 1987). Likewise, in this case, Plaintiff cannot seek to

"overrule" or ignore the Federal Rules of Civil Procedure by conducting discovery under the

auspices of an "investigation." "The SEC consciously embarked on a course of conduct that

placed its judgment above that of [this] court" when it determined to subpoena, and take the

testimony of, Mr. Cangany. See id at * 17. Such conduct cannot be tolerated.

IV. RELIEF SOUGHT

"The district courts wield their various sanction powers at their broad discretion." Mick

Haig, 2011 U.S. Dist. LEXIS 128366, at* 9 (quoting Topalian v. Ehrman, 3 F.3d 931, 934 (5th

Cir. 1993)). Plaintiffs conduct was egregious, intentional and clearly sanctionable.

Accordingly, Defendants seek the following relief:

(1) An Order prohibiting Plaintiff from using any of the documents or testimony obtained by Mr. Cangany for any purpose, including for impeachment and for use with other

·witnesses, in this litigation or any related proceedings initiated against any Defendant;

(2) An Order requiring Plaintiff to disclose to the Court and to Defendants any other subpoenas, testimony, or other discovery that Plaintiff has undertaken since January 3, 2012 to present;

(3) To the extent Plaintiff claims it has not conducted any further extra-judicial discovery, a written representation of same made under oath by Plaintiff and filed with the Court and served upon Defendants;

(4) An Order prohibiting Plaintiff from issuing any additional subpoenas and obtaining any additional testimony related to any or all of the Defendants without complying with the Federal Rules of Civil Procedure and this Court's Orders;

(5) An Order awarding Defendants $5,000.00 in attorneys' fees for having to prepare and file this Motion; and

(6) Any such other and further relief to which Defendants may be entitled.

V. PRAYER

For each of the reasons stated herein, Defendants respectfully request that the Motion be

granted in its entirety, and that they be awarded the relief sought herein.



LOCKE LORD LLP Jason S. Lewis State Bar No. 24007551 Email: [email protected] David W. Klaudt State Bar No. 00796073 Email: [email protected] Adam Tyler State Bar No. 24070777 [email protected] 2200 Ross A venue, Suite 2200 Dallas, Texas 75201 Tel: (214) 740-8000 Fax: (214) 756-8414

ATTORNEY FOR DEFENDANT BRIAN D. PARDO

PATTON BOGGS LLP S. Cass Weiland State Bar No. 21081300 Robert A. Hawkins State Bar No. 00796726 2000 McKinney Ave, Suite 1700 Dallas, Texas 75201 Ph: (214)578-1500 Fax: (214) 578-1550 Email: [email protected] Email: [email protected]

ATTORNEY FOR DAVID M. MARTIN

Respectfully submitted,

Is/ Elizabeth L. Yingling Elizabeth L. Yingling State Bar No. 16935975 E-Mail: [email protected] Laura J. O'Rourke State BarNo. 24037219 E-Mail: [email protected] Will R. Daugherty State Bar No. 24053170 E-Mail: will [email protected]

BAKER & McKENZIE LLP 2300 Trammell Crow Center 2001 Ross A venue Dallas, TX 75201 Tel.: (214) 978-3000 Fax: (214) 978-3099

J Pete Laney State Bar No. 24036942 E-Mail: [email protected] LAW OFFICES OF J PETE LANEY 1122 Colorado Street, Suite 111 Austin, TX 78701-2159 Tel: (512) 473-0404 Fax: (512) 672-6123




CERTIFICATE OF CONFERENCE

On June 28, 2012, the undersigned conferred with counsel for Plaintiff concerning the substance of this Motion. Counsel for Plaintiff, Jason Rodgers, stated that Plaintiff opposes the relief requested herein.

By Is/ S. Cass Weiland

CERTIFICATE OF SERVICE

I hereby certify that on July 2, 2012, I electronically filed the foregoing document with

the Clerk of the Court using the CM/ECF system, which will send notification of such filing to

all counsel who have registered with the Court. All others were served a copy via U.S. mail.

Is/ Elizabeth L. Yingling

713527-vl\DALDMS




AUSTIN DIVISION


Plaintiff, Civil Action No.: 1-12-cv-00033

v.


Defendants.

APPENDIX IN SUPPORT OF DEFENDANTS' MOTION FOR SANCTIONS

Exhibit Description

A Affidavit of Elizabeth L. Yingling

A-I Subpoena to Peter T. Cangany, Jr.

A-2 Redacted Questionnaire

A-3 Pages from Peter T. Cangany, Jr.'s testimony of January 26, 2012

B Affidavit of Jason S. Lewis

C Affidavit ofS. Cass Weiland

D Order issued in In the Matter of Morgan Asset Mgmt., Inc. Admin. Proceeding File No. 3-13847 (July 12, 2010)

APPENDIX IN SUPPORT OF DEFENDANTS' MOTION FOR SANCTIONS- Page 1

Case 1:12-cv-00033-JRN Document 30-1 Filed 07/02/12 Page 1 of 38

LOCKE LORD LLP Jason S. Lewis State Bar No. 24007551 Email: [email protected] David W. Klaudt State Bar No. 00796073 Email: [email protected] 2200 Ross A venue, Suite 2200 Dallas, Texas 75201 Tel: (214) 740-8000 Fax: (214) 756-8414

ATTORNEY FOR DEFENDANT BRIAN D. PARDO

PATTON BOGGS LLP S. Cass Weiland State Bar No. 21081300 Robert A. Hawkins State Bar No. 00796726 2000 McKinney Ave, Suite 1700 Dallas, Texas 75201 Ph: (214)578-1500 Fax: (214) 578-1550 Email: [email protected] Email: [email protected]

ATTORNEY FOR DAVID M. MARTIN

Respectfully submitted,

Is/ Elizabeth L. Yingling Elizabeth L. Yingling State Bar No. 16935975 E-Mail: [email protected] Laura J. O'Rourke State Bar No. 24037219 E-Mail: [email protected] Will R. Daugherty State Bar No. 24053170 E-Mail: [email protected]

BAKER & McKENZIE LLP 2300 Trammell Crow Center 2001 Ross A venue Dallas, TX 75201 Tel.: (214) 978-3000 Fax: (214) 978-3099

J Pete Laney State Bar No. 24036942 E-Mail: [email protected] LAW OFFICES OF J PETE LANEY 1122 Colorado Street, Suite Ill Austin, TX 78701-2159 Tel: (512) 473-0404 Fax: (512) 672-6123


CERTIFICATE OF SERVICE

I hereby certify that on July 2, 2012, I electronically filed the foregoing document with

the Clerk of the Court using the CM/ECF system, which will send notification of such filing to

all counsel who have registered with the Court. All others were served a copy via U.S. mail.

Is/ Elizabeth L. Yingling

713713-vl\DALDMS

APPENDIX IN SUPPORT OF DEFENDANTS' MOTION FOR SANCTIONS- Page 2



AUSTIN DIVISION


Plaintiff,

v.


Defendants.


AFFIDAVIT OF ELIZABETH L. YINGLING

STATE OF TEXAS § §

COUNTY OF DALLAS §

BEFORE ME, the undersigned authority, personally appeared, Elizabeth L.

Yingling, who being personally known to me and after being duly sworn on oath, states

as follows:

1. "My name is Elizabeth L. Yingling. I am over 18 years of age and am fully

competent and authorized to make this Affidavit. I have personal knowledge of every

fact stated in this Affidavit, each of which is within my personal knowledge and is true

and correct. I am submitting this Affidavit in support of Defendants' Motion for

Sanctions.

2. I am an attorney in good standing, licensed to practice law in the State of

Texas by the Supreme Court of Texas, and I have continuously practiced law in Texas

since my licensing in November, 1991. I am also licensed to practice law in all federal

AFFIDAVIT OF ELIZABETH L. YINGLING- Page 1 713560-vl\DALDMS


courts in the State of Texas. I am Principal with the Dallas office of Baker & McKenzie,

LLP ("Baker & McKenzie"), 2001 Ross Avenue, Suite 2300, Dallas, Texas 75201.

3. I am Lead Counsel for Life Partners Holdings, Inc. ("LPHI") and R. Scott

Peden ("Peden") in the above-styled and numbered cause. I was counsel for LPHI,

Peden, Life Partners, Inc. ("LPI"), Brian Pardo ("Pardo"), and David M. Martin

("Martin") in connection with the investigation conducted by the Fort Worth office ofthe

Securities and Exchange Commission ("SEC") of LPHI and LPI, which investigation

ultimately lead to this lawsuit.

4. In June, 2010, LPHI and LPI were notified by the SEC that the SEC was

conducting an informal inquiry of those entities.

5. Thereafter, on September 3, 2010, the SEC issued a Formal Order of

Investigation styled In the Matter of Life Partners, Inc. and Life Partners Holdings, Inc.,

FW-03501. In general terms, the Formal Order of Investigation stated that the SEC was

investigating whether violations of certain provisions of the federal securities laws had

occurred. The SEC's investigation included the issuing of numerous subpoenas to my

clients for the production of documents and for testimony.

6. The SEC instituted this action on January 3, 2012.

7. Neither LPHI, Peden nor myself received notice of the Subpoena issued to

Peter T. Cangany, Jr. dated January 10, 2012. Nor did LPHI, Peden or myself receive

notice that Mr. Cangany's testimony was to take place on January 18, 2012 in the SEC's

office. Accordingly, I was unable to attend Mr. Cangany's testimony and cross-examine

the witness.



8. On May 31, 2012, I, along with Jason Lewis, of Locke Lord LLP, Cass

Weiland, of Patton Boggs LLP, and Jason Rodgers, of the SEC, held a telephonic Rule

26(f) conference and reached agreement regarding various discovery issues, including the

date to exchange Initial Disclosures.

9. On June 8, 2012, each of the parties exchanged their respective Initial

Disclosures. Page 17 of the SEC's Initial Disclosures identified the January 18, 2012

Cangany Testimony as information that the SEC "may use to support its claims and

defenses" in this case.

10. On June 4, 2012, Plaintiff sent a CD to me containing the transcripts of

testimony taken by the SEC during its investigation, as well as the exhibits related

thereto.

11. That CD included Exhibit 133, which is the January 10, 2012 Subpoena issued

to Mr. Cangany. A true and correct copy of Exhibit 133, as produced by the SEC, is

attached hereto as Exhibit 1.

12. In addition, that CD also included Exhibit 135, which was apparently

introduced during Mr. Cangany's testimony, which is entitled "Abbreviated Background

Questionnaire." The handwriting indicates that the Questionnaire was for Mr. Cangany

and it is dated January 17, 2012. A true and correct redacted copy of the questionnaire is

attached hereto as Exhibit 2. Mr. Cangany's personally-identifiable information has been

redacted, which includes his address, date of birth, Social Security Number, spousal

information, and other background information.

13. Also included in the CD provided by the SEC was the condensed transcript of

Mr. Cangany's testimony. A true and correct copy of the first three pages of the



transcript, as well as a copy of the last page of the transcript showing the time the

testimony was concluded is attached hereto as Exhibit 3."

Further Affiant sayeth not.

Sworn to and subscribed before me by June, 2012.

My Commission~E~xp:i~re~s~: ;;;;;;;;;;;;;'It PMiD. SAVAGE


MY COMMISSION EXPIRES Febn181Y 13,2016


SUBPOENA

UNITED STATES OF AMERICA SECURITIES AND EXCHANGE COMMISSION

In the Matter of Life Partners, Inc. and Life Partners Holdings, Inc. (FW-3501)

To: Peter T. Cangany, Jr. c/o Thomas L. Riesenberg, Esq. Emst & Young LLP 1101 New York Avenue, N.W. Washington D.C. 20005

~ YOU MUST TESTIFY before officers of the SecUJitics and Exchange Commission, at the place, date and time specified below.

801 CheiTy Street, 19th Floor, Fort Worth, Texas 76102, Janua1·y 18, 2012 at 9:00am, CST.

0 YOU MUST PRODUCE everything specified in the Attachment to this subpoena to officers ofthe Securities and Exchange Commission, at the place, date and time specified below.

FEDERAL LAW REQUIRES YOU TO COMPLY WITH THIS SUBPOENA. Failure to comply may subject you to a fine and/or imprisonment.

By: Dav~(L9 Date: January I 0, 20 12

Enforcement Accountant Securities and Exchange Commission Division of Enforcement

FW-03501.LIFE PARTNERS

(817) 900-2604

I am an officer of the Securities and Exchange Commission authorized to issue subpoenas in this matter. The Securities and Exchange Commission has issued a formal order authorizing this investigation under Section 20(a) of the Securities Act of 1933 and Section 21 (a) of the Securities Exchange Act of 1934.

NOTICE TO WITNESS: If you claim a witne~s fee or mileage, ~uhmit this subpoena with the claim voucher

EXH.IBIT~·

133N~\

EXHIBIT


SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

Supplemental Information for Persons Requested to Supply Information Voluntarily or Directed to Supply Information

Pursuant to a Commission Subpoena

A. False Statements and Documents

Section 1001 of Title 18 of the United States Code provides as follows:

Whoever, in any matter within the jurisdiction of any department or agency of the United States knowingly and Willfully falsifies. conceals or covers up by any trick, scheme, or device a material fact, or makes any false, fictitious or fraudulent statements or representations, or makes or uses any false writing or document knowing the same to contain any false, fictitious or fraudulent statement or entry, shall be fined under this title or imprisoned not more than five years, or both.

B. Testimony

If your testimony is taken, you should be aware of the following:

1. Record. Your testimony will be transcribed by a reporter. If you desire to go off the record, please indicate this to the Commission employee taking your testimony, who will determine whether to grant your request. The reporter will not go off the record at your, or your counsel's, direction.

2. Counsel. You have the right to be accompanied, represented and advised by counsel of your choice. Your counsel may advise you before, during and after your testimony; question you briefly at the conclusion of your testimony to clarify any of the answers you give during testimony; and make summary notes during your teslimo11y solely for your use. If you are accompanied by counsel, you may consult privately.

If you are not accompanied by counsel, please aclv1se the Commission employee taking your testimony if, during the test1mony, you des1re to be accompallled, represented and advised by counsel. Your testimony will be adjourned once to afford you the opportunity to arrange to be so accompanied, represented or advised.

You may be represented by counsel wt1o also represents other persons mvolved in the Comm1ssion's investigation. This multiple representation, however. presents a potential conflict of interest if one client's mterests are or may be adverse to another's. If you are represented by counsel who also represents other persons 1nvolved in the investigation, the Commission will assume that you and counsel have discussed and resolved all 1ssues concerning possible conflicts of 1nteresl. The choice of counsel. and the responsibility for that choice, is yours.

3. Transcript Availability. Rule 6 of the Commission's Rules Relating to Investigations, 17 CFR 203.6, states:

A person who has submitted documentary evidence or testimony in a formal investigative proceeding shall be entitled, upon written request, to procure a copy of his documentary evidence or a transcript of his testimony on payment of the appropriate fees: Provided, however, That in a non public formal investigative proceeding the Commission may for good cause deny such request. In any event, any witness, upon proper Identification, shall have the right to inspect the official transcript of the witness' own testirnonyo

If you wish to purchase a copy of the transcript of your test1mony, the reporter will provide you with a copy of the appropriate form. Persons requested to supply information voluntarily will be allowed the rights rrovicled by this rule.

4. Petjury. Section 1621 of Tille 18 of the United States Code provides as follows:

Whoever ... having taken an oath before a competent tribunal, officer, or person, in any case 111 wtlich a law of the United States authorizes an oath to be administered, ti1at he will testify, declare, depose. or certify truly ... willfully and contrary to such oath states or subscribes any material matter which he does not believe to be true . . is guilty of perjury and shall, except as otherwise expressly provided by law, be filled under this title or imprisoned not more than five years or both ....

5. Fiftll Amendment and Voluntary Testimony. Information you give may be used against you in any federal, state, local or foreign administrative, civil or criminal proceeding brought by the Commiss1on or any other agency.

SEC 1662 (09-11)


You may refuse, in accordance with the rights guaranteed to you by the Fifth Amendment to the Constitution of the United States, to g1ve any information that may tend to incriminate you.

If your testimony is not pursuant to subpoena, your appearance to testify is voluntary, you need not answer any question, and you may leave whenever you wish. Your cooperation is. however, appreciated.

6. Formal Order Availability. If the Commission has issued a formal order of investigation, it will be shown to you during your testimony, at your request. If you desire a copy of the formal order, please make your request in writing.

C. Submissions and Settlements

Rule 5(c) of the Commission's Rules on Informal and Other Procedures, 17 CFR 202.5(c), states:

Persons who become involved in ... investigations may, on their own initiative, submit a written statement to the Commission setting forth their interests and position in regard to the subject matter of the investigation. Upon request, the staff, 1n its discretion, may advise such persons of the general nature of the investigation, including the indicated violations as they pertain to them, and the amount of time that may be available for preparing and submitting a statement prior to the presentation of a staff recommendation to the Commission for the commencement of an administralive or Injunction proceeding. Submissions by interested persons should be forwarded to the appropriate Division Director or Regional Director with a copy to the staff members conducting the investigation and should be clearly referenced to the specific investigation to which t11ey relate. In the event a recommendation for the commencement of an enforcement proceeding is presented by the staff, any submissions by interested persons will be forwarded to the Commission in conjunction with the staff memorandum.

The staff of the Commission routinely seeks to introduce submissions made pursuant to Rule 5(c) as evidence in Comm1ssion enforcement proceedings, wt1en the staff deems appropriate.

Rule 5(f) of the Commission's Rules on Informal and Other Procedures, 17 CFR 202.5(f), states:

In the course of the Commission's investigations, civil lawsuits, ancl administrative proceedings, the staff, with appropriate authorization, may discuss with persons 1nvolved the cllsposilion of such matters by consent, by settlement, or in some ot11er manner. It is the policy of the CommiSSIOn, however. that the disposition of any such matter may not, expressly or impliedly, extend to any criminal charges that have been, or may be, brought against any such person or any recommendation with respect thereto. Accordingly, any person involved in an enforcement matter before tho Commission who consents, or agrees to consent, to any judgment or order does so solely for the purpose of resolving t11e claims against him in that investigative, civil, or administrative matter and not for the purpose of resolving any criminal charges that have been, or might be, brought against him. Tl1is policy reflects tho fact that neither the Commission nor its staff has the authority or responsibility for instituting, conducting, settling, or otherwise disposing of criminal proceedings. That authority and responsibility are vested in the Attorney General and representatives of the Department of Justice.

D. Freedom of Information Act

The Freedom of Information Act, 5 U.S.C. tib2 (the "FOIA"), generally prov1des for disclosure of information to the public. Rule 83 of the Commission's Rules on Information and Requests, 17 CFR 200.83, provides a procedure by which a person can make a written request that information submitted to the Commission not be disclosed under the FOIA. That rule states that no determination as to the validity of such a request will be made until a request for disclosure of the information under the FOIA is received. Accordingly, no response to a request that information not be disclosed under the FOIA is necessary or will be given until a request for disclosure under the FOIA is received. If you desire an acknowledgment of receipt of your written request that information not be disclosed under the FOIA, please provide a duplicate request, together with a stamped, self addressed envelope.

E. Authority for Solicitation of Information

Persons Directed to Supply Information Pursuant to Subpoena. The authority for requiring production of informat1on is set forth in the subpoena. Disclosure of the information to the Commission is mandatory, subject to the valid assertion of any le9al ri9ht or privilege you might have

Persons Requested to Supply Information Voluntarily. One or more of the following provisions authorizes the Commission to solicit the information requested: Sections 19 and/or 20 of the Secunlles Act of 1933; Section 21 of the Securities Exchange Act of 1934; Section 321 of the Trust Indenture Act of 1939; Section 42 of the Investment

2


Company Act of 1940; Section 209 of the Investment Advisers Act of 1940; and 17 CFR 202.5. Disclosure of the requested information to the Commission is voluntary on your part.

F. Effect of Not Supplying Information

Persons Directed to Supply Information Pursuant to Subpoena. If you fail to comply with the subpoena, the Commission may seek a court order requiring you to do so. If such an order is obtained and you thereafter fail to supply the information, you may be subject to civil and/or criminal sanctions for contempt of court. In addition, if the subpoena was issued pursuant to the Securities Exchange Act of 1934, the Investment Company Act of 1940, and/or the Investment Advisers Act of 1940, and if you, without just cause, fail or refuse to attend and testify, or to answer any lawful inquiry, or to produce books, papers, correspondence, memoranda, and other records in compliance with the subpoena, you may be found guilty of a misdemeanor and fined not more than $1,000 or imprisoned for a term of not more than one year, or both.

Persons Requested to Supply Information Voluntarily. There are no direct sanctions and thus no direct effects for failing to provide all or any part of the requested information.

G. Principal Uses of Information

The Commission's principal purpose in soliciting the 1nformat1on is to gather facts in order to determine whether any person has violated, is violating, or is about to violate any provision of the federal securities laws or rules for which the Commission has enforcement authority, such as rules of securities exchanges and the rules of the Municipal Securities Rulemaking Bonrd. Facts developed may, however, const1tute violations of other laws or rules lnform<Jtion provided may be used in Commission and other agency enforcement proceedings. Unless the Commission or its staff explicitly agrees to the contrary 1n writ1ng. you should not assume that the Commission or its staff acquiesces in, accedes to, or concurs or agrees with, any position, condition, request, reservation of right, understanding, or any other statement that purports, or may be deemed, to be or to reflect a limitation upon t11e Commission·s receipt, use. disposition, transfer, or retention, in accordance with applicable law, of information provided.

H. Routine Uses of Information

The Commission often makes its files available to other governmental agencies, particularly United States Attorneys and state prosecutors. rhere IS a likelihood that 1nformat1on supplied by you will be made available to sucl1 agenc1es where appropriate. Whether or not the Commission makes 1ts file~ available to other governmental agenc1es is, 10

general, a confidential matter between the Commiss1on and such other governmental agencies.

Set forth below is a list of the routine uses which may be made of the information furnished.

1. To appropnate agenctes, entities, and persons when (a) 1t is suspectecl or confirmed t11at the security or confldenti<Jiity of information in the system of records has been compromised; (b) the SEC has detetrnined that, as a result of the suspected or confirmed compromise, there is a risk of ttarrn to economic or property interests, identity t11eft or fraud, or harm to the security or integrity of this system or other systems or programs (whether maintained by the SEC or another agency or entity) that rely upon the compromised information; and (c) the disclosure made to such agencies, entities, and persons is reasonably necessary to assist in connection with the SEC's efforts to respond to the suspected or confirmed comprom1se and prevent, minimize, or remedy such harm.

2. To other federal, state, local, or foreign law enforcement agencies; securities self-regulatory organizations; and foreign financial regulatory authorities to assist in or coordinate regulatory or law enforcement activities with the SEC.

3 To national securities exchanges and national securities associations that are registered with the SEC, the Municipal Securities Rulemaking Board; the Securities Investor Protection Corporation; the Public Company Accounting Oversight Board; the federal banking authorities, including, but not limited to, the Board of Governors of the Federal Reserve System, tt1e Comptroller of the Currency, and the Federal Deposit Insurance Corporation; state securities regulatory agencies or organizations; or regulatory authorities of a foreign government in connection with their rcgulntory or enforcement responsibilities

4. By SEC personnel for purposes of investigating possible violations of, or to conduct investigations authorized by, the federal securities laws.

5. In any proceeding where the federal securities laws are in issue or in which the Commission, or past or present members of its staff, is a party or otherwise involved in an official capacity.

6. In connection with proceedings by the Commission pursuant to Rule 1 02(e) of its Rules of Practice, 1l erR 201.102(e).

3


7. To a bar association, state accountancy board, or other federal, stale, local, or foreign licensing or oversight authority; or professional association or self-regulatory authority to the extent that it performs similar functions (including the Public Company Accounting Oversight Board) for investigations or possible disciplinary action.

8. To a federal, state, local, tribal, foreign, or international agency, if necessary to obtain information relevant to the SEC's decision concerning the hiring or retention of an employee; the issuance of a security clearance; the letting of a contract; or the issuance of a license, grant, or other benefit.

9. To a federal, plate, local, tribal, foreign, or international agency in response to its request for information concerning the hiring or retention of an employee; the issuance of a security clearance; the reporting of an investigation of an employee; the letting of a contract; or the issuance of a license, grant, or other benefit by the requesting agency, to the extent that the information is relevant and necessary to the requesting agency's decision on the matter.

10. To produce summary descriptive statistics and analytical studies, as a data source for management information, in support of the function for which the records are collected and maintained or for related personnel management functions or manpower studies; may also be used to respond to general requests for statistical information (without personal identification of individuals) under the Freedom of Information Act.

11. To any trustee, receiver, master, special counsel. or other individual or ent1ty that is appointed by a court of competent jurisdiction. or as a result of an agreement between the parties in connection with litigation or admilllslrative proceedings involving allegations of violations of the federal securities laws (as defined in sect1on 3(a)( 47) of the Securities Exchange Act of 1934, 15 U S C 78c(a)( 47)) or pursuant to the Commission's Rules of Practice, 17 CFR 201.100- 900 or the Commission's Rules of Fair Fund and Disgorgement Plans, 17 CFR 201.1100-1106, or otherwise, where such trustee, rece1ver, master, special counsel, or other Individual or entity IS

specifically designated to peliorm particular functions with respect to, or as a result of, the pending action or proceeding or in connection with the administration and enforcement by the Commission of the federal securities laws or the Commission's Rules of Practice or the Rules of Fair Fund and Disgorgement Plans.

12. To any persons during the course of any inqu1ry, examination. or investigation conducted by the SEC's staff. or in connecllon with civil litigation, rf the staff has reason to believe that the person to whom the record is disclosed may have further information about the matters relatecl therein, and those matters appeared to be relevant at I he time to the subject matter of the inquiry.

13. To 1ntcrns, grantees. experts. contractors, and ott1ers wt1o have been engaged by the Commission to assist in the performance of a service related to this system of records and who need access to the records for the purpose of assisting the Commission in the efficient administration of its programs. rncluding by performing clerical, stenographic, or data analysrs functions, or by reproduction of records by electronic or other means. Recipients of these records shall be requrred to comply with the requirements of the Privacy Act of 1974, as amended. 5 U.S.C. 552a.

14 In reports pllblished by the Commission pursuant to authority granted in the federal securities laws (as such term is defined in section 3(a)(47) of t11e Securities Exchange Act of 1934, 15 U.S.C. 78c(a)(47)), which authority shall 1nclude, but no\ be limited to, section 21 (a) of the Securities Exchange Act of 1934, 15 U.S.C. 78u(a)).

15. To members of advisory committees that are created by the Commission or by Congress lo render advice and recommendations to tt1e Commiss1on or to Congress, to be used solely in connection with their offic1al designated functions.

1G. To any person who is or t1as agreed to be subject to the Commission's Rules of Conduct, 17 Cf'R 200.735-1 to 200.735-18, and who assists in the investigation by the Commission of possible violations of the federal securities Jaws (as such term is defined in section 3(a)(47) of the Securities Exchange Act of 1g34, 15 U.S.C. 78c(a)(47)), in the preparation or conduct of enforcement actions brougl1t by the Commission for such violations. or otherwise in connection with the Commission's enforcement or regulatory functions under the federal securities laws.

17. To a Congressional office from the record of an individual in response to em inquiry from the Congressional office made at the request of that individual.

18. To members of Congress. the press, ancl the public in response to inquines relating to particular Registrants and their activities, and other matters under the Commission's jurisdiction.

19. To prepare and publish information relating lo violations of the federalsec:urilies laws as provided in 15 U.S.C. 78c(a)(47)), as amended.

20. To respond to subpoenas in any lit1gallon or other proceeding.

4


21. To a trustee in bankruptcy.

22. To any governmental agency, governmental or private collection agent, consumer reporting agency or commercial reporting agency, governmental or private employer of a debtor, or any other person, for collection, including collection by administrative offset, federal salary offset, tax refund offset, or administmtivc wage garnishment, of amounts owed as a result of Commission civil or administrative proceedings.

Small Business Owners: The SEC always welcomes comments on how it can better assist small businesses. If you have comments about the SEC's enforcement of the securities laws, please contact the Office of Chief Counsel in the SEC's Division of Enforcement at 202-551-4933 or the SEC's Small Business Ombudsman at 202-551-3460. If you would prefer to comment to someone outside of the SEC, you can contact the Small Business Regulatory Enforcement Ombudsman at http://www.sba.gov/ombudsman or toll free at 888-REG-FAIR. The Ombudsman's office receives comments from small businesses and annually evaluates federal agency enforcement activities for their responsiveness to the special needs of small business.

5


01/17/2012 12 03 FAX 2148536503 BAKER BOTTS DALLAS 14100:3,/012

f>lcnsc respond tu th<: following questions in thl' ~p;t~·e provided.

I.

-1.

Havtl you ~.·v~r bet.:n knuwn by ;my other n:unt•-;'> Yt.:~; ·- Nu X

If yes. !1st t.:ach :wch name(.)) and the pcnodh) in wluril )"U W<.:r<;: known by such I);J.!lJC:(.',}.

Current pnncip;d residence .

City .... _ ....... S1:1k _ - ....... /.q)_. ---

i'lun: ui' F3trth. .. I r I,'Pll haY<: \.'\'C:I' hi.,'(.; I) 111~\ITi t:d. pl<::l::>t.: st:lk i\11 L'~lL"il III.JITl:l)c<.:: ( i) the d:tll'( q td't he ltl:ln'l:tge. (i!) )'\'Ur spnu~e·,; tl:une. lllt.:lud!tlg ltl,tldt.·fl t!:llllV. 1!' .illy. (ill) '{<lUI' 'P"w·'-··:-, b1rtli

d:IIL'. diHI (lv) Y\llll' spnu::.e·~ <>..:t:upattun.

-·. (i) Datr\~1 \)( ;\lnt!'iagl'(_'J..

·-- J:t!. . ' F r<Hll

I l.Jh'

EXHIBIT


01/17/2012 12:03 FAX 2149536503 BAKER BOTTS DALLAS ~004/012

(>. /\re you ll\>W, <lf h:·IH' you CV~~r bt.'l.!ll, :tnl>ffit..'<:r' ur diit..TlDr t..lf':tny JHlhlt<:IY-il<.:ld <.:\>mp,lll\'>

'r'es.:'-!o.

II' yes, idr:nttl\· (i) (::1ch such <.~ompu11y, (II) your P'lSitiPils. :1nd (Ill) thi: date~ yo~1 h<:IJ each position.

7. Are )'<1\1 Jl(>w, or hav<: you ~;vr,:r bet:ll, :1 b<.:ne!lci-d ownt:r, dtr<.:<:tly or llHlircdly. nf live percent m nH.H'e of' ~my class <>f' o:quity ~;e,·uriti~·s of :tnv publidy lll.:!d <.:omp:my'.' y,~:; .N(. I r yc.~s. HkntJt'y <.:nch su<:h nnnpany. :\<:~:urily. :111d 'ilatl' tht: .unnunl. pt..·rt..:t..•nt:.tgc. :tnd d:Jtc~. lll' your ('>Wll•.:r ... h!p .

..... ~-·· ······-~···••« !


01/17/2012 12:03 FAX 2149538503 BAKER BOTTS DALLAS

K. !lave you ..:vcr k:-;tific.:J 111 nny pi<H:r..:l:Jing cunducl<.:d hv the ~talluCth<:' Sccurili<.:s ;Jnd Exchang.; Commissllll\, :"lllLllh~;:r l~·deral agency. :1 state :Jf',l:m:y. a I"<:Jcral (If .-.;t:tk c()urt. :1

~tnck e.xc.:hange, f--"lll•Hlc:ial lndu.\try RL'!;\tdntory ;\ utlh't it .'r ( Fl N R 1\ ). 1 he N:lt fl)ll;d 1\sso..:inlion of S<:curitit..:s Dc:dc.:rs ("NASD'") or any other -.;df~rcgul~ttory urganintion (''Sf\0"), or in nny arbitration procueding related to sccllrities trunsactium:·• Yc.:s.No-

[f'yes, fnr t.:nch Slll'h proceeding. idt:.ntify: (J) tht.! title of the.: proccc.:ding; (ii) tlw org~wi7.:ltion ur ag<:.n<:y; and (iii) !hi:' datt:(s) on whid1 you tcstiliL·\1.

For t:?nch such proc<..~<:.ding. tdentity: (i) til<: title..: or tlw prc.lL'l'<.:dmg. and (ii} lh<..· n~ln1l' o{'lhc

<:ourt, (iii) tlw '-'llbJt:L:t \'llH!tct c.>l"yo\fr te::nirnony. :111<! (I\·) rlic d:1tds) on whtch \'nil WLT':

dcpost.:d.

141005/012



I 0. I Ln 1.: you l'Ver hcvn rntll1L'd :1~ a 'kf,•ndant ,,r t·c.:spondc:nl in :11w a...:riott PI' pr(lc:c:~;·d1ng hr!iught by the SI'C'. <tny oth~.:r kd,•ral a~cm:y," st:1te -;~.:cuntit.•s :-tgcnt.':-'· I·INR.:\. th~:· :--.:i\SD. ,,r :ll\y :-.t,,c:k v.-.;,:llangt.•'.' y,.s • ~~~-

II.

lf"y<.:s, f\1r cth.:ll sud1 proceeding. 1dcnt1fy: (I) the title P!'thv prucced111g. (II) tiH: ;Jgency

l)r lrihuna!: (itt) th~:• substan~:c of the nlkgatil•ns: (I\') th~: PLIICnllH: olthc prtlt:et·ding; and (v) tbc date of the out<::orne.

ll'ycs. l(>r r.;:tdl such pr0CCL'ding. tdcnrit'y: til thl' tJti<: ufdH.: pn•c:n:dtng: (tilth<.· <:uun or triburw!; {iti) the out<.:ume of tile prllC.:t::t:dtng; illld (tv) the Jat<: o!'tht.! outcr>tl\l'.

i4J008!012



r I

I·L

!!"yes, l(•r L~:H:h such [Jr\H.'L'cding, t<ki\IJI) · It) the I ilk •'filh: pn>c'ecdttle. (JiJ the L'<.>tJr'l ••r lrihun:J!: (tii) iht: ot)lt.:<>lllL' v(thc pr11n·cding, .llhl (IVilht: daft' ot rl11.: \lllll'l>JJJL'.

If yes, l<.lr L!:t\.'h :w~:h licctl~~:. identi(y: (I) rhv iln·ns<.:; (JI) the ltccnsing org;llli/.;J{I\111; (iii)

the <kit<.: tht: lic.;nse wn:; uw~trded: (tv) tile d:JI<: such h~:c•n;;~.· tt:rn11nated, il'appl~>.:abk: lv) the datt:(SJ uf any dJ-:ciplin;try pr<:>c<:L'ding(s) :11:~ainst yuu: :tnd (Yi) thL· <l\ltconw uf ;HJ:V

sm:h dis\:tplinary prncel'ding (l'.g., repnm:tnd. suspt·m;ion. revucctli,,n J.

(j)

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[4]007/012


01/17/2012 12:04 FAX 2148538503

LiCtli1Sir'l9 Orqanr.'..t·J!Ion

Datu of LtC~HISt:! or

Ct·)rtifiCt1lion

BAKER BOTTS OALLAS

D11te of Licent.o or

Cortificotkm

T \!J:~!.'ntlletJ

0.1lt'J(!:i) ur i;>ny

DiSciplinary Prucdd1n9~; ACJw111SI You

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lfy<.'S, li:--t t(H' L':lcil· (1) the 1\:Jlll<: ul'tlit: t:luh ''f org:Hlll. .. tll\>11 ;llld (II) ~Ill!' lc:1dl.T\h1p

pnsitiu1b ~111d d~l!\..'s held. :tnd <iii) tile d:trc(s) t•f Y\>ur nwmht:r~lltp.

!41008/012

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. I'" .................... _________ _., .......... .

(li) Le:ldcrsllip l\tsltl<>llS ~md D:ltt'S (Iii) Date~ \lf r~>:->ttions Held

I(), l'ro' id..: the r\.'questcd infonnutinn :tbout c~J<.:h ~·duc;lti\.lrlid Ji1Sitfult<111 lit<Jt yuu IHIVt.:

:Hlt:ndcd beyond high school, bl'glrH11l11_!. with till~ mo-;t tl.Tt.:nt :111d \'nrrking hud.w.ml to

tho.: dail' lh:l\ !l'tJ ..:umpktcd, high school.



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141012/012


LPHI FW-3501

Cangany _Peter _20120118

Condensed Transcript

Prepared by:

SEC sec

Thursday, January 26, 2012


Page 1

1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION C 0 N T E N T S Page 3l

EXAMINATION I 2 2 3 In the Matter of: 3 WITNESSES 4 ) File No. FW-03501-A

5 LIFE PARTNERS, INC., AND LIFE )

6 PARTNERS HOLDINGS, INC.

7

8 WITNESS: Peter T. Cangany, Jr.

9 PAGES: 1 through 246

10 PLACE: U.S. Securities and Exchange Commission

11 801 Cherry Street, 19th Floor

12 Fort Worth, TX

13 DATE: Wednesday, January 18,2012

14

15 The above-entitled matter came on for hearing,

16 pursuant to notice, at 9:05a.m.

17

18

19

20

21

22

23

24 Diversified Reporting Services, Inc.

25 (202) 467-9200

4 Peter T. Cangany, Jr 5 5 6 EXHIBITS: DESCRIPTION IDENTIFIED 7 133 Subpoena 7 8 134 Subpoena 7 9 135 Background questionnaire 10

10 136 E-mail Jun 7 11 from G Lewis 13 11 137 E-mail Jun 6 11 from S Donohue 33 12 138 E-mail Aug 18 10 from M Rafferty 42 13 139 Evidence Document 102 51 14 140 E-mail Mar 28 10 to G Lewis 62 15 141 E-mail exchange G Lewis & Eide Bailly 65 16 142 Excerpt from 2010 audit work papers 76 17 143 Business template for 2010 audit 89 18 144 Evidence Document 1 00 105 19 145 Copy of electronic file 115 20 146 Audit Evidence No. 126 119 21 147 Evidence Document 127 133 22 148 Evidence Document 128 139 23 149 Excerpt files, detail binder one 147 24 150 Evidence Document 129 151 25 151 Evidence Document 132 158

r-------------------·----------------------~-------------------------------------------Page 2

1 APPEARANCES: 2 3 On behalf of the Securities and Exchange Commission: 4 MICHAEL KING, Branch Chief 5 MICHAEL JACKMAN, ESQ 6 DAVID R. KING, CPA 7 CAROL LOWEN, CPA 8 Division of Enforcement 9 Securities and Exchange Commission

10 801 Cherry Street, 19th Floor 11 Fort Worth, TX 76102 12 13 On behalf of the witness: 14 ROBB L. VOYLES, ESQ 15 Baker Botts LLP 16 2001 Ross Avenue 17 Dallas, TX 75201 18 19 THOMAS L. RIESENBERG, ESQ

20 JOHN A. THEIS, Audit Partner 21 Ernst & Young LLP 22 1101 New York Avenue, N.W.

23 Washington, DC 20005 24 25

1 EXHIBITS: 2 152 3 153 4 154 5 155 6 156 7 157 8 158 9 159

10 160 11 161 12 13 14 15 16 17 18 19 20 21 22 23 24 25

DESCRIPTION Page 4

IDENTIFIED 159 Excerpt Walk-through Binder No. 1

Excerpt U series & work papers Internal E-mail re Roman Ferber E-mail Mar 10 10 from P Toy E-Mail Jul 8 1 0 to D Martin

163 194

213 218

E-Mail Jul 13 1 0 to D Martin 220 E-Mail Jul 26 10 D Martin 222 Letter Jul 30 10 from S Peden 224 Excerpt from Mr. Lewis' desk file 228 Follow-up, client continuance 230

--------------------------------------L-------------------------------------_I

Cangany _Peter _20 120118 Pages 1-4


Page 5 Page 7

P R 0 C E E D I N G S 1 counsel in representation here.

2 MR. D. KING: We are on the record at 9:05 on 2 MR. D. KING: And Mr. Voyles, is your

3 January 18th, 2012. 3 representation of the witness as his counsel today? ·

4 Mr. Cangany, would you please raise your right 4 MR. VOYLES: Yes.

5 hand? 5 BY MR. D. KING:

6 Whereupon, 6 Q I'll just hand you a copy of what I have marked

7 PETER T. CANGANY, JR. 7 as Exhibit 133.

8 Having first been duly sworn, was called as a witness 8 (SEC Exhibit No. 133 was marked

9 herein, and was examined and testified as follows: 9 for identification.)

10 EXAMINATION 10 And ask you, Mr. Cangany, is this-- is your

11 BY MR. D. KING: 11 appearance today pursuant to the subpoena we have marked 12 Q Please state and spell your full name for the 12 as Exhibit 133?

13 record? 13 A Yes.

14 A Peter Thomas Cangany, Jr., P-E-T-E-R 14 Q I'll just hand you a copy of Exhibit 134, which

15 T -H-0-M-A-S C-A-N-G-A-N-Y J-R. 15 is a copy of a letter and subpoena that went out March

16 Q My name is David King and with me are Carol 16 14th, 2011.

17 Lowen and Michael Jackman. A little bit later today 17 (SEC Exhibit No. 134 was marked

18 Michael King will probably also join us. We are officers 18 for identification.)

19 of the Commission for the purposes of this proceeding. 19 Have you seen all or part of Exhibit 134

20 This is an investigation by the Commission in 20 before? And as you look at that, this is the request to

21 the matter of Life Partners, Inc., and Life Partners 21 Ernst and Young to produce its work papers related to the

22 Holdings, Inc., number FW-3501, to determine whether 22 2010 audit and the 2011 quarters.

23 there have been violations of certain provisions of the 23 A Yes.

24 federal securities laws. However, the facts developed in 24 Q And did you participate in identifying,

25 this investigation might constitute violations of other 25 producing documents pursuant to Exhibit 134? 1--·-------------------------+-----·---------·----·-------·-----

1 federal or state, civil or criminal laws.

2 Prior to the opening of the record I gave you a

3 copy of what is called the Formal Order of investigation.

4 It's not marked as an exhibit but will be available for

5 your reference here today.

Page 6

6 Have you had a chance to read the Formal Order?

7 A Yes.

8 Q Okay. I also gave you a copy of what has been

9 marked Exhibit 1, which is the Commission's Form 1662,

10 which covers routine uses of information and obligations

11 in providing information to the Staff.

12 Have you had a chance to review that?

13 A I have.

14 Q And do you have any questions about either of

15 those documents?

16 A No.

17 Q Are you represented by counsel today?

Page 8

A I did, yeah.

2 Q Okay. Were all documents that were responsive

3 to the subpoena tendered to the Staff?

4 A To the best of my knowledge.

5 Q Okay. Are you aware of any documents that were

6 not given to the Staff based upon any claim of privilege?

7 A No.

8 Q Are you aware of any documents that were

9 withheld for any other reason?

10 A No.

11 Q Do you know of any documents that were

12 responsive to the subpoena that weren't produced because

13 they weren't in existence on the day the subpoena went

14 out?

15 A Not that I'm aware of.

16 Q All right. And today as we go through and just

17 to keep things as organized as possible, the court

18 A Yes. 18 reporter is making a record of everything we say. So

19 MR. D. KING: And would counsel please make an 19 what I do ask, that as I ask my question please wait for

20 appearance for the record? 20 me to finish my question before you answer it. If you

21 MR. VOYLES: Robb Voyles of Baker Botts. 21 don't understand a question, please ask me to rephrase it

I 22 MR. RIESENBERG: And Thomas Riesenberg, General 22 or explain further. If you answer, we will assume that

23 Counsel of Ernst and Young. And with us here today is 23 you do understand the question that is being asked.

24 John Theis, who is an audit partner assigned to the 24 On exhibits that we give you and copies, we ask

25 General Counsel's office of Ernst and Young to assist the 25 that you not mark on those. Those are the Staffs copies L-----------------------~---Cangany _Peter _20 120118 Pages 5-8


2 3

4

5

6

7

8

9

10

11 12

13

14 15

16

17

18

19 20 21

22 23 24 25

1 ;

2

3 41

5 I

6

7

8

9

10

11

12 13

14 15 16 17 18

19 20 21

22 23 24 25

Cangany_Peter_20120118

Page 241

Page 242

Page 243

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

Page 244

1 MR. JACKMAN: Okay. 2 MR. D. KING: All right. At this time we have 3 no further questions for you. If we do need to ask you 4 to testify again we will contact your counsel. 5 At this time do you have anything that you 6 would like to clarify or add to your statements made 7 today? 8 THE WITNESS: No. 9 MR. D. KING: Okay. And does counsel have any

1 0 clarifying questions? 11 MR. VOYLES: No. 12 MR. D. KING: We are off the record at 5:00. 13 (Whereupon, at 5:00p.m., the examination was 14 concluded.) 15 16 17 18 19 20 21 22 23 24 25

* * * * *

Pages 241 - 244


-----------------------------------P-ag_e_2_4_5r----------------------------------------------l

1 PROOFREADER'S CERTIFICATE

2 3 In The Matter of: LIFE PARTNERS INC., AND

1

1

4 LIFE PARTNERS HOLDING, INC.

5 Witness: Peter Cangany, Jr.

6 File Number: FW-03501-A

7 Date: Wednesday, January 18, 2012

8 Location: Fort Worth, TX

9

10 This is to certify that I, Donna S. Raya,

11 (the undersigned), do hereby swear and affirm that the

12 attached proceedings before the U.S. Securities and

13 Exchange Commission were held according to the record and

14 that this is the original, complete, true and accurate

15 transcript that has been compared to the reporting or

16 recording accomplished at the hearing.

17

18 --------------19 (Proofreader's Name)

20

21

22 23

24

(Date)

i

·--+-------~ Page 246 I

25 ----·---

REPORTER'S CERTIFICATE 2 3 I, Terry W. Bryant, reporter, hereby certify that the 4 foregoing transcript of 244 pages is a complete, true and 5 accurate transcript of the testimony indicated, held on 6 January 18, 2012, at 9:05 a.m. in the matter of: Life 7 Partners, Inc., and Life Partners Holdings, Inc. 8 9 I further certify that this proceeding was recorded by

10 me, and that the foregoing transcript has been prepared 11 under my direction. 12 13 14 Date: 15 Official Reporter: 16 Diversified Reporting Services, Inc. 17 18 19 20 21 22 23 24 25

Cangany_Peter_20120118

I

Pages 245 - 246



AUSTIN DIVISION



v.

LIFE PARTNERS HOLDINGS, INC., BRIAN PARDO, R. SCOTT PEDEN, AND DAVID M. MARTIN

Defendants.

AFFIDAVIT OF JASON S. LEWIS

STATE OF TEXAS § §

COUNTY OF DALLAS §

BEFORE ME, the undersigned authority, personally appeared, Jason S. Lewis,

who being personally known to me and after being duly sworn on oath, states as follows:

1. My name is Jason S. Lewis. I am over 18 years of age and am fully

competent and authorized to make this Affidavit. I have personal knowledge of the facts

stated in this Affidavit, each of which is within my personal knowledge and is true and

correct. I am submitting this Affidavit in support of Defendants' Motion for Sanctions.



since my licensing in 1998. I am also admitted to practice law in all federal courts in the

State of Texas. I am a Partner with the Dallas office of Locke Lord LLP, 2200 Ross

Avenue, Suite 2200, Dallas, Texas 75201.

EXHIBIT

AFFIDAVIT OF JASON S. LEWIS- Page I


3. I am Lead Counsel for Brian Pardo ("Pardo") m the above-styled and

numbered cause.

4. Neither I nor Pardo received notice of the Subpoena issued by the Fort Worth

Regional Office of the Securities and Exchange Commission ("SEC") to Peter T.

Cangany, Jr. dated January 10, 2012. In addition, neither I nor Pardo received notice that

Mr. Cangany's testimony was to take place on January 18, 2012 in the SEC's office.

Accordingly, I was unable to attend Mr. Cangany's testimony and cross-examine the

witness.


Sworn to and subscribed before me 2012.

AFFIDAVIT OF JASON S. LEWIS- Page 2



AUSTIN DIVISION



v.


Defendants.

AFFIDAVIT OF S. CASS WEILAND

STATEOFTEXAS § §

COUNTY OF DALLAS §

BEFORE ME, the undersigned authority, personally appeared, S. Cass Weiland,

who being personally known to me and after being duly sworn on oath, states as follows:

1. "My name is S. Cass Weiland. I am over 18 years of age and am fully

competent and authorized to make this Affidavit. I have personal knowledge of every

fact stated in this Affidavit, each of which is within my personal knowledge and is true

and correct. I am submitting this Affidavit in support of Defendants' Motion for

Sanctions.



since 1985. I am also licensed to practice law in all federal courts in the State of Texas. I

am a Partner with the Dallas office of Patton Boggs L.L.P., 2000 McKinney Avenue,

Suite 1700, Dallas, Texas 75201.

AFFIDAVIT OF S. CASS WEILAND- Page 1 EXHIBIT


3. I am Lead Counsel for David M. Martin ("Martin") in the above-styled and

numbered cause.

4. Neither Martin nor myself received notice of the Subpoena issued by the Fort

Worth Office of the Securities and Exchange Commission ("SEC") to Peter T. Cangany,

Jr. dated January 10, 2012. Nor did Martin or myself receive notice that Mr. Cangany's

testimony was to take place on January 18, 2012 in the SEC's office. Accordingly, I was

2012.


MARTHA C. ROSE NOTARY PUBUC STATE OF TEXAS My Comm. Exp. 12-8-2012

AFFIDAVIT OF S. CASS WEilAND- Page 2

L---................ ,

s


UNITED STATES OF AMERICA Before the

SECURITIES AND EXCHANGE COMMISSION

ADMINISTRATIVE PROCEEDINGS RULINGS Release No. 656/July 12, 2010

ADMINISTRATIVE PROCEEDING File No. 3-13847

In the Matter of

MORGAN ASSET MANAGEMENT, INC., MORGAN KEEGAN & COMPANY, INC., JAMES C. KELSOE, JR., and JOSEPH THOMPSON WELLER, CPA

ORDER ADDRESSING ISSUES UNDER RULE OF PRACTICE 230(G)

Rule 230(g) of the Rules of Practice of the Securities and Exchange Commission (Commission), entitled "Issuance of Investigatory Subpoenas After Institution of Proceedings," provides:

The Division of Enforcement shall promptly inform the hearing officer and each party if investigatory subpoenas are issued under the same investigation file number or pursuant to the same order directing private investigation ("formal order") under which the investigation leading to the institution of proceedings was conducted. The hearing officer shall order such steps as necessary and appropriate to assure that the issuance of investigatory subpoenas after the institution of proceedings is not for the purpose of obtaining evidence relevant to the proceedings and that any relevant documents that may be obtained through the use of investigatory subpoenas in a continuing investigation are made available to each respondent for inspection and copying on a timely basis.

The Commission issued the Order Instituting Proceedings (OIP) in this matter on April 7, 2010. The investigation leading to the institution ofthe OIP was Investigation No. A-3042. The Commission authorized the Division of Enforcement (Division) to commence Investigation No. A-3042 on May 8, 2008.

Eight days after the Commission issued the OIP, the Associate Regional Director of the Commission's Atlanta Regional Office, acting pursuant to delegated authority, authorized a second investigation, Investigation No. A-3211. Respondents contend that Investigation Nos. A-3042 and A-3211 are functionally identical and the Division started the second investigation for the impermissible purpose of gathering additional evidence for use at the hearing in the present proceeding. They also assert that the "new" investigation number is simply a ploy by the Division to camouflage the fact that A-3042 is ongoing. Respondents request relief under Rule

EXHIBIT


230(g) of the Commission's Rules of Practice. The Division maintains that Rule 230(g) does not literally apply in the present circumstances. 1 It also asserts that it initiated A-3211 for the lawful purpose of investigating misconduct by other individuals who are not Respondents in this proceeding. The Division is willing to share with Respondents relevant information it develops in A-3211, but it argues that any additional relief under Rule 230(g) is unwarranted.

The Division has issued six subpoenas for documents and testimony in A-3211, but it has voluntarily postponed the return dates of those subpoenas pending resolution of the present controversy. The hearing in the present proceeding is scheduled to commence on September 13, 2010.

A-3211 is the continuation of A-3042, the investigation leading to the institution of the present proceeding;

Rule 230(g) applies to A-3211 with full force and effect.

The Division contends that Rule 230(g) "arguably does not apply" or "does not expressly apply" to A-3211 because there are two separate investigation file numbers and two separate formal orders (Div. Resp. at 4 n.l, 7). Respondents maintain that the orders of investigation in A-3042 and A-3211 are functionally identical. They accuse the Division of issuing a new formal order of investigation in A-3211 to circumvent the requirements of Rule 230(g) (Resp. Motion at 3, 6-7).

The formal order of investigation in A-3042 permitted the Division to investigate potential misconduct by the directors of Morgan Keegan & Company's Funds. The parties agree that potential misconduct by the Funds' directors is the focus of the formal order of investigation in A-3211. The Division concedes that there is "probably going to [be] some substantial overlap" between A-3042 and A-3211 (May 7, 2010, Prehearing Conf. Tr. at 35). Respondents examine the OIP and the formal orders of investigation in detail and they provide a host of particulars to demonstrate that A-3211 is little more than the continuation of A-3042 (Resp. Motion at 6-7). Respondents also point to an e-mail dated April 12, 2010 (five days after the Commission issued the OIP and three days before the Atlanta Regional Office issued the formal order in A-3211), the subject of which is "Morgan Asset-Continuing investigation after institution of proceeding" (Division's Supplemental Withheld Document and E-Mail Lists at 93) (describing an e-mail from Stephen E. Donahue to William P. Hicks).2 I agree with Respondents that the subject line of the withheld e-mail suggests an intention by the Division to continue the investigation leading to the institution of this proceeding, as well as the Division's likely

The Division notified Respondents and me on May 7, 2010, that it had initiated the investigation in A-3211. The Division did not inform Respondents or me once it began to issue subpoenas in A-3211 on June 4, 2010. Respondents' counsel learned of the subpoenas from a colleague in the private bar who represents the recipients of the subpoenas.

2 Mr. Donahue and Mr. Hicks are both designated as officers of the Commission to conduct the investigation in A-3211. Mr. Donahue attended the first prehearing conference in this proceeding as an observer (May 7, 2010, Prehearing Conf. Tr. at 3). Mr. Hicks has entered an appearance as counsel of record in this proceeding.

2


awareness of the prohibitions of Rule 230(g). In opposition to this strong showing by Respondents, the Division has elected to maintain its silence about its reasons for issuing a new formal order of investigation in A-3211.

I agree with Respondents that A-3211 is the continuation of A-3042, the investigation leading to the institution of the present proceeding. I further find that the Division's efforts to camouflage this fact are unpersuasive. Any other reading of the two formal orders would exalt form over substance. It would also require me to tum a blind eye to the Commission's concern that "[ e ]ven the appearance of a lack of integrity could undermine the public confidence in the administrative process upon which our authority ultimately depends." Clarke T. Blizzard, 77 SEC Docket 1515, 1518 (Apr. 24, 2002).

One of the Division's purposes for issuing investigatory subpoenas in A-3211 after the institution of proceedings is

to assist itself in preparing for the upcoming hearing.

Respondents object to the fact that the Division's case-in-chief will continue to evolve as the investigation in A-3211 progresses. They complain that it is fundamentally unfair to require them to shoot at a moving target, particularly where, as here, the investigative file in A-3042 is already voluminous and the Commission has imposed strict time limits for issuing an Initial Decision.

Respondents observe that, although the Division investigated pursuant to A-3042 for nearly two years, it failed to take the testimony of any of the Funds' directors. The Division's omission was surprising because the directors were within the ambit of the formal order in A-3042. Nonetheless, the Division's list of proposed hearing witnesses includes Mary Stone, a former director of one of the Funds who is now also subject to a subpoena for documents and testimony in A-3211. Some of the other Funds' directors may become witnesses for Respondents (May 7, 2010, Prehearing Conf. Tr. at 36-37).3 It is evident that the Division would benefit from taking investigative testimony from the six directors at this juncture. By doing so, it could lock the witnesses into their respective stories, and a tentative or potentially hostile witness who changed his/her testimony at the hearing would then risk impeachment. There is also considerable overlap between the Funds' valuation issues alleged in the OIP and the Funds' valuation documents sought from the directors by subpoena in A-3211.

The Division has also made plain that it wants to provide more evidence to its proposed expert witness than is available from the investigative file in A-3042. Division counsel referred to this plan at the June 2, 2010, Prehearing Conference (Tr. at 28-29) (emphasis added):

[T]o the extent that there is the kind of evidence that is ... different than anything that came up during the investigation . . . we would request that the expert be permitted to supplement her direct testimony by giving some live direct testimony just to address any new evidence or issues that come up . . . to the extent that there are new or different facts or issues that ... we don't know about

3 Respondents' list of proposed hearing witnesses is not due until July 27, 2010.

3


now and could not have anticipated, we would like our expert to be able to take those into account in fashioning her direct testimony.

When the Division's proposed expert filed her direct written testimony on June 22, 2010, she reiterated the same point on page 6 ("Our findings are as of the date of this report, and we reserve the right to modify or expand the opinions [expressed in this report] based on further thoughts given to existing information and upon the availability of additional documents and data.") (emphasis added).

I agree with Respondents. For reasons not explained on the record, the Division elected to follow a high-risk strategy: it asked the Commission to issue the OIP before it had completed the relevant parts of its investigation. The Division is free to take this sort of risk, of course, but it cannot now ask for a ruling that, in effect, guarantees that it will suffer no adverse consequences. I find that one of the Division's purposes in issuing subpoenas in A-3211 is to assist itself in preparing for the upcoming hearing.4

The Commission did not incorporate into Rule 230(g) a directive to consider only the "sole or dominant"

purpose of the continuing investigation.

Federal prosecutors conducting ongoing grand jury investigations are subject to limitations that are similar, but not identical, to those that Rule 230(g) imposes on the Division. See United States v. Bros. Constr. Co. of Ohio, 219 F.3d 300, 314 (4th Cir. 2000) ("[O]nce a criminal defendant has been indicted, the Government is barred from employing the grand jury for the 'sole or dominant purpose' of developing additional evidence against the defendant."); In re Grand Jury Subpoena Duces Tecum, 767 F.2d 26, 29 (2d Cir. 1985) ("It is improper to utilize a Grand Jury for the sole or dominating purpose of preparing an already pending indictment for trial") (citation omitted); United States v. Moss, 756 F.2d 329, 332 (4th Cir. 1985) (holding that the defendant bears the burden of showing that the government's purpose was primarily to collect evidence relating to the pending charges).

Under the criminal law approach, government prosecutors are allowed to make a goodfaith inquiry into charges that are not covered by the indictment "even if it uncovers further evidence against an indicted person." Bros. Constr. 219 F.3d at 314 (citing Moss, 756 F.2d at 332). A superseding indictment that adds charges or defendants to the criminal case is strong evidence that the grand jury was used for a proper purpose, but an ongoing investigation that does not produce new charges does not give rise to the converse inference of impropriety. See

4 The Commission did not prohibit altogether the issuance of subpoenas in a continuing investigation upon initiation of an administrative proceeding because "[i]n some circumstances, for example, ... where a single formal order is being used to investigate several distinct areas of potential violations, proceedings may be instituted prior to the end of all investigative activities." Rules ofPractice, 60 Fed. Reg. 32,738, 32,762 (June 23, 1995). The ongoing investigation ofthe Funds' directors is not really "a distinct area of potential violations." Moreover, the Division cannot legitimately characterize discovery of fresh evidence through A-3211 as merely "an incidental benefit." See infra p. 5.

4


United States v. Leung, 40 F.3d 577, 581-82 (2d Cir. 1994). Of course, a Leung-type analysis could only be made in the future and with the benefit of hindsight.

Although the government may not use a grand jury for discovery concerning a pending prosecution, it may continue an investigation from which information relevant to a pending prosecution "may be an incidental benefit." United States v. Alred, 144 F.3d 1405, 1413 (lith Cir. 1998) (quoting United States v. Beasley, 550 F.2d 261, 266 (5th Cir. 1977)); United States v. Gibbons, 607 F.2d 1320, 1328 (lOth Cir. 1979) (same).

The Division, apparently believing that this criminal law precedent should now be incorporated into the Commission's Rule 230(g) jurisprudence, asserts that its continuing investigation of the Funds' directors is "primarily" for the permissible purpose of determining if the Funds' directors violated any federal securities laws (Div. Resp. at 4-5).5

There are three reasons why the criminal law precedent should not be so incorporated. First, "there is a fine line between an improper 'trial preparation' use of a grand jury and a proper 'continuing investigation' use." United States v. Flemmi, 245 F.3d 24, 28 (1st Cir. 2001). While the grand jury is an arm of the judiciary, id., it can hardly be said that the Division's investigations are an arm of the Office of Administrative Law Judges. Under the best of circumstances, it would be difficult for an Administrative Law Judge (ALJ) to ascertain the Division's "sole purpose" or to distinguish the Division's "dominant purpose" from the Division's other purposes. Second, the leading judicial opinions such as Moss, Grand Jury Subpoena, and Leung were issued before 1995. They were presumably known to the Commission when it drafted its Rules of Practice. Nonetheless, the Commission elected not to phrase Rule 230(g) to apply only when the Division's "sole or dominant" purpose in continuing an investigation was improper. Lastly, the plain wording of Rule 230(g) authorizes an ALJ to take necessary and appropriate steps to eliminate the improper purpose, whether it is the sole purpose, the dominant purpose, or one of many purposes.

The Parties' Positions on Remedies

Respondents urge me either to order that Division staff members identified as officers of the Commission in A-3211 be precluded from participating in this proceeding or, alternatively, order that Division staff members currently appearing in this proceeding be precluded from participating in A-3211 or having access to information and documents obtained through A-3211 (Resp. Motion at 1-2, 9-11). The Division contends that the only remedy available is to require it

5 While there is a presumption of regularity in the Division's investigations, it is difficult to evaluate the Division's assertion about its "primary" purpose without a candid affidavit from the Associate Regional Director, attesting to the Division's good faith and explaining the reason for the different investigative file numbers. Such affidavits are routinely offered by criminal prosecutors disputing accusations of grand jury abuse. See,~' Moss, 756 F.2d at 331; In re Grand Jury Subpoena, Apr. 1978, at Balt., 581 F.2d 1103, 1105 (4th Cir. 1978); United States v. George, 444 F .2d 31 0, 312 (6th Cir. 1971). Here, the Division offers only a non-denial denial (Div. Resp. at 5) ("[I]t is difficult to conceive .... ").

5


to share with Respondents any relevant information it obtains in response to subpoenas issued in A-3211 (May 7, 2010, Prehearing Conf. Tr. at 35; Div. Resp. at 1, 5, 7 & n.2).

The Division's proposed remedy is problematic for several reasons. The second sentence of Rule 230(g) contains two clauses: a preventive clause ("the hearing officer shall order such steps as necessary and appropriate to assure . . . ") and a damage control clause ("the hearing officer shall order ... that any relevant documents that may be obtained ... are made available to each respondent ... "). The Division's approach would read the preventive clause, in its entirety, out of the Rule. I decline the invitation to treat the preventive clause as surplusage. The Division's reading of the damage control clause would grant itself entirely too much power. Division counsel of record should not have unlimited access to all documents and testimony developed through A-3211 while they simultaneously retain the authority to decree that certain documents gathered in A-3211 are not "relevant" to the present proceeding and are therefore unavailable to Respondents. At the same time, an ALJ could not realistically police disputes between the Division and Respondents about relevance without impermissibly intruding into the Division's conduct of A-3211.6 Finally, it is not clear that the Division's offer to turn over "relevant" documents includes a promise to share transcripts of all the investigative testimony it will develop in A-3211. Under 17 C.F.R. § 203.6, the Division retains the right to deny a person who testifies during an investigation a copy of the person's own transcript. The Division need only assert that there is "good cause" for doing so. Id. The Division has not explained whether it is pledging to make relevant transcripts available to Respondents while it retains the right to withhold the same transcripts from the witnesses themselves. Cf. Piper, 68 SEC Docket at 544 (ordering the Division to turn over transcripts of investigative testimony).

One aspect of Respondents' proposed remedy is also problematic. It is often stated that there is no such thing as an exclusionary rule in civil or administrative proceedings. See Richard 0. Bertoli, 47 S.E.C. 148, 153 n.23 (1979) (dictum) (citing United States v. Janis, 428 U.S. 433, 447 (1976)); see also Pa. Bd. of Prob. & Parole v. Scott, 524 U.S. 357, 364 (1998); INS v. Lopez-Mendoza, 468 U.S. 1032, 1050 (1984). However, it is also often stated that the criminal law doctrine of Brady v. Maryland, 373 U.S. 83, 87 (1963), and the Jencks Act, 18 U.S.C. § 3500, have no application to civil or administrative proceedings. See Williams v. Wynne, 533 F.3d 360, 372 (5th Cir. 2008); Millspaugh v. County Dep't of Public Welfare, 937 F.2d 1172, 1175 (7th Cir. 1991); McDougall v. Dunn, 468 F.2d 468, 475 (4th Cir. 1972). Nonetheless, the Commission has incorporated both Brady and the Jencks Act into its Rules of Practice. See Rules of Practice 230(b)(2) and 231(a). I interpret the first clause of the second sentence in Rule 230(g) as an exclusionary rule. Pursuant to Rule of Practice 111(d), which grants a presiding ALJ broad power to regulate the conduct of the parties and their counsel, I grant Respondents' motion, as set forth below.

6 In Piper Capital Mgmt., Inc., 68 SEC Docket 541, 544 (Oct. 1, 1998), the only prior decision interpreting Rule 230(g), an ALJ ordered the Division to produce "all" documents obtained through subpoenas in an ongoing investigation, not merely "relevant" documents. Piper was decided several years before the Commission confirmed the breadth of Rule of Practice Ill (d) in Blizzard. For that reason, the Division may not rely on Piper to support its claim that the first clause of the second sentence in Rule 230(g) is a dead letter.

6


ORDER

Division personnel involved in preparing the present case for hearing shall not participate, directly or indirectly, in Investigation No. A-3211. This prohibition applies to Division counsel of record and to any support staff, including paralegals, who may assist counsel of record. The prohibition shall remain in effect until the end of the hearing and the closing of the record.

During the hearing in this matter, the Division may not examine or cross-examine any witness with testimony or documents obtained by subpoenas issued in Investigation No. A-3211. The Division shall not ask any witness about testimony the witness may have given or documents the Division may have obtained by subpoenas issued in Investigation No. A-3211. The Division may not impeach any witness or refresh the recollection of any witness with evidence obtained by subpoenas issued in Investigation No. A-3211. The Division may not use evidence obtained by subpoenas issued in Investigation No. A-3211 to update or expand the direct written testimony of its proposed expert witness.

Notwithstanding the requirements of the first two ordering paragraphs, Division personnel conducting Investigation No. A-3211 may share documents and transcripts with Division personnel involved in the present proceeding under the following circumstances. Division personnel involved in Investigation No. A-3211 shall not provide Division personnel involved in preparing the present case for hearing with access to any documents or transcripts from Investigation No. A-3211 unless they provide Respondents with access to the same materials at the same time. If any materials from Investigation No. A-3211 are withheld from Respondents on the grounds that the materials are not relevant to the present proceeding, are privileged, or for any other reason, the withheld materials shall also be withheld from Division personnel involved in preparing the present case for hearing.

IT IS SO ORDERED.

7

James T. Kelly Administrative Law Judge



AUSTIN DIVISION


Plaintiff,

v.


Defendants.


ORDER GRANTING DEFENDANTS' MOTION FOR SANCTIONS

After considering Defendants' Motion for Sanctions and Brief in Support, and other

relevant matters on file with the Court, the Court is of the opinion that:

Defendants' Motion is well taken and should be GRANTED.

IT IS THEREFORE ORDERED, ADJUDGED AND DECREED as follows:

(1) Plaintiff is prohibited from using any of the documents or testimony obtained by Mr. Cangany for any purpose, including for impeachment and for use with other witnesses, in this litigation or any related proceedings initiated against any Defendant;

(2) Plaintiff shall disclose to the Court and to Defendants any other subpoenas, testimony, or other discovery that Plaintiff has undertaken since January 3, 2012 to present;

(3) To the extent Plaintiff claims it has not conducted any further extra-judicial discovery, a written representation of same made under oath by Plaintiff and filed with the Court and served upon Defendants;

( 4) Plaintiff is prohibited from issuing any additional subpoenas and obtaining any additional testimony related to any or all of the Defendants without complying with the Federal Rules of Civil Procedure and this Court's Orders; and

(5) Defendants are hereby awarded $5,000.00 in attorneys' fees for having to prepare and file this Motion.

SIGNED on the __ day of _____ , 2012.

UNITED STATES DISTRICT JUDGE 713715-vl\DALDMS

ORDER GRANTING DEFENDANTS' MOTION FOR SANCTIONS- Page 1
