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Securities and Exchange Commission v. Life Wealth Management

UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA


April 17, 2013

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
v.
LIFE WEALTH MANAGEMENT, INC., AND JEFFERY S. PRESTON, DEFENDANTS.

The opinion of the court was delivered by: Honorable Ronald S.W. Lew Senior, U.S. District Court Judge

ORDER RE Defendants' Motions in Limine Nos. 1-4 [76, 77, 78, 79], and Plaintiff's Motion in Limine [74].

Currently before the Court are Defendants' Motions in Limine Nos. 1-4 [76, 77, 78, 79], and Plaintiff's Motion in Limine [74]. Having reviewed all the papers pertaining to these Motions, the hearing on the Motions are advanced to this date and the Court deems the mater appropriate for hearing without oral argument pursuant to FRCP 78 and Local Rule 7-15. The Court HEREBY RULES AS FOLLOWS:

The Court DENIES Defendants' Motions in Limine Nos. 1-4, and GRANTS Plaintiff's Motion in Limine.

I. BACKGROUND

This Action stems from a Complaint filed by Plaintiff Securities and Exchange Commission ("Plaintiff") against Defendants Life Wealth Management, Inc. ("Life Wealth") and Jeffery S. Preston ("Preston"; collectively, "Defendants") for (1) violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder ("Exchange Act"), and (2) violation of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 ("Investment Advisers Act").

Plaintiff's claims concern Defendants' investment of client assets in unsecured promissory notes ("Notes") from 2005 to 2007, which were issued by the real estate company Atherton-Newport Investments, LLC ("ANI"). FAC. ¶ 4. Plaintiff alleges that Defendants misrepresented and failed to disclose to Life Wealth clients the substantial risks associated with ANI Notes.

Furthermore, Plaintiff asserts that Defendant Preston (1) recommended the Notes to Life Wealth clients despite having his own doubts about ANI's viability as a company, (2) recommended the Notes to clients even though ANI investments were highly unsuitable for them, (3) invested clients' assets in the Notes despite the fact that several clients repeatedly questioned the safety of the Notes, (4) failed to follow clients' clear instructions to invest their assets in cash, and (5) did not disclose to clients that he had conducted only a cursory review of key ANI documents, and that at least one client did not understand that the ANI Notes were unsecured.

Currently before the Court are Defendants' Motions in Limine Nos. 1-4 [76, 77, 78, 79], and Plaintiff's Motion in Limine [74], all filed on December 4, 2012. Each Motion addresses specific evidence that the respective Parties believe should be excluded from trial.

II. ANALYSIS

1. Defendants' Motion in Limine No. 1 to Preclude Any Evidence, Argument, or Reference to Previously Undisclosed Claims of Unauthorized Transactions or Any Other Evidence or Claim Not Disclosed In Discovery Defendants seek to exclude from trial evidence of unauthorized transactions relating to Stephanie Romanovich ("Ms. Romanovich"), Faye Huffman ("Ms. Huffman"), Steven Gilbertson ("Mr. Gilbertson"), and Aaron Adirim ("Mr. Adirim"), with the exception of a previously disclosed allegation concerning Mr. Adirim and his daughter's college fund. More specifically, Defendants seek to exclude the declaration of Ms. Romanovich and faxed correspondence between Ms. Romanovich and Defendants consisting of a fax cover sheet and accompanying distribution form authorizing the purchase of a $50,000 ANI Note.

Defendants' Motion in Limine No. 1 is hereby DENIED for the following reasons. First, "motions in limine should rarely seek to exclude broad categories of evidence, as the court is almost always better situated to rule on evidentiary issues in their factual context during trial." Colton Crane Co., LLC v. Terex Cranes Wilmington, Inc., No. CV 08-8525PSGP JWX, 2010 WL 2035800, at *1 (C.D. Cal. May 19, 2010). Second, contrary to Defendants' argument, it is simply not true that Plaintiff "waited over two years to allege that Defendants conducted unauthorized transactions." Mot. 4:3-4. Specifically, Plaintiff alleges in the FAC that Defendants failed to follow clients' instructions to invest their assets in cash and made investments in ANI Notes instead. In its first and second claims for relief, Plaintiff incorporated by reference the following factual allegation:

[Defendants] similarly failed to follow Life Wealth clients' clear instructions to invest their assets under management in cash. For example, a Life Wealth client asked Preston to invest $100,000 of his Life Wealth portfolio in cash for purposes of funding his daughter's college education. This client, who had already invested $180,000 in the Notes, discovered only after Atherton-Newport defaulted on them that Preston had disobeyed his directive by investing the $100,000 earmarked for his daughter's tuition in another Note.

FAC ¶ 33.

Although Defendants repeatedly state that Mr. Adirim's case is the lone exception to Plaintiff's failure to allege "unauthorized transactions", it is clear from the FAC that Plaintiff only referenced Mr. Adirim as an example to illustrate the type of wrongful conduct in which Defendants generally engaged. Despite Defendants' statements to the contrary, Plaintiff's allegations in the FAC of unauthorized transactions go beyond those limited to Mr. Adirim and his daughter's college fund. Thus, Defendants' argument that Plaintiff is attempting to introduce a "new claim" or "new argument" (Mot. 4:7-9, 4:21-23) is unavailing.

Furthermore, information obtained during discovery need not be the subject of supplemental disclosure when it is obtained through deposition testimony. See Nuance Commc'ns, Inc., v. ABBYY Software House, No. C 08-02912 JSW MEJ, 2012 WL 2838431 (N.D. Cal. July 10, 2012). See also 8 Charles Alan Wright et al., Federal Practice and Procedure § 2049.1 (2d ed.) ("[T]here is no need as a matter of form to submit a supplemental disclosure to include information already revealed by a witness in a deposition . . . ."). Here, both Mr. Adirim and Ms. Huffman testified during their depositions that Defendants rolled over or purchased ANI Notes without their authorization.*fn1

In light of Mr. Adirim and Ms. Huffman's testimony, Defendants do not adequately support their contention that all investors "disclaimed any unauthorized transactions in their depositions." Mot. 5:11-12. With regard to Mr. Adirim, Defendants cite to six consecutive pages of his deposition and assert that he admitted to authorizing all purchases of ANI Notes. However, nowhere in those six cited pages does Mr. Adirim discuss having authorized such transactions. See Anderson Decl., Ex. 2, pp. 38-43. As to Ms. Huffman, Defendants merely allege that she admitted to authorizing the ANI Note purchases, but they provide no evidentiary support for this assertion.

Furthermore, with regard to Ms. Romanovich, Defendants fail to sufficiently address why they did not produce during discovery the fax cover sheet and distribution form at issue here. Instead, Defendants try to convince the Court that Plaintiff is the Party at fault here for failing to fully explore during discovery the possibility of unauthorized transactions relating to Ms. Romanovich or that Plaintiff, in fact, had these documents all along and simply failed to disclose "the information and documents that it had for over two years." Reply 5:11-13. However, the Court is not convinced of this. Defendants also ignore Plaintiff's contention that Ms. Romanovich actually only authorized the purchase of a $50,000 ANI Note as opposed to a $100,000 ANI Note, the latter of which was indicated in the documents that Defendants produced during discovery.

Finally, Defendants' argument about their inability to depose Ms. Romanovich at this stage of litigation lacks merit because (1) Defendants should have been on notice from the First Amended Complaint ("FAC") that unauthorized transactions formed part of the basis for Plaintiff's claims, (2) Plaintiff specifically put Defendants on notice that Ms. Romanovich likely would have evidence related to Plaintiff's claims for relief, and (3) Defendants had opportunity to depose Ms. Romanovich during the discovery phase but chose not to do so.

Furthermore, the Court is not persuaded by Defendants' argument that Plaintiff's response to Interrogatory No. 8 indicated that Plaintiff did not intend to pursue a theory of unauthorized transactions. While Defendants are correct that Plaintiff, in its response to Interrogatory No. 8, incorporated by reference paragraphs 10 through 31 of the FAC, which do not specifically allege unauthorized transactions, Plaintiff also incorporated by reference the entirety of the FAC, which included paragraph 33 and the allegations of unauthorized transactions contained therein.*fn2

Moreover, the cases cited by Defendants are not on point. Specifically, Egatz is a patent case in which the term "claim" is used in reference to claims within a patent, not claims for relief. Egatz, Inc. v. Quicksilver, Inc., No. SACV 10-0300, 2012 U.S. Dist. LEXIS 92201 (C.D. Cal. July 3, 2012). In Lyman v. CSX Transp., Inc., 364 F. App'x 699 (2d Cir. 2010), the plaintiff alleged negligence claims for the first time in its opposition to the defendant's motion for summary judgment, and in Oracle USA, Inc. v. SAP AG, 264 F.R.D. 541 (N.D. Cal. 2009), the plaintiff introduced a new theory of damages late in the discovery process. Neither of these cases are on point here because Plaintiff's unauthorized transactions allegations have, in fact, existed since the filing of the FAC.

Based on the foregoing, the Court DENIES Defendants' Motion in Limine No. 1.

2. Defendants' Motion in Limine No. 2 to Preclude Any Previously Undisclosed Claims or Theories of Liability or Damages, or Evidence Related Thereto Defendants seek to exclude from trial any

negligence-based claim or theory of liability or damages, including disgorgement, pre-judgment interest, and civil penalties. Defendants argue that Plaintiff should not be permitted to pursue such claims because of its failure to disclose these claims before the discovery cutoff date.

Defendants' Motion in Limine No. 2 is hereby DENIED. Defendants' argument that Plaintiff never alleged negligence does not find support in the Record, including the FAC and Plaintiff's responses to Defendants' Interrogatories. Specifically, Plaintiff has alleged since the beginning of this litigation that Defendants violated Section 206(2) of the Investment Advisers Act. Although Defendants appear to believe that the factual allegations as set forth in the FAC can only support fraud as a basis for Section 206(2) liability, it is well established that negligence can also establish liability under Section 206(2). See e.g. Vernazza v. SEC, 327 F.3d 851, 860, amended, 335 F.3d 1096 (9th Cir. 2003); SEC v. Steadman, 967 F.2d 636, 643 n. 5 (D.C. Cir. 1992) ("A violation of § 206(2) of the Investment Advisers Act may rest on a finding of simple negligence."); SEC v. Moran, 922 F. Supp. 867, 897 (S.D.N.Y. 1996). Thus, there is strong support for Plaintiff's contention that "[w]hen a complaint alleges a fraud claim that legally can be based on a finding of negligence, that is more than sufficient to put a defendant on notice that negligence is part of the lawsuit." Opp'n 4:6-8. See Nacchio v. SEC, 438 F. Supp. 2d 1266, 1283 (D. Colo. 2006) ("[B]ecause [the] complaint adequately pleaded scienter, argument that [the] complaint failed to adequately plead negligence was without merit."). See also SEC v. Mannion, 789 F. Supp. 2d 1321, 1340 (N.D. Ga. 2011).

Defendants' reliance on Etagz, Lyman, and Oracle is misplaced for the same reasons previously discussed for Defendants' Motion in Limine No. 1. See supra p. 8-9. Furthermore, Defendants' claim that Plaintiff has never disclosed the disgorgement, pre-judgment interest, or civil penalties that it seeks is without merit because Plaintiff clearly states in the FAC that it seeks said remedies and provides the factual and legal bases upon which it seeks such relief.

In sum, the Court finds that Plaintiff's FAC and answers to Defendants' Interrogatories were sufficient to put Defendants on notice that negligence was a part of this litigation because (1) Plaintiff asserted a Section 206(2) claim against Defendants in the FAC (FAC ¶¶ 5, 38-39), and (2) it is well established that a Section 206(2) violation may be proven by a mere showing of negligence. Accordingly, the Court DENIES Defendants' Motion in Limine No. 2.

3. Defendants' Motion in Limine No. 3 to Preclude Any Evidence, Argument, or Reference to Any Medical Condition and/or Marital Issues, Including, but Not Limited to SEC's Proposed Exhibit 96 Defendants seek to preclude from trial all evidence

relating to any of Defendant Preston's medical conditions and marital issues, including, specifically, Exhibit 96, which is email correspondence between Defendant Preston and a personal friend who was also a Life Wealth client. Defendant argues that this evidence lacks relevance and is unfairly prejudicial.

Defendants' Motion in Limine No. 3 is hereby DENIED. Plaintiff argues that the emails are relevant because they reflect Defendant Preston's ability to recall certain facts about the alleged fraud, including whether he disclosed the risks of ANI Notes to clients or obtained client authorization before investing their assets in the Notes. The Court finds that Plaintiff's argument overcomes the relatively low threshold for finding evidence to be relevant. See Fed. R. Evid. 401. See also Rambus Inc. v. Samsung Elecs. Co., Ltd., No. C-05-02298 RMW, C-05-00334 RMW, 2008 WL 2944892, at *1 (N.D. Cal. July 16, 2008) (referring to the Rule 401 threshold for relevance as "exceedingly low"). Moreover, the extent to which the emails are relevant will be more fully determined within the context of other evidence presented at trial. United States v. Marino, 200 F.3d 6, 11 (1st Cir. 1999) (recognizing that proffered evidence can be more accurately assessed in the context of other evidence presented at trial).

Furthermore, Defendants' argument that the evidence is unduly prejudicial is unavailing. As Plaintiff points out, concerns of prejudice are minimized in the context of a bench trial. See United States v. Caudle, 48 F.3d 433, 435 (9th Cir. 1995). The risk that a verdict will be unfairly affected by the admission of improper evidence in a bench trial is far less than it is in a jury trial. See E.E.O.C. v. Farmer Bros. Co., 31 F.3d 891, 898 (9th Cir. 1994). See also Gulf States Utils. Co. v. Ecodyne Corp., 635 F.2d 517, 519 (5th Cir. 1981) (finding that exclusion of relevant evidence in a bench trial on the basis of unfair prejudice is "useless" and illogical).

Finally, Defendants' argument that the emails should be excluded because Plaintiff "grossly misrepresents" them is without merit. First, assuming, arguendo, that the emails are admitted, the Court is capable of reviewing their subject matter and giving them the evidentiary weight that they deserve. Second, allowing the emails to be admitted in their entirety guards against the possibility that email excerpts will be taken out of context. Thus, notwithstanding Plaintiff's offer to do so, the Court does not require Plaintiff to redact portions of the emails prior to the offer of admission.

In sum, the Court DENIES Defendants' Motion in Limine No. 3 because (1) the emails at issue are relevant in this case, (2) Defendants have not demonstrated that admission of the emails would be unduly prejudicial, and (3) to the extent that admission of the emails presents a risk of prejudice, such risk is minimized by the fact that this case is set for a bench trial.

4. Defendants' Motion in Limine No. 4 to Exclude Paul Meyer as an Expert Defendants seek to exclude Paul Meyer ("Mr. Meyer") as an expert witness on the grounds that he failed to establish proper foundation for his testimony as required by Federal Rule of Evidence 702.

Defendants' Motion in Limine No. 4 is hereby DENIED for the following reasons. The Court is not persuaded by Defendants' first argument that Mr. Meyer fails to provide a sufficient basis for his opinion that Defendants abrogated their duties as registered investment advisers. In this first argument, Defendants set forth two basic contentions. First, Defendants contend that Mr. Meyer fails to provide a sufficient basis for his opinion that Defendants should have performed specific due diligence tasks such as conduct "regular onsite visits" to ANI and review ANI's audited financial statements and written business plan. The Court notes that although Defendants take issue with Mr. Meyer's assertion that registered investment advisers should conduct "regular onsite visits" before making investment recommendations, Mr. Meyer does not rely on this specific due diligence task to support his opinion that Defendants' due diligence was inadequate. Rather, "regular onsite visits" is just one of six due diligence tasks that Mr. Meyer claims Defendants should have performed before recommending ANI Notes. More importantly, although Mr. Meyer does not specifically cite in his report to the sources from which he derived each of the aforementioned due diligence tasks, he does provide a lengthy list of materials upon which he relied in developing the due diligence standards that he applied in the case. Defendants have provided no legal authority to support the proposition that for Mr. Meyer's testimony to be admissible, he is required to specifically identify the source from which he derived each due diligence task he lists.

Defendants' next basic contention is that Mr. Meyer imposes an absolute due diligence standard on Defendants by pointing out that they failed to review ANI's audited financial statements and its written business plan. The Court rejects this contention because, aside from making this conclusory assertion, Defendants provide no explanation as to how Mr. Meyer imposes an "absolute standard" on Defendants. In sum, the Court does not accept Defendants' first argument because Mr. Meyer has, in fact, provided a sufficient basis for his opinion relating to Defendants' due diligence, and any additional concerns that Defendants have as to the basis of Mr. Meyer's opinion can be addressed through their cross-examination of him.

The Court finds Defendants' second argument similarly unconvincing. Here, Defendants make two basic contentions to support their argument that Mr. Meyer's testimony concerning Defendants' customer-specific suitability assessment should be excluded. With regard to Defendants' first contention that Mr. Meyer misstates the facts of the case by stating that Defendants "invested" clients' assets, the Court rejects this contention because it amounts to a mere parsing of words rather than a substantive issue about the misstatement of facts. With regard to Defendants' second contention that Mr. Meyer "ignores" the customer-specific suitability assessment steps that Defendants performed, this argument is solely based on Defendants' self-serving and conclusory claims that overlook Plaintiff's allegations to the contrary. See FAC ¶¶ 20-24. In forming his expert opinion, Mr. Meyer was not obligated to accept Defendants' self-serving statements over Plaintiff's contention that Defendants did, in fact, fail to disclose the Notes' substantial risks to clients. In essence, this argument boils down to Defendants' disagreement with Mr. Meyer's conclusions, which does not provide a sufficient basis for excluding his opinion. For these reasons, the Court finds that Defendants' second argument is insufficient to warrant excluding Mr. Meyer's testimony.

Defendants' third argument is also unavailing. Here, Defendants first claim that Mr. Meyer's testimony should be excluded because he relies on "limited knowledge and incomplete information" in forming his opinion that Mr. Adirim's assets were overly concentrated in ANI Notes. Mot. 7:9-10. However, Defendants fail to provide even a general explanation as to why Mr. Meyer's alleged limited knowledge and incomplete information on this subject should warrant excluding his entire opinion concerning Mr. Adirim. Defendants contend next that Mr. Meyer's testimony should be excluded because "the claim of suitability . . . was alleged after the discovery cutoff date." Id. 7:12-13. However, the Court finds that this argument is without merit because Plaintiff clearly alleges in the FAC that "[Defendants] recommended the Notes to [clients] even though the investment was highly unsuitable for them." FAC ¶ 30. For these reasons, Defendants' third argument is unpersuasive.

Finally, the Court rejects Defendants' fourth and fifth main arguments concerning Mr. Gilbertson and Ms. Huffman, respectively. Here, Defendants claim that Mr. Meyer's opinions are "not based on sufficient facts and data" and that he has failed to "properly apply the facts of the case" in forming his opinion that ANI Notes were unsuitable investments for Mr. Gilbertson and Ms. Huffman. Reply 5:12-20. However, this is really an issue concerning the true location of the evidence upon which Mr. Meyer relies rather than a substantial argument about his allegedly improper application of the facts of the case. Based on the declaration that Mr. Meyer submitted in conjunction with Plaintiff's Opposition to this Motion, it appears that Mr. Meyer originally cited in his Report to the wrong pages of Ms. Huffman's and Mr. Gilbertson's respective 2009 investigative testimony transcripts. Although Mr. Meyer addressed and corrected this mistake in his declaration (see Meyer Decl., Ex. 1), Defendants continue to assert that Mr. Meyer's conclusions stem from misapplied facts. However, it appears that the reason Defendants believe Mr. Meyer misapplied the facts is because they are looking at Ms. Huffman's and Mr. Gilbertson's 2012 transcripts, rather than at the corrected page citations in Ms. Huffman's and Mr. Gilbertson's 2009 transcripts. Moreover, while Defendants claim that Mr. Meyer may be relying on evidence that "does not even exist" (Reply 5:11-12), Defendants fail to identify a single assertion made by Mr. Meyer that is not drawn from the Record. Thus, based on the evidence presented by the Parties, the Court finds that Defendants' argument about Mr. Meyer's misapplication of facts is erroneous.

Finally, the Court finds that all of Defendants' arguments go to the weight of Mr. Meyer's testimony rather than its admissibility. See United States v. 17.69 Acres of Land, No. 99CV1248 DMS JMA, 2004 WL 5632928, at *1 (S.D. Cal. Dec. 20, 2004) (stating that "questions relating to the bases and sources of an expert's opinion affect the weight to be assigned that opinion rather than its admissibility and should be left for the jury's consideration."). See also United States v. 14.38 Acres of Land, 80 F.3d 1074, 1077 (5th Cir. 1996) (holding the same).

Accordingly, the Court DENIES Defendants' Motion in Limine No. 4 to exclude the expert testimony of Paul Meyer. 5. Plaintiff's Motion in Limine No. 1 to Exclude Certain Portions of the Expected Expert Testimony of Gregory B. Wood The Court GRANTS Plaintiff's Motion in Limine to exclude the portion of Mr. Woods' Opinion No. 5 that addresses Defendants' alleged good faith and lack of bias.

The Court finds that Mr. Wood's opinion that Defendants were "unbiased and acting in good faith" when they recommended ANI Notes to Life Wealth clients invades the province of the trier of fact. See Valiavicharska v. Celaya, No. CV 10-4847 JSC, 2012 U.S. Dist. Lexis 8191, at *8 (N.D. Cal. Jan. 24, 2012) (noting that it is "inappropriate for an expert to attempt to intuit a party's subjective knowledge").

See also In re Safety-Kleen Corp., No. 3:00-1343-17, 2004 Dist. LEXIS 30768, at *4 (D.S.C. Aug. 30, 2004) ("[An] expert may not testify on the ultimate legal conclusion as to whether the defendants discharged their duties, or acted in good faith.") (emphasis in original).

Moreover, the cases to which Defendants cite in arguing that Mr. Wood's opinion is admissible are not on point because they do not pertain to expert testimony. In fact, Defendants fail to cite to any legal authority in support of their proposition that it is appropriate for an expert to testify about Defendants' purported good faith or lack of bias. Although Mr. Meyer may opine that Defendants would have earned the same amount of money from their clients irrespective of the type of investment that Defendants recommended, it is improper for Mr. Meyer to assert conclusions about their motive, intent, or state of mind in recommending ANI Notes. Such conclusions are reserved for the trier of fact, not for an expert witness.

Accordingly, the Court GRANTS Plaintiff's Motion in Limine to exclude the portions of Mr. Woods' expert testimony regarding Defendants' purported good faith or lack of bias.

IV. CONCLUSION

Based on the foregoing, this Court DENIES Defendants' Motions in Limine Nos. 1-4, and GRANTS Plaintiff's Motion in Limine.

IT IS SO ORDERED.


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