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Securities and Exchange Commission v. Life Wealth Management

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, ...


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