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: jlewis@lockelord.com
David W. Klaudt
Email: dklaudt@lockelord.com
Adam Tyler
atyler@lockelord.com
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
Robert A. Hawkins
2000 McKinney Ave, Suite 1700
Dallas, Texas 75201
Ph: (214)578-1500
Fax: (214) 578-1550
Email: cweiland@pattonboggs.com
Email: rhawkins@pattonboggs.com
ATTORNEY FOR DAVID M. MARTIN
BAKER & McKENZIE LLP
Elizabeth L. Yingling
E-Mail: elizabeth.yingling@bakermckenzie.com
Laura J. O'Rourke
State BarNo. 24037219
E-Mail: laura.orourke@bakermckenzie.com
Will R. Daugherty
E-Mail: will.daugherty@bakermckenzie.com
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
E-Mail: jpete@jpetelaney.com
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.
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
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., Affidavit of Jason Lewis ("Lewis Aff."), included in the Appendix as Exhibit B; Affidavit of
S. Cass Weiland ("Weiland Aff."), included in the Appendix as Exhibit C.
10
Yingling Aff., Pages from Cangany testimony included as Exhibit 3 to Yingling Aff.
11
Exhibit 3 to Yingling Aff.
12
Yingling Aff., Redacted Questionnaire included as Exhibit 2 to Yingling Aff.
13
14
Yingling Aff., Lewis Aff., Weiland Aff.,
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
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
David W. Klaudt
Adam Tyler
atyler@lockelord.com
Dallas, Texas 75201
Tel: (214) 740-8000
Fax: (214) 756-8414
ATTORNEY FOR DEFENDANT
BRIAN D. PARDO
PATTON BOGGS LLP
S. Cass Weiland
Robert A. Hawkins
Dallas, Texas 75201
Ph: (214)578-1500
Fax: (214) 578-1550
Email: gweiland@pattonbogygs.com
Respectfully submitted,
Is/ Elizabeth L. Yingling
Laura J. O'Rourke
State BarNo. 24037219
Will R. Daugherty
E-Mail: will .daugherty@bakermckenzie.com
2300 Trammell Crow Center
2001 Ross A venue
Dallas, TX 75201
Tel.: (214) 978-3000
Fax: (214) 978-3099
J Pete Laney
1122 Colorado Street, Suite 111
Austin, TX 78701-2159
Tel: (512) 473-0404
Fax: (512) 672-6123
SCOTT PEDEN
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.
713527-vl\DALDMS
AUSTIN DIVISION
Plaintiff, Civil Action No.: 1-12-cv-00033
v.
DAVID M. MARTIN
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
David W. Klaudt
Dallas, Texas 75201
Tel: (214) 740-8000
Fax: (214) 756-8414
ATTORNEY FOR DEFENDANT
BRIAN D. PARDO
PATTON BOGGS LLP
S. Cass Weiland
Robert A. Hawkins
Dallas, Texas 75201
Ph: (214)578-1500
Fax: (214) 578-1550
Email: gweiland@pattonbogygs.com
Respectfully submitted,
Laura J. O'Rourke
Will R. Daugherty
E-Mail: will.daugherty@bakermckenzie.com
2300 Trammell Crow Center
2001 Ross A venue
Dallas, TX 75201
Tel.: (214) 978-3000
Fax: (214) 978-3099
J Pete Laney
1122 Colorado Street, Suite Ill
Austin, TX 78701-2159
Tel: (512) 473-0404
Fax: (512) 672-6123
SCOTT PEDEN
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.
713713-vl\DALDMS
APPENDIX IN SUPPORT OF DEFENDANTS' MOTION FOR SANCTIONS- Page 2
AUSTIN DIVISION
Plaintiff,
v.
DAVID M. MARTIN
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.
713560-vl\DALDMS
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
713560-vl\DALDMS
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 ;;;;;;;;;;;;;'It
PMiD. SAVAGE
713560-vl\DALDMS
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, Janua1y 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:

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 fee or mileage, this subpoena with the claim voucher

EXHIBIT
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 Commissions 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 f i l e ~ 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' provided.
I.
-1.
Havtl you bet.:n knuwn by ;my other n:unt-;'> - 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.
..
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ltl:ln'l:tge. (i!) )'\'Ur tl:une. lllt.:lud!tlg ltl,tldt.fl t!:llllV. 1!' .illy. (ill) '{<lUI' 'P"w'-:-, b1rtli
d:IIL'. diHI (lv) Y\llll' <>..:t:upattun.
-.
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-- J:t!. . ' F r<Hll
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EXHIBIT
01/17/2012 12:03 FAX 2149536503
BAKER BOTTS DALLAS

(>. /\re you ll\>W, <lf h:IH' you 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 (II) your P'lSitiPils. :1nd (Ill) thi: h<:IJ each
position.
7. Are )'<1\1 Jl(>w, or hav<: you bet:ll, :1 b<.:ne!lci-d ownt:r, dtr<.:<:tly or llHlircdly. nf live
percent m nH.H'e of' class <>f' o:quity of :tnv publidy lll.:!d <.:omp:my'.'
.N(.
I r HkntJt'y <.:nch su<:h nnnpany. :111d 'ilatl' tht: .unnunl. pt..rt..:t..nt:.tgc. :tnd
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 Sccurili<.:s ;Jnd
Exchang.; Commissllll\, agency. :1 state :Jf',l:m:y. a I"<:Jcral (If .-.;t:tk c()urt. :1
e.xc.:hange, f--"lllHlc: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 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
ur ag<:.n<:y; and (iii) !hi:' datt:(s) on whid1 you tcstiliL\1.
For t:?nch such tdentity: (i) til<: title..: or tlw prc.lL'l'<.:dmg. and (ii} lh<.. 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
01/17/2012 12:04 FAX 2149538503 BAKER BOTTS DALLAS
I 0. I Ln 1.: you l'Ver hcvn rntll1L'd a 'kf,ndant ,,r tc.:spondc:nl in :11w a...:riott PI'
hr!iught by the SI'C'. <tny kd,ral st:1te :-tgcnt.':-' IINR.:\.
:--.: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) of the nlkgatilns: (I\') PLIICnllH: olthc prtlt:etding; and
(v) tbc date of the out<::orne.
ll'ycs. l(>r r.;:tdl such pr0CCL'ding. tdcnrit'y: til thl' tJti<: ufdH.: pnc: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
IL
!!"yes, l(r 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 pr11ncding, .llhl (IVilht: daft' ot rl11.: \lllll'l>JJJL'.
If yes, l<.lr L!:t\.'h identi(y: (I) rhv ilnns<.:; (JI) the ltccnsing org;llli/.;J{I\111; (iii)
the <kit<.: tht: lic.;nse wn:; (tv) tile d:JI<: such tt:rn11nated, lv)
the datt:(SJ uf any dJ-:ciplin;try pr<:>c<:L'ding(s) yuu: :tnd (Yi) thL <l\ltconw uf ;HJ:V
sm:h dis\:tplinary prncel'ding (l'.g., repnm:tnd. susptm;ion. revucctli,,n J.
(j)
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r.
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01/17/2012 12:04 FAX 2148538503
LiCtli1Sir'l9
Orqanr.'..tJ!Ion
Datu of
or
Ct)rtifiCt1lion
BAKER BOTTS OALLAS
D11te of
Licent.o or
Cortificotkm
T
0.1lt'J(!:i) ur i;>ny
DiSciplinary

ACJw111SI You
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pnsitiu1b held. :tnd <iii) tile d:trc(s) tf Y\>ur
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(li) Le:ldcrsllip l\tsltl<>llS D:ltt'S (Iii) \lf
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I(), l'ro' id..: the r\.'questcd infonnutinn :tbout Ji1Sitfult<111 lit<Jt yuu IHIVt.:
:Hlt:ndcd beyond high school, bl'glrH11l11_!. with mo-;t tl.Tt.:nt :111d \'nrrking hud.w.ml to
tho.: dail' lh:l\ !l'tJ ..:umpktcd, high school.
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"lith. t UIUllf\
17. St:Jt<.: ernplnyment nctivitH.:s, twgnming wtth the ptt:>c:::nt and \ll,)rk1ng hut:k'.V<Ird t"
tht: datr..: tilat you ('\\mplet<::d your umkrgr:nh1att' ::>tudits. If ynu l1dd 10nr<: !lwn uno:
postllon w1Lh an ..:rnp!oy..:r. list w1d prol'i<k Lh<. tbtcs l(>r each posttion.
@010/012
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01/17/2012 1204 FAX
2148538503
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Plca:;c date and initial each page of questionn:1ire (indPding any additional pages
insert) and sign the certific:ation below.
I have rend rhc document and have answered all quc:-;tions fully and frankly.
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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
23 149 Excerpt files, detail binder one 147
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
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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 - - - - - - - - - - - - - - - - - - - - - - - ~ - - -
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Cangany_Peter_20120118
Page 241
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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.)
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* * * * *
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
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Cangany_Peter_20120118
I
Pages 245 - 246
AUSTIN DIVISION
v.
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.
DAVID M. MARTIN
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
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 good-
faith 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. S e e , ~ ' 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.
DAVID M. MARTIN
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

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