Free Memorandum in Opposition - District Court of California - California

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1 2 3 4 5 6 7 8 9 10 11 12 UNITED STATES DISTRICT COURT 13 NORTHERN DISTRICT OF CALIFORNIA 14 SAN FRANCISCO DIVISION 15 16 17 18 19 20 and 21 22 23 Relief Defendants. 24 25 26 27 28 FAHEY FUND, L.P., FAHEY FINANCIAL GROUP, INC., INTERNATIONAL TRADE & DATA, and ITD TRADING, Action Filed: September 26, 2007 SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. ALEXANDER JAMES TRABULSE, Defendant, Date: Time: Dept. December 6, 2007 8:00 a.m. Courtroom 9, 19th Floor Case No. C-07-4975 WHA DEFENDANTS' OPPOSITION TO PLAINTIFF'S MOTION FOR PRELIMINARY INJUNCTION Attorneys for Defendants ALEXANDER JAMES TRABULSE, FAHEY FUND, L.P., FAHEY FINANCIAL GROUP, INC., INTERNATIONAL TRADE & DATA, and ITD TRADING KEKER & VAN NEST, LLP MICHAEL D. CELIO - #197998 CLEMENT S. ROBERTS - #209203 JO F. WEINGARTEN - #246224 710 Sansome Street San Francisco, CA 94111-1704 Telephone: (415) 391-5400 Facsimile: (415) 397-7188 Email: [email protected] [email protected] [email protected]

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1 2 3 4 5 6 7 B. 8 9 10 11 C. 12 13 14 15 F. 16 17 18 19 20 21 22 23 24 25 26 27 28 IV. D. E. I. II. III.

TABLE OF CONTENTS Page Introduction..........................................................................................................................1 Statement of Facts................................................................................................................2 Argument .............................................................................................................................3 A. The SEC must make a substantial showing of both past violations and a likelihood of future violations of the securities laws. ...........................................3 The SEC cannot establish that the defendants have violated the securities laws. .........................................................................................................4 1. 2. The SEC cannot establish past violations of the Exchange Act ..................4 The SEC cannot establish past violations of the Investment Advisers Act.................................................................................................6

The SEC cannot establish the likelihood of future violations of the securities laws. .........................................................................................................9 The Court should not prevent the Fund from defending itself...............................10 The SEC's demand for expedited discovery is untethered to any claim of past or future harm.............................................................................................12 The Defendants' Alternative Proposal Should Be Adopted Instead of the SEC's Requested Injunctions...........................................................................16

Conclusion .........................................................................................................................17

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TABLE OF AUTHORITIES Page(s) Federal Cases Fed. Sav. & Loan Ins. Corp. v. Dixon, 835 F.2d 554 (5th Cir. 1987) .................................................................................................... 11 FTC v. Amy Travel Serv., Inc., 875 F.2d 564 (7th Cir. 1989) .................................................................................................... 11 Goldstein v. SEC, 451 F.3d 873 (D.C. Cir. 2006)............................................................................................ 6, 7, 9 Picard Chem. Inc. Profit Sharing Plan v. Perrigo Co., 940 F. Supp. 1101 (W.D. Mich. 1996) .................................................................................... 11 SEC v. Bowler, 427 F.2d 190 (4th Cir. 1970) .................................................................................................... 13 SEC v. Cavanaugh, 155 F.3d 129 (2d Cir. 1998) ....................................................................................................... 3 SEC v. Colello, 139 F.3d 674 (9th Cir. 1998) .................................................................................................... 11 SEC v. Dain Rauscher, Inc., 254 F.3d 852 (9th Cir. 2001) ..................................................................................................... 9 SEC v. Dowdell, 175 F. Supp. 2d 850 (W.D. Va. 2001) ...................................................................................... 11 SEC v. Edwards, 540 U.S. 389 (2004).................................................................................................................... 9 SEC v. Phan, 500 F.3d 895, 907-08, 2007 WL 2429365, at *8........................................................................ 9 SEC v. Ross --- F.3d ----, 2007 WL 2983707, at *8 (9th Cir. Oct. 15, 2007) .............................................. 11 SEC v. Unifund SAL, 910 F.2d 1028 (2d Cir. 1990) ........................................................................................... 3, 4, 10 SEC v.Merrill Scott & Assoc., Ltd., 505 F. Supp. 2d 1993 (D. Utah 2007)......................................................................................... 6 U.S. v. Payment Processing Ctr., LLC., 439 F. Supp. 2d 435 (E.D. Pa. 2006) ........................................................................................ 11 Other Authorities 15 U.S.C. § 80b-6(1)....................................................................................................................... 6 15 U.S.C.80b-6(2)........................................................................................................................... 6 Exchange Act §17(a)....................................................................................................................... 4 Exchange Act10(b) ......................................................................................................................... 4 Investment Advisers Act§ 206................................................................................................ 4, 6, 9 Rule 10b-5....................................................................................................................................... 4 Securities Act § 5 ............................................................................................................................ 4 ii

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I.

Introduction

The SEC's motion for a preliminary injunction seeks relief that is not needed to preserve the status quo and is not needed to prevent future harm. Although one would hardly know it from the SEC's motion, before the SEC filed that motion Mr. Trabulse stipulated to a broad set of measures preserving the status quo during this litigation. Specifically, Mr. Trabulse agreed (and the Court ordered) that he will: not take on any new investors; not cash any investors out of the Fund; immediately produce a list of both his and the Fund's bank and brokerage accounts, and provide monthly reports to the SEC on various aspects of the Fund's activity.1 In light of these agreements, the vast bulk of the SEC's motion is moot. Indeed, only two disputed issues remain: (1) whether the Court should prevent the Fund from spending money to defend itself and/or its general partner; and (2) whether the Court should grant the SEC's request for expedited and early expert discovery. The Court should deny both requests for at least four reasons. First, the SEC has not established--as it must to prevail on any request--the existence of past violations of the securities laws. As explained below (and in the pending motion to dismiss) the SEC's alleged violations of the securities laws are not even coherent and rely on logical inferences that are demonstrably wrong. Second, the SEC cannot show--again, as it must to prevail--that future violations of the securities laws are highly likely unless the Court grants the SEC's additionally requested relief. Again, as explained below, the parties' existing stipulation and the Court's order thereon already make most securities law violations impossible. Third, the SEC's request to prevent the Fund from defending itself or Mr. Trabulse is exceedingly disfavored under the law. Thus, the SEC cannot prevail on this request unless it can show that it is absolutely necessary to prevent a future violation of the securities laws. But, as discussed below, the SEC is simply guessing that the relief it seeks will prevent such a

As used herein, "the Fund" refers to the Fahey Fund, L.P., Fahey Financial Group, Inc, International Trade & Data and to ITD Trading.

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violation--it does not actually know that to be true and has introduced literally no evidence supporting that proposition. Fourth, the SEC's request for expedited discovery has no logical connection to preventing future violations of the securities laws. Moreover, as discussed below, the SEC already has taken nine months-worth of discovery, including taking more than 30 depositions, subpoenaing both Mr. Trabulse and third parties, and reviewing thousands of pages of documents. Under these circumstances, its claim that discovery must be expedited is unsupportable. II. Statement of Facts

The SEC's complaint is brought against defendant Alexander James Trabulse and the socalled "relief defendants:" Fahey Fund, L.P., Fahey Financial Group, Inc., International Trade & Data and ITD Trading (together the "Fund"). See SEC Complaint ("Compl.") ¶¶ 8-11. Mr. Trabulse is the General Partner of Fahey Fund, L.P. See Declaration of Clement S. Roberts ("Roberts Decl."), Ex. A. (Fahey Fund Partnership Agreement or "Partnership Agreement") § 4.01. As acknowledged by the SEC, the Fund was operated as a single hedge fund. Compl. ¶ 12. Under the Partnership Agreement, the Fund's "primary purpose" is to invest in a large range of investment opportunities, broadly defined as "publicly listed opportunities, natural resources and any other investment of a unique long-term character." Partnership Agreement § 2.01, Roberts Decl., Ex. A. In addition, under the Partnership Agreement, the Fund's general partner is authorized to withdraw up to 25% of the Fund's profits ­ which monies he must use to pay both the Fund's expenses and the his own compensation. Id. at §§ 5.12, 6.06. But nothing in the Partnership Agreement limits how this money can be spent or designates how it should be split between expenses and compensation. Id. Prior to the filing of the SEC's motion, the parties entered into a stipulation aimed at preserving the status quo by limiting the actions Mr. Trabulse can take with respect to the Fund and by requiring him to report on certain aspects of the Fund's activities. See Stipulation and Order Concerning Injunctive Relief Dated October 18, 2007 ("Trabulse Stip."); Roberts Decl. ¶ 2

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3. Specifically, Mr. Trabulse agreed, and the Court subsequently ordered him: · not to make any payments, transfers or distributions to any Fund investors other than those needed to "pay legitimate and reasonable expenses incurred in the ordinary operation of the" Fund (§§ II and VIII); not to accept any investments from any investors (§ III); not to transfer any funds or assets located in the US to jurisdictions outside the US (§ VII); not to transfer or convey any of the Fund's physical assets other than to sell them to a bona fide third party (§ V); to limit future investments to "securities, derivatives, commodities contracts, foreign currency or other exchange-traded investments" (§ IV); to provide the SEC with a list of all financial accounts in which Mr. Trabulse or the Fund have an interest (§ I); to provide the SEC with monthly accountings of all funds or assets transferred out of any of the Fund's accounts (§ VI); and to provide the SEC with a monthly accounting of all funds and assets used to pay the Fund's operating expenses (§ IX).

· · · · · · ·

During the negotiations leading up to this stipulation, the SEC made it clear that it was not seeking and would not seek to remove Mr. Trabulse from continuing to manage the Fund during this litigation. Roberts Decl. ¶ 6. The SEC also made it clear that, despite the stipulation, it intended to seek preliminary relief in order to prevent the Fund from spending any money to defend itself or Mr. Trabulse in this litigation. Id. ¶ 7. III. A. Argument

The SEC must make a substantial showing of both past violations and a likelihood of future violations of the securities laws. A preliminary injunction is only "appropriate if the SEC makes a substantial showing of

likelihood of success as to both a current violation and the risk of repetition." SEC v. Cavanaugh, 155 F.3d 129, 132 (2d Cir. 1998) (emphasis added). Where the SEC seeks "more than preservation of the status quo" courts "require a more substantial showing of likelihood of success, both as to violation and risk of recurrence." SEC v. Unifund SAL, 910 F.2d 1028, 1039 (2d Cir. 1990). 3

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In the present case the SEC must meet this heightened evidentiary standard because it is seeking relief designed not merely to preserve the status quo, but to prevent the Fund from litigating the case, to enhance the SEC's discovery position, and to generally enjoin the defendants from "violating the securities laws." Because such "prohibition[s] against future securities law violations...[are] among the sanctions that we have characterized as having grave consequences..." the SEC must demonstrate "a more substantial showing of likelihood of success, both as to violation and risk of recurrence...." Id. at 1039,1040 (citations omitted). As discussed below, however, the SEC has not even come close to meeting this standard. B. The SEC cannot establish that the defendants have violated the securities laws. The SEC has not established--as it must to prevail on any request for injunctive relief-- that it is likely to show successfully that the defendants have violated the securities laws. Indeed, the violations that the SEC alleges are in many places not even coherent and rely on logical inferences that are demonstrably wrong. The securities laws that the SEC claims (in its motion) the defendants have violated are § 206 of the Investment Advisers Act, as well as Sections §§17(a) and 10(b) of the Exchange Act and Rule 10b-5 enacted thereunder.2 See Compl. ¶¶ 3846. We will address each of them in turn below: 1. The SEC cannot establish past violations of the Exchange Act

As set forth in the defendants' motion to dismiss, the SEC has not even alleged a cognizable claim under the Exchange Act. Generally speaking, the SEC contends that Mr. Trabulse misled investors by telling them that the Fund was worth a given amount (call it "X" dollars) while, at the same time, the Fund's bank and brokerage accounts contained less than "X" dollars. See e.g. Compl. ¶ 14 ("in the second quarter of 2005 [he] reported to investors collective gains of approximately $2.5 million. . . . In reality the Fund realized a net loss in its brokerage accounts of more than $200,000.") (emphases added); Plaintiff SEC's Motion for Preliminary Injunction (the "Motion") at 5:12-16 ("Trabulse reported to investors that the fund's net assets . . . totaled approximately $50 million. . . . In reality the fund's brokerage account records and

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The SEC complaint also alleges a violation of § 5 of the Securities Act. See Compl. ¶¶ 47-49. The SEC apparently is not seeking injunctive relief related to that cause of action. 4
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bank statements show the fund's value was only approximately $10 million) (emphasis added). Yet, as the SEC alleges elsewhere in both its Complaint and in the current motion, Mr. Trabulse invested a "significant portion" of the Fund's capital in a wide variety of assets that are not held in brokerage accounts. See, e.g., Compl. ¶¶ 28-30; Motion at 9. Because the Fund's bank and brokerage accounts represent only a portion of the Fund's assets, the value of the whole Fund cannot be determined by looking only at those accounts. It is as if Mr. Trabulse told investors that his car had four people in it, and the SEC were trying to claim a likelihood of success based on evidence that only two people were in the front seat. The argument simply does not hang together. The Court should not accept such nonsensical logical inferences either in deciding this motion or the defendants' motion to dismiss. Perhaps recognizing the weakness of its presentation on this issue, the SEC has--in the current motion--alleged that Mr. Trabulse failed to disclose how he used investor money. Thus, for example, the SEC claims that Mr. Trabulse "failed to tell investors that Fahey Fund invested or planned to invest in jewelry, real property or rugs." Motion at 9. The SEC is not likely to succeed on this claim because the Fund's partnership agreement clearly states that "capital may be invested in other businesses" and that the Fund's mission will be to invest in "publicly listed opportunities, natural resources, and any other investment of a unique long-term character[.]" Roberts Ex. A § 6.09 and § 2.01 (emphasis added). Thus, the idea that Mr. Trabulse concealed this information from investors is simply insupportable. Moreover, even in the carefully chosen evidence submitted by the SEC, it is clear Mr. Trabulse did discuss his investments with the investors. For example, the SEC asked Urbano Maffei whether Mr. Trabulse had ever told him that he was investing in things like pearl necklaces. Mr. Maffei indicated that Mr. Trabulse had, and then explained that it had been discussed in the phone call "that we had five or six seeks ago. He brought up that he was investing in investment quality pearls. And I said, oh, that's fine as long as they're making money for us. That's okay." Schneider Decl, Ex. 26 at 112. Similarly, investor Suzanne Gregg told the SEC that she "knew that [Mr. Trabulse] was interested in Panama. And property in Panama" and that he had "[a] general interest for a real estate deal there. The potential growth." 5

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Schneider Decl., Ex. 34 at 81-82. Similarly, the SEC's own evidence shows that investors did not consider the information material. Again, for example, the SEC pushed Mr. Maffei to say that Mr. Trabulse's intent to invest in "other assets" was material--and he simply wouldn't. As he put it, "And so, yea, I think I'd like to know. But, again, its not going to change my mind or wouldn't have changed my mind at the time of the initial investment." Schneider Decl., Ex. 26 at 113. Similarly, Mr. James Banister was asked if "the type of investment that the Fahey Fund was invested in, was that important to you", and he responded with a simple "no." Schneider Decl., Ex. 35 at 63. Importantly, the defendants were not present in these interviews, have not been given copies of the transcripts and have not had a chance to depose the witnesses. Thus, these statements come from the portions of the evidence that the SEC chose as most favorable to its case. It is highly likely therefore that, unless the SEC succeeds in preventing the Fund from mounting a defense, the SEC's case will only get worse--not better. 2. The SEC cannot establish past violations of the Investment Advisers Act

In order to obtain relief on its claim brought under the Investment Advisers Act, the SEC must show (among other things) that Mr. Trabulse breached an obligation to the Fund itself as opposed to an obligation he owed to the Fund's clients.3 SEC v.Merrill Scott & Assoc., Ltd., 505 F. Supp. 2d 1993, 2005 (D. Utah 2007) (elements of the claim include a breach of fiduciary duty); Goldstein v. SEC, 451 F.3d 873, 881 (D.C. Cir. 2006) (under the Advisers Act, advisers owe "fiduciary duties only to the fund, not to the fund's investors.") (emphasis added); 15 U.S.C. §§ 80b-6(1) and (2) (Section 206). Thus, to obtain an injunction based on this claim, the SEC must establish a "substantial showing of likelihood" that Mr. Trabulse previously breached his

3

The SEC claims that a § 206 claim can be based upon a breach of the investment adviser's "fiduciary duties to his clients" and implies that these claims can thus be based upon misrepresentations made to investors and potential investors. See Motion at 13:22-14:7. However, as detailed in defendants' motion to dismiss the SEC's complaint, a recent case involving § 206 claims against a hedge fund general advisor makes clear that claims brought under the Advisers Act must allege a breach of fiduciary duty to the Fund itself, not to the investment clients. See Goldstein v. SEC, 451 F.3d 873, 881 (D.C. Cir. 2006). This is because hedge fund general partners, under the Advisers Act, owe "fiduciary duties only to the fund, not to the fund's investors." Id. (emphasis added). 6
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duties to the Fund itself 4 by withdrawing more than he was allowed to withdraw from the Fund (i.e., more than 25% of the Fund's profits). Cavanagh, 155 F.3d at 132 (emphasis added); Goldstein, 451 F.3d at 881. The SEC has not and cannot make such a showing because it has neither alleged nor submitted evidence about how much money the Fund made nor how much Mr. Trabulse withdrew. In particular, the SEC has submitted no evidence whatsoever regarding what the Fund's profits have been over any period of time, no evidence about what the Fund is likely to earn during the litigation, no evidence about how much Mr. Trabulse has withdrawn and no evidence suggesting that the costs of defending this litigation are (together with those withdrawals) likely to exceed 25% of the Fund's lifetime profits. Motion at 2-12. The SEC does not mention these things because it did not bother to gather the necessary evidence prior to filing suit even though it was conducting an investigation. The SEC seeks to paper over its inability to say how much Mr. Trabulse withdrew by attacking what Mr. Trabulse spent money on. The SEC alleges that Mr. Trabulse "used the...Fund bank accounts to pay for a wide variety of personal, and unauthorized, expenses".5 Motion at 7:21-22; see also Compl. ¶¶ 22-27. The SEC then lists some examples of withdrawals and transfers that Mr. Trabulse made from the accounts. Id. at 7:21-9:12; 16:11-20 ("Defendant...misappropriated investor funds, using the...Fund as a virtual piggy bank...") But these allegations--scandalous as they may sound at first blush--are totally irrelevant because of

Although the SEC's complaint contains numerous other allegations, virtually all of them involve an alleged breach of duty to the Fund's investors, not an alleged breach of duty to the Fund itself. See Compl. ¶¶ 13-21 (alleged misrepresentations made in statements and documents given to investors); 28-31 (alleged misrepresentations made about items invested in); 32-36 (alleged failure to file registration statement for fund). These allegations are completely irrelevant as § 206 requires a breach of duties to the Fund, not the investors. 5 In a few places, the SEC appears to want to argue that Mr. Trabulse violated a duty to the Fund by failing to take reasonable steps to determine whether or not he was entitled to withdraw additional money from the Fund. See Motion at 8:2-5. But this argument suffers from several fatal flaws. First, the SEC has submitted no evidence to support its contention that Mr. Trabulse's expenditures were above 25% of the Fund's profits. Second, even if Mr. Trabulse had withdrawn money without knowing how much he was entitled to withdraw, those withdrawals would not violate his duty to the Fund unless he actually withdrew too much. But, as explained below, the SEC has submitted zero evidence that Mr. Trabulse ever withdrew more than that to which he was entitled. 7
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the way the Fund is structured. Under the terms of the Fund's Partnership Agreement, Mr. Trabulse is entitled to withdraw up to 25% of the Fund's profits--from which he must pay the Fund's expenses and take his compensation. See Partnership Agreement, Roberts Decl., Ex. A. In particular, the Partnership Agreement says: All Fund profits and losses will be determined at the completion of each trading campaign. These profits will be allocated as to the ratio of each partner's capital account to the Fund's total capital. Thereafter, 25% of the net profit of each limited partner shall be payable and distributable to the General Partner. .... No partner shall be entitled to any salary, but the General Partner shall receive the right to draw expenses consistent with prudent and sound management of the trading activities, such expenses being charged against his share. See id. at §§ 5.14, 6.06. The Partnership Agreement does not otherwise limit how Mr. Trabulse can spend the 25% amount or designate how that amount must be split between expenses and compensation. See id. In other words, under the Partnership Agreement, Mr. Trabulse's duty to the Fund is not defined in terms of what he spends the money on, but is defined in terms of how much he spends. Thus, Mr. Trabulse's only obligation to the Fund with respect to withdrawing money is not to withdraw more than 25% of the Fund's profits for the combination of business expenses and personal compensation. Moreover, under the Partnership Agreement, Mr. Trabulse had no obligation to keep Fund expenses separate and distinct from his personal compensation. See id. Indeed because the Partnership Agreement requires Mr. Trabulse to pay Fund expenses out of his personal compensation, such a separation is impossible.6 Id. § 6.06. Thus, all of the SEC's evidence about the way Mr. Trabulse allegedly spent money is irrelevant; the question is whether Mr. Trabulse has ever withdrawn more than 25% of the Fund's profits. On that critical question, however, the SEC has introduced no evidence whatsoever. Because the SEC has introduced no evidence to establish that Mr. Trabulse breached his obligation to the Fund by withdrawing more than 25% of the Fund's profits, the SEC literally has For this reason, the opinion of the SEC's "expert" ­ Mr. Fong ­ that it is customary in the hedge fund industry to separate business and personal expenses is simply irrelevant. Fong Decl. ¶ 8. Although the Fahey Fund's organizational structure is unusual, there is nothing improper about it. Indeed, the structure perfectly aligns the interests of the manager with the interests of the investors in so far as both have an interest in running the Fund as efficiently as possible. It also simplifies life for the investors, who do not have to keep track of the true costs of various 8
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no factual basis for its claim that Mr. Trabulse previously violated the securities laws by misappropriating amounts from the Fund. As such, it has no basis to seek an injunction based on its claim that Mr. Trabulse previously violated § 206 of the Advisers Act. C. The SEC cannot establish the likelihood of future violations of the securities laws. Even if the SEC could show a past violation of the securities laws--which it cannot--its request for relief would still be meritless. The SEC cannot show that future violations of the securities laws are highly likely unless the Court grants the SEC's additionally requested relief; this failure is fatal to the SEC's claims. The parties' existing stipulation and the Court's existing order thereon already makes future securities law violations virtually impossible. The SEC is only entitled to relief on its Exchange Act claims if it can show that there is a risk that Mr. Trabulse will make future misrepresentations in connection with the offer or sale of securities. See SEC v. Phan, 500 F.3d 895, 907-08, 2007 WL 2429365, at *8 (quoting SEC v. Dain Rauscher, Inc., 254 F.3d 852, 856 (9th Cir. 2001)) (emphasis added).7 Similarly, in order to obtain an injunction based on its Investment Advisers Act claim, the SEC must establish that there is a likelihood that Mr. Trabulse will breach his duty to the Fund itself (i.e., withdraw excess amounts in the future). See Cavanagh, 155 F.3d at 132, 135; Goldstein, 451 F.3d at 881. Here, the Parties existing stipulation leaves virtually no risk that Mr. Trabulse will violate any of these statutes. Specifically, there is no risk that he will make future misrepresentations in connection with the offer or sale of securities because he has already agreed not to offer or sell securities at all. See Trabulse Stip. §§ II, III. This includes Mr. Trabulse's agreement that he will not "mak[e] a payment, transfer or distribution, to any people who have invested in and/or purchased securities from" the Fund" and will not "accept[] any investments from any current or prospective Investors" Id., at §§ 2, 3. The SEC's request for an injunction on these claims is moot because any such violations are already prohibited; there is, by definition, no risk of future violations. fees and commissions. 7 In the context of a hedge fund, the requirement that the challenged conduct involve the purchase or sale of a security is met when the conduct involves the purchase or redemption of an interest in the fund itself. See SEC v. Edwards, 540 U.S. 389, 393 (2004). 9
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Similarly, because the stipulation and order requires Mr. Trabulse to give the SEC a monthly report on all money that is transferred out of the Fund, there is virtually no risk that money will "disappear." Indeed, if the SEC were concerned about outright theft, it would not agree (as it has) that Mr. Trabulse should remain in charge of managing the investor's money during the pending litigation. Nor can the SEC claim that it has shown that if the Fund's money is spent on a legal defense the result is likely to be a violation of the Investment Advisers Act. The SEC's motion claims that it is "necessary to prevent [Mr.] Trabulse from making any distributions to himself" because "any distribution by [Mr.] Trabulse at this point is inherently suspect, as there can be no assurance that Trabulse is entitled any amount he may describe as `his' share." Motion at 17:1619. But as the Court can see--even from the SEC's language--this is pure speculation. As discussed above, the SEC has made no effort to prove what Mr. Trabulse has withdrawn, no effort to quantify the Fund's profits, no effort to determine what the Fund is likely to earn during the litigation and no effort to evaluate the impact of the Fund paying its legal bills. See Motion at 13. In light of the onerous burdens these broad injunctions would impose on defendants (including denying them the right to defend this action), the SEC's failure to produce this evidence is fatal to its request for preliminary relief. See Unifund SAL, 910 F.2d at 1039 (noting that the SEC's obligation "to make a more persuasive showing of its entitlement to a preliminary injunction the more onerous are the burdens of the injunction it seeks."). D. The Court should not prevent the Fund from defending itself The SEC's request to prevent the Fund from defending itself or Mr. Trabulse is disfavored under the law ­ and for good reason. The SEC cannot prevail on this request unless it can show that it is absolutely necessary to prevent a future violation of the securities laws ­ a higher standard than is required to obtain a more pedestrian preliminary injunction. But the SEC cannot establish that the Fund's legal defense is in any way improper, and it is simply guessing that the relief it seeks will prevent such a violation. The SEC has introduced literally no evidence supporting its claim. The Fund has an interest in defending its employees and agents, including its general 10
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partner, without the Court assuming the alleged wrongdoing prior to reaching judgment.8 See Fed. Sav. & Loan Ins. Corp. v. Dixon, 835 F.2d 554, 565 (5th Cir. 1987) ("[T]his suit was brought to establish the defendants' wrongdoing; the court cannot assume the wrongdoing before judgment in order to remove the defendants' ability to defend themselves. The basis of our adversary system is threatened when one party gains control of the other party's defense . . . "). As Mr. Trabulse and the Fund's alleged liability has not yet been proven, they should not be prevented from defending themselves. See U.S. v. Payment Processing Ctr., LLC., 439 F. Supp. 2d 435, 440 (E.D. Pa. 2006) ("Releasing restrained funds to pay attorney's fees is premised on the fact that wrongdoing is not yet proven when the fee application is made."). Moreover, this Court's central concern should be the fairness of the proceedings, and a fair result cannot be reached if Mr. Trabulse and the Fund cannot retain counsel in this complex legal matter. See SEC v. Dowdell, 175 F. Supp. 2d 850, 856 (W.D. Va. 2001) ("This court's central concern is the fairness of the proceedings. The court does not believe that it could achieve a fair result at the preliminary injunction hearing were it to deny defendants the ability to retain counsel. This is a complex legal matter, and lawyers are essential to the presentation of issues related to it."). Indeed, the right to counsel is so important that courts have allowed even frozen funds to be used to fund a defense. See FTC v. Amy Travel Serv., Inc., 875 F.2d 564, 575-76 (7th Cir. 1989) (allowing defendant to fund attorneys fees from frozen assets). Where, as here, the The SEC apparently believes that it can prevent the Fund from funding its defense because the Fund is only a "relief defendant" which is not a real party to this action. See SEC's Memorandum in Support of its Motion for Preliminary Injunction ("Motion") at 3-4. The law is clear, however, that the entities that make up the Fund are actual defendants in this action because they have a claim to the property in dispute. SEC v. Colello, 139 F.3d 674, 676, 677 (9th Cir. 1998) (holding that nominal defendants can be named in SEC actions but limiting the definition of such defendants to those who simply "hold[] the subject matter of the litigation in a subordinate or possessory capacity as to which there is no dispute" and who "lack...a legitimate claim to the funds"). Id. at 676 (citing Picard Chem. Inc. Profit Sharing Plan v. Perrigo Co., 940 F. Supp. 1101, 1137 (W.D. Mich. 1996) (Plaintiffs cannot name parties as nominal defendants "without a showing that they possess illegally obtained profits without a legitimate claim to them.")). Here, it is undeniable that the Fund has an interest in the property at issue because the SEC is trying to recover funds that make up the Fund's working capital. See SEC v. Ross, --- F.3d ----, 2007 WL 2983707, at *8 (9th Cir. Oct. 15, 2007) (defining relief defendants as those who "are in possession of funds to which they have no rightful claim."). Thus, given that the Fund has an interest in the property at issue, and a rightful claim to it, and given that the SEC has never attempted to show otherwise, the Fund defendants must be treated as real parties in interest. These parties cannot be denied a right to defend themselves. 11
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Fund continues to operate, the ability to fund a defense is even more appropriate. Additionally, to the extent the SEC seeks to use any of these injunctions to deny the Fund from defending itself, or its General Partner, in this litigation, it is worth noting that the SEC has already stipulated that Mr. Trabulse and the Fund should be permitted to pay the Fund's "reasonable business expenses" during the litigation. See Trabulse Stip. § VIII. Through this stipulation, the SEC has effectively admitted that Mr. Trabulse can spend money from the Fund without running afoul of his duty to the Fund or violating securities laws. Thus, given the privileged status of the right to counsel in our legal system, the SEC should not now be allowed to impose any broader, and unjust, limitations on how the Fund spends its money.9 For these reasons, the SEC's request that the Court deny the Fund, and Mr. Trabulse, the right to fund their defense must be rejected. However, as discussed in more detail in below, Mr. Trabulse wants the Court to be assured that the Fund is being run completely above-board during the litigation. Thus, he is prepared to submit to (and hereby proposes) very strict limitations on how he spends the Fund's capital during the litigation. These restrictions should help assuage any such concerns while also allowing the Fund, and Mr. Trabulse, to defend themselves in this litigation and allowing Mr. Trabulse to receive minimal compensation for the Fund-related work he will do during the course of this litigation. All he asks in return is that he be permitted to defend himself. E. The SEC's demand for expedited discovery is untethered to any claim of past or future harm. Finally, the SEC's request for expedited discovery has no logical connection to preventing future violations of the securities laws. The SEC, with its broad investigative powers, has already taken months worth of discovery, including dozens of depositions and collecting thousands of pages of documents from both defendants and third parties. Under these circumstances, its claim that discovery must be expedited is unsupportable.
9

Given that the SEC agrees that Mr. Trabulse will continue to manage the Fund during the course of this litigation, it is also unfair and unjust to deprive him of the right to all compensation for any Fund work that he will do in the future. See Roberts Decl. ¶ 6. Thus, as detailed further below, Mr. Trabulse proposes that the Court allow him to withdraw $25,000 per month from the Fund to cover Fund expenses and his living expenses. 12
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The SEC has requested four kinds of so-called "ancillary" relief: (1) a requirement that Mr. Trabulse conduct an expert "accounting" and submit a report on that accounting to the SEC immediately; (2) expedited discovery "including depositions and documents from the defendant, the relief defendants and other working with them"; (3) an order preserving documents and (4) the appointment of a monitor, paid for by defendants, who will, effectively, conduct expert discovery for the SEC, including internal interviews of defendants' associates. See Proposed Order §§ IV, V, VI, VII. Before granting such relief, the Court must consider "the disadvantages and possible deleterious effect[s]" of granting it, and weigh those effects "against the considerations indicating the need for such relief." SEC v. Bowler, 427 F.2d 190, 198 (4th Cir. 1970). Here, the deleterious effects of granting such relief far outweigh any of the SEC's claimed needs for such relief. These requests should all be denied. First, the SEC's request that Mr. Trabulse prepare an expert report for the SEC (covering broad 8 categories of information) would do nothing to prevent any future violation of the securities laws, but would impose large burdens upon defendants. See Proposed Order § VII. The SEC cannot even bring itself to argue that it "needs" this relief in order to make any potential violation of the Securities Laws less likely because, of course, it would not. See Motion at 18. Instead, the only "need" claimed by the SEC is that the report "will assist the Court to determine the scope of the defendant's fraudulent scheme .... [and] to know the value is of their respective share[s]." Id. at 18. But the value of the investors' shares is, of course, the key contested issue in this case. The fact that an issue is contested cannot be a basis for ordering special relief. This is especially true given that it is clear from the face of the SEC's proposed injunctive order that requiring defendants to provide, and pay for, an early expert report on numerous topics would further disrupt the Fund's operations and impose a significant financial burden on the defendants. See Proposed Order § VII. The report that the SEC seeks sounds like nothing more than a litigation-related expert report. The SEC has cited no law, and made no rational argument as to why the defendants should be required to prepare an expert report for the plaintiff's use at the outset of the discovery process. Every plaintiff suing over whether a defendant's accounting was correct would, no 13

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doubt, like to require that defendant to prepare an expert accounting report for its use at the outset of the litigation. But the mere fact that the SEC (or any other litigant) wants such a report is not a ground for requiring the defense to create it. Second, the SEC's "ancillary" request for numerous types of expedited discovery, including expedited depositions, interrogatories, document production and requests for admission, is equally flawed. See Proposed Order § IV. The SEC's only purported "need" for seeking such material is that "to date, the Commission has not obtained from Trabulse or the relief defendants documentation or testimony that substantiates the fund's purported value." Motion at 18. But this is just slight of hand ­ it means nothing more than that the SEC disputes what Trabulse has said about the Fund's value and thinks that he has not proven it to the SEC's satisfaction. Of course he hasn't ­ if he had the parties would not be in litigation. But the mere fact that there is a dispute about the value of the Fund does not mean that the normal discovery process (which is, after all, designed for the express purposes of resolving factual disputes) is inadequate. Moreover, the Fund has produced documents to the SEC--thousands upon thousands of pages--in response to its subpoenas. See Roberts Decl. ¶ 9. Indeed, as the Court can see from the correspondence submitted in connection with the defendants' motion to dismiss, the SEC's attorneys have not even read much of the important material they were given. See Roberts Decl., Ex. B. This request is particularly inappropriate given the SEC's extensive powers that it can-- and has--used in connection with this matter. Indeed, one look at the massive stack of paper filed in support of the SEC's motion refutes the SEC's claim that it is lacking for information. The SEC spent more than nine months taking discovery, including obtaining documents from the defendants and from numerous third parties, and taking testimony from more than 30 witnesses. See Roberts Decl. ¶ 8. Under those circumstances, for the SEC to argue that it needs expedited discovery is a purely tactical move designed to further extend its head start. Third, the SEC's request for an order preserving documents is unnecessary. See Proposed Order § V. The Court has already issued such an order as part of its standing orders. See Supplemental Order to Order Setting Initial Case Management Conference in Civil Cases 14

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before Judge William Alsup [Docket No. 9], at ¶ 4 (ordering that "[a]s soon as a party has notice of this order, . . . the party shall take such affirmative steps as are necessary to preserve evidence related to the issues presented by the action . . . ."). The defendants are already bound by that order, and no other order is necessary. This is especially true given that there is no allegation of missing or destroyed documents nor any other discovery misconduct. Fourth, the SEC's request for the appointment of a monitor, to be paid for by the Fund, is also without justification. See Proposed Order § VI. This is especially true given the broad powers the SEC wants the monitor to have, including the power to have full access to all documents, the power to interview, and obtain information from, defendants and anyone "associated" with defendants, the power to contact and interview all investors and the power to hire whoever the monitor wants to help in such tasks. Id. The SEC's only alleged need for this request is that it wants "to assure that all efforts are made to preserve and protect the remaining investor assets." Motion at 19. But the SEC has not shown that Mr. Trabulse has done anything that is not in keeping with preserving the investors assets--certainly the SEC has not shown that Mr. Trabulse has made unwise investments nor would such a showing provide a basis for the SEC's request. Moreover, the burdens imposed on the Fund here are enormous ­ on its face, the SEC's proposed order requires the Fund to pay for the monitor, pay for any, virtually unlimited work the monitor decides to conduct and pay for any employees the monitor wants to hire, in addition to facing the disruption of having the monitor act upon its broad powers in however it desires. See Proposed Order § VI and § VI (F), (G), (H). Again, although every plaintiff in every case would love to have the Court appoint an expert inquisitor to circumvent the discovery process and to ease the amount of work required to build a case, the SEC has offered no justification that merits imposing such burdens on the defendants. The only possible reasons to appoint a monitor is to prevent Mr. Trabulse from violating his prior agreement and the Court's existing order that the Fund will not take in additional money, cash out investors and the like. See Trabulse Stip. But the Court is very well able to enforce its own orders without giving the SEC a resident expert inside the defendants' operation--especially given the fact that Mr. Trabulse has stipulated (and been ordered) to 15

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provide monthly reports on all money taken from any Fund account. Thus, as a practical matter, Mr. Trabulse has already agreed to and been ordered to undertake measures that will allow the SEC and the Court to "monitor" his compliance with the Court's orders. The SEC's request for additional "monitoring" relief should be denied. F. The Defendants' Alternative Proposal Should Be Adopted Instead of the SEC's Requested Injunctions. Since the subject of preliminary relief has come up, the defense has attempted to ensure that it meets any possible concerns the Court might have about preserving the status quo during the pending litigation. But the one thing that neither the Fund nor Mr. Trabulse can agree to is to give up the ability to mount a legal defense to the SEC's suit. As a compromise, however, the defendants proposed the following to the SEC's counsel during their meet and confer sessions about Mr. Trabulse's existing stipulation, which proposal they make again to the Court. Specifically, the defense proposes that the Court order that, until further order of the Court, the only money that can be withdrawn from the fund is: (a) an amount equal to the fees and costs incurred by undersigned counsel in the defense of the litigation and (b) $25,000 per month, from which Mr. Trabulse will pay for all other Fund-related expenses and some living expenses. This proposal has several advantages. First, this proposal will ensure that a minimal amount of money is withdrawn from the Fund each month while the parties litigate the issues of how much the Fund has appreciated and how much of that appreciation Mr. Trabulse has spent on the combination of business and personal expenses. Indeed, this proposal is far more restrictive than the one to which the SEC stipulated in that it caps what can be spent from the Fund for any purpose. In the parties' stipulation, in contrast, any amount can be spent from the Fund, so long as it goes to reasonable business expenses. Second, this proposal has the substantial advantage of most closely tracking the Fund's Partnership Agreement. As discussed above, under that agreement, it makes no difference how Mr. Trabulse spends the Fund's money and instead focuses on how much is spent. The defense's proposal tracks that structure in terms of focusing on the amount and is therefore closer to what 16

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the Fund's investors signed on for. Third, and perhaps most importantly, as the SEC has recognized, it is in the investors' best interest to have Mr. Trabulse making investment decisions and managing the Fund's money during the litigation. This is true, at least in part, because ­ like many hedge funds ­ the Fund has numerous investment positions that can only be protected and cost-effectively unwound by someone who fully understands the investment strategy behind them. The only person who fully understands that strategy is the man who created it--i.e. Mr. Trabulse. But Mr. Trabulse can only remain at the helm of the Fund if he is permitted to use the Fund's capital to defend the Fund and himself, and if he is permitted to withdraw the small amount of money he needs to pay some living expenses. If the Court does not allow Mr. Trabulse to do this, it makes no sense for him to remain at the Fund. Instead, he will be forced to simply walk away--taking a job somewhere else, so that he can keep the heat on and make money to put towards his legal defense. This will, of course, more than likely result in enormous harm to the investors' capital--because the Fund will have to be unwound by an outsider who will be both exceedingly expensive, and inefficient. Thus, the best way to protect the investor's interests is to keep Mr. Trabulse on to manage their money while making sure that he takes only what is truly necessary while the valuation disputes are resolved. Finally, this is also the fairest proposition. The SEC wants Mr. Trabulse to keep managing the Fund and to keep working on behalf of the investors. Roberts Decl. ¶ 6. But, in the same breath, the SEC wants him to do it without any compensation, and without defending himself in the litigation. Thus, effectively, the SEC is trying to have its cake and eat it too ­ to have the benefit of Mr. Trabulse's expertise and management services on behalf of the investors, while relieving the investors of any obligation to pay for those services. The defendants' proposal, in contrast, seeks to ensure that the greatest possible value is preserved for the investors and that Mr. Trabulse and the Fund received basic procedural fairness as well. IV. Conclusion

Despite the deficiencies in its theories and the defendants' willingness to preserve the status quo during the litigation, the SEC has asked the Court to (essentially) declare it the victor 17

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in this litigation before the process even starts. Where, as here, the SEC has provided no justification whatsoever for taking such a radical approach, the Court should deny its request.

Dated: November 15, 2007

KEKER & VAN NEST, LLP

By: /s/ Clement S. Roberts CLEMENT S. ROBERTS Attorneys for Defendants ALEXANDER JAMES TRABULSE, FAHEY FUND, L.P., FAHEY FINANCIAL GROUP, INC., INTERNATIONAL TRADE & DATA, and ITD TRADING

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