Free Motion to Dismiss - District Court of California - California

Case 3:07-cv-04975-WHA

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Filed 11/01/2007

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1 KEKER& VANNEST, LLP MICHAL D. CELIO - #197998
2 CLEMENT S. ROBERTS - #209203 JO F. WEINGARTEN - #246224
3 710 Sansome Street

San Francisco, CA 94111-1704
4 Telephone: (415) 391-5400
Facsimile: (415) 397-7188

5 Email: mcelio~kv.com

croberts~kvn.com

6 iweingaren~kv.com
7 Attorneys for Defendants

ALEXADER JAMES TRAULSE,
8 FAHEY FUND, L.P., FAHEY FINANCIAL

GROUP, INC., INTERNATIONAL TRADE
9 & DATA, and ITD TRADING
10
11

UNITED STATES DISTRICT COURT
12

NORTHERN DISTRICT OF CALIFORNIA
13

SAN FRACISCO DIVISION
14
15

SECURITIES AND EXCHAGE COMMISSION Case No. C-07-4975 WH
16

Plaintiff,
17

v.
18

ALEXADER JAMES TRAULSE
19

Defendant,
20

and
21

DEFENDANT ALEXADER JAMES TRAULSE'S NOTICE OF MOTION; MOTION TO DISMISS THE FIRST, SECOND, AND THIRD CAUSES OF ACTION OR, IN THE ALTERNATIVE, FOR MORE DEFINITE STATEMENT; AND SUPPORTING MEMORADUM OF POINTS AND AUTHORITIES
Date: December 6, 2007

FAHEY FUND, L.P., FAHEY FINANCIAL 22 GROUP, INC., INTERNATIONAL TRADE &

Time: 8:00 a.m.

DATA, and ITD TRAING,
23

Couroom: 9 Judge: Hon. Wiliam H. Alsup

Relief Defendants.
24
25
Date Action Filed: September 26, 2007

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DEF.'S NTC. OF MTN., MTN. TO DISMISS i SI, 2ND & 3KU CAUSES OF ACTION OR, IN THE ALT., FOR
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MORE DEFINITE STATEMENT; AND SUPPORTING MEMORANDUM OF POINTS AND AUTH. CASE NO. C-07-4975 WHA

Case 3:07-cv-04975-WHA

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2 Pa2e
6 i.
7 II.
8 III.
9
10
11

1 TABLE OF CONTENTS

3 NOTICE OF MOTION AN MOTION .........................................................................................1
4 ISSUE TO BE DECIDED...............................................................................................................1

5 MEMORADUM OF POINTS AN AUTHORITIES .................................................................1
INTRODUCTION ...............................................................................................................1

FACTUAL BACKGROUND..............................................................................................3
ARGUMENT.................................................................................................................... ...5

A.

The Cour should dismiss the first and second causes of action. .............................6
1.

The SEC has not identified the allegedly false statements with paricularty. .......................................................................................... .:..... 7
The SEC has not met its obligation to say why and how any alleged statements were false or misleading...............................................8

2.
12
13

3.

The SEC has failed to meet its obligation to allege specific facts demonstrating the materiality of any allegedly false statements. ..............10

14

4.
15

The SEC has not met its obligation to allege specific facts showing that any allegedly false statement was made "in connection with the purchase or sale of a securty." ..................................12

16

B.
17
18

The SEC's Investment Advisers Act claim also lacks the necessary paricularity. .......................................................................................................... .13

C.

The Cour should, at a minimum, requie a more definite statement of
the charges. .......................................................................................................... ..17

19

IV . CONCLUSION....................................................................................... ......................... ..18
20
21

22
23

24
25

26 27
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1

DEF.'S NTC. OF MTN., MTN. TO DISMISS i ,2 & 3 CAUSES OF ACTION OR, IN THE ALT., FOR

MORE DEFINITE STATEMENT; AND SUPPORTING MEMORANDUM OF POINTS AND AUTH.

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Case 3:07-cv-04975-WHA

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TABLE OF AUTHORITIES
1

Pa2e
2

FEDERA CASES
3

4
5

Basic Inc. v. Levinson, 485 U.S. 224 (1988) ............... ..................... ....... ....................................................................10

Branch v. Tunnell,

14 F .3d 449 (9th Cir. 1994) .................................................................................................. .15
6 7
8

In re GlenFed Sec. Litigation, 42 F.3d 1541 (9th Cir. 1994) .................................................................................................17

Glen Holly Entertainment, Inc. v. Tektonix, Inc.,
100 F. Supp. 2d 1086 (C.D. CaL. 1999) ............................................................................5, 14

9
10
11

Goldstein v. SEC, 451 F .3d 873 (D.C. Cir. 2006).............................................................. .............................. ...13

Kaplan v. Rose, 49 F .3d 1363 (9t Cir. 1994) ............................................................................................... ..16
Livid Holdings LTD. v. Salomon Smith Barney, Inc., 416 F 3d 940 (9th Cir. 2005) ..........................................................................................1 0, 11
Neubronner v. Milken,

12
13

14
15

6 F .3d 666 (9th Cir. 1993) .......................................................................................................5
16 17
18

Parrino v. FHP, Inc., 146 F .3d 699 (9th Cir. 1998) .............................................................................................. ...14

SEC v. Baxter,
2007 WL. 2013958 (N.D. CaL. Jul. 11,2007) ..............................................................5, 7, 8

19

SEC v. Merril Scott & Associates, Ltd., 505 F. Supp. 2d 1993 (D. Uta 2007) ...................................................................................13
SEC v. Phan,

20
21

500 F.3d 895, 2007 WL. 2429365 ..........................................................................................6
22
23

SEC v. Rauscher Pierce Refines, Inc., 17 F. Supp. 2d 985 (D. Arz. 1998) .......................................................................................13
SEC v. Yuen, 221 F .R.D. 631 (C.D. CaL. 2004) .............................................................................................5

24
25

SEC v. Zandford, 53 5 U.S. 813 (2002)......................................................................................,............,........ ...12
Semegar v. Weidner,

26 27
28

780 F .2d 727 (9th Cir. 1985) .............. ................................. ........ ........ ........,.,....................., ..,5

11

DEF.'S NTC. OF MTN., MTN. TO DISMISS i si, 2ND & 3KU CAUSES OF ACTION OR, IN THE ALT., FOR

404602.07

MORE DEFINITE STATEMENT; AND SUPPORTING MEMORANDUM OF POINTS AND AUTH.

CASE NO. C-07-4975 WH

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TABLE OF AUTHORITIES
1

Pa2e
2
3

Simpson v. AOL Time Warner Inc., 452 F .3d 1040 (9th Cir~ 2006) ..................... .............. ................... ....................... ................ ....4
Vernazza v. SEC,

4
5

327 F .3d 851 (9t Cir. 2003) .. .................. ........ ...... ......................................................... ......13
6 7
8

Vess v. Ciba-Geigy Corp., 317 F .3d 1097 (9th Cir. 2003) ...........................................................................................5, 8

W Mining Council v. Watt, 643 F .2d 618 (9th Cir. 1981) ............................................................................... ................5, 9
Wenger v. Lumisys, 2 F. Supp. 2d 1231 (N.D. CaL. 1998) .....................................................................................17

9
10

FEDERA STATUTES
11

12
13

15 U. S. C. § 77 q( a) .........................................................................................................................6 15 U.S. C. § 78j (b) ....................................................................................................................,.....6 15 U.S. C. § 80b-6(1 )-(2)...... ................ .......................... ........................................................,;.. .,13 17 C.F .R. § 240.1 Ob-5.......................... ........... ........................ .............................. ....................,.,..6

14
15

Fed. R. Civ. P. 9(b) ............................................................. ............................ ............. ........ passim Fed. R. Civ. P. 12(b)( 6)........................ ............................................................................. ........ .2, 6 Fed. R. Civ. P. 12(e) .................. ............. .............................................................................. ...1, 17 Fed. R. Evid. 201 ......... ........................................................................ ................. .......................14 Rule 12(b)( 6) .............................. ...................................................................... ................... passim

16

17
18

19

20
21

22
23

24
25

26
27
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11 DEF.'S NTC. OF MTN., MTN. TO DISMISS i SI, 2ND & 3KU CAUSES OF ACTION OR, IN THE ALT., FOR

404602.07

MORE DEFINITE STATEMENT; AND SUPPORTING MEMORANDUM OF POINTS AND AUTH.

CASE NO. C-07-4975 WH

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1 NOTICE OF MOTION AND MOTION
2 PLEASE TAK NOTICE that at 8:00 a.m. on December 6,2007, or at such other date
3 and time ordered by this Cour, in Couroom 9 of

the above-referenced cour, before Honorable
Defendants Fahey Fund,

4 Wiliam H. Alsup, Defendant Alexander James Trabulse and Relief

5 L.P., Fahey Financial Group, Inc., International Trade & Data, and ITD Trading (collectively,

6 "Fahey Fund") will, and hereby do, move this Cour to grant ths motion to dismiss or, in the
7 alternative, grant ths motion for more definite statement. This motion to dismiss is brought
8 pursuant to Federal Rules of

Civil Procedure 12(b)(6), and 9(b), to dismiss the Complaint for its

9 failure to state a claim upon which relief may be granted and failure to plead its allegations with

10 sufficient paricularty. In the alternative, Defendant moves under Rule 12(e) for a more definite

11 statement of the charges.
;-

12 This motion seeks entr of an Order Granting Trabulse's Motion to Dismiss and is based
13 on this Notice of Motion and Motion, the Memorandum of

Points and Authorities that follows,

14 the request for judicial notice and the documents attached thereto submitted herewith, the
15 declaration of Clement S. Roberts submitted herewith, the pleadings on file with the Cour, and
16 any oral arguent heard by the Cour on December 6, 2007.

17 ISSUE TO BE DECIDED
18 Whether the SEC has pleaded its first, second, and third causes of action for securties
19 fraud with the requisite degree of paricularty, under Rules 12(b)(6), 9(b), and 12(e) of

the

20 Federal Rules of Civil Procedure.

21 MEMORADUM OF POINTS AND AUTHORITIES
22

I.

INTRODUCTION

23 Although you might not know it from the Complait's hyperbolic language, ths is a case
24 in which the paries agree that no investor lost money. Ths case is solely and exclusively a

25 dispute about how much money the Fahey Fund's investors made. If one examines the numbers
26 in the SEC's Complaint closely, it becomes clear that even under the SEC's math-which is

27 flawed-the Fund's investors outperformed the stock market durng the period covered by the
28
1
DEF.'S NTC. OFMTN., MTN. TO DISMISS ISI, 2ND & 3KU CAUSES OF ACTION OR, IN THE ALT., FOR MORE DEFINITE STATEMENT; AND SUPPORTING MEMORANDUM OF POINTS AND AUTH.

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1 Complaint.

1 To put it another way, the central dispute here is whether the Fahey Fund's

2 investors became slightly wealther or became much wealthier. Ths case is not a "fraud" case as
3 that term is tyically understood; because economic loss is an essential element of any fraud

4 claim, no investor could sue the Fund for fraud under these circumstaces.

5 As a result, the SEC is not intending to prove fraud, at least not in the traditional sense.
6 Instead, the SEC bases its Complaint on its special power to vindicate the securties laws by

7 bringing complaints even where no one has been harmed, in order to recover from defendants

8 who have been unjustly enrched. But in ths case the SEC's Complaint lacks both a coherent
9 theory of

unjust enrchment and paricular facts that could support such a theory. Instead, the

10 SEC alleges a series of disjointed facts and conclusory allegations, and then incorporates all of

11 those statements, by reference, into each cause of action. The SEC's hope is that the

12 defendant-and the Cour-will pick though the varous allegations and piece together a viable
13 theory for each cause of action. But, leaving aside the fact that this "puzzle-piece" style of
14 pleading has been repeatedly condemned, the SEC's Complaint must be dismissed because the

15 necessary puzzle pieces are either missing or simply do not fit.

16 For example, although the SEC generally alleges that Mr. Trabluse took "too much"
17 money from the Fund, the Complaint says nothng about how much he was entitled to tae nor

18 about how much he allegedly took. The Parership Agreement at issue in this case2 permits Mr.
19 Trabluse to take up to 25% of

the Fund's profits and requires him to pay Fund expenses using
(together) less
misappropriation.

20 that money. Thus, so long as Mr. Trabluse's personal and business expenses are.

21 than 25% ofthe Fund's appreciation, Mr. Trabulse did not commit any act of

22
23

24
25

26 27
28

the SEC's tral lawyers (whose name appears on the complaint) admitted to the press that the SEC's Complaint in ths case has "not alleged that (the defendant's investors) lost money." Kathleen Pender, Net Worth: Hedge Funds Need a CarefUl Look, S.F. Chron., Sept. 27, 2007, at C 1 (quoting SEC staff attorney Erin Schneider), attached hereto as Exhbit 2 to the Declaration of Clement S. Roberts. 2 The Fahey Fund (Limited) Parnership Agreement is attched to the Declaration of Clement S. Roberts in Support of the Motion to Dismiss, as Exhbit 1. Mr. Trabulse seeks judicial notice of the Parnership Agreement in his concurently filed Request for Judicial Notice, on the ground that the Agreement is effectively incorporated into the SEC's Complaint. See n.15, infra.
2
DEF.'S NTC. OF MTN., MTN. TO DISMISS I SI, 2ND & 3KU CAUSES OF ACTION OR, IN THE ALT., FOR

1 Indeed, one of

MORE DEFINITE STATEMENT; AND SUPPORTING MEMORANDUM OF POINTS AND AUTH.
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1 But nothing in the Complaint says how much the Fund appreciated or how much of that

2 money Mr. Trabluse used for personal and business expenses. Instead, the Complaint alleges a
3 few specific instaces of Mr. Trabulse spending Fund money for personal expenses while

4 recording the expenditues as business expenses. But, even if those allegations are tre, they are
5 irrelevant. Again, the Fund documents require Mr. Trabulse to treat business expenses as a

6 subset of his personal expenses and to pay for both from the same pool of money. From the

7 Fund's perspective, it simply does not matter whether a given expense was a personal expense or
8 a business expense, and/or how the expense was characterized-the only relevant questions are

9 what the total (business + personal) expenses were, and whether those expenses were less than

10 25% ofthe Fund's profits. But the SEC has made no factual allegations on either score.
11 As discussed in more detail below, the SEC's other theories are equally flawed. For
12 example, the SEC claims that investors were misled by false statements about the value of

their

13 accounts, but ignores the fact that these statements were allegedly made after the investments to

14 which they pertin. The SEC tries to plug this hole in its theory by alleging that (undentified)
15 later investors decided to invest based on (unspecified) conversatións with (undentified) existing
16 investors who supposedly passed along (undentified) allegedly false statements. But the SEC

17 has utterly failed to identify any specific conversations, investors, or false statements to support
18 this allegation.

19 For these reasons, and as discussed in more detail below, the first, second and third
20 causes of action should be dismissed and the SEC should be required to replead (if it can) with

21 paricularty and in a clear, logical order that does not require a puzzle-piece deciphering.
22

II.

FACTUAL BACKGROUND

23 Defendant Jim Trabulse is the General Parer ofthe hedge fud known as the Fahey

24 Fund, L.P. See Plaintiffs Complaint ("Complt.") (Docket No. 1) ~ 8. He is also the President
25 and Chief Executive Offcer of Fahey Financial Group, Inc., the "sole parer" of International
26 Trade & Data, and a founding general parter of ITD Trading - all of which are relief defendants

27 in this litigation. See id. ~~ 9-11.
28
3 DEF.'S NTC. OF MTN., MTN. TO DISMISS I SI, 2ND & 3KU CAUSES OF ACTION OR, IN THE ALT., FOR
MORE DEFINITE STATEMENT; AND SUPPORTING MEMORANDUM OF

POINTS AND AUTH.

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1 The SEC's Complaint avers generally that for the past seven years, Mr. Trabulse has
2 systematically "defrauded investors." Id. ~ 1. Yet, as the SEC publicly confrmed to the press,3

3 its Complaint nowhere alleges that the investors lost money by investing in the Fund. Indeed,
4 according to the allegations in the Complaint; the Fund made a lot of money for its investors.

5 The Complaint alleges that investors put almost $10 millon in capital into the Fund since
6 inception and that the curent value of

the Fund's brokerage accounts is approximately $13
the

7 milion. Id. ~~ 12, 15. Thus, ignoring money already retued to investors and the value of

8 assets held by the Fund outside its brokerage accounts, and assuming that the SEC's (disputed)

9 valuation is correct, the Fund would have retued just about 5% a year net of costs and fees - a
10 period durng which the Dow Jones Industrial Average had a compound average anual retu of

11 just 1.2%. Of course, as soon as the more than $7 milion in distrbutions are factored back in
12 (and again using the SEC's disputed curent valuation while ignoring the Fund's non-brokerage
13 account assets) the Fund's compound average anual retu

jumps to over 14%. Thus, even
which Mr. Trabulse disputes-the investors were

14 using the SEC's figues-the accuracy of

15 enriched enormously by virte of their investment in the Fund. There was, as a matter of law,
16 simply no fraud against the investors, notwthstanding the SEe's hyperbolic, press-release17 seeking statements to the contrar. See Simpson v. AOL Time Warner Inc., 452 F.3d 1040, 1047

18 (9th Cir. 2006) (economic loss and loss causation are both required elements of an investor's

19 claim for fraud).
20 The Cour should not, therefore, be misled by the Complaint's rhetoric into believing that
21 ths case concerns some kind of

massive theft from the Fund's investors. Indeed, in its

22 previously fied motion for preliminar relief, the SEC effectively asked the Cour to keep Mr.
23 Trabluse in charge of managing investors' accounts durg the pendency of the litigation 24 something it would not have done if

Mr. Trabluse had been stealing from his clients. Although
shouts fraud from the rooftops, the alleged foundation is far more modest-

25 the SEC's Complaint

26 27
28

3 The SEC has "not alleged that (the defendant's investors) lost money." Kathleen Pender, Net Worth: Hedge Funds Need a Careful Look, S.F. Chron., Sept. 27, 2007, at Cl (quoting SEC staff attorney Erin Schneider), attached hereto as Exhbit 2 to the Declaration of Clement S. Roberts.
4
DEF.'S NTC. OF MTN.,MTN. TO DISMISS ISI, 2ND & 3KU CAUSES OF ACTION OR, IN THE ALT., FOR

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1 namely the allegation that the Fund's accounting improperly valued its assets over time and, as a
2 result, somehow unjustly enrched Mr. Trabluse.

3

III. ARGUMENT

4 The Cour should dismiss the first, second, and thid causes of action because they lack
5 the specificity required by Federal Rules of

Civil Procedure 12(b)(6) and 9(b). Under Rule 9(b),

6 "(i)n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be

7 stated with paricularty." Ths heightened pleading standard applies "to fraud actions brought

8 under the federal securties laws(.)" SEC v. Yuen, 221 F.R.D. 631,634 (C.D. CaL. 2004)

9 (dismissing SEC complaint for failure to plead fraud with paricularty). Because the first three

10 claims all allege fraud, each must meet the heightened pleading requirements of Rule 9(b).
11 The purose of

this heightened pleading stadard is "to give defendants notice ofthe

12 paricular misconduct which is alleged to constitute the fraud charged so that they can defend
13 against the charge and not just deny that they have done anytng wrong." Neubronner v.

14 Milken, 6 F.3d 666,671 (9th Cir. 1993) (citing Semegar v. Weidner, 780 F.2d 727, 731 (9th Cir.

15 1985)). To meet the Rule 9(b) standard, a "complaint must specify such facts as the times, dates,
16 places, and benefits received, and other details of

the alleged fraudulent activity." Glen Holly

17 Entm't, Inc. v. Tektonix, Inc., 100 F. Supp. 2d 1086, 1094 (C.D. Cal. 1999) (citing Neubronner,
18 6 F.3d at 672) (internal citations omitted). Once the SEC has identified a paricular statement, its
19 allegations "must be accompaned by 'the who, what, when, where, and how' of the misconduct
20 charged." Vess v. Ciba-Geigy Corp., 317 F.3d 1097, 1106 (9th Cir. 2003). See also SEC v.
21 Baxter, 2007 WL 2013958, at *3 (N.D. Cal. Jul. 11,2007) ('''(A) plaintiff

must set forth more

22 than the neutral facts necessary to identify the transaction. The plaintiff must set fort what is
23 false or misleading about a statement, and why it is false."') (quoting Vess, 317 F.3d at 1106)
24 (emphasis added).

25 In evaluating whether the SEC has met this heightened pleading stadard, the Cour is not

26 required to accept uneasonable inferences, unwaranted deductions of fact, or conclusory legal
27 allegations cast in the form of

factual allegations. See W Mining Council v. Watt, 643 F.2d 618,

28
5 DEF.'S NTC. OF MTN., MTN. TO DISMISS ISI, 2ND & 3KU CAUSES OF ACTION OR, IN THE ALT., FOR

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1 624 (9th Cir. 1981); Yuen, 221 F.R.D. at 634. As discussed in more detail below, however, this
2 is all the SEC has offered.

3 A.

The Court should dismiss the first and second causes of action.

4 The SEC's first and second claims for relief do not meet the required pleading stadards.
5. In paricular, the SEC has: (1) failed to identify allegedly false or misleading statements with

6 paricularty; (2) failed to specify how and why it contends those statements were wrong; and (c)
7 failed to allege any specific facts showing that any such misinformation was materiaL.

8 The first and second claims for relief rise and fall together because they require the SEC
9 to plead the same elements. Specifically, each of Section 17(a) of

the Securties Act,4 Section

10 1O(b) ofthe Exchange Act,S and Rule 1Ob-5,6 require the SEC to allege specific facts showing

11 that a defendant made "'(1) a material misstatement or omission (2) in connection with the offer

12 or sale of a securty (3) by means of interstate commerce. ", SEC v. Phan, 500 F.3d 895, _,
13 2007 WL 2429365, at *8 (quoting SEC v. Dain Rauscher, Inc., 254 F.3d 852,856 (9th Cir.

14 2001)).7 Thus, uness the SEC has pled each ofthese thee elements with particularty, the first
15 and second claims for relief must be dismissed. As discussed in more detail below, the SEC has

16 failed to shoulder its burden.
17
18

4 15 U.S.C. § 77q(a). This section forbids any person in the offer or sale of any securties by

19

means of interstate commerce "(1) to employ any device, scheme, or arifice to defraud, or (2) to obtain money or property by means of any untre statement of a material fact or any omission to
state a material fact necessar in order to make the statements made, in the light of the circumstaces under which they were made, not misleading; or (3) to engage in any transaction,

20
21

practice, or course of business which operates or would operate as a fraud or deceit upon the
purchaser." Id.
S 15 U.S.C. § 78j(b). Ths section makes it unawfl for any person by means of

22
23

interstate

commerce "(t)o use or employ, in connection with the purchase or sale of any securty. . . any

24
25

manpulative or deceptive device or contrvance in contravention of such rules and regulations as the Commission may prescribe(.)" Id. 6 17 C.F.R. § 240. lOb-5. Rule lOb-5 provides that it shall be unawf for any person "(a) (t)o employ any device, scheme, or arifice to defraud, (b) (t)o make any untre statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in
the light of

the circumstaces under which they were made, not misleading, or (c) (t)o engage in

26
27
28

any act, practice, or course of business which operates or would operate as a fraud or deceit upon
any person, in connection with the purchase or sale of any securty." Id.

7 In addition, violations Section 17(a)(I), Section 10(b), and Rule lOb-5 require scienter, while
violations of Sections 17(a)(2) and (3) require a showing of

negligence. See id

6
DEF.'S NTC. OF MTN., MTN. TO DISMISS I SI, 2ND & 3KU CAUSES OF ACTION OR, IN THE ALT., FOR

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1

1.

The SEC has not identified the allegedly false statements with particularity.

2 The SEC fails to state with paricularty each of the statements that it believes to be
3 materially inaccurate. Whle the SEC generally avers that Trabulse made materially misleading
4 statements in his newsletter and quarerly reports, it måkes only fleeting attempts to identify

5 what the alleged misstatements were, identifying what it terms a few "examples" of the
6 statements in question. See Complt. ~~ 12-18. Yet, in order to meet the pleading requirements
7 '''the allegations should include the misrepresentations themselves with paricularty(.)'" Baxter,

8 2007 WL 2013958, at *6 (quoting Moore v. Kayport Package Exp., Inc., 885 F.2d 531,540 (9th

9 Cir. 1989)). Thus, only these purorted "examples" can be relied on to resist the present motion
10 to dismiss; everyg else is, by force of logic, not a paricularzed allegation.

11 But even these so-called "examples" fail to point to specific statements. For example, in
12 paragraph 14 of

the Complaint, the SEC alleges (as an "example") that "in the second quarer of

13 2005 Trabulse reported to investors collective gains of approximately $2.5 milion. In reality the
14 Fund realized a net loss in its brokerage accounts of

more than $200,000." Complt. ~ 14. But

15 the SEC canot meet the requirement of specifcally identifing allegedly false statements by
16 pointing to "collective gains" - because there is no allegation that any investor ever saw any
17 discussion of

the Fund's "collective gains." The SEC is pointing to an entire set of quarerly

18 reports-with each report being different for each shareholder-while generally alleging that
19 varous undentified statements in those reports were cumulatively misleading. The SEC must

20 identify what the paricular misleading statements were. It has not done so.
21 Yet ths is the most specifc allegation of

its kind in the Complaint. For example, in

22 attempting to offer a second "example" of a misleading statement in the latter par of paragraph

23 14, the SEC wrtes that "Trabulse fraudulently reported to investors durng the period from 1998

24 though 2006 that they collectively eared gains totaling approximately $30 milion." Complt. ~
25 14. Yet nothig in the Complaint identifies which of the hundreds or thousands of emails, phone

26 calls, and other communcations that took place during the referenced eight-year period are the

27 "reports" to which the SEC is referrng - much less what specific statements in those reports are
28
7
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1 alleged to be false or misleading. This kind of vague gestue towards hundreds of different

2 undentified communcations canot meet the specificity requirements of Rule 9(b).
3 Nor are these problems limited to anyone paragraph of

the Complait - they apply to
reference,

4 every attempt the SEC has made to identify an allegedly false statement. For ease of

5 those failings are sumarized in the char attched hereto as Exhbit A. As set fort therein, the
6 SEC nowhere points to a paricular statement that is misleading.
7
8
9 It is black letter law that, in order to meet the specificity requirement of 9(b) the SEC

2.

The SEC has not met its obligation to say why and how any alleged statements were false or misleading

10 must not merely specifically identif any allegedly false statements, but must specifically say
11 why and how those statements are alleged to be false and misleading. See Baxter, 2007 WL
12 2013958, at *3 ("'(A) plaintiff

must set forth more than the neutral facts necessar to identify the

13 transaction. The plaintiff must set fort what is false or misleading about a statement, and why it
14 is false."') (quoting Vess, 317 F.3d at 1106) (emphasis added). The SEC has failed to meet this

15 obligation.
16 First, the SEC repeatedly premises its assertion that Mr. Trabulse's (undentified)
17 statements to his investors were false on a logical fallacy. Retung to the previous example, in
18 paragraph 14 the SEC contends that Mr. Trabluse misled investors when "in the second quarer
19 of2005 (he) reported to investors collective gains of

approximately $2.5 milion." According to

20 the SEC, these (unspecified) statements were cumulatively misleading because "In reality the
21 Fund realized a net loss in its brokerage accounts of

more than $200,000." Complt. ~ 14

22 But ths allegation makes absolutely no sense. As the SEC well knows, and has alleged
23 elsewhere in the Complaint, Mr. Trabulse invested a "signficant portion" of

the Fund's capital in

24 a wide varety of assets that are not held in brokerage accounts, such as real estate, antique rugs,

25 and a sta-up golf company.8 Thus, the fact that the brokerage accounts saw a net decrease
26 durng a paricular period says nothing about whether the overall value of the Fund's assets were
27
8 See, e.g,. ~ 28

28
8 DEF.'S NTC. OF MTN., MTN. TO DISMISS ISl, 2ND & 3KU CAUSES OF ACTION OR, IN THE ALT., FOR

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1 up or down. It is like claiming that a person must be lying when he says that he ate more than
2 usual yesterday and pointing as proof to the fact that he ate a modest breakast. Again, even

3 accepting the SEC' s allegations as true for the purposes of ths motion, the fact that part of the

4 Fund declined in value does not logically imply that the whole Fund did so.
5 As noted previously, the Cour should not accept nonsensical logical inferences in
6 deciding a motion to dismiss. See W Mining Council, 643 F.2d at 624. The SEC therefore

7 canot satisfy its obligation to explain why a statement is allegedly false with an obvious logical
8 fallacy. Yet, if the Cour carefully reads the Complaint (or reviews Exhbit A hereto) it will see

9 that the SEC has premised its entire case for the falsity of the Fund's account statements on this
10 same ilogical and obviously deficient premise.
11 Nor is this the only instance where the SEC's allegations of

"falsity" are premised on a

12 demonstrably incorrect basis. For example, the SEC alleges that Mr. Trabulse misled his

13 investors by tellng them, "in both verbal and wrtten communcations, that the Fahey Fund
14 invested (in) financial instrents like stocks, options, derivatives, futues and foreign

15 curency(,)" and then actually invested in "gems and other jewelry, real property, and rugs(,)"
16 and using the money "to fud a star-up golf company and purchase a BMW for the golf
17 company's owner." Complt. ~ 28.
18 Leaving to one side (for the moment)

the fact that nothng in this paragraph identifies a

19 specific statement that is alleged to be false,9 the allegation of falsity is also demonstrably wrong.
20 In its Complaint, the SEC repeatedly cites to the Fund's Parership Agreement-effectively
21 incorporating it as a reference and allowig the Cour to review it on a motion to dismiss. Yet
22 the Parership Agreement clearly states that "capital may be invested in other businesses" and

23 that the Fund's mission will be to invest in "publicly listed opportties, natual resources, and
24 any other investment of a unique long-term character(.)" Declaration of Clement S. Roberts

25 ("Roberts Decl."), Ex. 1 (Fahey Fund (Limited) Parership Agreement ("Parnership

26 Agreement")) § 6.09 and § 2.01 (emphasis added). Thus, the Fund's investment in the golf
27
28
9
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1 company, and in other appreciating assets like a warehouse full of antique rugs, real-estate and
2 rare gems are all fairly within the set of investments that Mr; Trabulse agreed to with his limited
3 parers. The SEC's allegation that Mr. Trabulse misrepresented the scope of

the Fund's

4 investments is, therefore, not merely vague, but also wrong. Those allegations canot, therefore,
5 satisfy the requirements of

Rule 9(b).10

6 7

3.

The SEC has failed to meet its obligation to allege specifc facts demonstrating the materiality of any allegedly false statements.

Even if the Complaint had identified paricular misleading statements-which it does
8

not-and even if the Complaint had explained why those statements are misleading-which it
9

has not-the Complaint would stil fail because it does not specifically allege that the
10
(unidentified) statements were material. A misrepresentation "is material if

there is a substatial
the misrepresentation had

11
likelihood that a reasonable investor would have acted differently if

12
not been made or the trth had been disclosed." Livid Holdings LTD. v. Salomon Smith Barney,

13
Inc., 416 F.3d 940, 946 (9th Cir. 2005) (citation omitted). See also Basic Inc. v. Levinson,

485

14

U.S. 224,231-232 (1988) ("'(T)here must be a substantial likelihood that the disclosure ofthe
15

omitted fact would have been viewed by the reasonable investor as having significantly altered
16
the 'total mix' of

information made available.''') (quoting TSC Industries, Inc. v. Northway, Inc.,

17

426 U.S. 438, 449 (1976)).
18
But the SEC does not allege any specific facts regarding materiality. The vast bulk of

the

19

statements to which the SEC vaguely gestues were clearly made after people who received the
20

statements invested in the Fund. Thus, in order to adequately allege materiality the SEC would
21

have to allege with paricularty that specific investors would have divested from (or not
22

increased their investment in) the Fund had they received the specifically identified information.
23

24
25

made, or to whom they canot form a basis for sustaining the first and second causes of action.
10 Indeed, it is somewhat surrising (and disappointing) that the SEC made this mistae because

26 27
28

defense counsel explicitly pointed out the mistake before the SEC fied the Complaint. Specifically, after a meeting in which the SEC's tral counsel said it could not find any authorization in the Fund documents for this kind of investment, the defendant's counsel wrote and pointed the SEC to this authorization in the Fund documents. See Roberts Decl., Ex. 3 (Celio letter of July 17, 2007). Apparently the SEC either did not read, or chose to ignore, the letter.
10
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1 The SEC simply has not made any such allegation. Indeed, the only place in which the

2 Complaint even attempts to make such an allegation are in paragraphs 16, 17 and 20. But these
3 paragraphs do not contan any specific information whatsoever, and therefore fall far short of 4 what is required under 9(b). Paragraph sixteen, for example, only says that "many (undentified)
5 investors decided to invest in Fahey Fund because they heard (undentified statements) from
6 (undentified) frends or colleagues already invested in the fud

( . J" Complt. ~ 16.

7 Similarly, the most detailed allegation in paragraph seventeen says that "(0 )ne
8 (undentified) investor, who with his wife invested more than $2 milion in 2006, called several
9 (undentified) individuals on the list before investing and based his investment, in par, on
1 0 (undentified) material misstatements about the fund

( . J" Id. ~ 17.11

11 And paragraph 20 suffers from the same deficiencies. In paricular it does not
12 specifically identify any allegedly false information, does not even attempt to identify any person

13 who purortedly received that information, and does not contain any allegation whatsoever that

14 anyone took any action based on that information or considered that information as importt in
15 any way.

16 In other words, the SEC ha not identified any investor who allegedly would have
17 divested, any investor who would not have invested additional amounts or any first time investor

18 who would not have put money in "if the misrepresentation had not been made or the trth had
19 been disclosed." Livid, 416 F.3d at 946. Because the Complaint does not identify any specific

20 investor, nor any specific statement allegedly relied on by that (undentified) investor, it has not

21 plead materiality with the requisite specificity.

22 Indeed, assuming the SEC's numbers are correct (for the purose ofthis motion only)
23 and assuming therefore that the Fund retued an anual average of

more than 14% (as compared

24 with an overall market retu of about 1.2% 12) it is hard to tae seriously the notion that investors
25
11 Again, the SEC canot meet the paricularty requirement by alleging that one undentified

26 27
28

person had a conversation with another undentified person in which unown and undentified things were said and then invested based on unidentified misstatements. Yet ths is precisely the set of allegations upon which the SEC is attempting to rely.
12 Ths figue is derived from the Dow Jones Industrial Average anual retus for the years
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1 would have gone elsewhere had they had different inormation. Indeed, the SEC's failure to
2 allege materiality with specificity is probably a fuction of the fact that none of

the Fund's

3 investors would have wanted to give up a retu of at least 5% per year-more likely 14o/o-in
4 order to invest elsewhere in an otherwise sluggish market.

5 In considerig ths proposition, the Cour should keep in mind the fact that the SEC

6 already has deposed nearly 30 of the Fund's investors. If the lack of specificity in the Complaint
7 is any indication, apparently none of

them were willng to go on record saying that they would

8 have acted differently had they known what the SEC contends to be the Funds "actual" retu.

9 10

4.

The SEC has not met its obligation to allege specifc facts showing that any allegedly false statement was made "in connection with the purchase or sale of a security."

11 Finally, the SEC has failed to meet its pleading burden under this requirement for the
12 same reason it has failed to meet its burden of pleading materiality with paricularity - namely

13 the SEC has totaly failed to identify even a single person who made an investment decision in
14 connection with the receipt of any of

the (unspecified) statements about which the governent

15 complains. Indeed, given that the allegedly false statements in this case were supposedly

16 (somewhere) withi the statements that went to actual investors, the only way they could be in
17 connection with the purchase or sale of a securty is if someone put money into the fund based on

18 such a statement. But, again, the SEC' s simply has not identified a single specific instace in
19 which ths supposedly happened.

20 Indeed, even if the SEC were to identify the people who purortedly invested afer
21 taking to existing investors, and specified the contents of the conversations between them, the

22 allegations would stil be inadequate because any allegedly false statement in that conversation
23 was not made by Mr. Trabulse. In other words, the SEC's theory here appears to be that Mr.

24 Trabulse can be liable for makng a material misstatement in connection with the purchase or
25 sale of a sec~ty, even if he did not make the statement, or exercise control over what was said.

26 The case law does not support such an expansive reading of the securties law. As the Supreme
27 28
2000-2006. See Roberts DecL, Ex. 4 (Dow Jones Industrial Average anual retus report).

12
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1 Cour has put it, the statute "must not be constred so broadly as to convert every common-law
2 fraud that happens to involve securties into a violation of § 1 O(b )." SEC v. Zandford, 535 U.S.
3 813,820 (2002). Thus, even if

the SEC were to say which investors allegedly invested based on

4 which alleged misstatements, it might very well fail to satisfy the connectivity requirement. But,

5 as pleaded, we canot know-which is precisely why the Complaint violates Rule 9(b).

6 B.

The SEC's Investment Advisers Act claim also lacks the necessary particularity.
the Investment Advisers Actl3_

7 The SEC's third cause of action - for violating § 206 of

8 also fails under Rule 9(b). The "Advisers Act § 206 prohibits advisers from, directly or

9 indirectly, employing a scheme to defraud clients or engaging in practices which operate as a

10 fraud upon clients." Vernazza v. SEC, 327 F.3d 851,858 (9th Cir. 2003) (citing 15 U.S.C. §
11 80b-6(1)-(2)). Specifically, to successfully plead a cause of action under section 206(1), the SEC

12 must allege with paricularty that: (1) Mr. Trabulse was an investment adviser; (2) he utilzed
13 the mails or instrentalities of interstate commerce to employ a device, scheme or artifice;

14 (3) the device, scheme or arifice violated Mr. Trabluse's fiduciary duty to his clients; and

15 (4) Mr. Trabluse acted with scienter. See SEC v. Merril Scott & Associates, Ltd., 505 F. Supp.
16 2d 1993,2005 (D. Utah 2007) (listing elements of

the claim); SEC v. Rauscher Pierce Refines,

17 Inc., 17 F. Supp. 2d 985,988-90 (D. Arz. 1998) (applying Rule 9(b)'s paricularty requirements
18 to the claims under Section 206).14

19 Importantly, the only allegations that can form a basis for a claim under ths section are

20 allegations regarding conduct directed towards the Fund and not conduct or statements directed

21 to the Fund's investors. This is because the SEC must allege a breach of fiduciar duty to state a

22 viable cause of action, and because the only fiduciary duties a hedge fud general parer has are
23 those he owes to the Fund itself. Indeed, ths precise question was addressed in Goldstein v.
24 SEC, 451 F.3d 873 (D.C. Cir. 2006). In that case, the Cour of Appeals invalidated the SEC's

25 "hedge fud rue" and held that hedge fud general parers, under the Advisers Act, owe
26 27
28
13 DEF.'S NTC. OF MTN., MTN. TO DISMISS isi. 2ND & 3KU CAUSES OF ACTION OR, IN THE ALT., FOR
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14 The same elements apply for Section 206(2), except that the SEC need not allege scienter. Id.

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1 "fiduciary duties only to the fud, notto the fud's investors." Id. at 881 (emphasis added).

2 The SEC has made only one set of allegations that could form a basis for its Investment
3 Advisors Act claim - namely the allegations contaied in paragraphs 22 though 27 ofthe

4 Complait. Generally speakng, these paragraphs allege that Mr. Trabluse violated his duties to
5 the Fund by failing to maintain accurate accounting records, by failng to segregate his assets and

6 by using Fund assets for personal expenses. See Complt. ~~ 22-27. But these allegations are not

7 sufficient.
8 First, the allegation that Mr. Trabulse "failed to maintain accurate accounting records"
9 appears only in paragraph 26, and with no more detail than what was just quoted. Thus, ths
10 statement canot satisfy the paricularty requirements of

Rule 9(b). See Glen Holly, 100 F.

11 Supp. 2d at 1094 (holding that "a complaint must specify such facts as the times, dates, places,
12 and benefits received, and other details of

the alleged fraudulent activity" in order to meet the

13 Rule 9(b) stadard).

14 Second, the allegation that Mr. Trabulse failed to segregate his personal expenses from
15 those of

the Fund canot form a basis for the Investment Advisors Act claim because Mr.

16 Trabulse had no duty to distinguish between personal expenses and Fund expenses. As noted at
17 the outset, the Parnership Agreement that governs the operation of the Fund requires Trabulse to

18 pay for all Fund expenses from the 25% of the Fund's profits that make up his personal
19 compensation. See Roberts Decl., Ex. 1 (Parership Agreement) at §§ 5.14, 6.06.1S From the
20 perspective of

the Fund, it makes no difference at all how or for what purose Mr. Trabulse
the day,

21 withdraws money from the fud, or how he characterizes the expenditue. At the end of

22

is Even on a motion to dismiss, the Cour can tae judicial notice of a document which, like this

23 agreement, is referenced in the Complaint. See Fed. R. Evid. 201; Branch v. Tunnell, 14 F.3d 449,454 (9th Cir. 1994), overruled on other grounds by Galbraith v. County of Santa Clara, 307 24 F.3d 1119 (9th Cir. 2002) ("documents whose contents are alleged in a complaint and whose

authenticity no pary questions, but which are not physically attched to the pleading, may be
25 considered in ruling on a Rule 12(b)(6) motion to dismiss."). When ruling on a motion to dismiss, the cour may consider the facts alleged in the complaint, documents attched to the

26 complait, documents relied upon but not attched to the complaint when authenticity is not
contested, and matters of which the cour taes judicial notice. See Parrino v. FHP, Inc., 146

27 F.3d 699, 705-06 (9th Cir. 1998) (superseded by statute on other grounds). The arguents in
support of the Cour's taking judicial notice of

the Parnership Agreement is included in Mr.
14

28
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1 Mr. Trabulse's fiduciar obligation to the Fund is to withdraw no more than 25% of

the Fund's

2 profits-from which he must both tae his own compensation and pay the Fund's expenses.

3 Whle ths is, admittedly, an innovative arangement, it is designed to and does
4 substantially benefit the Fund's investors. Under the Fund's governance structue the investors

5 do not need to worry about whether the Fund manager is minmizing expenses or whether there

6 are any hidden fees. Thus, for example, when Mr. Trabulse rents a car, the investors need not
7 worry or keep track of how much of

the time he is using it for business puroses. Similarly,

8 neither the investors nor the Fund need be concerned about whether, when Mr. Trabulse flies

9 first class to Pars, he is really incurng a business expense or takng a vacation. The Fund's
10 governance strctue avoids all of those questions by treating business expenses and personal
11 expenses as the same with respect to the Fund's capital, and requiring, instead, that all expenses
12 (business expenses and personal compensation) together be restricted to 25% of

the Fund's

13 operating profits.
14 Because of

ths strctue, the allegation that Mr. Trabulse "mislabeled" personal expenses

15 as business expenses canot constitute a breach of

Mr. Trabulse's duties to the Fund. For

16 example, in paragraph 24, the SEC alleges that Mr. Trabulse wired $500,000 to an account in

17 France and spent the money for personal expenses, while simultaeously recording the wire

18 transfer as being for "business expenses." See Complt. ~ 24. But, so what? From the Fund's
19 perspective nothing tus on how the transaction was described-the only thing that matters is
20 whether Mr. Trabulse withdrew more or less than 25% of

the Fund's profits. To put it another

21 way, under the Parership Agreement, Mr. Trabulse was required to pay business expenses out
22 of

his personal stae in the Fund's profits. Thus, Mr. Trabulse's alleged failure to clearly

23 delineate what was a personal expense and what was a business expense canot constitute a

24 breach of his fiduciar duty to the Fund and, therefore, canot form a basis for a claim under
25 §206 of the Investment Advisors Act.

26 Third, the allegation that Mr. Trabulse misused Fund assets fails for the same reason. As
27
28

Trabulse's Request for Judicial Notice, filed concurently with ths motion to dismiss.
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1 noted previously, the only way to determine whether or not Mr. Trabulse misused Fund assets

2 for personal puroses is to look at the total profits of the Fund and the total amount of money
3 that Mr. Trabulse withdrew for business and personal expenses combined. Lookig at individual

4 expenses--r the accounts from which those expenses were paid-tells you nothing because Mr.

5 Trabulse had a right to use up to 25% of the Fund's profits to pay personal expenses.
6 Yet, the SEC seems unwilling or unable to understand this fudamental point. Thus,
7 instead of alleging anything about how much the Fund made in profits or how much of those
8 profits Mr. Trabulse used for the combination of

business expenses and personal compensation,

9 the SEC makes a series of flamboyant and irrelevant allegations about conspicuous personal
10 spending. For example, the SEC alleges that Mr. Trabulse "used Fahey Fund ban accounts to
11 pay for a wide varety of

personal, and unauthorized, expenses." Complt. at ~ 22. Ths statement
the word "unauthorized" is

12 is both misleading and irrelevant. First, the SEC's use of

just

13 grandstading. There is no clause in the Parnership Agreement regarding what expenses are
14 authorized or unauthorized. There is no'

requirement that Mr. Trabulse record exactly what he

15 did with his 25% of the net profits. And it is irrelevant to the health of the Fund whether Mr.
16 Trabulse used his share of

the profits to pay his ex-wife's mortgage, see id. ~ 23, or whether he

17 allowed his daughter to draw on the account using a debit card, see id. ~ 25. Mr. Trabulse's

18 fiduciary duty was, instead, only to ru the Fund without spending more than 25% of its profits
19 on the combination of business and personal expenses.
20 The only time the SEC says anything about totals is in paragraph 22, where it nakedly
21 alleges that Mr. Trabulse spent "more than he was entitled to under the terms of

the Fund's

22 limited parership agreement." Id. ~ 22. But the SEC fails to provide any paricularzed
23 allegation regarding what the profits of the Fund were, what 25% of that amount would have
24 been at any moment in time, what amount Mr. Trabulse withdrew from the Fund and over what

25 period, how that amount exceeded his 25% share, or any paricularzed facts whatsoever to guide
26 Mr. Trabulse in responding to the Complaint. See Kaplan v. Rose, 49 F.3d 1363, 1370 (9th Cir.
27 1994) ("(A) pleading is suffcient under Rule 9(b) if it identifies the circumstances of

the alleged

28
16
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1 fraud so that the defendant can prepare an adequate answer.").

2 Indeed, from (1) the SEC's exclusive reliance on the Fund's brokerage accounts; (2) the
3 fact that the SEC has ignored the value of

the Fund's numerous other investments; and (3) the

4 fact that the SEC has ignored the impact of distributions and new investments in its
5 "calculations" of

the Fund's profitability - it appears that the SEC did not conduct an adequate

6 prefiling investigation and therefore does not know what the fud was worth over time. In other

7 words, the reason the SEC has not alleged either the Fund's profits nor that the combination of
8 Mr. Trabulse's business and personal expenditues was more than 25% of

those profits is

9 because the SEe does not know if it is true. In a word, the SEC is just guessing - which it

10 plainly is not permitted to do under 9(b).
11 C.

The Court should, at a minimum, require a more definite statement of the charges.

12 In the alternative to his motion to dismiss under Rule 12(b)(6), Mr. Trabulse moves under
13 Rule 12(e), for a more definite statement. See Fed. R. Civ. P. 12(e). All of

the defects in the

14 allegations of the Complaint, discussed above, have created a pleading that is "so vague or

15 ambiguous that (Mr. Trabulse) canot reasonably be required to frame a responsive pleading."
16 Id. Thus, for example, as the Complaint is curently strctued, Mr. Trabulse canot tell which

17 of the various allegations are alleged to constitute a violation of each cause of action.
18 Under Rule 12(e) the defendant may move for an order requiring a more definite
19 statement by pointing out "the defects complained of and the detals desired." Id. Mr. Trabulse
20 hereby incorporates all of the arguents lodged above, in support of

his motion to dismiss and

21 requests a more definite statement on all the defects complained of and the detals that are
22 missing from the Complaint.

23 As numerous cours in the Ninth Circuit and tIs District have held, responding to a
24 complaint is nota treasure hunt and defendants are not required to excavate the allegedly false
25 statements from amongst a mass of

allegations. See In re GlenFed Sec. Litig., 42 F.3d 1541,

26 1554 (9th Cir. 1994) (en banc) ("A complaint is not a puzzle. . . and we are loathe to allow

27 plaintiffs to tax defendants. . . with the burden of solving puzzles in addition to the burden of
28
17
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1 formulating an answer to their complaint"); see also Wenger v. Lumisys, 2 F. Supp. 2d 1231,
2 1243-44 (N.D. Cal. 1998) (dismissing complaint where "(p)laintiffmerely thows the statements
3 and the alleged 'tre facts' together in an undifferentiated clump and apparently expects the
4 reader to sort out and pair each statement with a supposedly relevant 'true fact.' The predictable

5 demands of reviewing such a complaint abuse judicial resources."). Here, the Complaint
6 generally refers to varous alleged misrepresentations made over the course of eight years. But

7 the Complaint nowhere explains how these allegations fit together to form a cognizable legal
8 claim.
9 Accordingly, in the event that the Cour denies his motion to dismiss, Mr. Trabulse

10 requests that the Cour grant his motion for a more definite statement.
11

iv.

CONCLUSION

12 The SEC has extraordinar investigative powers. Using those powers in ths case it
13 deposed literally dozens of witnesses, and reviewed hundreds if not thousands of documents
14 prior to filing suit. Yet, despite all of

that apparent activity, the SEC has failed to plead a

15 cognzable theory of this case. The SEC has utterly failed to allege specific facts about how
16 much money the Fund made, or how much Mr. Trabluse allegedly spent on the combination of

17 business and personal expenses. Instead, it chose to attack Mr. Trabluse personally - accusing
18 him of lavish personal spending without in any way indicating how that spending supports a
19 conclusion that he violated a duty to the Fund.

20 Elsewhere, the Complaint gestues broadly towards allegedly false documents without

21 specifying the statements within those documents that are alleged to be false, alleges falsity
22 based on inference that are demonstrably incorrect, if not downght sily, and have utterly fails

23 to identify anyone who did anything based on those undentified statements. For these reasons,

24 / / / 25 / / /
26
27

28
18
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1 and for all the reasons set forth above, the first though thrd causes of action should be
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dismissed.

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Dated: November 1,2007

KEKER & VAN NEST, LLP

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By: sf Clement S. Roberts
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CLEMENT S. ROBERTS Attorneys for Defendants

ALEXANDER JAMES TRAULSE,
FAHEY FUND, L.P., FAHEY FINANCIAL GROUP, INC., INTERNATIONAL TRAE & DATA,

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and ITD TRAING

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DEF.'S NTC. OF MTN., MTN. TO DISMISS I SI, 2ND & 3KU CAUSES OF ACTION OR, IN THE ALT., FOR

MORE DEFINITE STATEMENT; AND SUPPORTING MEMORANDUM OF POINTS AND AUTH.
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EXHIBIT A

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EXHIBIT A
Deficienc This paragraph alleges background facts and does not allege that any of the statements referenced therein are false.

Aile ations

Trabulse operated Fahey Fund, L.P. and Fahey 12. Financial Group, Inc. as a single hedge fund

(collectively, "Fahey Fund"). In 1998, Fahey Fund had approximately 11 investors. By the end of 2006, the fund had grown to more than 100 investors. Trabulse described the fund to investors in oral conversations and written materials as a conservative fund that invested in financial instruments like stocks, options, derivatives, futures, indexes, and foreign currency. Since its inception, Fahey Fund has collected at least $10 million from investors. This paragraph describes (in general) a At the end of each calendar quarter, Trabulse 13. prepared and sent to investors an account hoast ofvergited material including account statements and newsletters. No specific statement that purported to account for the statements are identified or alleged to be changes in an investor's account balance from false. one quarter to the next. The statements purported to identify each investor's beginning balance, gains and/or losses earned during the period, and ending balance. Typically, the account statements were accompanied by a newsletter prepared and signed by Trabulse that summarized the fund's performance during the quarter and described current market conditions and what he expected markets to do in u coming quarters. The quarterly account statements Trabulse sent to This allegation does not identify any 14. investors were materially false and misleading. specific statement but points to an undifferentiated mass of materials that They bore no relation to the fund's actual spanned many years. performance during the quarter.
The value of one component of the Fund For example, in the second quarter of2005, Trabulse reported to investors collective gains of does not render false a statement about the approximately $2.5 million. In reality, the fund Fund's overall value. realized a net loss in its brokerage accounts of
more than $200,000.

¡.

Moreover, Trabulse fraudulently reported to investors during the period from 1998 through 2006 that they collectively earned gains totaling
approximately $30 milion, based on

the problems identifed above - no specific statement is identified and the assertion fails
This allegation suffers from both of

as a matter of logicaL.

investments in stocks, derivatives, and foreign

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currency. However, the fund's brokerage account records show the fund's profits during this time were less than $10 million. Similarly, Trabulse also overstated the funds' 15. assets in the quarterly statements he sent to
investors.

This allegation does not identify any specific statement but points to an undifferentiated mass of materials that spanned many years.
The value of one component of

December 3 1,2006, Trabulse reported to investors that their collective assets, which were composed of investor contributions and gains purportedly earned on investments in stocks, derivatives, and foreign currency, totaled more than $45 milion. In reality, the fund's
As of

the Fund

(the brokerage accounts) does not render false a statement about the Fund's overall value.

brokerage account records and bank statements

show the fund's value was less than $13 million. Trabulse used the false and misleading account 16. statements to encourage existing investors to recruit new investors and increase their own investments in Fahey Fund. Indeed, many investors decided to invest in Fahey Fund because they heard from friends or colleagues
already invested in the fund that the fund

This allegation does not identify who the . new investors were, what was said to them, who said it to them, or when those conversations took place.

achieved spectacular returns. Trabulse also touted the fund's positive performance when soliciting new investors.
Trabulse gave certain prospective investors a list
17. of existing investors who would act as

This allegation does not identify who received the alleged list nor who was on it.

references.

The investors identified as references had received materially false and misleading account statements with grossly overstated profits and account balances.

This allegation rests upon the SEC's flawed assertion that the account statements were false as noted above. The value of one component ofthe fund does not render false a statement about the Fund's overall value. This allegation does not identify the investor, who he spoke with, what was said or what alleged misstatemens he relied on.

One investor, who with his wife invested more
than $2 milion in 2006, called several of the

individuals on the list before investing and based his investment, in part, on material
misstatements about the fund's performance.

In addition, certain investors made multiple contributions into the fund based on the false and misleading representations about the fund's

This allegation does not identify which investors made these contrabutions, when the statements or contrabutions were made,

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performance in the account statements they received from Trabulse.

or which statements they allegedly relied on. In addition this allegation rests upon the SEC's flawed assertion that the account statements were false as noted ab