Free Reply Memorandum - District Court of California - California

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JOSEPH P. RUSSONIELLO United States Attorney THOMAS MOORE (ASBN 4305-O78T Assistant United States Attorney Chief, Tax Division 9th Floor Federal Building 450 Golden Gate Avenue, Box 36055 San Francisco, California 94102 Telephone: (415) 436-6935 HUONG T. BAILIE (NYBN 4035739) 300 E. 8th Street, Suite 601 Austin, TX 78701 Telephone: (512) 499-5759 ALLYSON B. BAKER (DCBN 478073) FREDERICK N. NOYES Tax Division U.S. Department of Justice Post Office Box 7238 Ben Franklin Station Washington, D.C. 20044 Telephone: (202) 202-353-8031 Facsimile: (202) 514-6770 Email: [email protected]

IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION UNITED STATES OF AMERICA Plaintiff, v. CHARLES CATHCART et al. Defendant. ) ) ) ) ) ) ) ) ) )

Civil No. 07-4762-PJH UNITED STATES' REPLY IN SUPPORT OF ITS MOTION FOR LEAVE OF COURT TO FILE FIRST AMENDED COMPLAINT Hearing: April 23, 2008, 9:00 AM

21 22 The United States respectfully submits this reply memorandum in support of its motion for 23 leave to file first amended complaint and responds to Yuri Debevc's Objection to that motion 24 (Dkt. # 49). The United States seeks leave to amend its complaint to add three parties as 25 defendants: Optech Limited and two of its principals, Charles Hsin and Franklin Thomason, and 26 to clarify several factual allegations in its original complaint. Optech and its principals have 27 28

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played a crucial role in promoting and organizing the 90% Loan program, which is the subject of the complaint. For this reason, the United States seeks to enjoin these parties along with the already-named defendants in order to halt promotion of the 90% Loan program. The United States brought its motion for leave to amend, because one current defendant ­ Yuri Debevc ­ refused to stipulate to the United States' amending its complaint without leave of court. Rule 15(a) of the Federal Rules of Civil Procedure counsels that courts should freely grant leave to parties to amend their pleadings when "justice so requires," that is unless the moving party's request to amend is dilatory, made in bad faith, unduly late, or prejudicial to an opposing party See Foman v. Davis, 371 U.S. 178, 182 (1962). See also Fed. R. Civ. P. 15(a)(2). The United States' request to amend is not dilatory, made in bad faith, or unduly late. Debevc does not show how he will be prejudiced by the United States' amending its complaint. Debevc contends that he has "no basis to believe that the claims that the United States has against these three parties have any relation to [his] case." Opp. at 1. Whether Debevc knows or believes that Optech, Hsin and Thomason relate to his case has no bearing on the decision to grant the United States leave to amend its complaint. See Foman, 371 U.S. at 182 (enumerating factors that determine whether to grant leave to amend). In addition, Debevc's claim that these parties have no relationship to his case is undermined by documents1 that show Debevc working with Optech and its principals to promote, organize and maintain the 90% Loan program. For example, in numerous documents, Debevc's company, Veridia Solutions, LLC, functioned as Optech's "U.S. Service Center" for account confirmations sent to Optech customers noting the type and amount of securities customers transferred to Optech in exchange for a purported 90% loan. See Activity Confirmation, dated June 21, 2005, attached Ex. 1. Other documents reflect Debevc's efforts to establish a post office

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The documents attached to this reply are part of a larger group of documents that the

United States will be producing during the ensuing weeks, pursuant to document requests served by defendants. -2-

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box as agent for Optech in South Carolina, including Debevc's application with the United States Postal Service. See July 28, 2005 email between C. Hsin and Y. Debevc and accompanying documents, attached as Ex. 2. As discussed in a letter dated March 18, 2005 between Debevc and a financial advisor, Debevc and his company, Veridia Solutions, also were granted specific authority by the Board of Directors of Optech to authorize and confirm a list of "individuals empowered to enter orders and to transfer funds" for Optech Limited's account at that financial institution. This account facilitated Optech's securities trades made as part of the purported 90% loan it offers customers. See March 18, 2005 letter from Y. Debevc to K. Haase, attached as Ex. 3. In another instance, Debevc's company, Veridia Solutions, represented Optech as a signatory to a referral fee agreement entered between Optech and another financial advisor in May of 2005. In this agreement, the advisor agrees to refer customers to Optech in exchange for a fee, which is paid to the advisor only upon confirmation from Optech "that a loan has been funded to a registered contact [customer]." See Referral Fee Agreement, attached as Ex. 4. Indeed, beginning as early as January 2003, Debevc and his company, Veridia Solutions, started doing business with Optech. Debevc and the then-director of Optech executed a contract for services in which Debevc agreed that his company would assist Optech in administering the "non-recourse loans" it purports to make to "borrowers." See Financial Services Representation/Administration and Processing Agreement Between Optech Limited and Veridia Solutions, L.L.C. at 2, attached as Exhibit 5. According to the agreement's terms, Debevc's company, Veridia Solutions, received a bi-weekly fee from Optech in exchange for its services. See id. at 12-13. Debevc clearly knows about Optech, Hsin and Thomason and understands how these parties relate to the Government's case against him. In his opposition, Debevc also contends that addition of these parties will add time and expense, because he will be forced to attend their depositions and other "events" if the United States amends its complaint. See Opp. at 1-2. Debevc, however, never explains which specific costs he will incur only if the United States amends its complaint, as proposed. The United States is seeking to add Optech, Hsin and Thomason as defendants, because, in light of their roles in -3-

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promoting the 90% Loan program, joining them as parties is necessary in order to end entirely the 90% Loan program. But even if they were not joined as parties, in all likelihood, the United States would still seek depositions and documents from Optech, Hsin and Thomason ­ a fact that Debevc undoubtedly knows, given these parties' working relationship with him. Debevc would not incur greater costs because these entities are joined as defendants. To the contrary, if anything, obtaining party discovery versus third party discovery is generally less costly and less time-consuming. See generally, Fed. R. Civ. P. 26, 45. Furthermore, even if Debevc did incur additional costs, these parties' significant involvement in promoting and organizing the 90% Loan programs, as shown even by the few attached documents, outweighs any minor inconvenience Debevc might experience from their addition as defendants. Debevc fails to show that he will suffer prejudice if the United States amends its complaint. Finally, Debevc argues that his prospects of settlement are diminished if the United States is allowed to add parties to the case. See Opp. at 2. He fails to explain the connection between the addition of these three parties and his settlement prospects. Moreover, he misrepresents the settlement positions that the United States has taken to date, and he also misrepresents the settlement proposals he has submitted to the United States for consideration. Specifically, Debevc's settlement proposals do not include language that would enjoin him from engaging in future conduct that interferes with enforcement of the Internal Revenue Code, even though he claims that he has not "engaged in any improper conduct since 2005." Opp. at 1. Again, his argument is without foundation and unrelated to the question of whether the United States should be granted leave to amend its complaint. Debevc's baseless opposition has cost the United States and the Court resources and time. Debevc does not show that he will suffer any prejudice if the United States is permitted to amend its complaint. Moreover, as evidenced by the attached exhibits, Debevc misrepresents his knowledge of Optech, Hsin and Thomason and how he has worked with them to promote, organize and maintain the 90% Loan program. If anything, his blatant misrepresentation underscores the need to have these additional parties named as defendants in this suit. -4-

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Conclusion The United States respectfully requests that the Court grant its motion for leave to amend its complaint.

Respectfully submitted, JOSEPH P. RUSSONIELLO United States Attorney

/s/ Allyson B. Baker ALLYSON B. BAKER FREDERICK N. NOYES Tax Division U.S. Department of Justice Post Office Box 7238 Ben Franklin Station Washington, D.C. 20044 Telephone: (202) 202-353-8031

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 /s/ Allyson B. Baker ALLYSON B. BAKER Yuri Debevc (pro se) 1483 Burningtree Road Charleston, SC 29412

CERTIFICATE OF SERVICE I hereby certify that on April 9, 2008, I electronically filed the foregoing motion, memorandum in support of the foregoing motion, and notice of motion with the Clerk of the Court using the CM/ECF System which will send notification of such filing to the following: Farley J. Neuman ([email protected]) Tom Prountzos ([email protected]) Jenkins Goodman Neuman & Hamilton LLP 417 Montgomery Street, 10th Floor San Francisco, CA 94104 Attorneys for Defendant, Robert Nagy David Bujannoff Porter , Jr. ([email protected]) Wood & Porter 333 Sacramento Street San Francisco, CA 94111 Attorney for Scott Cathcart I further certify that on April 9, 2008, service of the foregoing was made upon the following by depositing a copy in the United States mail, postage prepaid:

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