Free Memorandum - District Court of Arizona - Arizona

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Burton M. Bentley, Esq. (Bar No. 00980) BURTON M. BENTLEY, P.C. 5343 North 16th Street, Suite 480 Phoenix, Arizona 85016 (602) 861-3055 (602) 861-3230 fax Attorney for Rada Defendants

IN THE UNITED STATES DISTRICT COURT IN THE DISTRICT OF ARIZONA LAWRENCE J. WARFIELD, RECEIVER, Plaintiff, vs. MICHAEL ALANIZ, et al. Defendants. (Oral Argument Requested) CAUSE NO. CIV 03 2390-PHX-JAT MEMORANDUM OF POINTS AND AUTHORITIES SUPPORTING THE RADA DEFENDANTS' MOTION FOR SUMMARY JUDGMENT

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This Memorandum of Points and Authorities is filed on behalf of all Rada Defendants, definitively described in the Motion for Summary Judgment filed concurrently herewith. For clarity, the Table of Contents and Table of Authorities is included below.

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Table of Citations I Introduction Standard of Review for Summary Judgment Legal Argument A. CGAs Are Excluded From the Definition of "Security" Under All Federal Common Law, Federal Statutes (Including Analysis of Legislative History) and All Arizona State Statutes and Common Law. 1. The Statutory Definitions of a "Security" Under the '33 Act and the '34 Act Specifically Exclude CGAs. 2. The Applicable Exemption of the '33 Act Specifically Exempts CGAs. 3. CGAs are Exempted "Securities" Under the `34 Act. 4. Other Federal Statutes Lead to the Conclusion That CGAs Are Not "Securities" Under Any Part of the Federal Statutes. 5. No Federal Case Defines a CGA as a "Security," and Several Federal Courts Have Held That Fixed Commercial Annuities Are Not Subject to Securities Laws.

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6. CGAs Are Also Exempted Under Arizona Statutory Law. 7. No Arizona Case Has Defined a CGA as a "Security." 8. The Rada Defendants Were Hired as "Independent Associates" By Mid-America Because They Were Not Employees of Mid-America, They Are Not Covered By The PPA as Codified in Section 3(b)(2) of the'34 Act. 9. Any Sale of CGAs Operated to Mid-America's Benefit and Not to Their Detriment, Therefore, Counts Seven, Eight and Ten Do Not State a Claim. B. The Jurisdictional Provisions of the '34 Act Do Not Apply. The State of Arizona Lacks In Personam Jurisdiction Over Non-Resident Defendants Carroll, Derk, Davis, Frazier, Kerher, Lankford, Richard and Wehrly. 1. Requirements for Personal Jurisdiction in Arizona.

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C.

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2. "General" and "Specific" Personal Jurisdiction. 3. The Court Has Personal Jurisdiction Over Arizona Resident Defendants Rada, Bestgen and Crosswell. 4. The Court Does Not Have Personal Jurisdiction Over Any of the Non-resident Rada Defendants.

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D. The Statute of Limitations for the Application of Fraudulent Conveyance Has Expired and Applicable Statute of Repose Bars the Asserted Claims in Count Nine. E. The Establishment of a Constructive Trust in Not Available in This Case. 1. Constructive Trust is a Remedy, Not a Cause of Action, Count Three Should be Dismissed. 2. The Commissions Paid to the Rada Defendants are Not Assets of the Receivership Estate, Thus a Constructive Trust is Unnecessary. 3. The Rada Defendants had No Opportunity to Object to the Court's Decision in SEC v. Dillie and to Actions Taken by the Receiver Prior to the Filing of This Action in December of 2003 and Thus Any Jurisdiction Exercised by the Court Over Commissions Is a Violation of the Rada Defendants' Due Process Rights so the Commissions are Not Subject to Constructive Trust. F. Defendants are Entitled to Summary Judgment on Counts One, Two, Four, Five, Six and Eleven of Plaintiff's Third Amended Complaint Because Plaintiff Does Not Have Standing to Assert Claims That Belong Only to Purchasers of CGAs. 1. Claims for Breach of Fiduciary Duty Can Only Be Brought by the Purchasers of the CGAs. 2. Only the Purchasers Claiming to Be Victims of CGAs Can Sue for Breach of a Confidential Relationship.

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3. Any Damages Resulting From a Claim for Negligence Belongs to Purchasers Claiming to Be Victims, Not to Mid-America or the Receiver; the Receiver Lacks Standing. 4. Only "Victims" May Make a Claim of Unjust Enrichment Against a Defendant; the Receiver Lacks Standing. 5. The Rada Defendants Did Not Make Fraudulent Misrepresentations. 6. "Disgorgement" is Improper in This Case.

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III.

Conclusion

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TABLE OF AUTHORITIES CASES Bils v. Bils, 200 Ariz. 45, 47, 22 P.3d 38, 40 (2001) Burger King Corp. v. Rudzewicz, 471 U.S. 462, 474, 105 S.Ct. 2174, 2183, 85 L.Ed. 2d 528 (1985) Calder v. Jones, 465 U.S. 783, 104 S.Ct. 1482, 79 L.Ed. 2d 804 (1984) Celotex Corporation v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed. 2d 265 (1986) Cohen v. Barnard, Vogler & Company, 199 Ariz. 16, 18, 13 P.3d 758, 760 (App. 2000) Cooper v. Pacific Life Insurance Company, 229 F.R.D. 245, 251 (S.D.Ga. 2005) Corporation Commission v. Equitable Live Assur, Soc. Of United States, 73 Ariz. 171, 176, 239 P.2d 360, 363 (1951) Cunningham v. Brown, 265 U. S. 1, 12-13, 44 S. Ct. 424, 427, 68 L. Ed. 873 (1924) Duran v. Henderson, 71 S.W.3d 833, 838 (Tex.App. 2002) Ernst & Ernst v. Hochfelder, 415 U.S. 185 (1976); 96 S.Ct. 1375, 1384; 47 L.Ed.2d 668 (1976) Estate of Reddert v. United States, 925 F.Supp. 261, 269 (N.J. 1996) Hochfelder v. Midwest Stock Exchange, 503 F.2d 364, 374 (7th Cir. 1974) PAGES 29 27, 28

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CASES International Shoe Co. v. Washington, 326 U.S. 310, 320, 66 S.Ct. 154, 160, 90 L.Ed. 95 (1945) Johnson v. Miller, 596 F.Supp. 768, 772 (D.Colo. 1984) LaFond v. Davis, Superior Court C.A. 03-1039C

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Lander v. Hartford Life & Annuity Insurance Company, 251 F.3d 101, 104 (2nd Cir. 2001) Landreth Timber Company v. Landreth, 471 U.S. 681, 686, n.1, 105 S.Ct. 2297, 2301 (1985) Linder v. Lewis, Roca, Scoville & Beauchamp, 85 Ariz. 118, 123, 333 P. 2d 286, 290 (1958) Marine Bank v. Weaver, 455 U.S. 551, 556, 102 S.Ct. 1220, 1223, 71 L.Ed.2d 409 (1982) Moore v. Browning, 203 Ariz. 102, 108, 50 P.3d 852 (App. 2002) Nutek Information Systems, Inc. v. Arizona Corporation Commission, 194 Ariz. 104, 107, 977 P.2d 826, 829 (App. 1998) Otto v. Variable Annuity Life Insurance Company, 730 F.Supp. 145, 147 (N.D. Ill. 1990) Otto v. Variable Annuity Life Insurance Company, 814 F.2d 1127, 1141 (7th Cir. 1986) Ozee v. American Council on Gift Annuities, 888 F.Supp. 1318, 1321 N.D. Tex. 1995)

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CASES Ozee v. American Council on Gift Annuities, 888 F.Supp. 1318, 1325 (N.D. Tex. 1995) Pioneer Annuity Life v. Nat. Equity Life, 159 Ariz. 148, 153, 765 P.2d 550 (App. 1988) Rhoads v. Harvey Publications, Inc., 124, Ariz. 406, 408, 604 P.2d 670, 672 (App. 1979) San Vicente Medical Partners Ltd. V. American Principals Holding, Inc., 962 F. 2d 1402, 1406 (9th Cir. 1992) Scholes v. African Enterprise, Inc., 838 F.Supp. 349, 357 (N.D. Ill. 1993) Scholes v. Lehmann, 56 F.3d 750, 753 (7th Cir. 1995) Scholes v. Schroeder, 744 F.Supp. 1419, 1422 (N.D.Ill. 1990)

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Scholes v. Stone, McGuire & Benjamin, 821 F.Supp. 533, 535 (N.D.Ill. 1993) SEC v. Dillie, CIV 01-2493 PHX JAT (2003)

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Securities and Exchange Commission v. Bennett, 904 F.Supp. 435, 437 (E.D. Penn. (1995) Securities and Exchange Commission v. Variable Annuity Life Insurance Company of America, 359 U.S. 65, 69-70, 79 S.Ct. 618, 621, 3 L.Ed.2d 640 (1959) State v. Pedersen, 122 Wash.App. 759, 764, 95 P.3d 385, 388 (App. 2004)

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CASES Troelstrup v. Index Futures Group, Inc., 130 F.3d 1274, 1277 (7th Cir. 1997) United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 847, n.12, 95 S.Ct. 2051, 2058, n.12, 44 L.Ed.2d 621 (1975) United States v. Real Property Located at 13328 and 13324 State Highway 75 North, Blaine County, Idaho, 89 F. 3d 551, 553 (9th Cir. 1996) Williams v. Lakeview Co., 199 Ariz. 1, 3, 13 P.3d 280, 282 (2000) STATE STATUTES AND RULES A.R.S. §20-119 (2005) A.R.S. §44-1004

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A.R.S. §44-1004(A)(2) A.R.S. §44-1009 A.R.S. §44-1801(23) (now A.R.S. § 44-1801(26)) A.R.S. §44-1801(26) A.R.S. §44-1843 Ariz.R.Civ.P. Rule 4.2(a) Ariz.R.Civ.P. Rule 4(e)(2) /// ///

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FEDERAL STATUTES AND RULES, LEGISLATION AND OTHER a) 15 U.S.C.A. § 37(b) 15 U.S.C.A. § 77(c)(a)(8) 15 U.S.C.A. § 77b 15 U.S.C.A. § 77b(a)(1) 15 U.S.C.A. § 78c 15 U.S.C.A. §78C(3)(b)(2) 15 U.S.C.A. § 78c(a)(10) 15 U.S.C.A. § 78c(a)(12)(A)(v) 15 U.S.C.A. §78aa 15 U.S.C.A. §80a-3

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65 Am.Jur.2d Receivers §370 Arizona Uniform Fraudulent Transfer Act A Vocabulary of Variable Insurance Products, 813 PLI/Comm 11, 15-16 (2001), p. 20 "Charitable Gifts" by James W. Colliton, 3 Ed. (1996 and 2001) "Charitable Gift Annuities: The Case for Commissions" by Timothy K. Keehan and Mark A. Absher Commodities Exchange Act Federal Securities Act of 1933

Also cited: (May 27, 1933, c. 38, Title I, § 2, 48 Stat. 74; June 6, 1934, c. 404, §§ 201, 210, 48 Stat. 905, 908; Aug.

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FEDERAL STATUTES AND RULES, LEGISLATION AND OTHER 10, 1954, c. 667, Title I, §§ 1 to 4, 68 Stat. 683; June 25, 1959, Pub.L. 86-70, § 12(a), 73 Stat. 143; July 12, 1960, Pub.L. 86-624, § 7(a), 74 Stat. 412; Dec. 14, 1970, Pub.L. 91-547, § 27(a), 84 Stat. 1433; Oct. 21, 1980, Pub.L. 96477, Title VI, § 603, 94 Stat. 2294; Oct. 13, 1982, Pub.L. 97-303, § 1, 96 Stat. 1409; Dec. 4, 1987, Pub.L. 100-181, Title II, §§ 201, 202, 101 Stat. 1252; Oct. 11, 1996, Pub.L. 104-290, Title I, § 106(a), 110 Stat. 3424; Nov. 3, 1998, Pub.L. 105-353, Title III, § 301(a)(1), 112 Stat. 3235; Dec. 21, 2000, Pub.L. 106-554, § 1(a)(5) [Title II, § 208(a)(1)], 114 Stat. 2763, 2763A-434.) Federal Securities and Exchange Act of 1934

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Also cited: (June 6, 1934, c. 404, Title I, § 3, 48 Stat. 882; Aug. 23, 1935, c. 614, § 203(a), 49 Stat. 704; Proc. No. 2695, eff. July 4, 1946, 11 F.R. 7517, 60 Stat. 1352; June 25, 1959, Pub.L. 86-70, § 12(b), 73 Stat. 143; July 12, 1960, Pub.L. 86-624, § 7(b), 74 Stat. 412; Aug. 20, 1964, Pub.L. 88-467, § 2, 78 Stat. 565; Aug. 10, 1970, Pub.L. 91-373, Title IV, § 401(b), 84 Stat. 718; Dec. 14, 1970, Pub.L. 91-547, § 28(a), (b), 84 Stat. 1435; Dec. 22, 1970, Pub.L. 91-567, § 6(b), 84 Stat. 1499; June 4, 1975, Pub.L. 94-29, § 3, 89 Stat. 97; May 21, 1978, Pub.L. 95-283, § 16, 92 Stat. 274; Oct. 21, 1980, Pub.L. 96-477, Title VII, § 702, 94 Stat. 2295; Oct. 13, 1982, Pub.L. 97-303, § 2, 96 Stat. 1409; Aug. 10, 1984, Pub.L. 98-376, § 6(a), 98 Stat. 1265; Oct. 3, 1984, Pub.L. 98-440, Title I, § 101, 98 Stat. 1689; Oct. 22, 1986, Pub.L. 99-514, § 2, 100 Stat. 2095; Oct. 28, 1986, Pub.L. 99-571, Title I, § 102(a) to (d), 100 Stat. 3214 to 3216; Dec. 4, 1987, Pub.L. 100-181, Title III, §§ 301 to 306, 101 Stat. 1253, 1254; Nov. 19, 1988, Pub.L. 100-704, § 6(a), 102 Stat. 4681; Aug. 9, 1989,

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FEDERAL STATUTES AND RULES, LEGISLATION AND OTHER Pub.L. 101-73, Title VII, § 744(u)(1), 103 Stat. 441; Oct. 15, 1990, Pub.L. 101-429, Title V, § 503, 104 Stat. 952; Nov. 15, 1990, Pub.L. 101-550, Title II, §§ 203(b), 204, 104 Stat. 2717, 2718; Dec. 17, 1993, Pub.L. 103-202, Title I, §§ 106(b)(2)(A), 109(a), 107 Stat. 2350, 2352; Sept. 23, 1994, Pub.L. 103-325, Title II, § 202, Title III, § 347(a), 108 Stat. 2198, 2241; Dec. 8, 1995, Pub.L. 104-62, § 4(a), (b), 109 Stat. 684; Oct. 11, 1996, Pub.L. 104-290, Title I, § 106(b), Title V, § 508(c), 110 Stat. 3425, 3447; Nov. 3, 1998, Pub.L. 105-353, Title III, § 301(b)(1) to (4), 112 Stat. 3235; Nov. 12, 1999, Pub.L. 106-102, Title II, §§ 201, 202, 207, 208, 221(b), 231(b)(1), 113 Stat. 1385, 1390, 1394, 1395, 1401, 1406; Dec. 21, 2000, Pub.L. 106554, § 1(a)(5) [Title II, § 201], 114 Stat. 2763, 2763A413; July 30, 2002, Pub.L. 107-204, § 2(b), Title II, § 205(a), Title VI, § 604(c)(1)(A), 116 Stat. 749, 773, 796; Oct. 25, 2004, Pub.L. 108-359, § 1(c)(1), 118 Stat. 1666; Oct. 30, 2004, Pub.L. 108-386, § 8(f)(1) to (3), 118 Stat. 2232; Dec. 8, 2004, Pub.L. 108-447, Div. H, Title V, § 520(1), 118 Stat. 3267.) Investment Company Act of 1940 Philanthropy Protection Act of 1995 Ralph Ewing Clark, Clark on Receivers §592(a) (3d ed. 1958) SEC Rule 10b-5 "Should Charities Be Precluded From Using The Same Compensation Methodologies Used By Nearly Every Other Industry In America?" by Mark A. Absher Texas Insurance Code Art. 1.14-1(2)(a) U.S. Constitution Amendment XIV Washington Rev. Code § 21.20.005(12)(a) (2005) Washington Security Act

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MEMORANDUM OF POINTS AND AUTHORITIES II. INTRODUCTION Mid-America Foundation Inc. ("Mid-America") hired independent contractors throughout the country, via "Independent Associate Agreements" to sell chari-

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table gift annuities. SSOF ¶ 1. These independent contractors were licensed insurance sales agents. SSOF ¶ 2. In December of 2003, the Plaintiff, Lawrence J. Warfield, in his capacity as Receiver for Mid-America, caused a nine-count complaint to be filed against the above-named Rada Defendants that were hired by

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Mid-America to sell charitable gift annuities. SSOF ¶ 3. The Complaint was later amended to add additional counts. Plaintiff is on a Third Amended Complaint. SSOF ¶ 3. Each of the Rada Defendants is listed by name and state of residence at the time the Complaint was filed (see SSOF ¶ 4):

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Rada Defendants Bestgen, Leonard & Betty Carroll, Robert Crosswell, Rudy & Mary Davis, Charles Derk, Richard Frazier, Orville Dale Kerher, Ronald Allen Lankford, Dwight Rada, John & Candes Richard, Paul Wehrly, Patrick & Andrea

State of Residence at the time Complaint was filed Arizona California Arizona Massachusetts Florida South Dakota South Dakota Texas Arizona Maine Texas

Plaintiff has alleged that Defendants received commissions from Mid-

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America for services in the sale of Mid-America Foundation charitable gift annuities ("CGAs) to Mid-America clients. SSOF ¶ 5. Plaintiff now complains

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that those commissions were fraudulent conveyances. SSOF ¶ 6. Mid-America provided each individual sales representative with consumer brochures and marketing materials, which included biographical information of Mid-America Board of Directors and Trustees. SSOF ¶ 13. Mid-America also

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provided the sales representatives with a personal data sheet and a Gift Annuity Disclosure Statement for each individual prospective Mid-America annuity purchaser. SSOF ¶ 13. Financial and summary balance sheets were provided. SSOF ¶ 13.

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The only federal claim in Plaintiff's Third Amended Complaint is found in Count Seven, which alleges that Defendants violated Section 12 of the Federal Securities Act of 1933 ("33 Act"), Section 10(b) of the Federal Securities and

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Exchange Act of 1934 ("'34 Act") and SEC Rule 10b-5. All other claims are state claims. SSOF ¶ 7. The only credible basis for personal jurisdiction alleged by the Plaintiff is the "nationwide service of process" provision of the Federal Securities and Exchange Act, 15 U.S.C.A. §78aa, (Section 27, '34 Act). SSOF ¶ 8, except

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that the moving parties contest the applicability of Section 27. The findings of the Court in S.E.C. v. Dillie, CIV 01-2493 PHX JAT (2003), indicate that Mr. Dillie submitted to a default judgment. SSOF ¶ 9. The Court in

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that case found that what Mid-America was selling constituted a "security" under federal law. SSOF ¶ 10. But that was the uncontested theory of the government's

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lawyers. SSOF ¶ 9. II. STANDARD OF REVIEW FOR SUMMARY JUDGMENT "Under Rule 56(c) summary judgment is proper `if the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if

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any show that there is not a genuine issue of material fact and that the moving party is entitled to a judgment as a matter of law." Celotex Corporation v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed. 2d 265 (1986). Additionally, the party opposing a summary judgment motion "must come forward with compe-

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tent summary judgment evidence of the existence of a genuine fact issue." Ozee v. American Council on Gift Annuities, 888 F.Supp. 1318, 1321 N.D. Tex. 1995). The Receiver in this case "must do more than simply show that there is some

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metaphysical doubt as to the material facts." He "must `set forth specific facts showing that there is a genuine issue for trial.'" Id. This Motion is predicated upon the following: (A) CGAs are excluded from the definition of "security" under all federal

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common law, federal statutes and all Arizona state statutes and common law; (B) apply; The jurisdictional provisions of Section 27 of the '34 Act do not

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(C)

The State of Arizona lacks in personam jurisdiction over non-resident

Defendants Carroll, Derk, Davis, Frazier, Kerher, Lankford, Richard and Wehrly;
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(D)

The statute of limitations for the application of fraudulent conveyance

has expired because the applicable statute of repose bars the asserted claims in Count Nine; and (E) Defendants are entitled to summary judgment on Counts One, Two,

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Three, Four, Five, Six and Eleven of Plaintiff's Third Amended Complaint because Plaintiff does not have standing to assert claims that belong only to purchasers of CGAs. Though the Court made a finding in SEC v. Dillie, CIV 01-2493 PHX JAT,

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that a CGA is a "security" such finding is not binding upon the Rada Defendants who were not named in that case and who did not appear. See SEC v. Dillie, CIV 01-2493-PHX-JAT (2003). If in fact a charitable gift annuity is not a security

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under federal law, personal jurisdiction must rest, if it is to succeed at all, upon Arizona's long-arm statute, if at all. Ariz.R.Civ.P. Rule 4.2(a), (formerly 4(e)(2)). /// ///

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III.

LEGAL ARGUMENT A. CGAs Are Excluded From the Definition of "Security" Under All Federal Common Law, Federal Statutes (Including Analysis of Legislative History) and All Arizona State Statutes and Common Law.1 1. The Statutory Definitions of a "Security" Under the '33 Act2 and the '34 Act 3 Specifically Exclude CGAs.

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Section 2(a)(1) of the '33 Act provides a detailed definition of a "security," which specifically excludes a CGA: "`security' means any note, stock, treasury

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stock, security future, bond, debenture ... etc."4 In like manner, Section 3 of the '34 Act provides a similarly detailed definition of a security that specifically excludes a CGA: "The term "security" means any note, stock, treasury stock, security future, bond, debenture ... etc.5 The United States Supreme Court has held that the two definitions are considered to be "virtually identical and will be treated as such in ... decisions dealing with the scope of the term." Landreth Timber Company v. Landreth, 471 U.S. 681, 686, n.1, 105 S.Ct. 2297, 2301 (1985) citing Marine Bank v. Weaver,

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For an exhaustive and definitive analysis of the subject of the definition of "security" under federal law and the exclusion and exemption of CGAs and pooled income funds, see the following two copyrighted but unpublished articles attached hereto as Exhibit 1: "Charitable Gift Annuities: The Case for Commissions," by Timothy K. Keehan and Mark A. Absher (2003); "Should Charities Be Precluded from Using the Same Compensation Methodologies Used by Nearly Every Other Industry in America?," by Mark A. Absher. 2 See 15 U.S.C.A. § 77b. 3 See 15 U.S.C.A. § 78c(a)(10). 4 15 U.S.C.A. § 77b(a)(1). 5 15 U.S.C.A. § 78c(a)(10).

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455 U.S. 551, 555, n.3, 102 S.Ct. 1220, 1223, n.3, 71 L.Ed.2d 409 (1982); United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 847, n.12, 95 S.Ct. 2051,

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2058, n.12, 44 L.Ed.2d 621 (1975). Additionally, the United States Supreme Court held "[i]t is axiomatic that `[t]he starting point in every case involving construction of a statute is the language itself.'" Landreth, 471 U.S. at 686, 105 S.Ct. 2301.

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It is not incumbent upon the Rada Defendants or the Plaintiff to infer meaning of a section of a federal statute when the terms of the statute are "unambiguous." In that instance, "judicial inquiry is complete.'" Estate of Reddert v. United States, 925 F.Supp. 261, 269 (N.J. 1996). When the "plain meaning of a

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statute is evident from the face of the statute, `the sole function of the courts is to enforce it according to its terms.'" Id. And, of course, the failure to include may infer the intention to exclude.

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The plain language of each definition specifically excludes CGAs as covered by the `33 Act and the `34 Act. Both enactments have been amended multitudinous times since they were first passed in 1933 and 1934, by both liberal and conservative congressional bodies, enforcing the theory of conscious and

22 23 24 25 History of the Securities Act: (May 27, 1933, c. 38, Title I, § 2, 48 Stat. 74; June 6, 1934, c. 404, §§ 201, 210, 48 Stat. 905, 908; Aug. 10, 1954, c. 667, Title I, §§ 1 to 4, 68 Stat. 683; June 25, 1959, Pub.L. 86-70, § 12(a), 73
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intentional exclusion.6 If Congress had intended to include CGAs as part of the

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definition of a security covered by the Acts it would have been easy to have included it. The latest amendments to the Acts occurred in 2000 and 2004. In 70

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years Congress has not included CGAs in the definition of security in either the '33 Act or the `34 Act. In contrast, the State of Washington has specifically included CGAs in their definition of "security" which was enacted in 1959, latest amendment to the defini-

8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Stat. 143; July 12, 1960, Pub.L. 86-624, § 7(a), 74 Stat. 412; Dec. 14, 1970, Pub.L. 91-547, § 27(a), 84 Stat. 1433; Oct. 21, 1980, Pub.L. 96- 477, Title VI, § 603, 94 Stat. 2294; Oct. 13, 1982, Pub.L. 97-303, § 1, 96 Stat. 1409; Dec. 4, 1987, Pub.L. 100-181, Title II, §§ 201, 202, 101 Stat. 1252; Oct. 11, 1996, Pub.L. 104-290, Title I, § 106(a), 110 Stat. 3424; Nov. 3, 1998, Pub.L. 105-353, Title III, § 301(a)(1), 112 Stat. 3235; Dec. 21, 2000, Pub.L. 106-554, § 1(a)(5) [Title II, § 208(a)(1)], 114 Stat. 2763, 2763A-434.) History of the Exchange Act: (June 6, 1934, c. 404, Title I, § 3, 48 Stat. 882; Aug. 23, 1935, c. 614, § 203(a), 49 Stat. 704; Proc. No. 2695, eff. July 4, 1946, 11 F.R. 7517, 60 Stat. 1352; June 25, 1959, Pub.L. 86-70, § 12(b), 73 Stat. 143; July 12, 1960, Pub.L. 86-624, § 7(b), 74 Stat. 412; Aug. 20, 1964, Pub.L. 88-467, § 2, 78 Stat. 565; Aug. 10, 1970, Pub.L. 91-373, Title IV, § 401(b), 84 Stat. 718; Dec. 14, 1970, Pub.L. 91-547, § 28(a), (b), 84 Stat. 1435; Dec. 22, 1970, Pub.L. 91-567, § 6(b), 84 Stat. 1499; June 4, 1975, Pub.L. 94-29, § 3, 89 Stat. 97; May 21, 1978, Pub.L. 95-283, § 16, 92 Stat. 274; Oct. 21, 1980, Pub.L. 96-477, Title VII, § 702, 94 Stat. 2295; Oct. 13, 1982, Pub.L. 97-303, § 2, 96 Stat. 1409; Aug. 10, 1984, Pub.L. 98-376, § 6(a), 98 Stat. 1265; Oct. 3, 1984, Pub.L. 98-440, Title I, § 101, 98 Stat. 1689; Oct. 22, 1986, Pub.L. 99-514, § 2, 100 Stat. 2095; Oct. 28, 1986, Pub.L. 99-571, Title I, § 102(a) to (d), 100 Stat. 3214 to 3216; Dec. 4, 1987, Pub.L. 100-181, Title III, §§ 301 to 306, 101 Stat. 1253, 1254; Nov. 19, 1988, Pub.L. 100-704, § 6(a), 102 Stat. 4681; Aug. 9, 1989, Pub.L. 101-73, Title VII, § 744(u)(1), 103 Stat. 441; Oct. 15, 1990, Pub.L. 101-429, Title V, § 503, 104 Stat. 952; Nov. 15, 1990, Pub.L. 101-550, Title II, §§ 203(b), 204, 104 Stat. 2717, 2718; Dec. 17, 1993, Pub.L. 103-202, Title I, §§ 106(b)(2)(A), 109(a), 107 Stat. 2350, 2352; Sept. 23, 1994, Pub.L. 103-325, Title II, § 202, Title III, § 347(a), 108 Stat. 2198, 2241; Dec. 8, 1995, Pub.L. 104-62, § 4(a), (b), 109 Stat. 684; Oct. 11, 1996, Pub.L. 104-290, Title I, § 106(b), Title V, § 508(c), 110 Stat. 3425, 3447; Nov. 3, 1998, Pub.L. 105353, Title III, § 301(b)(1) to (4), 112 Stat. 3235; Nov. 12, 1999, Pub.L. 106-102, Title II, §§ 201, 202, 207, 208, 221(b), 231(b)(1), 113 Stat. 1385, 1390, 1394, 1395, 1401, 1406; Dec. 21, 2000, Pub.L. 106-554, § 1(a)(5) [Title II, § 201], 114 Stat. 2763, 2763A-413; July 30, 2002, Pub.L. 107-204, § 2(b), Title II, § 205(a), Title VI, § 604(c)(1)(A), 116 Stat. 749, 773, 796; Oct. 25, 2004, Pub.L. 108-359, § 1(c)(1), 118 Stat. 1666; Oct. 30, 2004, Pub.L. 108-386, § 8(f)(1) to (3), 118 Stat. 2232; Dec. 8, 2004, Pub.L. 108-447, Div. H, Title V, § 520(1), 118 Stat. 3267.)

tion section (12) (a) was in 2002: any note; stock; treasury stock; bond; debenture; evidence of indebtedness; ... charitable gift annuity; (emphasis added)...

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Washington Rev. Code § 21.20.005(12)(a) (2005). The Washington Legislature clearly intended to specifically regulate CGAs

3 4 5 6 7

separately as a security under the Washington Securities Act, contrary to congressional intent indicated in the '33 Act and the '34 Act quoted above. A recent Washington state Court of Appeals case found the State of "Washington's definition [of "security"] mirrors the federal definition, (emphasis added) and thus

8 9 10 11 12

[the court] may look to federal law to determine the meaning of `security.'" State v. Pedersen, 122 Wash.App. 759, 764, 95 P.3d 385, 388 (App. 2004). Irrespective of Pedersen, the Washington definition is similar, but it does not "mirror" the definitions in the '33 and '34 Acts.

13 14 15

2.

The Applicable Exemption of the '33 Act Specifically Exempts CGAs.

The Securities Act was specifically drawn to exclude any "annuity contract"
16 17 18 19 20 21 22 23 24

from coverage by the Act. Even if a CGA were included in section 2(a)(1) of the '33 Act, the specific exemption applicable to charitable securities under Section 3(a)(8) of the '33 Act provides the safe harbor as to "[a]ny insurance or endowment policy or annuity contract ... issued by a corporation subject to the supervision of the insurance commissioner, bank commissioner, or any agency or officer performing like functions, of any state or Territory of the United States...." '33 Act Section 3(a)(8), 15 U.S.C.A. § 77(c)(a)(8).

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The allocation of investment risk between the insurer and the contract owner (i.e., the annuitant) was evidently of great significance to the court. In SEC v.

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Variable Annuity Life Insurance Co. ("VALIC"), where the United States Supreme Court reviewed the characteristics of a fixed annuity as contrasted with a variable annuity. The following particulars were noted for a fixed annuity: (a) the payment of "specified and definite amounts beginning with a certain year of his or her (the

8 9 10 11 12

annuitant's) life"; (b) relatively conservative investment standards imposed upon the issuer; (c) payments continuing until the death of one or two annuitants or for some other defined term; (d) payments constituting both return of investment in the contract and income; and (e) payment amounts varying according to the age of

13 14 15 16

the annuitants. Securities and Exchange Commission v. Variable Annuity Life Insurance Company of America, 359 U.S. 65, 69-70, 79 S.Ct. 618, 621, 3 L.Ed.2d 640 (1959).

17 18 19 20 21

The Supreme Court reasoned that although both fixed and variable annuities involve the transfer of mortality risk from the annuitant to the annuity issuer, the variable annuity product failed to transfer the invest risk to the issuer and "places all the investment risks on the annuitant." VALIC, 359 U.S. at 71, 79 S.Ct. at 621-

22 23 24 25

22. The Court accordingly concluded that variable annuities were securities and not within the exemption provided by Section 3(a)(8) of the '33 Act. Id.

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Unlike variable annuities, CGAs are annuity contracts that bear the characteristics of fixed annuities almost identically as delineated by the Supreme Court in

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VALIC. Further, because the payments are fixed, the issuing charitable organization assumes both the mortality as well as the investment risks from the annuitants. The Rada Defendants were selling CGAs being offered by Mid-America as a 501(c)(3) charitable organization. There is no confusion on that fact by the

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Receiver or the Rada Defendants. SSOF ¶ 11. 3. CGAs are Exempted "Securities" Under the `34 Act.

If an instrument is determined to be a "security " for purposes of the `34 Act, then persons selling such instruments ordinarily will be required to register as

13 14 15 16

a broker-dealer under the provisions of the '34 Act. Section 3, '34 Act; 15 U.S.C.A. § 78c. Even if a CGA is deemed a "security under the `34 Act, it should none the less be deemed an interest or participation in an exempt fund as described

17 18 19 20 21

in Section 3(a)(12)(A)(v) of the '34 Act, thus it is an "exempted security." Because persons selling an exempted security are not subject to the broker-dealer registration provisions under the Exchange Act, an issuer of a CGA and its agents should not be required to register or be regulated as broker-dealers under the '34

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Act requirements. /// ///

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The Philanthropy Protection Act ("PPA")7 amended certain provisions of the Exchange Act to permit the solicitation of funds by chartable organizations and

3 4 5 6 7

associated persons without being deemed a "broker," "dealer," "government securities broker" or "municipal securities broker." Specifically, section 4(a) of the PPA added a new paragraph (v) to the definition of "exempted security" under Section 3 of the '34 Act to include within the term "exempted security" any

8 9 10 11 12

security "issued by or any interest or participation in any pooled income fund, collective trust fund, collective investment fund, or similar fund that is excluded from the definition of an investment company under Section 3(c)(10)(B) of the Investment Company Act of 1940. Section 3(a)(12)(A)(v) of the '34 Act; 15

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U.S.C.A. § 78c(a)(12)(A)(v). Section 3(c)(10)(B) of the Investment Company Act excludes from the definition of an investment company, among other things, "a pooled income fund,

17 18 19 20 21

collective trust fund, collective investment fund, or similar fund by a charitable organization exclusively for the collective investment and reinvestment of one or more of the following: ... (iii) assets contributed to a charitable organization in exchange for the issuance of charitable gift annuities." Section 6(c)(10)(B)(iii),

22 23 24 25
7

Philanthropy Protection Act of 1995; 15 U.S.C.A. § 80a-3(c)(10)(B)(iii).

Public Law 104-62, December 8, 1995; 15 U.S.C.A. § 80a-3a.

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(Emphasis added.) A CGA may be deemed an "interest" or "participation" in the charitable

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income fund on the basis that a CGA functions essentially as a trust. First, CGA assets are expressly identified by statute as among the permissible assets comprising a charitable income fund. Second, CGA assets are managed, invested and separately accounted for during the life of the donor. Third, the charitable

8 9 10 11 12

organization acting as a trustee has a fiduciary duty to invest and otherwise manage the corpus of the charitable income fund for the benefit of the donor or annuitant. Dillie's unlawful and willful failure to obey the law does not change the laws regarding CGAs.

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4.

Other Federal Statutes Lead to the Conclusion That CGAs Are Not "Securities" Under Any Part of the Federal Statutes.

The Antitrust provisions of the Federal statutes passed by Congress provide
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that CGAs "shall have immunity from suit under the antitrust laws, including the right not to bear the cost, burden and risk of discovery and trial, from the conduct set for in this subsection." 15 U.S.C.A. § 37(b). This is further evidence that Congress intended to exclude CGAs from regulation.

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In 15 U.S.C.A. § 80a-3, the definition of "investment company" specifies simply that a charitable organization is not an investment company. The Rada Defendants understood that Mid-America was a 501(c)(3) company. Again, this is

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further evidence that a CGA does not have the characteristics of risk that investment or financial instruments that are defined as securities must have. Therefore,

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the securities laws are inapplicable here. 5. No Federal Case Defines a CGA as a "Security," and Several Federal Courts Have Held That Fixed Commercial Annuities Are Not Subject to Securities Laws. a. CGA Defined.

8 9 10 11 12 13 14

The Federal District Court of the Eastern District of Pennsylvania provided a clear and concise definition of a CGA: A charitable gift annuity is a contractual agreement by a charity to pay a fixed sum at least annually to an annuitant for life in exchange for a transfer of property to the charity. The promise to pay the annuity is backed by all of the assets of the issuing charity. Securities and Exchange Commission v. Bennett, 904 F.Supp. 435, 437 (E.D.

15 16 17 18 19

Penn. (1995). It has clearly been held that a "variable annuity is a `security' within the meaning of the federal securities law." Cooper v. Pacific Life Insurance Company, 229 F.R.D. 245, 251 (S.D.Ga. 2005) (emphasis added). However, the specific and mostly unique characteristic of a CGA is that it provides a fixed rate

20 21 22 23 24

of interest to the annuitant as distinguished from other pooled income funds. Bennett, 904 F. Supp. at 437. /// ///

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b.

"Security" Defined.

Thought the fixed rate of interest is not the only distinguishing feature of the
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CGA, the purchaser of a CGA has a donative intent to gift a preferred charity in exchange for a tax benefit. 26. U.S.C.A. § 170(10)(D). Additionally, the donor knowingly pays more for the CGA than it is worth in order to benefit the charity. See Charitable Gifts, James W. Colliton (3rd Ed. 1996 & 2001), ¶ 8.02[1]. If the

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purchaser of a CGA is looking for a high rate of return, a CGA is not the best financial vehicle for such an investment. In fact, a CGA is not an investment at all. It is a gift made to a charity in exchange for a tax deduction, as outlined in federal tax law and by the intentional exclusion by Congress from securities law.

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While the Supreme Court has held that the definition of a "security" is "quite broad," the highest Court has also held that "Congress in enacting securities laws did not intend to provide a broad federal remedy for all fraud." Marine Bank v.

17 18 19 20 21

Weaver, 455 U.S. 551, 556, 102 S.Ct. 1220, 1223, 71 L.Ed.2d 409 (1982). The test as to whether a financial instrument may be found to be a security is "what character the instrument is given in commerce by the terms of the offer, the plan of distribution, and the economic inducements held out to the prospect." Id. Using

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this analysis, the Court in the Marine Bank case found that a "certificate of deposit" issued by a financial institution had a guarantee of payment to the purchaser, so it was not the type of risk that would be regulated by the securities

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laws claims for losses to a purchaser of a certificate of deposit could be made under the banking laws, so coverage by federal securities laws was unnecessary.

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Id., 455 U.S. at 558-59, 102 S.Ct. at 1224-25. In 1995, the Northern District Court in Texas found that the "offering, making, issuing, selling, or delivering an annuity contract constitutes `the business of insurance' under the Insurance Code" in Texas. Ozee v. American Council on

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Gift Annuities, 888 F.Supp. 1318, 1325 (N.D. Tex. 1995).

In citing Texas

Insurance Code Art. 1.14-1(2)(a), the court found that "any corporation doing business under any charter involving annuities has engaged in `the business of insurance.'" Id. The court in this case determined that the insurance code would

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apply even where a CGA is obtained by a person "motivated exclusively by charitable, not commercial, intent.... A person's motive does not determine whether a transaction is charitable. The nature of the transaction is determined by the

17 18 19 20 21

purpose to which the gift is appropriated." Id., 888 F.Supp. at 1324. In Otto v. Variable Annuity Life Insurance Company, 730 F.Supp. 145, 147 (N.D. Ill. 1990), upon rehearing, the court found the instruments being identified by Variable Annuity Life Insurance Company ("VALIC") were in fact investment

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contracts and subject to the securities laws.

Otto v. Variable Annuity Life

Insurance Company, 814 F.2d 1127, 1141 (7th Cir. 1986) rehearing April 15, 1987, as Amended June 10, 1987 and Rehearing En Banc Denied June 15, 1987. The

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Seventh Circuit Court's reasoning was based upon the fact that VALIC "asserted the right to alter past interest bands." Quite obviously this ability to alter the pay-

3 4 5 6 7

off to the annuitant shifted the risk of the investment to the annuitant. Id. Upon analysis, Rule 151 of the '33 Act provides a "safe harbor" and exemption from securities laws only for annuity contracts that fall within the requirements of the rule. Id., 814 F.2d at 1142.

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The Seventh Circuit Court also found that the variable annuity's funds are invested primarily in common stocks and other equities, and the variable annuity's benefits vary with the success of the company's investment experience." Id., 814 F.2d at 1131. The Mid-America Foundation CGA sold to the Rada Defendants'

13 14 15 16

annuitants affords no risk to the annuitant based upon changing interest rates, "altered interest bands" or the risks of doing business, as the rate was fixed for the life of the contract.

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The Second Circuit also defined a fixed annuity in a decision in 2001: Fixed annuities are typically thought of as insurance products because the annuitant receives a guaranteed stream of income for life, and the insurer assumes and spreads the "mortality risk" of the annuity--the risk that the annuitant will live longer than expected, thereby receiving benefits that exceed the amount paid to the seller of the policy. Citing A Vocabulary of Variable Insurance Products, 813 PLI/Comm 11, 15-16 (2001), p. 20. Lander v. Hartford Life & Annuity Insurance Company, 251 F.3d 101, 104 (2nd Cir. 2001).

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6.

CGAs Are Also Exempted Under Arizona Statutory Law.

The Arizona securities law defining "security" expressly excludes CGAs
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from the definition of a security as well. A.R.S. § 44-1801(26). A current Arizona insurance statute references does now define and regulate the sale of CGAs, but this statute was not in effect in Arizona at the time Mid-America was selling CGAs through independent associates. A.R.S. § 20-119 (2005), as amended in

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2004. Like the PPA, A.R.S. §44-1843 exempts a "pooled income fund, collective trust fund, collective investment fund or similar fund that is excluded from the definition of an investment company under Section 3(c)(10)(B) of the[I]nvestment [C]ompany [A]ct of 1940." See A.R.S. §44-1843(A)(6).

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7.

No Arizona Case Has Defined a CGA as a "Security."

"Whether an instrument is a "security" is always a question of law." Nutek Information Systems, Inc. v. Arizona Corporation Commission, 194 Ariz. 104, 107,

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977 P.2d 826, 829 (App. 1998) as amended November 10, 1998, review denied 1999. The Arizona Court of Appeals has held that the definition of "security" as defined by the Arizona Legislature is "substantially similar" to the definition for security in both the '33 and '34 Acts. Id., 194 Ariz. at 108, 977 P.2d at 830. The

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court determined that the "element of risk" was important to the determination of

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whether a financial instrument was to be considered an "investment contract," as defined in A.R.S. § 44-1801(23).8 As far back as 1951, the Arizona Supreme Court affirmed that a fixed annuity contract is not a "risk based upon contingency of loss." Corporation Commission v. Equitable Live Assur, Soc. Of United States, 73 Ariz. 171, 176, 239 P.2d 360, 363 (1951). There was no "element of risk" involved in the sale of

8 9 10 11 12

CGAs by the Rada Defendants. Each CGA had a fixed rate of return that would never vary tax advantages attributable to CGAs by the IRS, and a charitable gift to any recipient chosen by them. Without Dillie's intervening thievery, the goals were achievable.

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8

8.

The Rada Defendants Were Hired as "Independent Associates" By Mid-America Because They Were Not Employees of Mid-America, They Are Not Covered By The PPA as Codified in Section 3(b)(2) of the'34 Act.

Section 3(b)(2) of the '34 Act places limits on compensation for sales of exempted securities. Section 3(b)(2) '34 Act (15 U.S.C.A. § 78c(3)(b)(2)), states: (2) LIMITATION ON COMPENSATION.--The exemption provided under paragraph (1) shall not be available to any charitable organization, or any trustee, director, officer, employee, or volunteer of such a charitable organization, unless each person who, on or after 90 days after the date of enactment of this subsection, solicits donations on behalf of such charitable organization from any donor to

Now numbered as A.R.S. § 44-1801(26) after amendments.

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a fund that is excluded from the definition of an investment company under section 3(c)(10)(B) of the Investment Company Act of 1940, is either a volunteer or is engaged in the overall fund raising activities of a charitable organization and receives no commission or other special compensation based on the number or the value of donations collected for the fund. The text of the section specifically omits independent contractors like the Rada Defendants. The nature of the CGA offered by Mid-America through the Rada Defendants was a "donative" instrument designed to benefit the annuitant's charity and to afford the annuitant a tax deduction not otherwise available. The

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rate of interest paid to the annuitant was absolutely fixed. Each of the Rada Defendants signed an independent associate agreement with Mid-America to sell the CGAs. Each Rada Defendant was paid a percentage of their respective sales of the CGAs. Since the Rada Defendants were not employees of Mid-America, nor a

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trustee, director, officer or volunteer, but rather an "independent contractor," they are not specifically covered by the language of the '34 Act. The sale of the annuity was a benefit to the charity. There is something completely understandable and fair about the concept of paying the independent

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sales representative who succeeds in completing a sale and not paying the independent sales representative who fails to generate revenue for the charity. The success-related compensation benefited the charity. The Plaintiff has been able to offer no proof other than at the time the Rada Defendants rendered services to the

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annuitants, they could not reasonably have been expected to know they were facilitating anything but tax benefits and a fixed rate of return to the annuitants.

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The Rada Defendants were insurance agents, and they were not required to be NASD registered because they were not selling "securities." 9. Any Sale of CGAs Operated to Mid-America's Benefit and Not to Its Detriment, Therefore, Counts Seven, Eight and Ten Do Not State a Claim.

In Scholes v. Schroeder, 744 F.Supp. 1419, 1422 (N.D.Ill. 1990), a courtappointed receiver alleged that a "Ponzi" scheme violated certain federal security laws in the sale of fraudulent investments. Schroeder, 744 F.Supp. at 1423. The court stated: "[t]o the extent that such a claim continues to speak on behalf of the

13 14 15 16

investors as such it cannot stand." Id. There, the receiver alleged that the "investors and the receivership entities" relied in their purchase and sale of fraudulent investments. Schroeder, 744 F.Supp. at 1423. The court stated that such "conclu-

17 18 19 20 21

sory wording alone," (i.e., that the investors and receivership entities relied to their detriment in purchasing and selling limited partnership interests) did not permit the court to circumvent the limitations of the receiver's standing. The court rightly found that any "reliance" by the receivership entities on

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the [defrauders'] misconduct in the sale of securities operated to the entities' benefit and not to their detriment. In like fashion, it cannot be refuted that MidAmerica's deceit enabled it to sell securities ­ securities that would not have been

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sold had [the Mid-America defrauders] published financial statements indicating Dillie's grand theft of $54 million. It was Mid-America that was generating all or

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most of the documentation the sales representatives were providing to the potential annuitants. There was no way for the sales representatives to know Dillie was promising solvency while stealing money from annuity funds. In at least one instance, as described by Lisa Mayfield, financial information was requested, and

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promises to produce it were made, but never kept. Securities laws may disclose theft after the fact, but cannot prevent theft from occurring. Any detriment

sustained by the entities came from the post-sale looting by [the defrauders]. Id. The Schroeder court applied this same analysis to the next count in the receiver's

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complaint that alleged "aiding-and-abetting (claim) based upon Douglas' asserted violations of [federal securities law] and upon Schroeder's having assisted in those violations." Id. at 1424.

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a.

The Rada Defendants' Sale Activities Did Not Violate Securities Law.

Plaintiff alleges in Counts Seven and Eight of his Third Amended
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Complaint that Defendants violated federal and state security laws (a conclusion contested by the Rada Defendants) by making untrue statements to the Victims "in connection with the sale of" of CGAs. Warfield also alleges this "also caused harm to Mid-America ... because Defendant-agents' misrepresentations aided and

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abetted Dillie's Ponzi scheme thereby deepening and furthering the insolvencies of Mid-America...." [Id. ¶¶ 161, 166] (emphasis added). The sale of CGAs ­ that is,

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the collection of money--did not further Mid-America's insolvency; and to the contrary, the sales of CGAs funded the charity. Warfield cannot claim that the Rada Defendants put Mid-America into bankruptcy. Dillie's theft caused the Foundation's insolvency. Only Dillie's passion for gambling and spending and

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nothing more. Adding money to the legitimate bank accounts of Mid-America via successful CGA sales by the innocents cannot cause insolvency. Stealing sales receipts can do that very effectively. b. "Aiders and Abetters" Cannot be Changed With Securities Violations Unless There is Proof They "Actively and Knowingly" Engaged in Fraudulent Activities Not Present in This Case.

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Conclusory wording in the Complaint that Defendants' alleged violations of
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security laws aided and abetted Dillie's Ponzi scheme and caused harm to MidAmerica is not supportable for the reasons that aiders and abetters cannot be charged with securities violations unless they actively and knowingly engaged in the fraudulent activities of the issuer. Hochfelder v. Midwest Stock Exchange, 503

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F.2d 364, 374 (7th Cir. 1974); Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976); 96 S.Ct. 1375, 1384; 47 L.Ed.2d 668 (1976). Based on the substantive allegations (¶¶ 161, 166 and preceding paragraphs

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of the Complaint), the alleged misrepresentations of the Rada Defendants immediately and affirmatively operated to Mid-America's benefit and not to its

3 4 5 6 7

detriment. The alleged misrepresentations brought money into Mid-America's inviolable trust accounts through a one-way revolving door. The issuance of accurate financial statements from Mid-America would have shown Mid-America was bankrupt and would have brought in zero investor funds, bankrupting the

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Foundation. The detriment sustained by Mid-America instead came from Dillie's unabashed thieving ways. Accordingly, the allegations of Counts Seven and Eight (that Mid-America suffered a "detriment" resulting from Defendants' alleged violations of securities laws is a legal fiction) are not supportable by law or fact. The

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facts do not support Plaintiff's claims, and the law does not support Warfield's conclusory assertions.9 Additionally, the Court should grant summary judgment on Counts Seven

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and Eight because a CGA is not a "security." Additionally, Counts Seven and Eight assert damage claims personal to the annuitants. Plaintiff does not have standing to sue under forthcoming analysis. c. There was no Conversion by the Rada Defendants' Acting as Independent Sales Associates.

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9

Count Ten alleges that Dillie "wrongfully diverted ... monies belonging to

"Hamlet's dictum that `there is nothing either good or bad but thinking makes it so' has limited scope in federal

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Mid-America ... to Defendant-agents in order to pay them facilitation fees for the sales of CGAs which perpetuated his Ponzi scheme." [Id. ¶ 173]. However, the

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payment of commissions to the Rada Defendants, which otherwise would have been stolen by Dillie, did not aid the Ponzi Scheme, any more than payment of printing costs or the United States Post Office aided the Ponzi Scheme. Theft was the raison d'etre for Mid-America's termination as a charitable foundation.

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Whether Dillie paid "facilitation" fees to Defendants or withheld payment is irrelevant to its demise. Payment of operating expenses did not cause the downfall of Mid-America as espoused by Plaintiff. To the extent that Count Ten alleges that Dillie's wrongful diversion

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consisted of the payment of "facilitation" fees to Defendants, the commission facilitating the sales of CGAs operated to Mid-America's benefit, and not to its detriment. Plaintiff unwittingly asserts that Dillie's payment of commissions

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enabled Mid-America to sell the CGAs (which is true); and that the CGAs would not have been sold had Dillie not paid the "facilitation" fees to Defendants (which is also true); and attempts to link these two facts to the Ponzi scheme. Where there is always payment for services rendered, the Court has held this to be not aiding

22 23 24 25 litigation." Troelstrup, 130 F.3d at 1278.

and abetting. Plaintiff sidesteps the real issue: Any detriment sustained by Mid-

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America came from the admitted post-sale looting by Dillie, not by the influx of cash from the sale of CGAs. Count Ten alleges wrongful diversion, but under the

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precedent cited in section "F" below, Plaintiff does not have standing to allege a personal claim belonging only to the purchasers of the CGAs from Mid-America. Such claims belong to annuitants and not to the Receiver. B. The Jurisdictional Provisions of the '34 Act Do Not Apply.

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The provisions for nationwide service of process under federal law (Section 27 of the '34 Act; 15 U.S.C.A. §78aa) also do not apply in this case if charitable gift annuities are neither classified as "securities" or "exempted securities." C. The State of Arizona Lacks In Personam Jurisdiction Over Non-Resident Defendants Carroll, Derk, Davis, Frazier, Kerher, Lankford, Richard and Wehrly. 1. Requirements for Personal Jurisdiction in Arizona

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For the Court to have personal jurisdiction over each of the Rada
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Defendants, who were and are non-residents of Arizona, Warfield must answer "yes" to a court-imposed two-part analysis: (i) has the Defendant done business or caused an event to occur in Arizona out of which the claim which is the subject of the complaint arose? and, (ii) is the exercise of personal jurisdiction over the

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Defendant consistent with the requirements of the due process clause of the fourteenth amendment? Rhoads v. Harvey Publications, Inc., 124, Ariz. 406, 408, 604 P.2d 670, 672 (App. 1979) rehearing and review denied citing Ariz.R.Civ.P.

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4(e)(2) and U.S. Const. Amend XIV. The State of Arizona's authority to exercise personal jurisdiction over a non-resident defendant is derived from Arizona's

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"long-arm" statute that confers jurisdiction over non-resident defendants to the "fullest extent permitted by the Due Process Clause" of the Fourteenth Amendment and "hinges on federal law." Williams v. Lakeview Co., 199 Ariz. 1, 3, 13 P.3d 280, 282 (2000).

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Plaintiff is required to prove that the Defendants have "sufficient minimum contacts" with the State of Arizona, "such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice." International Shoe Co. v. Washington, 326 U.S. 310, 320, 66 S.Ct. 154, 160, 90 L.Ed. 95 (1945).

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2.

"General" and "Specific" Personal Jurisdiction

"Personal jurisdiction may be divided into two types: (1) general jurisdiction and (2) specific jurisdiction." Id. Under either specific or general jurisdiction the

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Receiver will also have to prove that the Defendants "purposefully established `minimum contacts in the forum state.'" Id., citing Burger King Corp. v.

Rudzewicz, 471 U.S. 462, 474, 105 S.Ct. 2174, 2183, 85 L.Ed. 2d 528 (1985). a. The Level of Contact Required to Show General Jurisdiction is Quite High, But a High Level of Contact Is Non-Existent in This Case.

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The non-resident Defendants in this case will only be "subject to general jurisdiction if the Defendant's contacts" with the State of Arizona "are substantial

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or continuous and systematic enough that" they "may be haled into court" in Arizona, "even for claims unrelated to the defendant's contacts" with Arizona.

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Williams, 199 Ariz. At 3, 13 P.3d at 282. But "[t]he level of contact required to show general jurisdiction is quite high." Id. b. The Court May Find Specific Jurisdiction Only if Three Specific Circumstances are Met, and They Are Not Met In This Case.

If the non-resident Rada Defendants' activities in Arizona "are not so pervasive as to subject it to general jurisdiction, the Court may still find specific jurisdiction if it makes a "finding" that: (1) the Defendant purposefully avails himself of the privilege of conducting business in the forum; (2) the claim arises out of or

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relates to the Defendant's contact with the forum; or (3) the exercise of jurisdiction is reasonable. Id. Specific jurisdiction does not arise from the non-resident Defendant's mere foreseeability that a claim may arise. Id. The issue of personal

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jurisdiction will be decided upon weighing facts of each case in determining whether exercising personal jurisdiction over a non-resident Defendant would "comport with `fair play and substantial justice.'" Id., 199 Ariz. at 4, 13 P.3d at 283.

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Accordingly, the Receiver must show that each of the separately named Defendants "`purposefully created contacts' with Arizona ... or `purposefully directed' [its] activities' at Arizona residents." Also, Plaintiff's claims must "arise

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out of or relate to" the Defendant's forum activities. Cohen v. Barnard, Vogler & Company, 199 Ariz. 16, 18, 13 P.3d 758, 760 (App. 2000). This means that the

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non-resident Rada Defendants must have made Arizona the "`focal point' of the harm" alleged by the Receiver. The mere "effect of a damage-causing event or consequences suffered in the forum state are not enough under Arizona law. Id., 199 Ariz. at 760-61, 13 P.3d 18-19, citing Calder v. Jones, 465 U.S. 783, 104 S.Ct.

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1482, 79 L.Ed. 2d 804 (1984). Under Arizona law, minimum contacts are considered when "a court properly focuses on the relationship among the defendants, the forum and the litigation." Bils v. Bils, 200 Ariz. 45, 47, 22 P.3d 38, 40 (2001). None of the non-

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resident Rada Defendants made Arizona the "focal point" of their sales activities and because no CGAs were sold to Arizona residents by these non-resident Rada Defendants. It is evident therefore that no "harm" was suffered by Arizona resi-

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dents as a result of any activity of any non-resident Rada Defendant. 3. The Court Has Personal Jurisdiction Over Arizona Resident Defendants Rada, Bestgen and Crosswell.

The three Arizona resident Defendants (Rada, Bestgen and Crosswell) fall within the jurisdictional bounds of the Arizona District Court without any further showing and arguments relating to personal jurisdiction do not therefore concern them.

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The Plaintiff alleges that personal jurisdiction is achieved through Section 27 of the '34 Act which allows for "nationwide service of process (where) any act

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or transaction constituting the violation occurred." (Section 27 of the '34 Act equated with 15 U.S.C.A. §78aa. See First Amended Complaint, ¶ 27. However, the Plaintiff's Complaint also fails to allege a separate basis for personal jurisdiction for each of its pendent state law claims. Had the Complaint properly

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alleged grounds for jurisdiction over the non-resident Defendants for the state claims, the facts set forth in their attached Declarations clearly indicates insufficient minimum contacts for personal jurisdiction under the Arizona long-arm statute. Moreover, a "security" transaction must be at the core of the violation to

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bring non-residents before an Arizona District Court and under Section 27 of the '34 Act. (SSOF ¶ 7) 4. The Court Does Not Have Personal Jurisdiction Over Any of the Non-resident Rada Defendants.

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A review of the Declarations by non-resident Defendants Carroll, Derk, Davis, Frazier, Kerher, Lankford and Richard establishes insufficient minimum

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contacts with Arizona to grant the Court personal jurisdiction. (SSOF ¶ 8) The Court is required to answer the question regarding personal jurisdiction as to each non-resident Defendant and therefore must make separate findings of fact that each of the non-resident Rada Defendants each intentionally or purposefully created

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contacts in Arizona. But none of the non-resident Defendants has: Ever lived in Arizona;10 Has relatives in Arizona; Attended School in Arizona;11 Voted in Arizona; Owned a Bank Account in Arizona;12 Conducted business in Arizona;13 Had a Arizona Driver's License or any other license issued by any other governmental agency in Arizona;14 Owned real property in Arizona;15 Vacationed in Arizona.16 Some of these non-resident Rada Defendants did attend training seminars in

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Arizona, but no more. Some did not even visit Arizona. Attending a seminar or training session is insufficient to create the required minimum contacts for the Arizona long-arm statute to apply. International Shoe Co., 326 U.S. at 320, 66 S.Ct. at 160. None of the Defendants intentionally created contacts with Arizona

15 16 17 18 19 20 21 22 23 24 25 Rada Defendant Wehrly lived in Arizona for a short period of time between the dates of February 1995 and September 1998. See Declaration of Patrick Wehrly, ¶5. 11 Rada Defendant Patrick Wehrly attended insurance school in Arizona in approximately 1996 or 1997. See Declaration of Patrick Wehrly, ¶5. 12 Rada Defendant Wehrly had bank accounts in Arizona during February 1995 and September 1998. See Declaration of Patrick Wehrly, ¶5. 13 Rada Defendant Kerher works with approximately four South Dakota residents who vacation in Arizona, he continues to work with them or their power of attorney. Kerher has never conducted CGA business in Arizona; he only serviced clients holding existing accounts. There were no new solicitations to Arizona residents. See Declaration of Ronald A. Kerher, ¶9. Rada Defendant Wehrly conducted an estate planning business during the time he lived in Arizona in February 1995 to September 1998. See Declaration of Patrick Wehrly, ¶5. 14 Rada Defendant Lankford has an Arizona non-resident insurance license. See Declaration of Dwight Lankford, ¶2. Rada Defendant Kerher holds an Arizona Non-Resident Securities (NASD) appointment and Arizona nonresident insurance license. See Declaration of Ronald A. Kerher, ¶5. 15 Rada Defendant Robert Carroll owns a one parcel of real property in Arizona. 16 Visits by Rada Defendant Kerher (if any) were brief vacations, prior to and after his first CGA sale. See Declaration of Ronald A. Kerher, ¶11.
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residents in relation to the charges in the Complaint. All of the work for Mid-

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America was completed outside of the State of Arizona in their home state, where the annuitants lived. (SSOF ¶ 4; see Declarations of Rada Defendants Robert

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Carroll, Charles Davis, Richard Derk, Orville Dale Frazier, Ronald A. Kerher, Dwight Lankford, Paul E. Richard and Patrick Wehrly.) Additionally, it is unreasonable and unfair to hale any one of these Defendants into court in Arizona. Because under Arizona's long-arm statute there is no personal jurisdiction over

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these non-resident Rada Defendants, the Complaint agai