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Securities & Exchange Commission v. Mahabub

United States District Court, D. Colorado

December 22, 2017

SECURITIES & EXCHANGE COMMISSION, Plaintiff,
v.
TAJ JERRY MAHABUB, and GENAUDIO, INC., Defendants.

          ORDER DENYING MOTION TO STRIKE AND DENYING MOTION FOR SUMMARY JUDGMENT WITHOUT PREJUDICE

          WILLIAM J. MARTINEZ, UNITED STATES DISTRICT JUDGE.

         This is a securities fraud case that Plaintiff Securities and Exchange Commission (“SEC”) has brought against Taj “Jerry” Mahabub (“Mahabub”) and the company he founded, GenAudio, Inc. (“GenAudio”) (together, “Defendants”). This case is deceptively complicated because, although it is beyond dispute that Mahabub sometimes lied about certain of GenAudio's business relations, it is not always clear how these lies fit within the framework of the various theories of liability the SEC asserts.

         Currently pending before the Court are two substantive motions: (1) the SEC's Motion for Summary Judgment, seeking to establish Defendants' liability on all causes of action, leaving only remedies for further consideration (ECF No. 53); and (2) Mahabub's Motion to Strike Exhibits Submitted with Plaintiff's Reply in Support of Summary Judgment (“Motion to Strike”) (ECF No. 75), which GenAudio has joined (ECF No. 77). Also before the Court is GenAudio's Request for Oral Argument on Summary Judgment (ECF No. 67) and Mahabub's Joinder in and Request for Oral Argument on Summary Judgment (ECF No. 69).

         For the reasons explained below, the Motion to Strike will be denied. As for the Motion for Summary Judgment, the Court reluctantly must send the parties back to the proverbial drawing board. There are too many problems with both parties' briefs that the Court has no confidence it can make a well-informed, well-supported decision on the current record-and these problems are too extensive to be sorted out simply through oral argument. Accordingly, the SEC's Motion for Summary Judgment will be denied without prejudice to re-filing, and Defendants' requests for oral argument will be denied as moot.

         I. EVIDENTIARY OBJECTIONS & THE MOTION TO STRIKE

         Summary judgment turns on whether material facts are genuinely disputed. Defendants have attempted to create factual disputes through an extended series of evidentiary objections, and through their Motion to Strike, which seeks to prevent the SEC from addressing Defendants' evidentiary objections.

         As required by WJM Revised Practice Standard III.E.3, the SEC's Motion for Summary Judgment included a statement of material facts in numbered paragraphs, with citations to supporting evidence. (ECF No. 53 at 9-30.)[1] And, as required by WJM Revised Practice Standard III.E.4, Defendants included in their respective response briefs a section admitting or denying the SEC's various asserted facts. (ECF No. 58 at 5-15; ECF No. 60 at 6-19.)[2] However, the vast majority of Defendants' denials are solely “on the basis [that] the evidence is inadmissible.” (See id., passim.) As to these denials, Defendants cite to a separate, 19-page document[3] (“Objections Brief”) that GenAudio attached to its response brief. (See ECF No. 58-71.)

         The Objections Brief explains in detail Defendants' evidentiary objections.[4] The majority of these objections are highly technical, often having to do with authentication, such as the failure to include the shorthand reporter's signed certification page at the end of an exhibit comprising deposition excerpts (id. at 5-6); or, as to documentary evidence, the fact that “Plaintiff has not cited to anything in the record properly authenticating the [document], ” including many documents that Defendants produced from their own files (id. at 9-19). Defendants also object that the SEC's Federal Rule of Evidence 1006 summary exhibits are based on documents that were not themselves introduced into the summary judgment record (id. at 6-8), although that Rule only requires the proponent to make the underlying documents “available for examination . . . at a reasonable time and place.” Defendants nonetheless frame these Rule 1006 exhibits as “violat[ing] the best evidence rule, ” referring to Rule 1002. (ECF No. 58-71 at 6-8.) Finally, Defendants assert a number of hearsay objections, mostly regarding e-mails sent or received by persons expected to be witnesses at any trial in this case. (See, e.g., id. at 11-12, 14-15, 16-17.)

         The SEC, in its summary judgment reply brief, attached a separate document responding to the Objections Brief. (ECF No. 66-27.) The SEC also attached evidence filling in the purported gaps asserted by Defendants, such as shorthand reporter certifications and additional deposition excerpts showing that various witnesses had authenticated the e-mails and other documentary evidence attached to the opening brief. (See ECF Nos. 66-1 through 66-23 & 66-25 through 66-26.)

         Defendants then filed their Motion to Strike, opening with the following lines: “‘Do-over, ' ‘reboot, ' and ‘second bite of the apple' are all terms that could be applied to the SEC's Reply in Support of Summary Judgment. . . . [N]o provision of FRCP 56, governing motions for summary judgment, provides for such an extreme ‘mulligan.'” (ECF No. 75 at 3.) Defendants argue that the SEC's newly attached evidentiary excerpts should be stricken, or that Defendants should at least be permitted to file surreplies. (Id. at 4, 10.)

         Defendants' attorneys apparently choose to ignore Federal Rule of Civil Procedure 56(c)(2): “A party may object that the material cited to support or dispute a fact cannot be presented in a form that would be admissible in evidence” (emphasis added). This is the only appropriate basis on which to raise an evidentiary objection at the summary judgment phase. To be sure, there exist legitimate evidentiary objections, including authenticity objections, that a party might raise against summary judgment evidence. But, unless “apparent from the context, ” the objection must “state[] the specific ground, ” Fed.R.Evid. 103(a)(1)(B), or in other words, explain why the proponent of the evidence will have no way of authenticating it at trial (e.g., lack of a competent witness to testify about the document's creation). Defendants' objections uniformly fail this requirement. The Court could find no objection where it was apparent from the context why the SEC could not present the content of an exhibit in an admissible form at trial. Thus, Defendants had a duty to state the specific ground for believing as much. They nowhere did so-thus tacitly admitting that they had no good faith basis for such an objection, and were interposing it simply to avoid admitting the SEC's factual assertions. In other words, Defendants' attorneys, rather than taking their role as officers of the Court seriously and assisting it in “secur[ing] the just, speedy, and inexpensive determination of every action and proceeding, ” Fed.R.Civ.P. 1, decided instead to play a purely procedural game-and, moreover, to play according to the wrong rules, having disregarded Rule 56(c)(2).

         The Motion to Strike, for its part, doubles down on these juvenile tactics. To begin, the undersigned enforces no restriction against attaching evidence to a reply brief. “[E]vidence attached to a reply brief rarely eliminates a dispute over a material fact. But there is no blanket procedural exclusion of such evidence.” Olivero v. Trek Bicycle Corp., 2017 WL 5495817, at *6 (D. Colo. Nov. 16, 2017).

         Defendants are correct that there may be instances when reply-brief evidence raises a genuinely new issue to which the summary judgment opponent should be given an opportunity to respond, if the evidence is not stricken. (See ECF No. 75 at 6 & n.6.) But Defendants nowhere explain how the SEC's reply-brief evidence prejudices them, or what they could possibly address by way of a surreply to something like a shorthand reporter's certificate.

         For all of these reasons, the Motion to Strike will be denied. Normally, the Court would also deem Defendants to have admitted any statement to which their only objection was evidentiary inadmissibility. However, for reasons independent from Defendants' improper objections, the SEC's statement of material facts needs reworking, as explained in Part II, below. Because the SEC must file a new statement of facts, Defendants will have an opportunity to file a proper response. In so doing, the Court calls the parties' attention to the undersigned's Revised Practice Standards, as recently updated, which provide as follows regarding responses to statements of material fact:

The opposing party may not “deny” an assertion on grounds of evidentiary inadmissibility or other reasons for inadmissibility (including irrelevance, lack of authenticity, lack of foundation, incompleteness, waiver, or estoppel). The opposing party “may object that the material cited to support or dispute a fact cannot be presented in a form that would be admissible at trial, ” Fed.R.Civ.P. 56(c)(2), and any party so objecting must include a concise explanation of its objection, but the party must still admit or deny the factual substance of the assertion, unless doing so would violate a recognized privilege.
* * *
All of the [foregoing] requirements . . . apply to th[e] Response Concerning Additional Disputed Facts [contained in a reply brief].

         WJM Revised Practice Standards III.E.4.c & III.E.6.b (effective Dec. 1, 2017).

         II. PROBLEMS WITH THE STATEMENT OF MATERIAL FACTS

         Most of this case is fundamentally a question of “what happened when.” Inexplicably, however, the SEC presents most of its material facts out of chronological order. (ECF No. 53 at 9-30.) This has made it very difficult and extraordinarily time-consuming for the Court to evaluate what Mahabub did or did not know, or what he should have known, at any given time. Accordingly, in the SEC's revised summary judgment motion, it should endeavor to present its statement of material facts in precise chronological order as much as possible, and Defendants should do the same in any statement of additional disputed facts.

         The Court recognizes that some assertions do not fit neatly onto a timeline, such as facts based on summaries of many stock transactions over the course of months or years. (See ECF No. 53 at 12, ¶ 15.) The Court therefore does not mandate chronological order in every possible respect. A few matters are perhaps best organized topically rather than chronologically. But for the most part, the significance of the parties' factual assertions would be much more readily discernible if presented in strict chronological order.

         III. PROBLEMS WITH THE MERITS

         A. The SEC's General Approach

         As currently framed, the SEC's Motion for Summary Judgment essentially argues that a cloud of misrepresentations and omissions collectively satisfies a cloud of liability theories. (See ECF No. 53 at 32-45.) To be sure, the various forms of liability under Securities Act § 17(a) (15 U.S.C. § 77q(a)), Exchange Act § 10(b) (15 U.S.C. § 78j(b)), and Rule 10b-5 (17 C.F.R. § 240.10b-5) share common elements, but the Court has no power to give the SEC a “general verdict” at summary judgment. If the Court finds for the SEC at all, the Court must be able to explain precisely which statements, collections of statements, or other actions violated which provisions of Securities Act § 17(a), Exchange Act § 10(b), and/or Rule 10b-5.

         The Court requires something more formulaic from the SEC. The Court does not wish to precisely dictate how the SEC should present its arguments. The Court can, however, envision a mode of presentation that would likely be helpful. The SEC would first set forth the elements of each distinct theory of liability, i.e., the elements of a Securities Act § 17(a)(1) violation, the elements of a Securities Act § 17(a)(2) violation, and so forth.[5] Then the SEC would set forth a particular statement, collection of statements, action, or series of actions that the SEC believes satisfies the elements of at least one of these theories, ...


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