According to the U.S. District Court for the Western District of Texas, the SEC violated the Federal Rules of Civil Procedure when it deposed a third party witness in its enforcement case dealing with an allegedly fraudulent life settlements accounting scam. The case is SEC v. Life Partners Holdings Inc. While the Commission contended that under its regulatory authority to look into possible securities law violations the deposition was properly obtained, the Judge James Nowlin disagreed, backing up the defendants’ claim that the regulator was trying to get ex-parte discovery.
In the Texas securities lawsuit it filed against Life Partners Holdings and three of its senior executives several months ago, the Commission is accusing the defendants of being allegedly involved in an accounting scam over life settlements involving the selling and buying of fractional interests of life insurance policies in the secondary market. The agency also said that they neglected to tell shareholders that the financial firm was materially underestimating the life expectancy estimates it employed to determine transaction prices.
According to the Court, prior to the Rule 26(f) conference between the two parties and after the SEC lawsuit was filed, the Commission deposed Peter Cangany, who was a Life Partner auditor and a third party. Contending that the deposition was obtained without the court’s leave, before the conference, and without them being notified, the defendants filed a motion for sanctions. Meantime, the SEC came back with the defense that the subpoena it sent to Cangany had been an administrative one seeking more information about possible violations that hadn’t been made in the lawsuit.
Per the court’s recap, what is pertinent here is whether the FRCP governs Cangany’s deposition or it was obtained pursuant to the investigatory authority of the FRCP. It noted that although the SEC doesn’t explicitly point to the reason for the deposition, it “implies” that Cangany was deposed to look into possible violations he made as the auditor of Life Partner. Topics that came up during the deposition included the practices of Life Partners as they relate to revenue recognition, life expectancy, and asset impairment-areas that are the basis of the SEC’s lawsuit against Life Partners.
Although per Rule 26(d)(1), a party cannot pursue recovery before parties have spoken pursuant to Rule 26(f) and in instances where the parties have not stipulated, a defendant looking to obtain a deposition before the conference has to first get the court’s permission first, and also, a party looking to depose a witness must give notice to other party, the court noted that the Commission deposed Cangany before the Rule 26(f) conference, without the stipulation of the other parties, and without getting the court’s leave. The court also said that even though the Commission gave the defendants the transcript and contended that, as a result, they were not prejudiced, this is not the end result. By taking an extra-judicial deposition from a non-party witness to get testimony against the defendants, the court said that the SEC did cause the defendants to be prejudiced. Also, not notifying the defendants that Cangany was to be deposed prevented them from being able to cross-examine him and object to testimony that the agency had elicited.
The court says the SEC cannot use this deposition testimony in its lawsuit against Life Partners. It also has to pay the defendants’ legal fees legal fees for filing the motion for sanctions.
Read the Complaint (PDF)
Court Raps SEC for Discovery Violation In Suit Over Alleged Life Settlements Scam, Bloomberg BNA, August 21, 2012
More Blog Posts:
Texas Securities Fraud: SEC Charges Life Partners Holdings Inc. in Life Settlement Scam, Stockbroker Fraud Blog, January 4, 2012
Texas Appeals Court Says Letter of Intent for Sale of Fiduciary Financial Services of Southwest Stock to Corilant Financial is Not an Enforceable Contract, Stockbroker Fraud Blog, August 17, 2012
Lawsuit Challenging BP Cancellation of 2010 First Quarter Dividend After Deepwater Debacle is Dismissed in Texas Court, Stockbroker Fraud Blog, August 10, 2012
Citigroup to Pay $590M to Settle Shareholder Class Action CDO Lawsuit Over Subprime Mortgage Debt, Institutional Investor Securities Fraud, August 30, 2012
Our Texas securities law firm represents institutional and individual investors with FINRA arbitration claims and securities fraud lawsuits against members of the financial industry.
Contact Shepherd Smith Edwards and Kantas, LTD, LLP today.
The information contained in this Website is provided for informational purposes only, and should not be construed as legal advice on any subject matter. No recipients of content from this site, clients or otherwise, should act or refrain from acting on the basis of any content included in the site without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from an attorney licensed in the recipient’s state. The content of this Website contains general information and may not reflect current legal developments, verdicts or settlements. The Firm expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this Website. Read More.