7-29memoinsupportofmotiontocompel.pdf

7/31/2019 7-29memoinsupportofmotiontocompel.pdf

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Case 1:10-cv-00621-EJL -REB Document 85 Filed 07/29/11 Page 1 of 11


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MARC J. FAGEL (Admitted to Cal. bar) TRACY F. DAVIS (Admitted to Cal. bar)

[email protected] SUSAN F. LAMARCA (Admitted to Cal. bar)

[email protected] DAVID A. BERMAN (Admitted to N.Y. bar)

[email protected]

Attorneys for Plaintiff SECURITIES AND EXCHANGE COMMISSION 44 Montgomery Street,

26th Floor San Francisco, California 94104 Telephone: (415) 705-2500 Facsimile: (415) 705-2501

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF IDAHO

SOUTHERN DIVISION

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff, v.

ALTERNATE ENERGY HOLDINGS, INC., DONALD L. GILLISPIE, and JENNIFERRANSOM,

Defendants,

and

BOSCO FINANCIAL, LLC, and ENERGY EXECUTIVE CONSULTING, LLC,

Relief Defendants.

Case No. 1:10-cv-621-EJL-REB

MEMORANDUM IN SUPPORT OF SECURITIES AND EXCHANGE COMMISSIONS

MOTION TO COMPEL


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The Securities and Exchange Commission (the Commission) is moving the Court for

an order requiring Defendant Alternate Energy Holdings, Inc. (AEHI) to produce documents

and information in its possession or under its control, which are relevant and responsive to

discovery requests served more than seven months ago. That AEHI has failed to make an

adequate production is not mere speculation. Through discovery from third parties, the

Commission has obtained thousands of pages of AEHI documents that are highly-relevant, and

yet have never been produced by AEHI. AEHI has offered no substantive explanation for its

failure to produce these documents or other similar documents, nor any promise to do so.

Among those documents are e-mails from defendant Donald L. Gillispie to promoters, offering

documents used by AEHI to raise money from investors, press releases and board minutes.

AEHI has also failed to produce responsive documents from two Asian offices on the

purported grounds that AEHI does not control them. AEHI has admitted that it has made no

effort to preserve those documents. AEHIs claim that it does not control these Asian offices

is inconsistent with its other discovery responses, as well as its defense on the merits of the

Commissions allegations.

Accordingly, the Commission respectfully requests that the Court order AEHI to make a

complete production of documents responsive to the Commissions requests, and to provide

information about steps it has taken to preserve and collect such materials, within 20 days, as

described in the Commissions Proposed Order.The Commissions Document Requests and AEHIs Production

The Commission served its First Request for Production of Documents to Alternate

Energy Holdings, Inc. (the First Request) on December 27, 2010. Declaration of David A.

Berman in Support of the Commissions Motion to Compel (Berman Decl.) 2, Ex. A. In its

First Request, the Commission sought documents and electronically stored information (ESI)

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related to the allegations in the Complaint, including those relevant to the Commissions charge

in its proposed Amended Complaint arising under Section 5 of the Securities Act of 1933. These

included the following requests:

REQUEST NO. 3. All DOCUMENTS relating to meetings of the AEHI Board of Directors,

including but not limited to agendas, board packets, minutes, presentations, reports, memoranda,

and notes.

REQUEST NO. 4. All DOCUMENTS relating to meetings of the AEHI Audit Committee,

including but not limited to agendas, minutes, presentations, reports, memoranda, and notes.

REQUEST NO. 10. All DOCUMENTS constituting or reflecting COMMUNICATIONS between

YOU and any PROMOTERS, BANKS or FUNDS.

REQUEST NO. 12. All DOCUMENTS constituting or relating to drafts or final versions of

promotional materials, newsletters, reports, tout sheets, marketing, advertising, press releases,

public statements, investor kits, investor relations packages, or similar DOCUMENTS, includingbut not limited to e-mails, facsimiles, and internet postings, relating to AEHI.

REQUEST NO. 13. All DOCUMENTS constituting or relating to drafts or final versions of private

placement memoranda relating to AEHI.

REQUEST NO. 16. All DOCUMENTS reflecting or relating to issuances, cancellations,

repurchases, grants, sales, transfers, or any other transactions in the securities of AEHI, including

but not limited to stock, stock options, notes, and warrants.

REQUEST NO. 18. All DOCUMENTS relating to the sale of AEHI securities pursuant to an

exemption from registration under the federal securities laws.

REQUEST NO. 19. All DOCUMENTS relating to any plan to restrict or control sales of AEHI

securities.

Id. Ex. A. The First Request was not only directed to AEHI, but also to those acting on AEHIs

behalf and under its control, including officers, employees, agents, independent contractors,

affiliates, subsidiaries and divisions. Id., Ex. A.

As described in the attached Declaration of David A. Berman, 5-10, AEHIs

production has been deficient in a number of critical respects. As a result, the Commission has

been forced to seek discovery of AEHI documents from third parties, including from AEHI

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consultants, stock promoters and former employees. The Commissions third-party

discovery has confirmed the deficiency of AEHIs production, as the Commission has obtained

thousands of pages of clearly responsive, highly relevant AEHI documents from third parties,

even though those documents were never produced by AEHI. Id. These documents span the full

time period covered by the First Request late 2006 to 2010 and relate to a number, if not all,

of the allegations in the Commissions Complaint. A selected sample of AEHI documents

produced by third parties, but missing from AEHIs own production, including a summary of

their relevance, is attached to the Berman Declaration at Exhibit B.

As just one of many examples, AEHI failed to produce a single copy of its private

placement memorandum in which it told investors that its nuclear project is funded. Id. 7,

Ex.B. Private placement memoranda were clearly sought by the First Request, which called for

production of all documents constituting or relating to drafts or final versions of private

placement memoranda relating to AEHI. Id. 2, Ex. A. Instead, AEHI produced only various

copies its private placement memoranda that omitted the false and misleading statement. Id. 11.

In a sworn affidavit to this Court, Defendant Gillispie conceded that the statement about funding

was nonsensical and claimed that the document was altered without AEHIs knowledge or

permission and was never disseminated by AEHI. Docket No. 29-1 at 59, 62.

But through third party discovery, the Commission has obtained at least six distinct

versions of AEHIs false and misleading private placement memorandum, coming from at leastseven different sources, including AEHIs independent auditors. Berman Decl. 8-9.

Moreover, the documents obtained include emails from Gillispie, himself, who distributed the

false and misleading private placement memoranda and asked that the recipients, in turn, forward

it to others. Id. 10.

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Defendants Should Be Ordered to Collect and Produce Responsive Documents from AEHI

China and AEHI Korea

AEHI has failed and affirmatively refused to produce a single document from the

entities called AEHI China, Ltd. (AEHI China) and AEHI Korea. Moreover, Defendant

Gillispie testified that AEHI has not taken any steps to preserve or collect documents maintained

by those entities. Berman Decl. 18-19, Ex.G.

Documents maintained by AEHI China and AEHI Korea are clearly relevant and

responsive to the Commissions First Request, which explicitly sought discovery from AEHIs

affiliates, subsidiaries and divisions. Those two entities in particular have been identified by

AEHI in public press releases as its own foreign office[s] and in this litigation as AEHI

subsidiaries. Moreover, documents and other information about those offices are relevant to

the Commissions claims, as among other things, they will assist in discovering who made

investments in AEHI or its subsidiaries and why, and who was enriched by such investments.

For example, documents obtained from third parties show that Nancy Shi, the President of AEHI

China, was paid commissions by AEHI for selling its stock to Chinese and American investors in

unregistered transactions, in some instances through use of AEHIs false and misleading private

placement memorandum. Id. 6, Ex. B at No. 12.

After the Commission repeatedly requested an explanation for AEHIs failure to produce

documents from such Asian offices, AEHI responded that it would not make the production

because, it claimed, neither AEHI China nor Ms. Shi is under the control of AEHI. Id. 12-

25.1

But this claim is directly inconsistent with statements AEHI has made to the investing

1 In addition, Defendant Gillispie testified that, like AEHI China, AEHI Korea was a separate legal

entity beyond AEHIs control. Berman Decl. 18, Exhibit G at 48:12-49:14. Accordingly, the

Commission is moving to compel AEHI to produce documents from AEHI Korea and its officers

and employees for all the same reasons that are discussed with respect to AEHI China.

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public. For example, AEHI stated in a June 18, 2009 press release that: AEHI will open an

office in the Chaoyang District, central business district, of Beijing in July to facilitate

institutional investors for AEHI projects and joint ventures Nancy Shi will be the President of

AEHI China reporting to AEHI Chairman and CEO, Don Gillispie, in the US. Id. 27, Ex. K.

In solicitations to potential investors, AEHI identified AEHI China as a holding[] of AEHI and

listed it among its subsidiaries. Berman Decl. 28, Ex. L. And in a May 2010 AEHI newsletter,

Gillispie began his message to investors with Greetings from our China office. Id. 28, Ex. M.

AEHIs claim that it does not control Ms. Shi is not only inconsistent with its public

statements, but also with those it has made in this very litigation. As described in the

Commissions Proposed Amended Complaint, AEHI misled investors when it stated in its 2009

10-K that: The Company and its subsidiaries have 15 full-time employees. Docket No. 81-1.

When the Commission served an interrogatory asking AEHI to identify the purported 15 full-

time employees of it and its subsidiaries, AEHIs sworn response included Ms. Shi of AEHI

China and three individuals identified as working for AEHI Korea. Id. 29, Ex. N. In other

words, AEHI could not defend the accuracy of its public statement without claiming that those

four individuals were full time or full time equivalent employees of either AEHI or one of its

subsidiaries. AEHI cannot deny that it has control over AEHI China and Ms. Shi for purposes of

evading discovery, while at the same time denying that its statements to the public about opening

foreign offices and holding subsidiaries were false and misleading.Even aside from these inconsistencies, AEHI still has the duty to produce the documents

and information requested; it cannot legally escape its discovery obligations by arguing that

AEHI China and AEHI Korea are technically separate entities, as Gillispie has asserted. Id. 18,

Ex. G at 30:11-25. Gillispie testified that AEHI China was set up using AEHI money in order to

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negotiate on AEHIs behalf and has no other clients or purpose. Id. at 87:7-89:1, 25:3-6.

Gillispie also testified that he is the CEO of AEHI China. Id. at 21:16. Under any interpretation

the story AEHI told investors, or the story its CEO is telling now AEHI has control over its

agents in China and Korea and so is obligated to make the requested production. [A] party who

does not have actual possession of documents will be required to produce them if the party has

the practical ability to obtain the documents from another, irrespective of legal entitlements to

the documents. Hayles v. Wheatherford, 2010 WL 4739484, at *6 (E.D. Cal. Nov. 16, 2010)

(internal citation omitted). Cf. U.S. v. Intl Union of Petroleum & Indus. Workers, 870 F.2d

1450, 1452 (9th Cir. 1989) (A corporation must produce documents possessed by a subsidiary

that the parent company owns or wholly controls.).2

AEHI Should Be Ordered to Make a Corrective Production and Provide Information on Its

Process for Preserving and Collecting Responsive Documents

Over the past seven months, in letters, calls, and through the meet-and-confer process, the

Commission has worked in good faith to obtain from AEHI discovery that is necessary to

prosecute its claims. The Commission has identified for AEHI the deficiencies in its document

production, including specific examples of documents that it obtained from third parties but not

from AEHI, and has attempted to gain an understanding about the process that led to these

deficiencies. Berman Decl. 12-25. These efforts have been fruitless. AEHI has not denied

2 In correspondence with the Commission, counsel for AEHI appears to have relied on the legal

control test for the assertion that his client need not produce documents from AEHI China or its

President, Ms. Shi. That test limits the obligations of entities to produce documents from affiliates

when they have no legal mechanism for obtaining them. See In re Citric Acid Litigation, 191 F.3d

1090, 1107-8 (9th Cir. 1999). The legal control test does not limit AEHIs obligations in this case

because AEHI does have the ability to compel AEHI China and AEHI Korea to produce

documents. AEHI has publicly referred to these entities as its Asian offices, Berman Decl. 28-

29, and Gillispie testified that he is the CEO of AEHI China. Id. 19, Ex. G at 21:16. In any case,

AEHI has conceded that it has not asked AEHI China or AEHI Korea to produce documents let

alone that it asked and was rebuffed. Id. at 102:20-103:13. A party may not escape the discovery

rules simply by making unsupported claims in mid-litigation about its ability to control its ownagents.

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that the documents identified by the Commission originated in its own files, nor that its

production of whole categories of documents remains incomplete. And yet AEHI has refused to

share any information about the status of its collection and production, including what remains to

be collected and produced, and when such collections and productions will be made, if ever.

Instead, AEHI has responded to the Commissions requests with incredible claims and

excuses, and has caused undue delay in the discovery process. For example, when the

Commission identified certain categories of documents for which AEHIs production appeared

incomplete, AEHI responded by claiming that those documents were not sought by the

Commissions First Request. Id. 14, Ex. E. The categories of documents included AEHIs own

correspondence with its auditors, press releases, shareholder letters, public filings and related

correspondence, Board minutes, private placement memoranda, and documents related to AEHI

China. Id. 13, Ex. D. These materials were all clearly sought by the First Request, sometimes

applicable to more than one request. Id. 2, Ex. A. When the Commission identified specific

examples of AEHI documents it obtained from third parties, but which were absent from AEHIs

production, AEHI claimed that the problem was that it was having trouble searching the third-

parties productions. Id. 14, Ex. E. AEHI ignored the fact that these documents originated

from AEHIs own files. And, in any case, there was no problem certain materials were

simply produced by third parties, and thus re-produced by the Commission, in a non-text-

searchable format. Id. 17.The documents sought by the Commissions First Request, including all those that the

Commission has specifically identified as missing from AEHIs production, are properly the

subject of discovery under Federal Rules of Civil Procedure 26 and 34. AEHI has not and

cannot claim that any of the discovery sought by the Commission is privileged or otherwise

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subject to the limitations in Federal Rule of Civil Procedure 26(b)(2)(C). Id. 16. In fact,

despite the Commissions request, AEHI has never produced a privilege log showing which

documents it may have collected but withheld. Id.

Without any information about the status and details of AEHIs collection and

production, other than those gaps that it has identified through its review of documents from

third parties, the Commission is left to guess about the discovery that remains to be obtained.

For example, AEHI has not disclosed whether it has collected and/or produced all responsive

email from its own CEO. AEHI has also not disclosed whether it has completed its collection of

responsive files that are stored at the companys main office on Winding Creek Drive, let alone

those files that may be maintained at its additional office space in Eagle. Id. 30, Ex. O. And

AEHI has refused to provide any information about its collection and production of documents in

several substantive categories that the Commission has specifically identified.

AEHIs discovery failures, along with its refusal to provide information about the details

and status of its collection and production, also raise the question of whether relevant documents

have been adequately preserved. If AEHI denies that its own press releases, private placement

memoranda, and shareholder correspondence are responsive to the First Request which it has,

despite the straightforward language of those requests than the Commission has cause to be

concerned that AEHI has allowed those materials to be destroyed. This concern is exaggerated

by the fact that AEHI has taken contradictory positions as to the most basic aspects of itsbusiness, including the locations of its offices and the identities of its employees. The

Commission has requested information about documents that may have been destroyed during

the pendency of this litigation, but AEHI has not responded. Id. 12-14, Exs. D, E.

The Commission has already been prejudiced by defendants failure to produce the

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requested documents, and will be further prejudiced if AEHI does not remedy its failure. The

most obvious and immediate harm to the Commission results from its lack of access to unknown

files, and the inability to determine what evidence may be lost. Even with respect to the AEHI

documents that the Commission has been able to recover from third parties, the Commission will

be prejudiced at trial if AEHI does not produce these documents, as the Commission will have to

call additional (and unnecessary) witnesses to authenticate them, wasting the Courts and the

jurys time. Given the sheer number of documents and the number of different persons who

have produced those documents, AEHIs discovery tactics threaten to turn this case into an

inquiry into the provenance of documents rather than focusing on the true issues.3

Accordingly, the Commission seeks an Order from this Court that will both compel

AEHI to produce all documents in its possession, custody or control that are responsive to the

First Request, and also to disclose the steps that it has taken to do so. Both components are

necessary to ensure that AEHI complies with its discovery obligations. First, as described above,

the record is clear that AEHI has not produced all responsive documents, notwithstanding the

passage of more than seven months and the repeated urging of the Commission. Second, a mere

corrective production, without disclosure, would leave important unanswered questions about the

adequacy of that production. It would also leave open the question of whether AEHI has

allowed relevant documents to be destroyed. Such disclosure is appropriate in light of the

3 Indeed, this is no idle threat. Defendants claimed in their Opposition to the CommissionsMotion for Temporary Restraining Order, filed Jan. 14, 2011 (Dkt No. 29), that the Commission

had no good faith basis for claiming that AEHI had disseminated the PPM that included the false

and misleading statements about funding of AEHI, because, the defendants argued, the origin of

the PPM was the internet and the PPM therefore must have been altered by persons outside of

AEHI. Id. at 9. From their quibble with the source of the PPM defendants argued vociferously that

the Commissions allegation in its complaint is False. Id. at 9-10. Unbeknownst to the

Commission (and to the Court) was the fact that AEHI had, in fact, disseminated the false and

misleading PPM, regardless of the origin of the particular document that the Commission had then

obtained.

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