Free Affidavit in Support of Motion - District Court of California - California

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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA BEFORE HONORABLE DANA M. SABRAW, JUDGE PRESIDING. ___________________________________ SECURITIES AND EXCHANGE COMMISSION,) PLAINTIFF, ) VS. ) TUCO TRADING, LLC AND ) DOUGLAS G. FREDERICK, ) DEFENDANTS. )

CASE NO. 08CV0400-DMS SAN DIEGO, CALIFORNIA MARCH 5, 2008

TELEPHONIC HEARING RE TEMPORARY RESTRAINING ORDER REPORTER'S TRANSCRIPT OF PROCEEDINGS COUNSEL APPEARING: FOR PLAINTIFF: ROBERTO TERCERO, SENIOR COUNSEL DONALD W. SERLES, ESQ. UNITED STATES SECURITIES AND EXCHANGE COMMISSION 11TH FLOOR 5670 WILSHIRE BOULEVARD LOS ANGELES, CALIFORNIA 90036 MICHELE R. FRON, ESQ. KEESAL, YOUNG & LOGAN & 400 OCEANGATE LONG BEACH, CALIFORNIA 90801 DAVID L. OSIAS, ESQ. EDWARD FATES, ESQ. ALLEN MATKINS LECK GAMBLE & MALLORY 501 WEST BROADWAY, 15TH FLOOR SAN DIEGO, CALIFORNIA 92101

FOR DEFENDANTS:

FOR THE RECEIVER:

REPORTED BY:

LEE ANN PENCE, OFFICIAL COURT REPORTER UNITED STATES COURTHOUSE 940 FRONT STREET, BOX 4199 SAN DIEGO, CALIFORNIA 92101

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SAN DIEGO, CALIFORNIA - WEDNESDAY, MARCH 5, 2008 - 3:30 P.M. * THE CLERK: * *

CASE 08CV0400, S.E.C. VERSUS TUCO

TRADING; ON FOR STATUS HEARING. THE COURT: SABRAW. GOOD AFTERNOON, COUNSEL. THIS IS JUDGE

WE ARE ON THE TELEPHONE, I BELIEVE WITH ALL COUNSEL. AND I HAVE ELECTED TO PUT THE MATTER ON THE RECORD,

SO AT THIS TIME CAN I HAVE COUNSEL IDENTIFY THEMSELVES AND MAKE AN APPEARANCE? MR. SEARLES: YES, YOUR HONOR. FOR THE COMMISSION,

DONALD SEARLES AND ROBERTO TERCERO. MS. FRON: ON BEHALF OF THE DEFENDANTS, MICHELE FRON

AND STEVE YOUNG OF KEESAL, YOUNG & LOGAN. MR. OSIAS: ON BEHALF OF THE TEMPORARY RECEIVER, TOM

LENNON, DAVID OSIAS OF ALLEN MATKINS. THE COURT: THANK YOU VERY MUCH.

THE COURT DID ISSUE A TRO EARLIER TODAY, AND I UNDERSTAND THERE ARE SOME QUESTIONS REGARDING THAT ORDER. I AM HAPPY TO HEAR FROM COUNSEL. MR. SEARLES: YOUR HONOR, FROM THE S.E.C.'S

PERSPECTIVE -- AND I BELIEVE THIS IS THE UNDERSTANDING ALSO OF THE RECEIVER'S COUNSEL -- IS THAT BASED UPON THE COURT'S FINDING IN SECTION B OF THE SECOND PAGE, SORT OF THE PREAMBLE PORTION OF THE ORDER, IN WHICH THE COURT FOUND THAT GOOD CAUSE EXISTS TO BELIEVE THE DEFENDANTS WILL CONTINUE TO ENGAGE IN

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SUCH VIOLATIONS, NAMELY VIOLATION OF SECTION 15(A) AND 10B-5 OR 10(B) OF THE EXCHANGE ACT, TO THE IRREPARABLE AND IMMEDIATE LOSS OR DAMAGE TO INVESTORS AND TO THE GENERAL PUBLIC UNLESS THEY ARE RESTRAINED AND ENJOINED, THAT THERE IS A TEMPORARY RESTRAINING ORDER THAT THE COURT DID GRANT PREVENTING CONTINUING THE FUTURE VIOLATIONS OF SECTION 15(A) OR 10(B). BASED ON THAT ASSUMPTION, THE ACTIVITY THAT TUCO IS ENGAGED IN BY ALLOWING ITS TRADERS TO TRADE THROUGH ITS ACCOUNTS AND COLLECTING COMMISSIONS ON THOSE ACCOUNTS AND AUTHORIZING OR SUPERVISING THE WITHDRAWALS AND DISTRIBUTIONS OF FUNDS FROM THOSE ACCOUNTS, THAT IS THE VERY ACTIVITY THAT VIOLATES SECTION 15(A), AND THAT IS THE VERY ACTIVITY THAT IS ENJOINED. OUR DISCUSSION WITH YOUR CLERK WE OBVIOUSLY -- I THINK THERE IS A CONFUSION ABOUT THE ORDER WITH RESPECT TO THE ALLOWANCE OF THE TRADERS TO CONTINUE TO TRADE. WE HAVE ARTICULATED OUR UNDERSTANDING WHAT THE COURT'S ORDER IS. I BELIEVE, THE DEFENDANT'S COUNSEL HAS

PERHAPS A DIFFERENT INTERPRETATION, OR AT LEAST WE NEED A CLARIFICATION ON THE ORDER. THE COURT: YES. THAT IS A FAIR QUESTION, SO I

APPRECIATE YOUR BRINGING IT TO THE COURT'S ATTENTION. WHAT I ATTEMPTED TO DO IN THIS ORDER, I OBVIOUSLY USED THE PROPOSED ORDER BY THE S.E.C., WITH SOME SIGNIFICANT MODIFICATIONS.

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AND THE FOCUS OF THE ORDER THAT WAS ISSUED BY THE COURT WAS TO FIND THAT THE COMMISSION MADE A PRIMA FACIE SHOWING, AS SET FORTH IN THE PREAMBLE AT PARAGRAPH B -- AS IN BOY -- AND C -- AS IN CAT. AND SO BASED ON THAT PRIMA FACIE

SHOWING, THE TRO WAS ISSUED. HOWEVER, I ELECTED TO TAKE OUT THE LANGUAGE RESTRAINING AND ENJOINING THE DEFENDANTS FROM THE STANDARD LANGUAGE, WHICH WAS INCLUDED IN THE INITIAL PROPOSED TRO, RESTRAINING AND ENJOINING THE DEFENDANTS FROM VIOLATING THOSE SECURITY LAWS THAT ARE SET FORTH AND FROM FREEZING ASSETS. WHAT I INTENDED TO DO IS CONCLUDE THAT A PRIMA FACIE SHOWING HAD BEEN MADE, BUT RATHER THAN ISSUE A TRO FREEZING ASSETS AND ENJOINING THE DEFENDANTS FROM CONDUCTING BUSINESS, I WANTED TO SET -- I WANTED TO DECLINE TO DO THAT, AND INSTEAD SET THE MATTER FOR AN OSC ON PRELIMINARY INJUNCTION. SO I INTENDED THE ORDER SIMPLY TO INDICATE THAT A PRIMA FACIE SHOWING HAS BEEN MADE, BUT ULTIMATELY DECLINING TO ISSUE AN ULTIMATE TRO FREEZING ASSETS AND ENJOINING DEFENDANTS FROM CONDUCTING BUSINESS. AND RATHER, IN LIGHT OF THE PRIMA

FACIE SHOWING, TO ENJOIN THE DEFENDANTS FROM, AS SET FORTH IN THE ORDER, DESTROYING DOCUMENTS OR ANY OTHER RELEVANT INFORMATION, PROVIDING FOR EXPEDITED DISCOVERY, AND THEN SETTING THE MATTER ON SHORT NOTICE FOR AN OSC. SO THAT WAS THE FOCUS OF THE ORDER. I UNDERSTAND THERE IS ALSO A QUESTION WITH RESPECT

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TO THE RECEIVER, AND HOW HE SHOULD GO ABOUT PERFORMING HIS DUTIES IN THE ABSENCE OF AN ASSET FREEZE. BUT ON THIS FIRST QUESTION, DOES THAT ADDRESS COUNSELS' CONCERNS? MR. SEARLES: AGAIN. THAT CLARIFIES THE ORDER FOR US. WHETHER IT I THINK THAT -- THIS IS DON SEARLES

ADDRESSES OUR CONCERNS OR NOT -- OBVIOUSLY, THE RELIEF REQUESTED IS FAR SHORT OF WHAT WE HAD ASKED FOR. AND THE

CONTINUING VIOLATIONS OF LAW OVER THE NEXT TWO WEEKS ARE OF DEEP CONCERN TO US. I IMAGINE THAT WHAT MOTIVATED THE COURT HERE WAS A CONCERN FOR THE TRADERS AND NOT WANTING TO HARM THE TRADERS. WHAT I THINK THE LOOPHOLE IS, IS NOW MR. FREDERICK IS FREE TO WITHDRAW ALL FUNDS AND MOVE TO COSTA RICA, WHICH, HOPEFULLY, HE WON'T DO. BUT THERE IS -- THERE IS A LOT OF LEEWAY HERE FOR NOT ONLY CONTINUED TRADING ACTIVITY BUT FOR CONTINUED -- OR FOR WITHDRAWALS. FREDERICK. MS. FRON: IT IS OUR UNDERSTANDING THAT THE INTENT AND OF MOST CONCERN WITHDRAWALS BY

OF THE COURT WAS TO ALLOW TUCO TRADING TO CONTINUE IN ITS NORMAL BUSINESS PRACTICES BETWEEN NOW AND MARCH 19TH, AND THAT THEIR INVESTORS ARE ALLOWED TO EXECUTE ORDERS, AS THEY HAVE BEEN. AND IF THEY WISH TO WITHDRAW FUNDS, THAT THEY WILL BE

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FREE TO DO SO. THE COURT: THAT'S CORRECT.

IT WAS MY ESTIMATION, AT THE END OF THE HEARING YESTERDAY, AS I INDICATED, THAT THE S.E.C. HAD MADE A PRIMA FACIE SHOWING. BUT IT SEEMED TO ME, UNDER ALL OF THE

CIRCUMSTANCES AND THE INFORMATION PRESENTED THUS FAR, THAT THE SCOPE AND THE BREADTH OF THE TRO THAT WAS REQUESTED WAS -- I WAS UNCOMFORTABLE ISSUING THAT ORDER AT THIS TIME, AND I PREFERRED TO HAVE THE NOTICED HEARING ON AN OSC TO ADDRESS THE FULL SCOPE OF THE REQUESTED TRO. SO I THINK, WITH THE COMMENTS IN THIS SETTING, I THINK I HAVE CLARIFIED THE SCOPE OF THE TRO AT THIS POINT ON THIS FIRST ISSUE. BUT I UNDERSTAND THERE IS ANOTHER QUESTION WITH REGARD TO THE RECEIVER. MR. OSIAS: TEMPORARY RECEIVER. THE COURT: MR. OSIAS: YOURSELF AVAILABLE. YES. I VERY MUCH APPRECIATE YOUR MAKING AS WE HAVE EXPLAINED, BOTH THE S.E.C. AND YOUR HONOR, THIS IS DAVID OSIAS FOR THE

THE DEFENSE COUNSEL, OUR STRONG DESIRE IS TO DO EVERYTHING YOU WISH US TO DO AND TO DO NOTHING YOU DON'T WISH US TO DO. AND,

THEREFORE, WE DID HAVE A FEW QUESTIONS -- ONE OF WHICH YOU CLARIFIED ALREADY IN TERMS OF WITHDRAWAL OF FUNDS. IF I COULD PUT A SLIGHT NUANCE ON THE ANSWER IN THE

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FORM OF ANOTHER QUESTION, BASED ON EXPERIENCE.

YOU KNOW,

SOMETIMES RECEIVERS ARE APPOINTED TO BOTH PROTECT ASSETS AND NOT LET ANY TRANSACTIONS OCCUR. NOT WHAT YOU HAVE IN MIND. AN INTERMEDIATE STEP IS RECEIVERS ARE SOMETIMES APPOINTED AND THEY HAVE PRIMARILY AN INVESTIGATORY ROLE AND REPORTING TO THE COURT, AND IT LOOKS LIKE YOU HAVE THAT IN MIND HERE. AND SOMETIMES THEY ARE ALSO INSTRUCTED TO NOT ALLOW ANY ACTIVITY WITH RESPECT TO ASSETS THAT IS NOT IN THE ORDINARY COURSE OF BUSINESS. THAT IS -- MAYBE I WILL USE A AND THAT SOUNDS LIKE THAT IS

SILLY EXAMPLE, BECAUSE IT DOESN'T INVOLVE MATERIAL MONEY, BUT SELLING OF FURNITURE. THEY ARE NOT IN THE BUSINESS OF SELLING FURNITURE. IF THE OFFICE IS, YOU KNOW, STRIPPED BARE AND THE ASSETS ARE GONE BY THE 19TH, IT IS PROBABLY NOT TRADING ACTIVITY IN THE SENSE THAT YOU HAVE IN MIND. SO SOMETIMES THERE IS A NO ACTIVITY OTHER THAN THE ORDINARY COURSE, AND THE RECEIVER WATCHES TO MAKE SURE THERE IS NO, YOU KNOW, SORT OF LIQUIDATION ACTIVITY OR SHIPPING ASSETS OFFSHORE, YOU KNOW, THAT HASN'T BEEN THE WAY THEY HAVE BEEN DOING IT IN THE PAST. IT IS SORT OF LIKE PRESERVING

HISTORICAL, NORMAL BUSINESS OPERATIONS. THAT MAY ALSO NOT BE WHAT YOU HAVE IN MIND. MERELY HAVE US WATCHING AND REPORTING. YOU MAY

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AND IF THERE WAS A SPECIFIC QUESTION ABOUT THE ACCOUNTING AND WITH CONTINUING ACTIVITY, DID YOU HAVE A DATE YOU WISH THE ACCOUNTING TO BE AS OF? THE COURT: I THINK YOU HAVE SET OUT THREE SCENARIOS AND I THINK IT MAY

THERE, AND THAT THIRD ONE IS A GOOD ONE.

NEED CLARIFICATION, PERHAPS IN A SUPPLEMENTAL ORDER. IT WAS MY INTENT, AS I SAY, NOT TO FREEZE ASSETS, BUT TO APPOINT A RECEIVER TO NOT ONLY PROVIDE AN ACCOUNTING BUT, ON THIS THIRD POINT THAT YOU RAISED, MR. OSIAS, IS TO SERVE IN A WATCHDOG CAPACITY, AS WELL. IT SEEMED TO ME THAT UNDER THE CIRCUMSTANCES THE APPOINTMENT OF A RECEIVER FULFILLING THAT ROLE WOULD SUFFICIENTLY ADDRESS THE COMMISSION'S CONCERNS ABOUT THE SECURITY VIOLATIONS ON WHICH IT HAS MADE A PRIMA FACIE SHOWING. AND SO THE INTENT OF THE TRO WAS CERTAINLY NOT AS BROAD AS THE COMMISSION HAS REQUESTED, BUT IT WAS INTENDED TO PUT INTO PLACE A MECHANISM BY WHICH INVESTORS AND THE MARKET AND OTHERS COULD BE ADEQUATELY PROTECTED THROUGH, IN THIS CASE, THE RECEIVER NOT ONLY PROVIDING AN ACCOUNTING BUT, AS YOU SET FORTH IN THAT THIRD SCENARIO, PROVIDING A WATCHFUL EYE OVER THE ACTIVITIES OF THE DEFENDANTS TO ENSURE THAT ONLY ACTIVITIES CONDUCTED IN THE ORDINARY COURSE OF BUSINESS ARE BEING PURSUED. MR. OSIAS: OKAY.

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THE COURT:

IN THAT REGARD, DO YOU PROPOSE -- OR

PERHAPS WHAT I SHOULD REQUEST IS ADDITIONAL LANGUAGE THAT WOULD BE SUBMITTED -- I GUESS BY MR. OSIAS -- THAT WOULD SUPPLEMENT THE CURRENTLY ISSUED TRO. MR. OSIAS: WE WOULD BE GLAD TO DO THAT. IT IS VERY

HELPFUL THAT NOW, THAT YOU HAVE EXPRESSED WHAT YOU HAVE IN MIND, FOR US TO DO SO. I WOULD -- JUST SO WE CAN HEAR FROM PEOPLE WHILE WE HAVE THEM AND DO THIS AS QUICK AS POSSIBLE, THE BANKRUPTCY CODE -- WHICH IS OFTEN LOOKED AT BY DISTRICT COURTS IN EQUITY RECEIVERSHIPS AS AT LEAST A GUIDE, OR AN ANALOGY -- HAD THE CONCEPT FOR DEBTORS IN POSSESSION OF THE USE OF ASSETS IN THE ORDINARY COURSE OF BUSINESS WITHOUT COURT CONSENT, AND PROHIBITION OF USE OF ASSETS OUTSIDE OF THE ORDINARY COURSE OF BUSINESS, UNLESS YOU FIRST GET COURT CONSENT. WE WOULD PROBABLY PROPOSE, FOR EASE OF DRAFTING AND SPEED, TO LIFT THE LANGUAGE LIKE THAT RIGHT OUT OF THE BANKRUPTCY CODE AND PUT IT IN A SUPPLEMENTAL ORDER FOR YOUR HONOR -- UNLESS EITHER THE S.E.C. OR THE DEFENSE COUNSEL THINKS THAT IS AN INAPPROPRIATE STANDARD TO BORROW. MS. FRON: ON BEHALF OF THE DEFENDANTS I THINK THAT

IS ACCEPTABLE, AND PRECISELY THE WAY WE INTEND TO MOVE FORWARD BETWEEN NOW AND MARCH 19TH; ORDINARY COURSE OF BUSINESS. THE COURT: AND AS TO THE COMMISSION, DO YOU AGREE? YES, YOUR HONOR. THAT IS REASONABLE,

MR. SEARLES:

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AS WELL. THE COURT: MIND. I THINK WHAT WE WILL DO, IN ORDER TO BE MOST EFFICIENT, IS WE WILL SIMPLY ISSUE A SUPPLEMENTAL ORDER TO THE TRO WITH THAT LANGUAGE. MR. OSIAS: THEN, YOUR HONOR, IN TERMS OF SORT OF ALL RIGHT. I HAVE THAT LANGUAGE IN

DAY TO DAY, WHAT I WOULD ENVISION IS IF YOU -- IF YOU WILL BEAR WITH ME ONE MORE MINUTE. THE COURT: MR. OSIAS: YES. THE RECEIVER GOING OUT, GETTING AN AND THEN,

UNDERSTANDING OF HOW THIS BUSINESS OPERATES.

THROUGH WHATEVER STEPS HE FEELS APPROPRIATE, MONITORING IT. AND IF HE ADVISES -- I WILL SAY MANAGEMENT, I ASSUME IT IS DOUGLAS FREDERICK, BUT WHOEVER WE LEARN IS MANAGEMENT -THAT HE BELIEVES AN ACTIVITY IS OUTSIDE THE COURSE, THEN IT IS INCUMBENT UPON -- UNLESS THEY EXPLAIN TO HIM WHY IT IS, IT IS INCUMBENT UPON THE DEFENDANT TO SEEK COURT PERMISSION BEFORE GOING FORWARD WITH THAT ACTIVITY. THE COURT: I THINK THAT IS APPROPRIATE LANGUAGE.

DO YOU OBJECT? MS. FRON: OBJECT. MR. SEARLES: YOUR HONOR, THIS IS DON SEARLES AGAIN. ON BEHALF OF THE DEFENDANTS WE DO NOT

ONE OF MY CONCERNS IS, ONCE THE TRADERS ARE NOTIFIED

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OF THE EXISTENCE OF THE TRO, I WOULD IMAGINE ALL OF THEM WILL CHOSE TO -- NECESSARILY, THIS IS NOT THE SAFEST PLACE TO KEEP THEIR MONEY AND WILL SEEK TO WITHDRAW IT, CAUSING A RUN ON THE BANK THAT WE FEARED MIGHT OCCUR GIVEN THE SHORTFALL IN THE ACCOUNT -- WHICH IS PART OF THE PAPERS. TRADERS START READING

OUR PAPERS AND START TO REALIZE THE SHORTFALL AND THE MISREPRESENTATIONS, WE MAY BE CAUSING THE VERY THING THAT WE FEARED. AND IF THERE ARE REQUESTS FOR WITHDRAWALS IN THE NEXT FEW WEEKS, FROM OUR PERSPECTIVE IT WOULD BE MOST PRUDENT NOT TO ALLOW THOSE TO OCCUR, OR AT LEAST NOT TO OCCUR WITHOUT THE RECEIVER'S REVIEW AND APPROVAL TO MAKE SURE THAT WHATEVER DEBITS THAT SHOULD BE HAPPENING TO THOSE WITHDRAWALS ARE MADE, AND THAT THE REQUEST FOR THE WITHDRAWAL AND THE AMOUNT OF THE REQUEST IS ACCURATE. THE COURT: THAT SOUNDS REASONABLE.

DO YOU OBJECT, MS. FRON? MS. FRON: I DO NOT OBJECT, NO. I THINK THAT,

ESPECIALLY GIVEN THEIR AGREEMENT STATES THAT, YOU KNOW, WE DON'T HAVE TO GIVE THEM THEIR MONEY THAT DAY, THAT WE CAN DO THIS IN A LOGICAL FASHION, SEE WHAT TYPE OF REACTION WE GET FROM THE TRADERS, AND HAVE THE RECEIVER TAKE A LOOK AT ANY WITHDRAWALS. THE COURT: ALL RIGHT.

MR. SEARLES, WHAT LANGUAGE WOULD YOU PROPOSE,

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SPECIFICALLY? MR. SEARLES: WELL, PERHAPS JUST WORKING WITH DAVID

IN TERMS OF DEFINING WHAT "OUTSIDE OF THE SCOPE" IS, OR PUTTING IN A PHRASE THERE THAT ANY REQUEST FOR WITHDRAWALS PENDING THE PRELIMINARY HEARING ON THE 19TH WILL BE SUBJECT TO THE REVIEW AND APPROVAL OF THE RECEIVER AND SUBJECT TO THE RECEIVER'S DISCRETION AS TO WHETHER TO GRANT OR DENY THE REQUEST. MR. OSIAS: THIS IS MR. OSIAS.

AND IN ORDER TO BE AS COMPLIANT AS EVERYONE WOULD LIKE A RECEIVER TO BE, TO THE EXTENT WHAT I AM HEARING IS THAT WITHDRAWALS ARE PERMISSIBLE, BUT TO THE EXTENT THE BUSINESS ARRANGEMENTS, AS DESCRIBED BY MS. FRON, INVOLVE A RIGHT TO REQUEST FUNDS BUT NO OBLIGATION TO INSTANTANEOUSLY MAKE THEM AVAILABLE, AND THEY ARE GOVERNED BY CONTRACTS; THE RECEIVER'S DISCRETION, IT SOUNDS LIKE, WILL BE TO LOOK AT THE VOLUME OF REQUESTS, ESPECIALLY IN LIGHT OF THE ONLY TWO-WEEK PERIOD BEFORE THE NEXT HEARING. AND IF THE CONTRACTS AREN'T VIOLATED

BY ACTING SLOWLY ON THE WITHDRAWAL REQUESTS, I THINK THAT WOULD BE THE RECEIVER'S BIAS TO POSTPONE, BUT WITHIN THE CONTRACTUAL CONSTRAINTS SO HE IS NOT VIOLATING THE AGREEMENTS, THE WITHDRAWAL. IF IT IS -- WHAT I WOULD FEAR IS, AS MOST RECEIVER OR BANKRUPTCY LAWYERS WOULD, IS A STANDARD THAT ENDS UP BEING FIRST COME, FIRST SERVED. AND THEN A WEEK AND A HALF FROM NOW

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THE RECEIVER DECIDES THERE HAVE BEEN TOO MANY, AND IT IS A DIFFERENT RULE FOR THE REST OF THE WEEK. ME AS NECESSARILY A FAIR SYSTEM. SO IT SOUNDS LIKE, AS A CONTRACT, THAT ENTITLES THEM TO WITHDRAWAL IN A SHORTER PERIOD THAN BETWEEN NOW AND THE 19TH, WE WOULD BE INCLINED TO RECEIVE THE WITHDRAWAL REQUEST, ACT ON IT, BUT ONLY WITHIN THE CONTRACTUAL PERIOD WHICH IS GOING TO BE LONGER THAN THE NEXT HEARING, AND THEN WE CAN TAKE UP THIS QUESTION AGAIN -- WE CAN'T, BUT YOU ALL CAN WITH THE COURT. IS THAT OKAY? WHY DON'T THE THREE OF US, THE PARTIES, GET TOGETHER AND COME UP WITH LANGUAGE THAT WE ALL AGREE ON, THEN WE CAN SUBMIT IT TO THE JUDGE. STANDARDS POSSIBLE. MR. TERCERO: WE WOULD TOO. I WOULD LIKE THE MOST OBJECTIVE THAT DOESN'T STRIKE

YOUR HONOR, THIS IS ROBERTO TERCERO ON BEHALF OF THE COMMISSION. WE HAVE, AS WE INFORMED THE COURT YESTERDAY DURING THE HEARING, INFORMED THE VARIOUS BROKERAGE FIRMS AND CLEARING FIRMS, AND THEY VOLUNTARILY AGREED TO PLACE A HOLD ON THE ACCOUNTS. THAT HOLD, AS WE INFORMED THE COURT, ALLOWS FOR

TRADING TO CONTINUE BUT DOES NOT ALLOW FOR FUNDS TO BE REMOVED. CERTAINLY, WE HAVE BEEN IN CONTACT WITH THEM WITH

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REGARD TO THE ORDER THAT THE COURT ISSUED EARLIER TODAY, AND WE HAVE ASKED THEM TO WORK WITH THE RECEIVER AND WITH COUNSEL FOR THE RECEIVER. WHAT IT SOUNDS LIKE AT THIS POINT, THAT THE VOLUNTARY HOLD THAT THEY ARE ABIDING BY -- ON THEIR OWN, ACTUALLY, WE DON'T HAVE A POWER OVER THEM TO DO SO -- IS CONSISTENT WITH WHAT THE DISCUSSION HAS BEEN DURING THE COURSE OF THIS TELEPHONIC HEARING. AND BASED UPON WHAT LANGUAGE THE PARTIES AND THE RECEIVERSHIP COUNSEL CAN COME UP WITH, AND WHAT THE COURT ULTIMATELY DECIDES TO ISSUE, WE WILL CERTAINLY CONTINUE TO INFORM THEM OF WHAT IS GOING ON, PROVIDE THEM WITH COPIES OF THE ORDER, AND HAVE THEM, TO THE EXTENT THAT THEY HAVE QUESTIONS, AT LEAST FIRST LOOK TOWARDS THE RECEIVER FOR GUIDANCE. THE COURT: I THINK THAT IS FAIR.

ANY COMMENT BY COUNSEL? MS. FRON: THE COURT: NO. WELL, ARE THERE ANY OTHER ISSUES, THEN,

THAT NEED TO BE ADDRESSED AT THIS TIME? MR. OSIAS: ONE MORE. THE COURT: MR. OSIAS: YES. AS TO AN ACCOUNTING OR OTHER REPORTS YOUR HONOR, I APOLOGIZE. MR. OSIAS.

THAT WOULD BE PRODUCED BY THE RECEIVER, WHEN WOULD YOU LIKE

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THEM SUBMITTED TO THE COURT IN ADVANCE OF THE 19TH SO WE KNOW WHAT DEADLINE WE ARE WORKING AGAINST? THE COURT: MR. OSIAS: WHAT DO YOU PROPOSE? WELL, AS MUCH TIME AS POSSIBLE, BUT NOT

SO MUCH THAT YOU DON'T HAVE THE TIME TO READ WHATEVER HE PRODUCES. TWO DAYS AHEAD OF THE HEARING? THE COURT: THE 17TH. MR. OSIAS: ACTUALLY, I DIDN'T LOOK AT YOUR BRIEFING DOES THAT WORK WITH THE BRIEFS THAT THAT IS WHAT I WAS GOING TO SUGGEST.

SCHEDULE FOR THE OTHERS. THE OTHERS MUST SUBMIT? MR. TERCERO: TECERO AGAIN.

THE ONLY ISSUE -- THIS IS ROBERTO

THE ONLY ISSUE IS THE FOLLOWING. COUNSEL FOR THE DEFENSE IS SUPPOSED TO SUBMIT TO THE COURT, AND TO THE COMMISSION, ITS OPPOSITION, IF ANY, BY THE 12TH. DEFENDANT COUNSEL WILL NOT HAVE AN OPPORTUNITY TO

ACTUALLY SEE THAT. AND IF IT IS SUBMITTED ON THE 17TH, THE COMMISSION WILL NOT HAVE AN OPPORTUNITY TO SEE THE ACCOUNTING BEFORE IT ISSUES ANY REPLIES IT DEEMS APPROPRIATE. WHILE WE WOULD LIKE TO GET THIS ON THE HEARING, WHAT I DO RECOMMEND -- AND THIS CAN OR CANNOT BE PART OF THE ORDER -- THAT TO THE EXTENT THAT THERE IS INFORMATION

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AVAILABLE IN ADVANCE, AND IF THE ACCOUNTING CAN BE -- IF IT ACTUALLY IS DONE QUICKLY, THAT IT BE PROVIDED TO BOTH PARTIES AT THAT EARLIER TIME. TO THE EXTENT THAT IT IS POSSIBLE TO GET IT DONE SO THAT MS. FRON CAN REVIEW IT AND INCORPORATE WHATEVER SHE THINKS IS APPROPRIATE TO ANY OPPOSITION THAT SHE DESIRES TO FILE, IT SEEMS FAIR TO AT LEAST GIVE HER THAT OPPORTUNITY. YOU KNOW, CERTAINLY THE COMMISSION WOULD LIKE AN OPPORTUNITY TO SEE IT, AS WELL. BUT, OF COURSE, IF IT IS IN

ADVANCE OF -- IF MS. FRON GETS IT IN TIME, CERTAINLY THE COMMISSION GETS IT IN TIME. MR. SEARLES: MR. OSIAS: DAVID, HOW QUICKLY CAN YOU --

THAT IS A FAIR QUESTION, BUT ONE I AM

NOT ABLE TO ANSWER WITHOUT -- EVERYTHING I KNOW ABOUT THIS CASE I HAVE HEARD SINCE, YOU KNOW, YESTERDAY. WE HAVEN'T BEEN

TO THE OFFICE YET TO SEE THE QUALITY OF THE COMPUTER RECORDS. IF WE WERE TO DO IT IN ADVANCE OF THE 12TH SO THAT IT WOULD BE USABLE BY DEFENSE COUNSEL, THAT IS LESS THAN A WEEK FROM TODAY. THE COURT: ANOTHER OPTION, PERHAPS, IS TO HAVE THAT AND

ACCOUNTING PROVIDED, IF POSSIBLE, BY FRIDAY, THE 14TH.

ANY SUPPLEMENTAL BRIEFING BY THE COMMISSION, AND DEFENDANTS FROM MS. FRON, BY MONDAY THE 17TH. THE PARTIES ARE ALSO ALWAYS FREE TO ADJUST THE BRIEFING AND THE HEARING DATE BY AGREEMENT. COUNSEL CAN MEET

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AND CONFER ON THAT ISSUE. IF WE STAY WITH THE CURRENTLY SCHEDULED HEARING DATE, MR. OSIAS IS THAT A -- MARCH 14, IS THAT A DATE YOU THINK YOU CAN MAKE? MR. OSIAS: YES, IT IS. WE WILL MAKE ANY DATE, IT

IS MERELY THE QUALITY AND THE DEPTH OF THE INVESTIGATORY WORK WE CAN DO. THE COURT: WHY DON'T WE PROCEED THAT WAY, THEN, SO

THAT THE ACCOUNTING -- THE REPORT TO THE COURT BY MARCH 14, CLOSE OF BUSINESS. AND THEN ANY SUPPLEMENTAL OPPOSITION OR

COMMENT BY THE COMMISSION AND MS. FRON BY CLOSE OF BUSINESS MARCH 17TH. MR. OSIAS: PERHAPS, YOUR HONOR, IN LIGHT OF THIS

SCHEDULE, MS. FRON COULD LET US KNOW. THE PARAGRAPH 9 ORDER REGARDING THE SCHEDULE OF ASSETS GAVE THEM FIVE DAYS FROM ISSUANCE. THAT CAN BE SHORTENED TO THREE DAYS? MS. FRON: I JUST DON'T KNOW BECAUSE I HAVEN'T IS THERE ANY WAY

CONFERRED WITH MR. FREDERICK. WE WILL NOT SIT ON IT, THAT IS FOR CERTAIN. IF WE

CAN GET IT FINISHED UP IN THE NEXT FEW DAYS, WE WILL SEND IT OUT AS SOON AS WE CAN. MR. TERCERO: THIS IS ROBERTO TERCERO.

WE APPRECIATE DEFENSE COUNSEL'S DESIRE TO MOVE QUICKLY. WE WILL DO THE SAME. IN THAT SAME SPIRIT, THAT WAS

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OUR MOTIVATION FOR MAKING SURE THAT DEFENSE COUNSEL HAS AN OPPORTUNITY, ONCE READING THE RECEIVER'S ACCOUNTING REPORT, THAT SHE GETS A FULL OPPORTUNITY TO RESPOND, AS WELL. MR. OSIAS: YOUR HONOR, WE WILL HAVE BOTH THE

RECEIVER AND HIS ACCOUNTANT AVAILABLE IN COURT ON THE 19TH SHOULD THERE BE ANY QUESTIONS. THE COURT: ALL RIGHT. THANK YOU.

NOW, ON THE PROPOSED LANGUAGE WITH RESPECT TO THE REQUEST FOR WITHDRAWALS, COUNSEL WILL MEET AND CONFER AT THIS TIME, AND SUBMIT THAT LANGUAGE TO THE COURT LATER THIS AFTERNOON. AM I CORRECT? YES. WE CAN DO THAT, YOUR HONOR.

MR. SEARLES:

SHOULD WE SUBMIT A PROPOSED ORDER TO THE E-FILE E-MAIL ADDRESS? THE COURT: YES. THIS IS ROBERTO TERCERO AGAIN.

MR. TERCERO:

WE CAN GO AHEAD AND DO THAT. THE COURT: ALL RIGHT. I APPRECIATE THE QUESTIONS,

THANK YOU VERY MUCH. THEY WERE GOOD ONES.

AND I THINK, FOR THE DISCUSSION, THE AND I WILL LOOK

ORDER WILL BE CLARIFIED IN A MEANINGFUL WAY.

FORWARD TO THE BRIEFING AND TO SEEING EVERYONE ON THE 19TH. MS. FRON: THANK YOU. THANK YOU.

MR. SEARLES: THE COURT:

YOU ARE WELCOME.

Case 3:08-cv-00400-DMS-BLM

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I CERTIFY THAT THE FOREGOING IS A CORRECT TRANSCRIPT FROM THE RECORD OF PROCEEDINGS IN THE ABOVE-ENTITLED MATTER. S/LEEANN PENCE 7/24/08 DATE

LEEANN PENCE, OFFICIAL COURT REPORTER