Judicial Mayhem

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7/19/22 10:23 AM

Judicial Mayhem How Federal Judges Betrayed Their Public Trust

David M. Dorsen Author of Henry Friendly, Greatest Judge of His Era and The Unexpected Scalia

Headline Books Terra Alta, WV

Judicial Mayhem How Federal Judges Betrayed Their Public Trust

by David M. Dorsen copyright ©2023 David M. Dorsen All rights reserved. No part of this publication may be reproduced or transmitted in any other form or for any means, electronic or mechanical, including photocopy, recording or any information storage system, without written permission from Headline Books.

To order additional copies of this book or for book publishing information, or to contact the author: Headline Books P.O. Box 52 Terra Alta, WV 26764 www.HeadlineBooks.com Tel: 304-789-3001 Email: mybook@headlinebooks.com

ISBN 13: 9781951556914 Library of Congress Control Number: 2022939436

P R I N T E D I N T H E U N I T E D S TAT E S O F A M E R I C A

To United States Attorney and District Attorney Robert M. Morgenthau and Senator Sam Ervin (D - N.C.), two gentlemen and scholars who hired me and whose example I have tried to emulate in the pursuit of justice.

There is no crueler tyranny than that which is perpetrated under the shield of law and in the name of justice.

—Charles de Montesquieu

[A] judge who thinks legal reasoning is nothing more than a rationalization for decisions reached on other grounds, and yet announces those decisions in the name of the Constitution, acts in bad faith. Such decisions may enjoy raw institutional power, but they are lawless, as our tradition has understood law.

—H. Jefferson Powell

I did not escape from behind the Iron Curtain to come to the United States to confess to some Lavrentiy Beria [head of NKVD under Stalin] wannabes to having done something I did not do.

—Michael Lauer

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Also By David M. Dorsen Nonfiction Henry Friendly, Greatest Judge of His Era The Unexpected Scalia: A Conservative Justice’s Liberal Opinions Fiction Moses v. Trump, A contemporary novel Other For Whom the Bell Tolls (opera libretto) The Saturday Night Massacre (play)

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Contents Introduction ...................................................................................... 9 1. Iron Curtain Years ...................................................................... 13 2. The Good Life and the Blue Horizon....................................... 22 3. Storm Clouds Form.................................................................... 31 4. Miami SEC Goes to Court ........................................................ 38 5. Ex Parte Destruction.................................................................. 50 6. Reality Sets In ............................................................................. 59 7. Receiver Steinberg Liquidates ................................................... 73 8. The Noose Tightens ................................................................... 90 9. In Contempt of Court .............................................................. 103 10. Lauer’s Aborted Offensive ..................................................... 116 11. Miami SEC Goes All In ......................................................... 123 12. Summarily Judged .................................................................. 140 13. Disgorged ................................................................................ 153 14. To a Higher Court .................................................................. 169 15. DOJ to the Rescue, Not ......................................................... 180 16. Lawyers to Lauer’s Rescue, Sort of ....................................... 203 17. Down the Drain...................................................................... 212 18. Second Chances, Anyone? .................................................... 225 19. “Shut Up,” They Explained .................................................... 241 20. Marra’s Send Off ..................................................................... 247 21. Hi Ho, Hi Ho, to the Higher Courts We Go ....................... 257 Afterword ...................................................................................... 270 Acknowledgments ........................................................................ 276 Appendix A -- Participants in events described in the book ................................................................................. 279 Appendix B -- Major dates in litigation involving Michael Lauer ........................................................... 286 Endnotes ........................................................................................ 293 Index .............................................................................................. 344 The Author .................................................................................... 352 7

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Introduction This is a book about the tribulations of one man, Michael Lauer, in the American courts, although it is much broader than that. It also recounts how federal judges, the Securities and Exchange Commission, and others involved in his cases cost countless innocent people who placed their faith in Lauer and the proper operation of the federal courts $1 billion.1 The cases presented in this book were brought by the United States in the federal courts of the United States, which many legal professionals believe are substantially superior to the much larger number of . state-court cases. Chief Justice John Roberts wrote in 2013: “the federal court system has become a model for justice throughout the world. Foreign jurists...uniformly admire United States courts.”2 The Supreme Court has written: “The United States wins its point whenever justice is done one of its citizens in the courts.”3 SEC v. Lauer describes events 180 degrees opposite to this optimistic model. SEC v. Lauer, the principal case discussed, was an unmitigated disaster. I am talking not only about the result, although that factors into the failure. I am referring to how the case started and how it was handled by certain federal judges, all of whom enjoy life tenure. A veteran of the national civil rights movement in the South told me SEC v. Lauer reminded him of some of the prosecutions against blacks and their allies in the police courts of the deep south in the 1960s.

Michael Lauer grew up behind the Iron Curtain in 1955. In 1971 he arrived in the United States at sixteen with his mother penniless and speaking no English. He worked his way through 9

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college and business school. Surprisingly, he chose a career on Wall Street. After working in premier investment banks, he founded his own hedge funds. He enjoyed an unblemished reputation with no complaints or SEC red flags in his entire career before the events described in the book. Thirty years after arriving in the United States, he was financially successful beyond anyone’s wildest dreams, worth well into nine figures and running hedge funds valued at over $1 billion. He was turning down new investors.

While Lauer had the immigrant’s belief in the goodness and justice of the American system, starting in July 2001 and lasting for a decade and a half, he was confronted with improper actions and court rulings against him. He was forced to defend himself before biased and vindictive judges.4 To give one example, without explanation, federal judges refused to give Lauer $48 million that auditors PricewaterhouseCoopers certified was properly owed him and the SEC conceded he was owed and entitled to. (The total amount to which Lauer was entitled from the hedge funds in which he invested was twice that amount.)

The government created and broadcast falsehoods to demean and create prejudice against Lauer, going so far as to say in an SEC filing in the district court: “This matter involves one of the largest hedge fund frauds in the history of the United States.

Lauer masterminded this devious plot, which cost investors hundreds of millions of dollars while netting him more than $50 million. Lauer fashioned a web of deceit using nearly every fraudulent device imaginable.” The supposed evidence for this statement was a creation and manipulation of the SEC and their collaborators, especially the supposedly neutral receiver, who was court-appointed and court-supervised, and his large staff of professionals, which the federal judges universally and blindly supported. The charge against Lauer, it should be emphasized, was that he allegedly overbilled his wealthy and sophisticated clients (none of whom had ever complained).

Despite spending over $100 million pursuing Lauer over fourteen years, the government, its agents, and the receiver who unlawfully partnered with the SEC failed to demonstrate that 10

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Lauer’s activities were illegal or fraudulent despite their relentless efforts.5 They and the courts destroyed more than $1 billion of the assets of Lauer and his fellow investors. The scores of investors emerged with just over $50 million of their assets, which had been valued at $1 billion before SEC v. Lauer; Lauer lost every dollar he had, regardless of its relationship to the alleged fraud.

Lauer’s constitutional rights were violated, starting with over-zealous FBI agents who approached him in a sting in 2001 without any basis and later when other agents conducted an illegal search and seizure of his computer; by SEC litigators who worked relentlessly to deny him of fundamental rights, including his right to counsel; by an out-of-control receiver selected by the SEC who thrived on money taken from the investors; and by a series of federal judges who repeatedly trampled on the Constitution. As for the receiver, who was a class-action lawyer and not a financial manager, the judges awarded him and the professionals he hired at least $70 million in fees and expenses, far more than the investors ultimately received. As a final blow, the judges rejected Lauer’s numerous requests to have the receiver and his professionals audited and to force them to return to the investors millions of dollars they did not deserve.

Perhaps most fundamental was the violation by federal judges of the Constitution’s Due Process Clause. They repeatedly denied Lauer access to assets he acquired years before his alleged misconduct, which prevented him from obtaining an attorney. At the same time, a federal judge ordered him not to communicate with the other investors, many of whom were potential witnesses, which destroyed whatever remained of his ability to defend himself. When he tried to act as his own lawyer, he was beset by a flood of technical objections that the judges uniformly upheld.

He could not acquire an attorney to contest the charges in SEC v.

Lauer until early 2012, which was eight and one-half years after the SEC sued him and after they wrongly secured a $62 million judgment against him. These were just some of the unlawful prejudicial acts inflicted on Lauer.

The government and federal courts cost Lauer his wealth, his livelihood, and his peace of mind, but he refused to surrender.

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Despite this severe and enduring hardship, Lauer refused to admit wrongdoing that he never did.

But I am moving much too quickly...

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Chapter 1

Iron Curtain Years Michal (later Michael) Lauer was born in 1955 in Lviv, Poland, the son of an ethnically mixed marriage. Both his parents were well educated. His Jewish father was a dentist; his Russian Orthodox mother was a hematologist. He was considered from Poland, although the city was then in Soviet Ukraine. Lviv was the kind of place that is always part of you, especially when you have parents to tell you about it. Lviv was the epicenter of the region described by Timothy Snyder in Bloodlands: Europe Between Hitler and Stalin (2010). Snyder estimated that between 1933 and 1945 approximately fourteen million noncombatants in the region that primarily encompassed Poland and Ukraine perished from starvation, persecution (including the Holocaust), and war.6 Lviv (formerly Lvov) was founded in the mid-thirteenth century, and Jews soon became a large proportion of the population. By the 1820s, there were 19,000 Jews in Lviv and they owned 265 of its 290 stores. While there were periodic invasions, changes of borders, and pogroms, the most serious problems began with World War I, when tens of thousands of refugees arrived in Lvov to escape the Cossacks. Jews were persecuted, but nothing like what occurred later. Famine struck the region in the early 1930s, and more than three million died, mostly of starvation. Nevertheless, the Jewish population swelled to more than 100,000, half the city’s total, by the late 1930s.

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When World War II began, Lviv was in Soviet hands. The Soviets forced Jewish shops and synagogues to close and deported thousands to the Soviet hinterlands. Then came the Nazi invasion on September 1, 1939, which many, and perhaps most, of the Ukrainian population welcomed. Lviv Jews were slaughtered by the thousands; others were sent to work as slave laborers; most were sent to die in concentration camps or death camps in 1942 and 1943, where many of the guards were recruited from the local population in Poland and Ukraine. Many western Ukrainians not only cooperated with the Nazis, some even organized their own pogroms. Their children were Lauer’s neighbors. On June 1, 1943, the Nazis liquidated the remaining few thousand of the more than 100,000 Jews that initially had been herded into the ghetto in 1941. One account describes the number of Jewish survivors, who hid in sewers or were protected by the local population, as a handful.

Apart from Michal Lauer’s father, Bernard, all the paternal side of the Lauer family were killed during World War II, including his father’s parents and siblings. Michal’s parents named him after his father’s younger brother, whom the Nazis murdered in 1942, when he was sixteen. The elder Lauer survived by assuming the identity of a Polish Catholic, Stefan Dobrowolski.

Bernard Lauer worked for a local dentist as a technician, where he had to protect himself from the Ukrainians as much as from the Germans, although a Ukrainian woman saved his life. The Gestapo picked him up twice and he escaped both times. He attributed his survival to his excellent physical condition; he was an elite amateur middleweight boxer. He also survived because he was determined, optimistic, bright, and good at assessing risk-reward benefits. He later instilled in his son an interest in boxing and other competitive sports. To this day, Michael Lauer credits his boxing training for his survival.

The Russian Orthodox and members of the derided entrepreneurial class (which were allowed under Lenin’s “New Economic Policy,” sometimes known as NEPmen), were violently mistreated. A Soviet court sentenced Bernard Lauer’s mother-inlaw to ten years in a gulag for the crime of being married to her 14

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husband, who had been imprisoned. Because of the miraculous efforts of Lauer’s mother-in-law, her husband’s and her sentences were eventually commuted, and most of her family survived World War II. The Red Army liberated Lviv in the late summer of 1944.

Bernard Lauer (still Stefan Dobrowolski) was drafted by the Russians but was allowed to continue school and train as a dentist. He met Valentina Selukov at the Lviv University (now Ivan Franko National University), where both were students.

Soon they married and prospered, at least by local standards.

While Bernard had no family left to object to the intermarriage, Valentina’s family was not excited by the prospect, but accepted Bernard once they got to know him. His father-in-law particularly supported him. Lauer worked hard from early morning until well into the evening. Valentina was a medical researcher, and that contributed to the family’s income and status.

In 1957 the Lauer family took the opportunity to move from Lviv to an industrial region near Krakow, Poland, just a few miles from Auschwitz, where most of the paternal side of Lauer’s family had been killed. It required some string-pulling, as well as luck. There, Valentina became the head of a medical institution specializing in tuberculosis patients and a professor of biology and Russian language at a local college. Bernard rose to the level of manager and chief dentist of a state-owned dental clinic, which provided the full range of dental work, including surgery. The authorities allowed him to receive private clients in a separate office after completing his clinic duties, and his thriving private practice supplied most of their money.

Intellectuals and intellectually curious, Lauer’s parents also took risks, including listening to Voice of America and Radio Free Europe broadcasts and reading translations of publications banned in Poland, such as the New York Times, the Financial Times, Der Spiegel (in the original German), publications that were readily available in the West, but could mean the end of careers and prison for those who were caught. Michal watched his father’s hand darken with ink as he read; the underground copying methods left much to be desired. Even though the 15

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authorities pressured them to join the Communist Party, his parents refused as a matter of principle because they viewed it as oppressive and corrupt. Lauer explained that he drew inspiration from acts like those. “Principles before profits” was a lesson he learned from his parents. Plenty of stress and danger went with living under the totalitarian regime.

Young Michal seemed to have three strikes against him. Not only was he Jewish, but also he was half Russian, which made him an enemy of Poland because of both the retaliation the Red Army inflicted on Poland near the end of World War II and the presence of some surviving German sympathizers. Finally, his family was wealthy by local standards. They had a nice apartment and a car, both rarities. They had the only telephone on the block.

Prejudices were complex. Young Lauer found himself friends mostly with the Silesians and the Volksdeutsche rather than the Poles. There were no Jews around to be his friends.

Contemporaries picked on and tried to bully Michal, but he consistently fought back. The test was not whether he won but whether he stood up to the bullies. The main lesson he learned from growing up in the Soviet Bloc was that when someone attacks you, you fight back, and they eventually learn respect and stop. Turning the other cheek and appeasement do not work.

His determined participation in physically demanding sports, including ice hockey but especially boxing, won him the respect of his peers. In Poland, some of his greatest joys were winning fights or getting picked first in a pickup hockey game even though he was the youngest player.

Lauer’s father let him work in his private office when he was ten or eleven, mostly opening doors and seeing that patients were comfortable in the waiting room. He saved his wages and bought a racing bicycle at eleven and his first motorcycle at thirteen. Michal concealed his motorcycle purchase from his mother. Lauer’s mother discouraged his bicycle racing, which she felt was dangerous. To frighten Michal, she described to him the autopsies she had performed in medical school on the mangled bodies of young victims of bicycle and motorcycle accidents.

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From his youth, Michal took risks, the same kind that teenagers took everywhere. Lauer’s father encouraged his son’s free spirit.

After the 1967 “Six-Day War” in the Middle East, there was another surge of state-propagated anti-Semitism in Poland.

In 1968, a rare window of opportunity opened for individuals with Jewish backgrounds to leave Poland. Michal’s non-Jewish mother wanted to take advantage of this opportunity, while Michal’s Jewish father did not and remained in Poland. While he would have welcomed leaving, there was no certainty that the authorities would let Bernard go, and it would have destroyed his career if he were to be denied. Also, Western nations would not have accepted his medical credentials, and he would have had to start over. Michal’s parents divorced in 1968. Michal (then thirteen) and his mother, both stateless because she was stripped of citizenship, her professional position, and other privileges as soon she declared her intention to leave Poland, clutched their valuable exit papers and left. Michal’s father, who remarried and had two more sons, died in Poland in 1978.

Essentially penniless, because Poland’s “soft” currency “zloty” was not convertible into hard currencies at that time, Michal and his mother left for Vienna in 1969. Lauer had hoped to go to Israel, enlist in the military, and become a pilot. But when he arrived in Vienna as a stateless refugee, he learned from Israeli consulate representatives that he was not Jewish under the law of Israel, which defines a Jew as someone whose mother is Jewish. The two realized they might experience discrimination there, so they decided to consider alternative destinations.

One of the important events during their approximately oneyear stay in Vienna that started in the late summer of 1969 was meeting through a mutual friend the famed Nazi hunter Simon Wiesenthal, who was also from Lviv. Wiesenthal became the Lauer family’s lifelong friend, and inspired Lauer.

Lauer and his mother arrived at New York’s John F. Kennedy airport on a snowy January day in 1971. Lauer was then about eight months shy of his sixteenth birthday, and his mother was then nearly fifty years old. Neither spoke English, and Lauer’s mother’s advanced academic credentials obtained in the Soviet 17

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Union were not recognized in the United States. Relying financially on a tiny stipend from the International Rescue Committee, which Lauer repaid hundreds of times over in the subsequent decades, Lauer and his mother embarked on the realization of their version of the American Dream.

Over the subsequent decade, young Lauer, renamed Michael, received his bachelor’s degree from City College, an excellent public college in New York City, then known as the “Harvard for the proletariat.” He played varsity hockey for the City College Beavers, where he centered the “Iron Curtain Line,” consisting of a Pole, a Czech, and a Russian (Lauer). He continued his education with an MBA from Manhattan College. To support his mother and himself and finance his academic education, Lauer held various jobs, including co-owning a restaurant at the age of 19, serving as a department-store sales clerk, and even working briefly as a lifeguard in the original Plato’s Retreat. But most notably, Lauer drove a New York City taxicab during night shifts for more than three years. In his spare time, he boxed in the Police Athletic League and then on the New York Athletic Club team.

Shortly after he became a U.S. citizen in 1976, at the age of twenty and still with a thick Eastern European accent, Lauer enlisted in the Marine Corps Officer Candidate School at Quantico, Virginia, to become a Marine aviator. While he regards his experience as very positive and transformative in many respects, he likes to recall an incident about a week into training. He was standing in platoon formation while a superfit sergeant instructor inspected the candidates as offensively as possible, calling into question the candidates’ manhood and fitness as Marine Corps officers. “Where you from?” the sergeant demanded from Lauer. “New York, sergeant instructor,” Lauer shot back, grinning. The sergeant got to the point. “Why are you fucking with me, Candy? Even I know that the New York faggots like you don’t sound like this! Do you think I am stupid? Where were you born?”

Recognizing that Candy stood for “candidate” and that the sergeant was calling him by one of the nicest pejorative 18

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monikers, Lauer replied with even a wider grin, “Lvov, sergeant instructor.” “Where the fuck is that?” the instructor asked. “The Soviet Union,” was Lauer’s reply. The platoon cracked up while the sergeant backed up, stunned.

“Holy God, Almighty! My mother [referring to the Marine Corps]! The Marine Corps sent me a Commie spy!”

Lauer got into the spirit. “I’m not a Commie, just the opposite. I came here to learn how to kill Commies, sergeant instructor.” He continued grinning, assuring the sergeant that he was a motivated and loyal marine hungry for action.

“Bullshit!” Pausing deep in thought, the sergeant added, “I know. I got it. The Corps is testing me! The Corps sent me a Commie spy to see if I’d know what to do with the enemy.” The sergeant paused and stared hard at Lauer. “I’m going to think of something real special for you, Commie...Real special.” The sergeant stared Lauer down again and moved onto the next “Candy.”

Of the fifty in his platoon, Lauer finished second. It was a harsh test, and he passed it. Most did not complete the course.

But when he learned during his stay in Quantico that a previously undiagnosed eyesight anomaly would keep him from flying fighter jets, he decided not to take the officer’s commission. He finished his obligation to the Marine Corps and said goodbye to the military. Nevertheless, Lauer learned plenty in the Corps that reinforced his education in Poland. Most important for him was when he realized that he would rather die than abandon his principles. It hit him when he was leading a platoon of Marines on a twenty-mile forced march on a ninety-plus-degree humid day in Quantico, Virginia. Many had quit, but he would faint or die before quitting. He has called it “a great moment, which the Marine officers and other elite forces have to reach before they can move on and lead others. I don’t think you can teach that ‘rather-die-than-be-done-moment,’” he said.7 Simon Wiesenthal, based in Vienna, would contact Michael and his mother when he visited New York to locate and expose Nazis. His efforts required him to visit various neighborhoods in and around New York City to track down Holocaust survivors for 19

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information and identifications. Some efforts were dangerous.

Packing a Walther PPK pistol (James Bond’s weapon of choice) that he secured to take target practice (and to defend himself), Lauer volunteered to drive him in his fire-engine-red Porsche 911 Turbo, one of the few supercars of that era. Wiesenthal, who was the subject of many death threats and preferred to speak to witnesses one-on-one, would not allow Lauer to join him in the interviews. He waited for Wiesenthal in his car. Lauer eventually became the largest individual contributor to Wiesenthal’s Nazihunting efforts, providing hundreds of thousands of dollars, mostly for rewards for the capture of Nazi war criminals, including Joseph Mengele.8 Guided by one of his former college professors, Lauer interviewed with the Central Intelligence Agency. The CIA was eager to recruit native Slavic-language speakers as analysts, although Lauer’s having relatives behind the Iron Curtain was troubling. The CIA’s case-office profile found Lauer to be highly analytical, moderately extrovert, and empathetic, with a balanced sense of risk. When Lauer talked to Simon Wiesenthal about his career over dinner prepared by his mother in her Upper West Side apartment, Wiesenthal was negative. In fact, Wiesenthal, who had a dim view of intelligence agencies from his anti-Nazi crusade, was horrified at Lauer’s choice.

To Lauer’s surprise, Wiesenthal suggested that he enter the world of finance. Wiesenthal arranged for Lauer to meet Jack Nash, a supporter of Wiesenthal’s, whose wife was a Holocaust survivor. Nash had also gone to City College. Nash was president of the highly regarded brokerage/investment banking/mutualfund management firm, Oppenheimer & Co. After taking several aptitude tests, Nash invited Lauer to join Oppenheimer in 1980.

By 1982, when he became a senior securities analyst, Lauer was certain that his professional calling was linked to Wall Street, a far cry from his upbringing in Poland.

Lauer specialized in defense and industrial technologies companies for three brokerage firms during his dozen-year career as an analyst – Oppenheimer, Cyrus J. Lawrence, and Kidder Peabody. In his thirties and with a lingering eastern 20

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European accent, Lauer rose to be a limited partner with the title of a managing director of Oppenheimer. Within five years, Lauer became a member of the prestigious Institutional Investor Magazine’s annual All-American Analyst All-Star List, then the acme of professional achievement, which continued for seven years. Even by lofy Wall Street standards, Lauer was a success, making an exceptionally good living and enjoying an excellent reputation. His accent gradually became less pronounced, although he never shed it, possibly because it added some gravitas.

An analyst at a large financial institution, he felt constrained by his position. For one thing, he spent nearly eighty percent of his time marketing, which was not what he enjoyed most. He preferred stock picking, which is where he excelled. Moreover, his position required him to be rather conservative in his choices; many of his firm’s wealthy clients preferred to focus on the Blue-Chip S&P 500 universe. Lauer, however, favored stocks of companies that were mispriced, often smallish ones.

Lauer wanted to become portfolio manager of his own hedge fund, which would give him considerable freedom. His success as an analyst provided him with funds with which to start his own hedge fund, where he would not have to worry at the outset about finding other investors. He also had the confidence required to do the job. He told one interviewer a few years before he made the switch: “I hesitate to say this because I don’t want to sound arrogant. One of the things that gave me confidence in going out on my own was that fund managers were my clients when I was an analyst, and I thought they would not be particularly difficult to compete against.”9 Lauer planned on a small operation with only a handful of people. He would use only the best service providers to audit his undertaking and perform other important functions, and he would farm out many of the more routine jobs, such as making the actual trades in stocks.

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Chapter 2

The Good Life and the Blue Horizon Hedge funds in the 1970s and 1980s were not what they became in the 1990s and later. The bear market of the early 1970s and the crash of 1987 wiped out many hedge funds, although some of the more creative (or lucky) won big in 1987. By 1990 the number had risen to some 600 funds, which became 1000 by 1992. According to one source, 1993 was “the year of the hedge fund.”10 Fortunes were made overnight in currency speculation and other shrewd bets. The top funds dwarfed the stock market in profits. But there were also spectacular losses; the biggest of the period was Long-Term Capital Management in 1994, largely because it had overleveraged its investments. A relatively small drop in its long positions was disastrous.

Strategies and objectives vary among hedge funds, but they share one characteristic -- they all have sophisticated and wealthy investors. While the extent of the risk varies among hedge funds, they are not for the average investor. The law requires an investor to have $1 million to invest. Some managers prefer to invest in publicly traded stocks, while others invest in real estate or foreign currencies, commodities (precious metals and produce), and private placements. Some funds that invest in stocks only buy long; others focus on short sales, and some do both. Some funds are highly leveraged; others refuse to borrow money to make investments. Most funds are relatively small, usually because they cannot attract investors.

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In 1993 Lauer started the Lancer Group of hedge funds, which used mostly his own money to pursue a “long/short equity” strategy, focusing mostly on the secondary domestic stocks, not the Blue Chips. Lauer created two entities, Lancer Management Group, LLC, and Lancer Management Group II, LLC (sometimes collectively referred to as Lancer Management or Lancer), to manage hedge funds, three of which he continued into the twenty-first century. The first fund he created was Lancer Partners, L.P., based in Connecticut. (Somewhat confusingly, the first hedge fund was managed by Lancer Management Group II.) Lauer became adept at attracting offshore investors and based the next two, including what became the largest, Lancer Offshore, Inc., and the smallest, Omnifund, Ltd., in the British Virgin Islands, which was more hospitable to hedge funds than the United States. The two offshore funds comprised 80 percent of the assets under Lancer Management. Lauer and his colleagues operated out of an office in the Seagram Building at Park Avenue and Fifty-Second Street in Manhattan. Lauer also maintained an office in Stamford, Connecticut.

Hedge funds, with their qualified investors, are lightly regulated by the Securities and Exchange Commission. For example, hedge funds do not fall within the scope of the Investment Advisers Act of 1940, which regulates companies and individuals in the business of providing advice to investors, many of whom are unsophisticated. Indeed, the private-placement memoranda (PPMs) Lauer utilized stated that the funds and the managers were not registered under the Investment Advisers Act of 1940.

Lauer’s offshore funds were not considered subject to SEC supervision; they were based in the British Virgin Islands and described in the PPMs as subject to BVI law. None of the operative events, such as the signing of agreements by the investors or trading in the funds themselves, occurred in the United States.

The trades by Lauer’s management companies of interests in the offshore funds were carefully designed to take place abroad, and the largest fund, Lancer Offshore, was listed on the Irish stock exchange, which increased its visibility and transparency.

The SEC obviously was America-based and focused on U.S. violations.

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Lancer’s objective was to make as much money as possible with manageable risk and without concern about monthly volatility. While Lauer preferred to analyze stocks, he had to spend considerable time meeting with investors as the head of Lancer. Lancer charged the funds the customary fees – generally one percent annually of their net asset value (NAV) as the management fee and twenty percent of annual increases in NAV value as the incentive fee. The more important income component by far was the twenty percent performance fee because the one-percent management fee failed to cover the expenses of managing the hedge funds. Investors were given access to the auditors, prime brokers, and administrators before committing their investments. While the minimum investment was $1 million for all funds, the average investment was close to $5 million; and some investments were much greater. Lauer modeled his structure on the operations of George Soros and Warren Buffet.

As was usually the case, the PPMs (private-placement memoranda that are both the offering documents and the contracts between investors and the fund managers) specified that the investment program entailed substantial risk and was suitable only for sophisticated investors. They also stated that the funds would not conform to any specific strategy but instead would follow a flexible approach. As represented in the funds’ PPMs, Lancer’s investors could expect to invest in shares of small publicly held companies. The PPMs stated that “There is no limitation on the size or operating experience of the companies in which the Fund may invest” and made other disclaimers.11 Lauer wanted to find speculative opportunities. He wanted flexibility and freedom. His strategy did not preclude buying on major public exchanges, such as the New York Stock Exchange or NASDAQ, and he did that.12 Along with buying the stocks of smaller publicly held companies that were disfavored, including in private transactions, Lauer’s business model included finding promising start-up companies, buying a controlling interest, and then taking them public through what is known as a reverse merger or reverse 24

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takeover, an alternative to an initial public offering (IPO). Lancer Management inserted the new company into an existing empty corporate structure, sometimes called a “shell,” a nonpejorative term. If a small publicly traded company goes out of business and sells all its assets, one asset is the corporate legal structure, which has value. It took the lawyers for the defunct company many hours to prepare the documents that created the corporation, including meeting the legal requisites for its having gone public.

The alternative would require starting from scratch and going public with an initial public offering, which could cost hundreds of thousands of dollars. The reverse merger has been a legal way of taking a company public, one accepted by the SEC. The operative documents for the offshore hedge funds gave complete discretion to an independent board of directors to set policies and select service providers, such as the funds’ administrators, auditors, prime brokers, banks, attorneys, and investment manager. The PPMs stated: “The management of the Funds’ operations is and will be vested solely in the Board of Directors.”13 Lauer was never a director of any of the Funds as a matter of principle because he wanted to be genuinely independent.

While Lauer was going to be the first investment manager, the PPMs stated, “The Directors may appoint any person or persons as manager of the Company.” The directors had the power to fire Lauer. Lauer obviously expected to be appointed the manager, but the directors and ultimately the owners of the hedge funds had the right to replace him. Changing managers would be tantamount to dissolving the hedge funds. The investors could replace the directors. While Lauer clearly wielded influence and the directors could not monitor every investment, they nevertheless operated as a brake on any excesses. The directors had access to the portfolios of the hedge funds and all other relevant information in real-time.

Initially, the directors of the two offshore funds, Lancer Offshore, Inc., and Omnifund, Ltd., were from Citco Fund Services, a prominent offshore hedge-fund management company that was Lancer’s administrator and knew its positions 25

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nearly real-time and participated in evaluating the offshore funds assets calculating the NAVs. By 2002 the directors of the two funds were independent of Citco. One was Dr. Richard Geist, a Harvard Ph.D., a former Harvard instructor, president of the Institute of Investing and Psychology, and a prolific writer and lecturer on investment topics. The second was John W. Bendall, Jr., a prominent figure in finance who founded and became chairman and chief executive officer of Hermitage Capital Corporation, with a background that included heading an investment banking firm and working for a division of Dunn and Bradstreet.

Lauer hired two senior people, Martin Garvey and then Eric Hauser. Each had an impressive resume,14 and the three had collectively forty-five years of unblemished experience. Garvey dealt with the service providers and wrote all the checks for Lancer Management. He acted as office manager through an entity called GH Associates, which paid Lancer’s bills and was, in a sense, one of Lancer Management’s providers. Hauser was in charge of trading. Garvey and Hauser owned GH Associates in equal shares (hence the name). Lancer also hired several other employees. Since Lancer did not trade stock itself, it bought and sold stocks for the hedge funds it managed through many independent licensed brokers, including Hermitage Capital Corporation and Shamrock Partners. Because these brokers ordinarily were not market makers themselves in the stocks traded, they had to work through yet another broker, which made the market in the stock. Only a market-maker could effect a transfer of a stock.

Lauer insisted on top-tier hedge-fundservice providers, such as administrators, prime brokers, auditors, and banks, which were more expensive than some new hedge funds used, but were designed to embody integrity and professionalism.

Their manager remained Citco. The funds’ prime broker was Bank of America. Selected as auditor for the offshore funds was PricewaterhouseCoopers (Netherlands Antilles) (PWC). PWC and Citco had access to the portfolio information in almost realtime. GGK, which was affiliated with American Express and was 26

David M. Dorsen

also highly reputable, did the accounting work for the domestic Lancer Partners. As a result, Lancer and Lauer never had any issues with any regulatory agencies or any “red flags.” Nor did any investor in a Lancer hedge fund ever complain.15 Valuation was a critical part of the funds’ activities because it governed such matters as redemption price and the fees paid to the funds’ manager. The directors had “absolute discretion” to set the method of valuation of the funds’ assets (their net asset value or NAV). The PPMs stated: “The Board of Directors, in conjunction with the investment advisers, estimates the fair values of such securities based on methodology developed by the investment manager.”16 “[T]he Board, as advised by the Investment Manager, will value such investment as it reasonably determines.”17 In other words, so long as the management companies followed any one of the recognized procedures, they were acting correctly. This was according to a contract executed by the investors. The PPMs also stated: “There have never been any administrative, civil or criminal actions, whether pending, on appeal or concluded, against the Funds, the Investment Manager or Mr. Lauer.”18 For large publicly traded companies, which the hedge funds held, the valuation is simple – the market price reflects the value of the liquid assets. However, some assets are illiquid, such as the stock of a nonpublic company, where the valuation is less automatic.19 Most of Lancer’s investments were in publicly traded companies – although not necessarily on the New York Stock Exchange – that had market-makers that implemented the trades and over whom Lancer had no control. Some of the companies were very lightly traded, however, and the stock prices might not reflect the value of the companies at any particular point in time.20 According to the book Stock Market Wizards: Interviews with America’s Top Stock Traders by Jack D. Schwager,21 which featured top hedge-fund managers, the Lancer Group compiled among the best long-term performance records in the industry.

Ordinarily, the hedge funds were diversely invested. They were the best performing funds in the country in 1997-98 and were consistently rated as among the highest five percent in their 27

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category.22 Lipper Inc. ranked Lancer’s early Voyager Fund as the best-performing U.S. equity fund for 1997, while Standard & Poor’s Micropal ranked that fund as the top U.S. global fund for 1998. Between their inception and the close of 2001, the funds returned over $500 million in cash to investors.23 Lauer personally saw his $2 million investment at the start of the hedge funds soar to $50 million by 2000.24 An interview that Lauer gave to Schwager in 1999, which Schwager published in his book in 2001, laid out his investing strategy and other aspects of his business philosophy.25 Lauer explained that he often invested in the stock of companies that were not doing well. “Many of the largest public funds that individual investors believe are being actively managed, with stocks presumably being selected based on fundamental merits, are actually closet indexing funds.” By their very nature, index funds invest mainly in high capitalization stocks that mirror the entire market. “The bottom line is that in the present perverse incentive structure of benchmark-guided portfolios, there is more risk for fund managers in owning certain grossly overvalued mega-capitalization stocks than in abstaining from them.” This creates problems when one of those stocks loses favor, particularly with mutual funds or pension funds.26 In 2001 Lauer’s prime example of a stock due to fall substantially was Microsoft, with Dell and AOL not far behind.27 “With all due respect to Warren Buffet, this business is not about investing in great companies; it’s about profiting from inefficiently priced stocks.”28 Lauer described his criteria for purchasing stocks. “The basic theme that underlies three-quarters of our trades is buying a dollar’s worth of assets at a substantial discount.” He concentrated his investments on about fifteen stocks at one time. It was not unusual, however, for the hedge funds to be invested in as many as eighty companies at one time. “Concentration is critical to superior performance,” while broader diversification adds very little.29 “My typical target is to double my investment within twelve months. Unless I believe the stock has that potential, I probably will not be interested...Usually, when I get out of a stock, I believe 28

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there are at least twenty or thirty percent left on the upside, but the key question is whether I can get a better-adjusted risk-return somewhere else.” Obviously, the system was not foolproof. For example, Lauer suffered a huge loss, particularly in his personal account, during the October 1987 crash because he opted to sell rather than cover the margin call. He went from being up over 100 percent for nine months to being slightly above breakeven.

The funds’ individual holdings bounced back quickly.30 Schwager introduced the final subject of Lauer’s 1999 interview with the question, “Your company literature states that you have a policy of not disclosing your positions. Why?” Lauer explained. First, if he disclosed he was shorting the stock of a company, management would ostracize him. Second, “there would be a lot of coat-tailing.” This is a problem because Lancer tended to build up positions gradually. Third, investors would call and bother him with questions asking why he was investing in stocks with such “lousy fundamentals” and had recently plunged. “[F]rankly, I was losing my patience because I’m Lancer’s largest individual investor, with nearly all of my net worth tied to its fortunes.”31 Like most other funds, Lancer was not transparent regarding its investments, although outsiders could get an idea of what Lancer owned through its 13F filings with the SEC, albeit with some delay.32 Lancer and the funds it managed were not struggling to attract new investors and, in fact, were turning them away.

Stock Market Wizards stated, “Lauer’s flagship fund [Lancer Offshore] currently manages over $700 million. The capital under management could be significantly greater, but [it] is closed to new investors and even returns assets when profits cause the funds he operates to grow beyond what he considers optimal size.”33 He was not trying to maximize his earnings but, instead, wanted to combine financial success with professional gratification.

On the personal side, Lauer lived beyond his wildest dreams when he emigrated to the United States thirty years earlier.

In 1997, Lauer became a father to twin girls, with three more daughters arriving in 2002, 2003, and 2005.34 Lauer’s mother, 29

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then in her late seventies, resided in her two-bedroom apartment on the Upper West Side of Manhattan that Lauer maintained for her, not far from Lauer’s own Manhattan apartment. Lauer’s autoracing career was accelerating; it culminated with Lauer and his team winning the 24 Hours of Daytona in his class in 2002. Lauer bought and raced Porches, Jaguars, Mercedes, BMWs, and other cars. He had some near-death experiences, including one time when he was standing in front of his car just off the track when another race car traveling backward missed rear-ending him by a foot. One of his racing teammates, including at the 24 Hours of Daytona, was actor and entrepreneur Paul Newman, with whom he developed a close friendship even though Newman was thirty years older than he.35 Lauer founded a motion-picture company along the way. He also became a significant philanthropist both individually and with Newman.

Lauer also pursued his lifelong passion for flying. He obtained a license and purchased a Cessna propeller plane, which he hangared just minutes from his home in Greenwich, Connecticut. When he was not using it, he rented the plane to others. One of his great pleasures was to soar above the clouds free of earthly cares. Lauer recalled a moment in 2001.

It was a gloomy late winter or early spring day. I was in a private Citation X jet (my favorite jet), flying to Canada.

I felt great, and I had been looking forward to the trip. The pilot briefed me that once we broke through the low clouds, it was sunshine all the way. I remember clearly how he broke through the low clouds, the super-powerful jet (Citation X was the fastest private jet at the time) still accelerating (I’m addicted to the sensation of speed) and the sun suddenly blasting through and shining as if only on me. The world below was in clouds. It also hit me how absolutely perfect my life was at that point. I had perfect health, perfect family, perfect career in a perfect profession. And yet, and this is the paradox, it seemed like a disappointing moment/ epiphany. I realized then that what makes me the happiest – as many successful, but not materialistic, people would tell you – is the journey/process of striving and growing and not the arrival.36 30

Chapter 3

Storm Clouds Form Michael Lauer’s enviable life faced attacks on various fronts beginning in mid-2001. His problems can be traced back to events and people a world away from his successful and heralded career to people he did not know, whose specialty was securities fraud. Their securities frauds from 1993 to 1996 cost investors between $20 million and $40 million.37 When caught, the two perpetrators38 agreed to cooperate with federal authorities in the hope of leniency.

The FBI and the Royal Canadian Mounted Police set up shop at their office in Boca Raton, Florida. The Department of Justice set about enticing others to commit securities-law or other violations in Florida and elsewhere, including New York City, Canada, and the Bahamas. It was a typical, though large, sting operation. The two posed, one assumes without much difficulty, as corrupt United States representatives of a fictitious foreign hedge fund that was manipulating the price of several stocks.

They told prospective investors that they would collectively pay millions of dollars in kickbacks in exchange for the purchase of shares at inflated prices. Another part of the scheme involved financial professionals in money laundering for purported proceeds from cocaine distribution.

The Florida-based operation, to which the authorities gave the code name “Bermuda Short,” culminated in twenty-three indictments against fifty-eight people in the U.S. District Court 31

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for the Southern District in Florida in 2002 for securities fraud, mail fraud, and conspiracy. A Department of Justice press release announced that the operation was “designed to expose and prosecute those who attempt to engage in the fraudulent purchase and sale of stock of companies whose shares trade on the United States public markets.”

What led the FBI to Lauer were completely accidental and innocent events. Joseph Huard, who was employed by an independent trading company, Shamrock Partners, Ltd., that executed trades for Lancer Management, used Lancer’s offices in Manhattan to hold a meeting that involved principals of Lighthouse Fast Ferry, a legitimate company in which the Lancer funds had made relatively small investments, under one percent of its portfolio at its peak. The company was committed to crossing the Hudson River with ferries. The two perpetrators, however, had become engaged with the company’s stock. The fortunes of the FBI sting and Lighthouse Fast Ferry had intersected, and those who had had any contact with that company became fair game.

Unbeknownst to Lauer, he had become a target of the sting even though he never learned of any basis, much less probable cause, for anyone to believe he had done anything illegal or would do anything illegal. He was a private citizen with an exemplary record, both individually and through his management companies. The courts and DOJ require a threshold of evidence before the FBI can approach the witness in a sting and that minimum does not appear to have been met with Lauer.39 The Bermuda Short indictments were unsealed on August 15, 2002. Among the defendants indicted were Bruce Cowen, James T. Kelly, and Joseph Huard. The indictments caught Lauer’s attention. Cowen, an independent contractor who lived and worked mainly in California, was one of Lancer Management’s numerous consultants. Cowen assisted primarily with the smaller companies in which Lancer invested. James Kelly worked as an independent broker at Shamrock and supervised Huard there on the Lancer account. Kelly and Huard had executed trades for Lancer and numerous other clients, while Shamrock was one 32

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of the firms utilized by Lancer to trade the stock it bought for the hedge funds. Lauer knew Kelly and Huard only slightly. The indictment charged Kelly and Huard with alleged manipulation of the stock price of Lighthouse Fast Ferry. It charged Cowen with offenses that were either unrelated to Lancer or Lauer or with victimizing them through a stock-purchase-and-kickback scheme, which netted Cowen and his confederates $600,000.

Huard and Cowen pleaded guilty to one count of conspiracy and agreed to cooperate with the FBI and SEC. Kelly fought the charges related to Fast Ferry and was acquitted in a retrial after the first trial ended with a hung jury. One of his arguments was that Lancer held a negligible amount of Fast Ferry’s stock and that it made no economic sense for Lancer and Kelly to manipulate it. The cross-examination of FBI agent Michael Palusek during Kelly’s two trials disclosed that the two apprehended perpetrators had approached Lauer multiple times with their criminal scheme and that Lauer summarily rejected their solicitations.40 That should have been the end of it.

A series of columns starting in September 2002 in the New York Post, a New York City tabloid, by Christopher Byron months after the indictments, hyped the investigation and spread misinformation about Lancer Management, including that Bruce Cowen was one of its employees. There were some forty columns in the Post by Byron,41 but nowhere else. Although the assertion in the columns that Cowen had been a Lancer employee and other content were untrue, many investors in Lancer funds became alarmed. They created a dramatic surge in investmentredemption requests in September 2002.

Lancer Management Group II, LLC, had stopped accepting new investments in Partners long before Byron’s articles appeared.42 In early 2003 Partners placed itself into voluntary, debtor-in-possession bankruptcy in Connecticut because redemptions had made it illiquid, although not insolvent. The reason was not that Partners’ liabilities exceeded its assets (in fact, Partners had no liabilities.)43 Rather, the unique provisions of Connecticut law, whose law applied, gave creditors and investors 33

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priority based on the order in which they filed suit. Partners could not act fast enough to satisfy all its investors, to which it wanted to make a distribution in kind of its assets. A small minority of investors forced Lancer Partners into insolvency under Connecticut law. Partners’ lawyers then led it into federal bankruptcy. Although he was its largest investor, Lauer had no choice.44 The peculiar Connecticut law created a highly undesirable result –to obtain priority, potential claimants would race to the courts to file suit, thereby jeopardizing the solvency of a company that had no reason to be unraveled.45 After the transfer to federal jurisdiction, the Bankruptcy Court in Connecticut appointed a neutral examiner to stay on Lancer Management II’s premises and work with Lancer Partners with full access to the latter’s records.46 The court would maintain strict surveillance over Lancer Partners.

On February 14, 2003, Lauer and Lancer sued the Post and the columnist for libel, citing, among other things, the columnist’s poor record for accuracy. Lauer went ahead with the case despite his attorney’s warning that his whole life would be scrutinized during discovery.

The hedge funds’ counsel in the British Virgin Islands, Simon Pascoe, informed Lauer that the BVI Financial Service Commission (FSC), a BVI government entity, was filing a complaint against the offshore Lancer-managed funds, Lancer Offshore and Omnifund, seeking, among other things, the appointment of an administrator (the equivalent of a receiver) over the funds. The PSC based its information on New York Post columns. The presiding judge in BVI denied the FSC’s petition.

Instead, the funds entered into an undertaking (stipulation), which provided no incentive fees or other compensation would be paid to Lancer or Lauer. In addition, Lancer and Lauer would make no investment withdrawals during the pendency of the litigation with the FSC so that no investor could be prejudiced.

In other words, Lauer had no access to the assets of the offshore hedge funds. The BVI court set a trial for September of 2003. No one has ever suggested that BVI, the home of much international 34

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financial activity, could not deal with charges against the two offshore funds.

The FSC commissioned the United States accounting firm Deloitte Touche to write a report analyzing the valuations of the assets in the offshore hedge funds, which the FSC immediately sealed, even though the report did not disclose the identity of the stocks held by the funds; the report used a code, instead.

The highly confidential Deloitte report, dated May 21, 2003, stated that the valuations were greatly inflated. Lauer concluded, however, that Deloitte’s report was badly flawed, demonstrating an absence of knowledge about hedge funds and how they are valued. Deloitte embraced a conservative static methodology based on the book value of investments rather than a method of evaluation based on market price and actual and potential earnings.

To assist Pascoe, Lancer Management retained a Florida professional to respond to the accusations, Milton Barbarosh, who headed the firm of Stenton Leigh, a recognized entityvaluating company. Barbarosh was a professional appraiser and someone who had worked for Lancer in the past. Bruce Cowen had introduced Lancer to Barbarosh and worked with him; Lauer had met Barbarosh once.47 Barbarosh finished his response in mid-June, which Pascoe sent promptly to the FSC. It, too, was sealed from the general public.

While Pascoe prepared for trial in BVI, Lancer Management and the funds awaited further word from the SEC. They had not received a notice of a formal SEC investigation or a Wells Notice, a document that the SEC routinely sent to subjects of an anticipated SEC proceeding inviting them to provide exculpatory material. Lancer cooperated with all authorities that approached them, and Lauer was anxious to tell its story and answer questions.

Briefed by the Miami-based FBI, in mid-March 2003, the Miami office of the SEC requested information from Lancer for an “informal” inquiry. Everyone was puzzled by the SEC’s request for extensive information. The Lancer hedge funds were neither SEC-registered nor SEC-regulated entities; two of the 35

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three hedge funds were offshore and presumably exempt from SEC regulation. Moreover, the funds had nothing to do with the Miami office of the SEC, whose jurisdiction extended to Florida, Mississippi, and Louisiana.

Lancer’s lawyers checked with the New York SEC, which assured them that nothing was going on concerning Lancer.

Lancer’s lawyers concluded that the Miami SEC was investigating companies in which Lancer had invested. So, they advised Lauer to provide voluntarily and without a formal order voluminous information about the offshore funds to the Miami SEC,48 which assured Lauer and Lancer that it would not give the records to anyone else.49 It did not tell Lauer that it was improperly coordinating with the FBI. Lauer was agreeable to voluntarily cooperate with the SEC because he was confident he had not done anything wrong and had nothing to hide. Moreover, he had confidence in the integrity of the United States government, a belief that came easily to someone who grew up under the corrupt Soviet rule and what passed there for a legal system. But as questions became more pointed, Lancer’s attorney asked for the SEC’s formal order of investigation, something the Miami SEC did not have. Only the SEC Commissioners can authorize a formal investigation, and they had not. Cooperation ceased.

In retrospect, the cooperation was a colossal mistake. The Miami SEC could not have subpoenaed the documents for the simple reason that it never obtained subpoena power until the day before it filed its complaint on July 8, 2003. Significantly, John C. Mattimore, head of the Miami office at the time, admitted under oath years later that he shared the information with the Department of Justice in violation of its assurances to Lancer.

He also testified that the DOJ shared with the SEC confidential information that it obtained through a search warrant, even though the use of the grand-jury material was limited to the grand jury was secret: Q. I assume after you initiated your investigation that you continued to have contact with the DOJ attorneys, correct?

A. Yes. 36

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Q. And I assume you also shared information with them?

A. Yes.50 Documents the SEC had given to the FBI in violation of its assurances to Lancer and Lauer allowed the latter to draft an application to secure a search warrant, which permitted federal agents to seize many files and computer disc drives detailing the activities of Lancer Management and the funds.51 On June 12, 2003, FBI agents executed a warrant from a federal grand jury in southern Florida directed at the Lancer Management offices in New York and Connecticut, as well as one directed at the office of offshore funds’ director John W. Bendall, Jr. The FBI took nearly all of Lancer Managements’s and Lauer’s records.52 Virtually all the other evidence, which the SEC had given to the FBI, had been supplied voluntarily by Lancer and Lauer for the SEC’s exclusive use. Lauer and Lancer’s misguided cooperation coupled with the government’s abuse of power drove the SEC, the DOJ, and the FBI forward.

37

Chapter 4

Miami SEC Goes to Court The SEC moved hastily, even rashly. Without allowing Lancer Management or Lauer to contest its position and without informing them in advance, as it routinely did by sending targets a Wells Notice,53 the SEC filed a complaint on July 8, 2003, for injunctive and monetary relief in the United States District Court for the Southern District of Florida, a location where Lancer and Lauer did no business. The defendants named were Lauer, Lancer Management Group, LLC (which managed the two offshore funds), and Lancer Management Group II, LLC (which managed the Connecticut-based hedge fund).54 Lauer owned eighty percent of both management companies. Separately, the SEC filed emergency motions that asked for a freeze of the defendants’ and the funds’ assets and the appointment of a court-appointed and court-supervised receiver over Lancer Management’s and the offshore hedge funds’ assets.55 The complaint, which Lauer first saw three days after the SEC filed it, alleged that Lancer Management and Lauer artificially inflated the NAVs (net asset values) of the assets held by the funds. Higher values for the funds’ assets would create higher fee income for the management companies and Lauer. The SEC’s complaint charged that starting around March 2000, Lauer decided to defraud investors in a complex scheme in which Lancer Management and Lauer purchased for the hedge funds shares of thinly traded stock at or near the closing days of the 38

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month, which set the prices at which Lancer valued the stocks to investors. The alleged scheme, known as “marking the close,” was designed “to overstate the value of certain of the Funds’ holdings in virtually worthless companies and overinflate [sic] performances and net asset values (‘NAVs’).”56 There was no allegation of fraud or misconduct related to the companies in which the funds invested. The complaint named the three hedge funds run by Lancer as “Relief Defendants,” a designation that will be discussed later. The investors in the hedge funds clearly were the alleged victims of the defendants.

Paragraph 34 of the complaint “Bogus Valuations,” alleged that Lauer and Lancer Management assigned fictitious valuations for seven stocks in small companies the hedge funds held as investments. The complaint charged that the values assigned to the holdings “mirrored or closely approximated the [manipulated] values assigned to [a fund’s] holdings by Defendants based on the manipulated closing prices at month end,” did not follow mandated procedures for valuing hedgefund assets, and used “unfounded, baseless and unrealistic projections.” Valuations were “fatally flawed and did not reflect the true values of [a fund’s] holdings under the generally accepted Uniform Standards of Professional Appraisal Practice or American Society of Appraisers Business Valuation Standards...

Indeed, under accepted standards of valuing business, certain of the Funds’ holdings were and/or are essentially worthless.”57 The next section of the complaint cataloged “materially false and misleading statements in offering materials and newsletters about, among other things, the Funds’ holdings, performance, values and management backgrounds.” The SEC listed first that the hedge funds’ PPMs falsely represented that most investments would trade on listed exchanges, and second, that funds would not take legal or management control of the issuer of any underlying investments. However, there was no explanation why these circumstances were important or how they contributed to the alleged fraud. Other allegations included that monthly newsletters had misrepresented the size of the funds’ interests in companies and contained other misrepresentations.58 The 39

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complaint charged that Lauer ran the operation, including Lancer Management and the funds, as a “control” person, including making decisions and executing necessary documents, and directly benefited “from the manipulative and fraudulent conduct.”59 Finally, the complaint alleged that Lauer had violated provisions of the federal securities laws, including laws prohibiting stock manipulation and the Investment Advisers Act of 1940, which applied to persons in the business of giving securities advice. The complaint sought injunctions against Lauer and Lancer Management, including an order directing them to disgorge all ill-gotten gains and extracting from them statutory civil penalties. The SEC, however, did not order the exchanges to stop trading the allegedly manipulated stocks to prevent any manipulation from spreading.60 The SEC neither sued nor made any specific allegations against any others (then or at any other time), including Lauer’s two junior partners, Lancer’s employees, the unaffiliated licensed traders who made the alleged manipulated trades, the directors of two offshore hedge funds, or the servers, including Bank of America, PricewaterhouseCoopers, or Citco for the offshore funds, and GGK/American Express for Partners.

To Lauer, the scheme charged in the complaint made no sense. The complaint accused Lauer and Lancer Management both of rigging the closing price of many stocks (“marking the close”) and giving arbitrarily high valuation to allegedly worthless companies by the simple device of repricing the stock in the funds’ portfolio. The market price was the presumptive value of assets, but the complaint alleged that Lauer could simply fix the value of holdings to charge investors as he saw fit. But why do both, especially since marking the close was complicated and required many other accomplices, including Lancer’s outside brokers? The complaint alleged manipulation to fix the closing price in seven of the scores of the stocks which Lancer Management had bought over time for the hedge funds Manipulating the price of seven stocks was an enormous undertaking. The complaint alleged that the fraud started around March 2000 but did not explain why Lauer, after years of financial success, would suddenly start 40

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committing massive fraud in 2000. It also did not explain how or why he made the intricate transmission from a legitimate company to one allegedly steeped in fraud.

The complaint gave some purported examples, but did not demonstrate that the late-day trading it cited was a pattern or that the volume of late-day trading was out of the ordinary. In other words, if someone traded heavily, but randomly, during the year, there would be trades near the close of every day, week, month, and year, but that would prove nothing. The laws of chance would require a certain number of trades to take place at various times. Moreover, some of the trades the complaint cited as part of the scheme had nothing to do with setting Lancer’s fees because they were not made at the end of a quarter (for purposes of the one percent fee) or at the end of the year (for the purpose of the performance fee).61 There seemed to be no plausible reason why the SEC included those trades in the complaint.

The SEC’s complaint was also taking an expansive view of marking the close. A popular definition of the term reads: “Marking the close is the practice of buying a security at the end of a trading day at a significantly higher price than the current price of the security.”62 The complaint, however, included purchases earlier in the day and did not provide the price before the acquisitions. In fact, the complaint identified purchases of stock that occurred on December 26 and 27, which left days for subsequent trades. Finally, the trades the SEC listed in the complaint were not numerous.

The SEC had not sued any of the brokers whom Lancer Management hired to make its trades or, for that matter, any other entities. Under the law, Lancer could not make trades itself.

Lancer’s employees had to use licensed independent brokers, much as individuals use brokers and traders to buy and sell securities. To effect the alleged scheme, someone at Lancer would have had to tell the brokers when and at what price to execute the orders. Since these brokers did not make a market in any of the stocks named in the indictment, the brokers Lancer used would have to tell other brokers to mark the close. Yet the SEC gave all the brokers, who were far more aggressively regulated than 41

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the lightly regulated hedge funds and others, a total pass, even though independent brokers Kelly and Huard, who made trades for Lancer, had been indicted in Bermuda Short. The SEC did not even explain how the alleged marking of the close had worked.

All it said was that Lauer had given instructions to brokers.

Lauer saw in other respects that the complaint misstated how Lancer Management operated. The complaint alleged that Lauer established the valuations of the stocks the funds held. However, the directors and not Lauer made valuations, and the auditor PWC had the final word on the valuations to compensate Lancer.63 Lauer explained in an affidavit (dated September 6, 2003) and elsewhere: “As a private investment pool, Lancer valuations are a function of a contractual agreement with its investors, and not a standardized formula as applicable to the regulated mutual fund industry. The reality is, that the Lancer valuation practices – particularly during the years of alleged wrongdoing – were more conservative than permitted by the Lancer PPM.”64 Published standards for evaluating companies were irrelevant, he argued; the contract (PPM) had agreed on a specified method for making valuations, which included an audit by a major auditing firm. No one disputed Lauer’s statement.

While the complaint alleged violation of American standards, it ignored the fact that the two offshore funds were required to use international, not American, standards to evaluate the assets of the offshore funds. And it did not allege that the use of international standards rather than American standards facilitated the alleged fraud. Furthermore, the same higher price used for fixing fees would be the basis for redemptions. Thus, an investor who owned shares in the hedge fund would receive the allegedly inflated price if he chose to redeem his investment, and the hedge funds had redeemed over $500 million by the end of 2002.65 Which was higher, the extra twenty-one percent investors had to pay Lancer in fees, or the allegedly inflated amount paid to redeeming investors? The complaint did not say, although the answer is crucial.66 In addition, the offshore funds, Lancer Offshore, LLP, and Omnifund, Ltd., did not operate in Florida or even the United 42

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States. No trades of interests in those hedge funds were conducted on United States stock exchanges, only the Irish exchange and elsewhere outside the United States. Moreover, the other activities in the United States – those of Lancer Partners, LLP, and Lancer Management II – were in New York and Connecticut and not in Florida. What was the Miami office of the SEC doing in the case?

The SEC did not say. Its only allegation in the complaint read: “[V]enue is proper in the Southern District of Florida because many of Defendants’ acts and transactions constituting violation of the Securities Act am Exchange Act occurred in the Southern District of Florida.”67 It identified none.

There was yet one more problem with the SEC’s allegations.

It was undisputed that Lauer was the largest individual investor in the hedge funds with most of his net worth in them. Lancer Management also loaned the funds tens of millions of dollars, eighty percent of which was his money (while ten percent belonged to Eric Hauser and Martin Garvey each). Lauer also held millions of dollars of the same stocks as the hedge funds in his personal portfolio at Bank of America. Why would Lauer loan the funds money? Why would Lauer not sell stocks whose prices he supposedly knew were artificially inflated? Indeed, why would Lauer jeopardize his substantial personal fortune for what seemed a moderate haul? The SEC did not say. Instead, it ignored the evidence that made Lauer’s alleged scheme self-defeating if not impossible.

Lauer was outraged that the SEC’s Miami Office denied him and his associates the chance to explain the workings of the hedge-fund industry and how Lancer Management operated. The Miami SEC had also not even conducted a formal investigation, which would have given it access to people who did business with Lancer, such as its traders and service providers. Lauer was concerned that the Miami SEC did not understand how Lancer operated. There was no allegation of fraud or misconduct related to the companies in which the funds invested.68 Lauer believed that there was an unseemly rush to file, but he could detect no reason for the haste. The quarter had ended on June 30, 2003. The complaint was filed on July 8, 2003. No 43

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fees were going to be computed, much less collected, for nearly three months. The all-important incentive fee was not going to be calculated or possibly collected for nearly six months. There certainly was no statute of limitations problem. Later, the Miami SEC conceded that the discovery it took after the complaint was filed provided almost all the evidence it had. “The SEC’s evidence of these matters [motion for summary judgment] was primarily developed during depositions.”69 Deposition-taking did not begin until mid-2004, a year after the SEC filed its complaint, even though the SEC had not interviewed knowledgeable people before it filed. Why couldn’t the SEC have obtained some of the facts before filing, Lauer wondered: Let me reemphasize that the only legal valuation (or portfolio pricing may be a better phrase) policy that matters is the one that was cited in the PPM. That’s it. Nothing else. Hedge-fund subscription is a private contract between the investment manager and the sophisticated investors in the funds...It’s never been shown that Lancer deviated from the portfolio pricing policy cited in the PPM, which was fairly standard and in line with the International Accounting standards. PWC [PricewaterhouseCoopers] audits could not be more clear, which is also one of the reasons why PWC and other Lancer service providers never objected to Lancer’s portfolio pricing...Why didn’t the government claim that Lancer deviated from the PPM outlined policies...? Because we didn’t!... Plus, there was no evidence, documentary, or testimonial that showed that any stocks were manipulated.70 Because Lauer did not know the judges in the United States District Court for the Southern District of Florida, the name “Zloch” stamped on the front page of the complaint made no impression on him when he first saw it on July 11, 2003. It would not take him long to learn that Judge William K. Zloch, the district’s chief judge, was an unfortunate selection from his point of view. He was a zealous and pro-government judge. He was also rash and excitable. Although most district judges sat in 44

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Miami, he was based further north in Ft. Lauderdale. The cover sheet to the complaint filed by the SEC stated that the cause of action arose in Palm Beach County, but nothing in the complaint suggested how this was so.

A newspaper story in the Miami Herald announcing the filing of the complaint said it was the first of its kind against hedge funds brought by the Miami SEC office in the sixty years of its existence. That meant that the Miami office might not have known whether the alleged violations, even assuming they existed, were serious, unlike the SEC offices in New York. As understood by Lauer, the SEC did not consider marking the close a serious offense that required the bringing of a comprehensive suit like SEC v. Lauer, but rather something that was handled administratively.71 When an attorney representing Lauer at the inception of the case sought enlightenment from the SEC’s office in Manhattan, the SEC there told him they knew nothing about the case. Miami had apparently not sought outside assistance in analyzing the case or drafting the complaint. Lauer saw no evidence that New York or national offices of the SEC ever played any role in the district court in SEC v. Lauer.

SEC attorney Kerry Anne Zinn, who signed the complaint, also filed two “emergency” motions with the complaint. First was a motion for a temporary restraining order (TRO) and related relief.72 The motion sought to enjoin Lauer and Lancer Management immediately “from continuing to engage in a devious plot to overinflate [sic] the performance and net asset values (‘NAVs’) of the three hedge funds...in violation of the federal securities laws.” The TRO would remove Lauer from participating in the activities of Lancer and the funds and freeze all his assets. “Given the egregious nature of this fraud,” Zinn wrote, “which is apparently being perpetrated primarily to line their pockets at investors’ expense, it is crucial for this Court to issue an order freezing the assets of offshore bank account into which investors proceeds were transferred.”73 The SEC simultaneously filed a second motion, Plaintiff ’s Emergency Motion for Appointment of Receiver.74 In an SEC enforcement case, a receiver is court-appointed and court45

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supervised. A receiver is a fiduciary held to the highest duty to those whose property he controls.75 He was part of the judicial, not executive, branch of the government (unlike the SEC). The motion and proposed order granted nearly absolute powers to the receiver over Lancer Management Group, LLC, Lancer Management Group II, LLC, and the two offshore funds, Lancer Offshore, Inc., and Omnifund, Ltd., including granting the receiver the “full and exclusive power, duty, and authority to administer and manage the business affairs, funds, assets, choses in action, and any other property” of the entities placed in receivership and to investigate their affairs. It authorized the receiver to employ “one or more legal counsel, actuaries, accountants, clerks, consultants and assistants as the Receiver deems necessary and pay their reasonable compensation and reasonable expenses” out of the assets of the receivership entities.

The receiver would assume control of all bank and brokerage accounts and make payments and disbursements from them.

He would receive and open all mail addressed to Lauer and the receivership entities. No one else could act on behalf of the management companies or the hedge funds.76 The SEC’s motion asserted without explanation or reference, “Lauer also owns or controls the Relief Defendants who have received investors’ funds.”77 Other paragraphs in the proposed order extended the enormous protection given to the receiver. “No bond shall be required in connection with the appointment of the Receiver.”78 Usually like all fiduciaries, receivers are held to an unusually high standard of conduct to protect their beneficiaries. The proposed order abolished the higher fiduciary standard that the fiduciary law imposed. It absolved the receiver for liability whom the receiver might harm by his negligence: “Except for an act of gross negligence, the Receiver shall not be liable for any loss or damage incurred by Lancer, Lancer II, Offshore, Omnifund...or by the Receiver’s officers, agents or employees, or any other person, by reason of any act performed or omitted to be performed by the Receiver...79

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The entire argument that a receiver was needed in this case was the following: The appointment of a receiver is particularly appropriate in cases where a defendant, through its management, has defrauded members of the investing public. In such cases, without the appointment of a Receiver to maintain the status quo, the corporate assets will be subject to diversion and waste to the detriment of those who were induced to invest in the fraudulent scheme. A TRO is appropriate when it is obvious that those in control of an entity who have inflicted serious detriment in the past must be ousted.80 While this was an argument for placing Lancer Management into receivership, it was not for the hedge funds, which were not defendants, were no threat to anyone, and were independent of the management companies. Under well-established law, receivership is an extraordinary remedy reserved for an entity that did something wrong and threatens to repeat its wrongdoing.

Overwhelming authority dictates that only a defendant can be placed in receivership and then only a defendant that has shown a disregard for the law and is a threat to continue to commit an unlawful act whom the receiver might harm.81 No one disputed these established principles, least of all the SEC, who in countless other cases explicitly accepted them.82 Relief defendants are basically stakeholders who are not parties but are included in a case and are listed only to facilitate the granting of relief.83 Their status has been summarized: “Relief defendants are nominal, innocent parties who hold funds traceable to the receivership but have no legitimate claim or ownership interest in them. These are nominal parties as opposed to full or primary defendants, have no cause of action against them, and if they show no legitimate claim to the funds traced to the receivership, the hedge funds are disgorged...”84 The funds had not “defrauded members of the investing public”; the investors in the funds were the investing public. They were not persons who might have to surrender assets but entities that owned the 47

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subject matter of the litigation. According to the complaint, the hedge funds were the victims of Lancer and Lauer’s alleged fraud.

If a bookkeeper defrauds a company, a court does not put the company into receivership. Nevertheless, the hedge funds were named relief defendants, placed into receivership, and largely treated as ordinary defendants.

Forcing the hedge funds onto receivership was a travesty.

To repeat, they were the alleged victims of Lauer’s alleged fraud.

Under the PPMs, the offshore funds had their own elected and independent directors selected by the investors, none of whom had been accused of misconduct, and they could have removed Lauer, the management companies, and service providers whenever they wished. (Later, the receiver exonerated the directors.) The directors controlled the hedge funds and could have taken the necessary steps to protect the investors, by, for example, replacing the manager of the funds (Lauer). The investors could have removed the directors if that was required.

Innocent of wrongdoing and owning everything they held and possibly more, the hedge funds should have been immune from efforts to interfere with their rights and property. The funds should have been allowed to handle their own affairs, just like any other alleged victim of alleged misconduct.

Lauer, a layman, did not recognize the serious legal problem, indeed chaos, caused by listing the hedge funds as relief defendants and placing them in receivership, which Judge Zloch, the SEC, and the receiver blindly engineered. That is why defendants have lawyers, preferably good ones. As we shall see, however, for a decade, none of the scores if not hundreds of wellpaid lawyers in the case saw any problem in placing the hedge funds into receivership. How federal judges could have made such a rudimentary mistake is beyond comprehension.

The candidates the SEC listed for the post of the receiver over Lancer Management and the hedge funds were litigators, not managers of financial institutions, and certainly not anyone who had experience in the management of the assets of hedge funds.

The specialty of the lawyer candidates was ferreting out fraud, essentially the same skill possessed by the SEC trial lawyers who 48

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filed the complaint. The receiver’s job, however, was to oversee the operation of the hedge funds collectively a complex billiondollar financial entity, as part of the court’s bizarre decision to give the responsibility of management to a third party pending resolution of the SEC’s action, to maintain the status quo. The SEC’s nominee, sure to be the judge’s, was Marty Steinberg, Esq., head of the Miami office of the international law firm of Hunton & Williams (later Hunton Andrews Kurth).85 Neither Steinberg nor his counsel he appointed from his firm, Craig V. Rasile, disclosed any previous experience running hedge funds.86 Steinberg stated his qualifications: I have extensive experience in handling matters involving fraud, including representing clients in securities fraud matters relating to the SEC. I have also spearheaded a number of confidential internal investigations for major corporations to identify fraud and/or defend against criminal actions. Also, from 1979 until 1982, I was Chief Counsel to the Permanent Subcommittee on Investigations, which was chaired by Senator Sam Nunn at the time. In that role, I conducted numerous investigations of various entities which owned or controlled billions of dollars in assets.87 The fact that the candidates for the position of receiver were class-action lawyers was significant. It demonstrated that the SEC was not looking for a qualified asset manager to replace Lauer to “preserve the status quo,” as the order appointing the receiver required,88 but was looking for a colleague who would work with the SEC to help it prosecute its nascent and intricate case against Lancer Management and Lauer. Maintaining the status quo was the furthest thing from their minds.

After she filed her motions, Zinn arranged for an ex parte hearing89 with Judge Zloch on the morning of July 10, 2003, at which she would present her case for a temporary restraining order and the appointment of a receiver, all before notifying Lauer, the directors of the funds, or the investors. Neither Lauer nor the hedge funds, their directors, or their investors had any idea that SEC v. Lauer had even been filed.

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Chapter 5

Ex Parte Destruction Not all ex parte applications or hearings are bad. Many are good and important. Search warrants or wire-tap orders directed at a drug lord, a terrorist, or a Bernard Madoff are an essential tool of effective law enforcement. Other benefits that may emerge from an ex parte hearing, such as a temporary restraining order (popularly known as a “TRO”) against a fraudulent initial public stock offering, can stop the offering and save innocent victims from losing their savings. Orders freezing someone’s assets can serve the public, such as those entered against foreign dictators who put their stolen billions in banks far from their homes.

These, however, are blunt and potentially devastating weapons.

When used against an innocent person, there is often no way to reverse the untold harm. That is why the law requires persons performing law-enforcement functions to present their case for injunctive relief to an impartial judge or magistrate, who must be conscientious, cautious, and critical.

When government lawyers seek a TRO and other relief from a judge ex parte, they arrive with a great advantage. They know the case while the judge does not. They represent the United States of America, ordinarily known for its competence and rectitude. Indeed, the very fact that the government concluded that it was necessary to proceed ex parte may convince a judge of a defendant’s guilt. Perhaps most important, there is no one to contradict or cross-examine the government, an essential element 50

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of fundamental fairness. The adversary process is suspended.

Miami SEC attorneys Kerry Anne Zinn and Christopher E. Martin represented the United States at the ex parte hearing before Chief Judge Zloch.

The ex parte TRO hearing in SEC v. Lauer held on July 10, 2003, lasted less than a half-hour (exclusive of the court’s recess and decision). The case involved over one billion dollars of investor assets at risk and was held to decide what relief should be ordered against Lauer and the Lancer management companies (but also the hedge funds themselves) before they would be heard.90 Thus, Zinn’s job was to demonstrate that notice to Lauer and the funds would seriously undermine the investigation and that extraordinary immediate steps were warranted. Before taking the hedge funds out of the hands of their sophisticated owners and directors and imposing a total asset-freeze order on Lauer, Zloch, the transcript shows, never asked the SEC about what documentary evidence it had and on what indicia of fraud it relied, what Lauer’s position and background were, who were the witnesses on whom the SEC relied, whether the stock transactions had a legitimate business purpose, whether Lauer had kept his personal money in the entities or had cashed in his profits, and other matters. There was no suggestion that any Lancer trade was collusive or artificial; all were conducted at arms’ length and usually on an exchange.

Zinn also did not tell Zloch that Lancer did not make trades itself but always used independent third-party brokers, whom the the SEC had not interviewed and never charged. Nor did Zinn discuss whether making the trades alone and without other improper circumstances, such as collusion over the price, violated any securities laws. Zinn did not tell Zloch that Lancer Partners was operating under federal-court supervision in Connecticut with an examiner on the premises. Nor did she tell Zloch that BVI authorities were in the middle of an investigation of the offshore hedge funds, and they had executed a stipulation that ensured there would be no improper financial transactions or cash withdrawals from the offshore funds. In other words, there was no way Lauer could have withdrawn money from Lancer 51

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Management, Lancer Management II, or the hedge funds even before the SEC’s application to Zloch, but Zinn did not tell him that.

Zinn’s first goal was to create and amplify the essential element of secrecy and urgency. Otherwise, why not hear from Lauer? Zinn told Zloch “that there is a very strong likelihood of recurrence if there’s no order in place preventing him from doing so...

And without the relief being in place, he could certainly continue manipulating the stock, and we wouldn’t know until months down the road.”91 There was no such likelihood. For one thing, Lancer, Lauer, and the hedge funds were the subject of multiple restrictions. And surely, the SEC’s copious powers could have been used to prevent Lauer from engaging in fraudulent trades for the few days that it would have taken to give him notice and hold an adversary hearing, even without the protections afforded by the Connecticut examiner and the BVI administrator. The SEC could obtain confirmation slips of trades in hours. The idea that Lauer could keep the SEC in the dark for “months down the road” defied reason.

Zinn continued: “Lauer has at least one personal account offshore that we’re aware of, which is set forth in Exhibit 48, and which show a transfer of one point three million dollars, and it occurred on March 3rd.92 We have grave concerns that if he’s given notice of this action prior to a freeze in place, and prior to having a Receiver in control of the company, that he will take steps to pay himself that forty-eight million dollars and to perhaps dissipate it, hide it, or move it offshore.”93 That was fiction. The account Zinn referred to, located in Ireland, had been disclosed by Lancer as an account of the Offshore fund, which was listed on the Irish stock exchange and used for routine operations.94 During the long years of the case, the SEC never presented evidence that defendant Lauer had an undisclosed personal account in Ireland or anywhere else, even though it and the Department of Justice kept repeating the falsehood for years.95 Zinn also claimed, “there are mutual funds that are at the very moment valuing the holdings in Lancer based on the overstated prices...We don’t know how many mutual funds hold Lancer at 52

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this point in time, it’s multiple. And we submit to the Court there’s a lot of mutual funds in the Offshore hedge fund.”96 The SEC never produced any evidence that a single mutual fund owned a share of any of the hedge funds and never again raised the issue that the hedge funds were harming small and unsophisticated investors.

As required by law, all the investors in the funds were wealthy, sophisticated, and certified and included wealthy individuals, major pension funds, and the likes of Morgan Stanley. Indeed, other hedge funds invested in the Lancer funds.97 Zloch asked Zinn, “when was this scheme first discovered?

What brought it to light?” Zinn responded: “Dating back to October of last year [2002], there’s a reporter named Christopher Brian [sic]. . . for the New York Post...And he wrote a series of articles...calling into question Mr. Lauer’s connection with certain Mafia figures. He also called into question the fact that the Fund may not be worth as much as it was stating...”98 As discussed below, an FBI agent in Florida later testified that he alerted Zinn to the information in March 2003 and that the FBI and the Miami SEC remained in contact. Also, Zinn’s claim the Miami SEC read Byron’s columns in the New York Post, which numbered about 40 and started in September 2002, but never contacted the SEC’s New York office, is preposterous. There was no evidence that Lauer had a connection with Mafia figures, an allegation that was false and never repeated. The SEC should have checked it before wrongly prejudicing the court against Lauer.

The picture Zinn painted was so scary that Zloch interrupted to ask, “Aren’t the Funds going to be shut down?” Zinn replied, “Well, no, Your Honor.”99 That, too, was false. The receiver was going to shut down the management funds and the hedge funds the next morning, and arrangements were well underway, even though no one had given a good (or bad) reason why they should be shut down. There was none. Did the SEC and receiver nevertheless construe Zloch’s question rhetorically and conclude that he would support whatever steps that would take against Lauer and anybody else whom they said was at fault? It is possible, but no one involved in any such decision has been willing to talk to me about the case.

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The absence of a Florida connection to the events was palpable.

No defendant and no relief defendant was a Floridian. None of the service providers for the funds was Floridian. No contract with an investor was drafted or executed in Florida. There was no evidence that interests in the hedge funds were traded in Florida. There was no business conducted by Lauer or Lancer Management in Florida. Zinn did not identify any Floridian investor, although speculated that there might be. The only fact that Zinn asserted was that some of the companies whose stocks were allegedly manipulated were based in Florida. Still, they were not identified as victims or participants in the alleged scheme to defraud investors, so they were irrelevant to the alleged fraud.

It would be like relying on where an automobile was built in a lawsuit alleging driving while intoxicated. As far as anyone could tell, not a single witness or a single sheet of paper involved in any alleged marking the close was located in Florida when the SEC filed its complaint. Zinn nevertheless told Zloch, “I think [venue] would be equally appropriate on the east coast,”100 which falsely represented that the considerations favoring proceeding in south Florida were as strong as those favoring proceeding in New York.

One statement of Zinn’s helped Lauer. Zinn stated: “[T]his [case] is based on the audited financials for the Fund, one for 2000 for Partners and the Offshore Fund for 2000/2001... [A]t his [Lauer’s] election he deferred another forty-eight million dollars in fees which he has earned and is entitled to have.” 101 Zinn was conceding that the funds were indebted to Lauer through Lancer for $48 million, income that Lauer had earned years earlier but had not withdrawn from the hedge funds but instead left there as a loan. As PricewaterhouseCoopers’s certified audits to which Zinn referred also showed, Lauer deferred payment of fees to him for five years.102 The SEC was claiming that Lancer Management was nothing more than a Ponzi scheme. Perpetrators of Ponzi schemes do not leave their own money in the investment or pay off investors with their own money; the essence of a Ponzi scheme was for perpetrators to use new investors’ money to pay off earlier investors. Ponzi schemes do not lend money to their operation 54

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or close their investment to new investors, as Lauer did in 2001,103 or encourage investors to withdraw funds, as Lauer did for many years. This was yet another instance in which the SEC or receiver’s claims made no sense.104 After a recess, Zloch announced, “I will grant the SEC’s request,” and signed the two orders drafted by the SEC. One order turned over to Receiver Marty Steinberg a one-billion-dollar business consisting of Lancer Management and the hedge funds. Without notice or a contested hearing, Zloch had summarily discharged the duly and uncharged elected and independent directors of the hedge funds and placed the supposed innocent victims of Lauer’s alleged fraud into receivership under a class-action lawyer with no relevant qualifications.105 No one considered whether what transpired violated due process. One Supreme Court case said, “Individuals must receive notice and an opportunity to be heard before the Government deprives them of property...The practice of ex parte seizure...creates an unacceptable risk of error...

Moreover, the availability of a postseizure hearing may be no recompense for losses caused by an erroneous seizure.”106 Moreover, the SEC and Zloch ignored Steinberg’s overwhelming conflict of interest, which Lauer later stressed.107 Zloch had appointed Steinberg receiver both of the two Lancer Management entities and the offshore hedge funds. However, Lancer Management was named a principal perpetrator of the alleged fraud while the hedge funds and their investors were identified as the victims of the alleged fraud. In effect, the SEC and Zloch appointed Steinberg as receiver for both the plaintiff and the defendant in a case. The receiver owed a fiduciary duty to both sides of the dispute. If he supported the hedge funds, he violated his fiduciary duty to Lancer Management and vice versa.

The other order imposed a total asset freeze on Lauer. He was barred from using any of his assets, valued at more than $100 million, regardless of when and how he obtained them.

The order rendered him penniless. Finally, Zloch ordered the repatriation of all assets of Lauer and the Lancer management entities, including those acquired before the alleged fraud and

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those in the BVI. No one discussed whether Zloch had the power to do any of the things he ordered.

Despite the court order requiring the maintenance of the status quo and Zinn’s representation that the hedge funds would not be shut down, on Friday, July 11, the receiver’s team of lawyers and investigators arrived without warning at Lancer’s offices in Manhattan and Stamford, evicted Lauer, and fired all Lancer employees without notice and without any inquiry into whether they were at fault in any way.108 The receiver canceled all employees’ health insurance and other benefits immediately and provided no severance pay, even though the SEC had not charged and never would change any other employee or principal of Lancer other than Lauer. He likewise canceled all financial services necessary to the management of the hedge funds, including Bloomberg. Steinberg stripped Lancer of all its accumulated knowledge and expertise and took over the complex business and financial decisions for the hedge funds without a shred of experience or access to the facts.109 Eric Hauser, a ten percent owner of Lancer Management, testified that he worked at its Manhattan office from late 1997 to July 11, 2003. That was when “the FBI walked in with guns, and that was enough for me.”110 That also was when Lauer first learned that the SEC had sued him.

The ex parte orders, followed by the raids a day later, wiped out Lancer Management Group, LLC, and crippled the offshore hedge funds. Once he took over Lancer Management in Manhattan and Stamford, Steinberg and his people moved everything relating to the activities of Lancer and the hedge funds to Miami, including the detailed computer records relating to the hedge funds and their holdings.111 The receiver did all this without arranging for a replacement manager for the hedge funds. He was casting adrift a billion-dollar enterprise that required minute-by-minute supervision. He promptly expanded his domain when on July 24, 2003, the Bankruptcy Court in Connecticut made him the representative for the administration of Lancer Partners, the domestic hedge fund.112 56

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The companies in which Lancer had invested millions of dollars on behalf of the hedge funds were not worthless. Some were established companies whose stock was listed on stock exchanges. Some were startups and potentially highly successful.

They were the kind of companies that sometimes grew into highly profitable investments, as Lauer’s enviable record demonstrated.

Lauer’s experience was that some, probably most, would fail, but that those that succeeded would make his operation extremely profitable. However, the insipient companies in which Lancer had invested depended on Lancer’s financial support to keep going. There was no allegation that Lancer’s support of the companies was improper or that any of the money Lancer paid them to support their operations was misused. Lauer’s method and record were well-known.

Nevertheless, Receiver Steinberg immediately terminated all support for these companies. He did so without warning and without conducting any analysis of the companies. In fact, it is unlikely that the SEC and Steinberg knew that Lancer was supporting active companies when they took over Lancer Management and the funds. As a result, many of them went into bankruptcy, as Steinberg subsequently admitted before Zloch on December 2, 2003. Steinberg acknowledged (“to be quite frank”) many of the startups “depended on Lancer to survive … [and] because we have ceased that function … probably five or six of them are in bankruptcy.”113 Steinberg’s admission failed to ignite the concern it warranted.

It soon became apparent why the hedge funds were placed in receivership, along with the Lancer Management companies, which managed the funds and their holdings. The management companies had no substantial assets. They had cash of about $3 million to use to manage the funds, for example, pay providers.114 Placing the billion-dollar hedge funds into receivership forced the innocent investors to foot the bills for the receiver’s investigation of Lancer and Lauer’s alleged wrongdoing, an unconstitutional use of their money. The record shows that the SEC could not have managed on its own without the receiver.

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Receiver Steinberg created a substantial operation.

Representing him was the international law firm of Hunton & Williams.115 As head of its Miami office, Steinberg was representing himself and paying himself. The lawyer he named to represent him was his partner Craig V. Rasile (succeeded several years later by Juan C. Enjamio) and scores of the firm’s other lawyers.116 Lauer counted over fifty lawyers at Hunton & Williams who billed the investors. The investigative outfit brought in by Steinberg, Touchstone Investigative Group, was first owned

by Steinberg personally and later transferred to Hunton & Williams.117 Steinberg added other law firms, accounting firms, and expert witnesses to his payroll.118 In SEC-enforcement cases, of which SEC v. Lauer was one, the executive-branch SEC and the court-appointed receiver are supposed to play vastly different roles. The SEC’s (or Department of Justice in a criminal case) role is to enforce the law. The SEC litigates to determine whether the defendants violated the law and how extensively. Typically, a receiver is not appointed until after someone’s liability is established or an indictment is filed.

Then, as a neutral officer of the court, the receiver attempts to recover the wrongfully acquired property from the defendants and others and return it to its lawful owners.119 The receiver’s job was to act as an arm of the court in carrying out the court’s judgment, not to establish the guilt of any party. It was the job of the executive branch SEC to enforce the laws. So says the Constitution.

Knowing nothing about the alliance between the receiver and the SEC and incorrectly assuming the receive was operating in the best interests of the hedge funds, Lauer spent three days in July 2003 with Steinberg’s lawyer Craig Rasile explaining the operation of the hedge funds and the role of the manager of hedge funds. He also urged former Lancer Management employees to cooperate with the receiver. Lauer learned that neither the SEC nor the receiver knew that Lancer did not do its own trading and was not the market maker in the stocks it traded and that neither the SEC nor the receiver knew how the holdings of the hedge funds were calculated, among other things.120 58

Chapter 6

Reality Sets In Lauer, of course, immediately contacted his attorneys to learn how to combat the SEC and how to deal with Steinberg. But Lauer had a major problem. As a result of Zloch’s freeze order, he was penniless, and any sums he could raise to pay his lawyers were subject to seizure by the SEC and the receiver. Some of Lauer’s lawyers seemed interested only in freeing Lauer’s assets from the freeze order so that he would have the funds to pay what was bound to be substantial legal fees. While Lauer had some help, the legal effort at first was essentially confined to freeing up his assets. Moreover, there were no sympathetic lawyers for any codefendants to whom Lauer could turn. But events would not stop.

Dealing with Steinberg’s actions was only one of Lauer’s many serious concerns. Another concern of Lauer’s was keeping his family supplied with necessities and freeing his assets to hire lawyers. Another concern was the aggressive discovery that the SEC demanded from him. This and the following chapters deal with Lauer’s problems separately, although they were occurring simultaneously, starting in mid-2003 and continuing for years.

This chapter deals with the freeze order.

Because the TRO was limited to a matter of weeks, Zinn had sought a preliminary injunction in the SEC’s initial filings. A preliminary injunction is designed to last until final judgment when it either is transformed into a permanent injunction or is 59

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dissolved. Lauer’s principal New York lawyers told him that the best thing for him to do was to consent to the entry of a preliminary injunction along the lines of the TRO and then file a motion to modify it. As Lauer later stated in court, his lawyer “counseled the Respondent [Lauer] to consent to the temporary injunction and the asset freeze, which he affirmed would be extensively modified after a Court’s hearing...[He] assured the Respondent that the judges customarily ‘carve out’ provisions for ‘reasonable legal fees and living expenses,’ which would be particularly likely in this case, as the Respondent could demonstrate that he owned substantial assets prior to the alleged wrongdoing.” The lawyer added that Lauer’s consent to the preliminary injunction would not prejudice his case.121 Lauer took his advice and Zloch signed the consent order on July 17, 2003.122 While the consent to the preliminary injunction stated that the defendants and relief defendants (the three hedge funds) neither admitted nor denied the allegations of the complaint, it also noted that Lauer controlled Lancer Management and the hedge funds and admitted that the court had jurisdiction over them and the subject matter of the case, all potentially damaging concessions.123 The order prohibited Lauer (individually and as a “control person” for Lancer and the hedge funds) and the other defendants from violating provisions of the federal securities laws, froze all the assets of Lauer, Lancer Management, and the hedge funds for the duration of the court proceedings, ordered the repatriation to the United States of all their assets, ordered an accounting, and ordered the retention of records. The preliminary injunction expressly permitted Lauer to apply to the court for a modification to provide him with an allowance for living and legal expenses.

It soon became apparent to Lauer that consenting to the preliminary injunction was a mistake, if not a potential disaster, as well as unnecessary. It would have been simple for Lauer’s lawyers to have allowed the entry of a PI over their objection if the lawyers were not willing to participate in a hearing without pay.

The consent permitted the SEC to argue and Zloch to conclude that Lauer had admitted to the existence of considerable evidence 60

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that he had done something seriously wrong. Thus, two months later, Zinn argued: “Although Lauer and Lancer Management had the opportunity to contest the SEC’s allegations and dispute this Court’s findings, they elected to consent to the preliminary injunction, which was entered on July 17, 2003.”124 In criminal cases where a conviction could mean prison, the Supreme Court has held that the Due Process Clause requires the government to provide free counsel to indigent defendants.

Rarely, a criminal defendant chooses to defend himself, which a judge must allow if he is satisfied that the defendant is making the choice knowingly after having been advised of the plenary disadvantages. An adage about a lawyer who decides to represent himself states “A lawyer who represents himself has a fool for a client,” which applies to experienced and competent lawyers.

The reason is that counsel provides independent perspective and judgment as well as essential expertise. Self-absorption tends to result in bad decisions, including favoring arguments that show one is innocent to arguments that have a better chance of winning the case, even though they may make the defendant look bad. Lauer, however, had no choice.

Civil stock fraud, with its technical provisions, is far more complicated than almost all criminal charges. The person trying the case must also confront procedural rules, including rules of evidence such as hearsay and rules relating to jurisdiction, relevance, the need to make specific and timely objections to preserve arguments for appeal, and a host of others. Also, problematic for a layman is the matter of priorities. Some arguments are more important and better than others, which often depend on knowing the law as well as possessing sound judgment, which comes with experience. Indeed, some arguments have to be made promptly.

On August 19, 2003, pro se Lauer (acting for himself without an attorney) filed an answer to the complaint, which denied the charges of wrongful conduct and added affirmative defenses that the complaint failed to state a claim, the venue was improper in the Southern District of Florida, that the court lacked subject 61

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matter jurisdiction, and asked for a jury trial.125 On the same day, Lauer also filed a motion to modify the preliminary injunction, which contained his lengthy affidavit.

Lauer’s motion made several arguments. First, he was without assets or income and could not pay for the living expenses of his family and himself. Second, he “cannot retain counsel to represent him in this highly complex litigation.” Third, the great majority of his net worth was earned prior to the alleged start of his alleged fraud, namely, before 2000, and invested in the hedge funds or securities also held by the hedge funds.

Lauer enterprisingly quoted cases that limited freeze orders to funds traceable to fraud.126 He also argued that the SEC had not demonstrated probable cause to believe he had violated the securities laws (in fact, no demonstration of probable cause, which is less of a burden than preponderance of the evidence. was made until five years later in 2008, during which time he was without funds to retain counsel). Finally, the SEC had not stated the size of the alleged fraud with any degree of certainty, which should preclude it from freezing any assets. Lauer argued that “The actual compensation that was attributed to the years of the alleged wrongdoing is a fraction (perhaps 1%) of the assets frozen.”127 Lauer’s affidavit asserted that living expenses for himself, his mother, and two children in his care (two were in the care of their mother and one had yet to be born), including housing, food, school tuition, and other costs, were approximately $43,000 a month. Child support to his estranged partner (who will be referred to as H.C. to preserve her and Lauer’s children’s privacy) was $10,000 more.128 Lauer provided documentary support for his living expenses, which were substantial but not unreasonable for a person whose net worth was in nine figures and who paid federal income taxes in 2001 of $8 million. In addition, pursuant to an agreement, Lauer paid the IRS $50,000 a month.129 The reason for that payment essentially was that as a result of Lauer’s taking a deduction in the wrong year; Lauer owed IRS about $2.5 million (above the multi-million-dollar tax payments he had made) for 2000, but he was due a refund the following year, 62

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so Lauer’s tax lawyer worked out the arrangement with IRS.130 It was unrelated to the dispute with the SEC. Finally, as he did in many of his filings, Lauer complained about the false statements and accusations made by the SEC. Lauer argued that since the SEC and receiver had all his records, it was the SEC not he, who was failing to supply relevant details. How, he asked, could the funds have redeemed over $500 million in cash to investors if the SEC’s allegations were true?

The SEC never said. As a demonstration of his confidence in the funds, Lauer reiterated that he was the largest individual investor in the funds and had deferred much of his income, leaving it in the funds. No sane crook does that, Lauer argued. In fact, Lauer said, the funds had redeemed $200 million in cash in 2000 and 2001, during which time he did not withdraw any of the twenty percent incentive fees he had earned. As early as September 18, 2003, Lauer presented under oath a comprehensive explanation and defense to the SEC’s charges, along with copies of relevant documents in his possession, which showed the absurdities and contradiction in the SEC’s theory.131 Zinn and Christopher Martin, first her deputy and then her successor, vigorously opposed Lauer’s motion with a legal memorandum and over 230 pages of exhibits. Lauer had itemized assets of more than $114 million listed in a sworn financial statement that he presented in court. The SEC remarkably placed Lauer’s assets at $6.6 million.. The SEC valued his $30 million portfolio at Bank of America at or near zero, even though most assets were shares of companies listed on a stock exchange.

Lauer’s alleged living expenses were both undocumented and “outrageous,” zealous Zinn argued at a hearing before Judge Zloch. The SEC “would not authorize one nickel for [Lauer’s legal] fees.”132 Zloch decided Lauer’s motion to modify the asset-freeze order on December 3, 2003. The first three pages looked promising.

Zloch noted “that along with the authority to implement an asset freeze the Court has the corollary authority to release personal assets or lower the amount frozen” when appropriate and that “personal funds are ultimately only ‘forfeitable to the extent 63

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they are comprised of the defendants’ ill-gotten gains.’”133 This statement was an important victory for Lauer since it limited the amount of the asset freeze to income earned in 2000-03. Zloch continued: “Lauer claims to have over $90,000 in recurring monthly expenses.” At “this early stage of this litigation for the Court to predict the extent of Lauer’s potential liability and his ability to satisfy that amount” was difficult, Zloch wrote.

The Court...does recognize the benefit to the Court and to the allegedly defrauded investors of a full and fair adjudication of the issues presented in this cause.

To that end, it is beneficial that Lauer have access to and be represented by experienced and knowledgeable counsel in defending this action. As it has been shown that Lauer has, or has access to, few if any assets other than those subject to the asset freeze, the Court finds it reasonable and necessary to release some of those assets for the purpose of satisfying Lauer’s living expenses and attorney’s fees.134 What Zloch ordered, however, was entirely different and raises questions concerning Zloch’s vindictiveness and competence. He ordered Lauer, who had not been found to have done anything wrong, to sell his home in Greenwich and his condominium in Manhattan, which Lauer had bought years before the alleged fraud. Further, Zloch decreed Lauer must satisfy all liens and encumbrances, including IRS’s $2.5 million lien. Combined, they were at least equal to the total selling price of the residence and several times Lauer’s equity. No one cited any authority for Zloch’s extraordinary action. Neither Zloch nor the lawyers for the SEC and receiver saw anything wrong in ordering a civil defendant to sell his homes at the commencement of a case, well before any evidence had been presented, especially without a compelling reason.

The order continued: “Beginning with the month funds [from the sales of the homes] are deposited in the escrow account, Receiver shall pay Lauer ten thousand dollars ($10,000)

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per month to be used by Lauer for living expenses and attorney’s fees.”135 Thus, until his homes were sold months later and the proceeds, if any, were deposited with Steinberg – which would, incidentally, make Lauer and his family homeless and penniless – he was not to receive a penny. The $10,000 per month (if and when it was generated by the sale of Lauer’s homes) was supposed to cover Lauer’s obligation to the IRS, substantial legal fees, and the living expenses.136 On the assumption that Lauer could hire an experienced lawyer in 2003 for $500 an hour (probably too low), the money would provide a single lawyer for only twenty hours a month.

It would leave nothing for any other expense, including the $50,000 per month owed to the IRS, which was not known for its lackadaisical attitude towards debtors. Meanwhile, Steinberg and his crew were running up a massive bill for their legal expenses.

Receivership fees paid were at the average rate of $1 million a month (or $30,000 a day) for years, or six hundred times what Zloch offered Lauer for his living expenses, legal expenses, and satisfaction of his obligation to the IRS combined.

To preserve at least one of his homes, Lauer filed a motion to relieve him of the obligation to sell his home in Greenwich, where two of his minor children and elderly mother now lived. He had a good reason. Because of the significant encumbrances on his principal residence, its sale would produce no net funds. Lauer’s motion explained that complying with the order as written would make his family homeless for no good purpose. Zloch granted the motion, but only because the sale would not bring money from Lauer into the coffers of the SEC and the receiver.137 From then on, however, the SEC would accuse Lauer of choosing to proceed pro se. If only he would sell “his $4 million Greenwich, Connecticut mansion,”138 and move to cheaper quarters with his mother and four children, he could easily afford to hire a lawyer, the SEC said, although it cited no proof to that effect and was false.139 Without precedent, Zloch was ordering a civil defendant without any evidence submitted as to his wrongdoing and no

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proof that Lauer bought the assets with tainted money to sell his primary residence to receive any of his own money to support himself and his family and to hire counsel to represent him, and even that was uncertain.140 It seemed that Zinn and Martin were furious at Lauer for his financial success. Because Lauer had made a lot of money, he should be punished by the court.

Lauer continued to press Zloch at the hearing to allow him to use his funds that preexisted any alleged fraud. Zloch, however, insisted that Lauer denude himself of all assets, including his Connecticut home. Addressing Zloch in a hoarse voice,141 he explained: Lauer: I leave here without the ability to defend myself.

Court: Well, do you want to sell the home?

Lauer: No, sir.

Court: All right.142 Continuing to gall and prejudice Lauer was the SEC’s choice of southern Florida as the forum, including that the case was assigned to a courthouse in Fort Lauderdale rather than the more convenient Miami (neither had any connection with the case), to which flying was easier. Traveling was not free from the New York area. Zloch scheduled hearings, and Lauer had to choose between spending funds needed for his family or instead participate by telephone, a far less satisfactory alternative, especially when the SEC’s and the receiver’s lawyers were sitting across from the judge. But he had no choice and was physically absent from most hearings.

Zinn and Martin took the position that everything they did for Lauer was an instance of noblesse oblige. They generously “allowed” him to participate in the deposition by telephone. They provided him with documents exhibits as a favor.(“Once again, I am under no obligation to do this...”)143 Zinn and Steinberg would not send him copies of deposition transcripts but insisted that he buy them from the court reporter or read them in their offices in Miami. Neither was feasible.

Under his authority to “[d]efend, compromise or settle legal actions,” the receiver filed a motion to discontinue on behalf of 66

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Lancer Management the libel action that Lauer and Lancer had filed against the New York Post and its columnist.144 Although the receiver was an arm of the court, he was passionately committed to the position that Lauer and Lancer Management were guilty of at least everything charged. With more than he could handle, Lauer did not file a hopeless objection, and Zloch granted the motion to drop the case on behalf of Lancer. Lauer then dropped his personal lawsuit, as well.

Zloch also entered an order barring Lauer from communicating with investors, an incredible action in and of itself and almost certainly unconstitutional for a pro se party.145 First, he denied Lauer the use of his funds to hire a lawyer to prepare a defense. Then he entered an order that prohibits Lauer from talking to witnesses himself to try to mount a defense, which he had to do alone because he was denied the funds to hire a lawyer. Read even from the perspective of nearly 20 years, Zloch’s order is remarkable.

Lauer had hoped and fought for a speedy trial. He wanted one for a host of reasons, including to exonerate himself, to get out from under the stigma and financial restraints imposed on him, and to try to salvage what was left of the hedge funds. The hedge funds, unlike the devastated Lancer entities, might be salvageable, at least in part. In November 2003, Lauer requested a “speedy trial in six months,” to which the SEC objected.146 Instead, the SEC requested that the case be assigned to a “complex track” with a trial date at least a year off.147 Obviously, the SEC was not ready. From all indications, they were nowhere near prepared.

During an omnibus hearing on March 10, 2004, on one of many motions by Lauer to modify the freeze order based on the hardship that the freeze order imposed on him and his family, Zloch aggressively posed a rhetorical question to Lauer. “Are they any less painful by the way that you used [in] your process of marking the close?”148 Implicit in the question was a conclusion that Lauer had violated the law. Marking the close, or setting the closing price of a stock, was the central charge in the SEC’s complaint. Zloch had decided the case against Lauer without his being presented with a single piece of evidence at a hearing on 67

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the issue. Zloch proceeded to reject Lauer’s pleas to gain access to his funds to retain a lawyer: Maybe you can find a lawyer who would look at it in this light, that his representation of you would be like an investment. It would be like investing in you, and if [the] lawyer can bring you through this and steer you through it and return you to the millions that you were dealing with. All right? Then there would be a pot of gold at the end of that yellow brick road.149 Not only did Zloch scorn Lauer’s predicament, but he also demeaned and humiliated Lauer’s elderly and proud mother, the 80-year-old Valentina Lauer. Lauer sought to have released his mother’s checking account with a balance of about $7,500, which the SEC had seized. The account, which had both Lauer and his mother as signatories, had been in existence for more than twenty-five years. Mrs. Lauer lived on that account, which Lauer funded along with her Social Security checks and her small pension of $481.81 a month. The SEC and receiver nevertheless insisted that they take half of the account. Zloch refused to accept Lauer’s and his mother’s sworn statements that the account was exclusively for his mother’s use, and he insisted that Lauer get a letter from the bank.150 “Look, how are you going to satisfy me that this money is solely for your mother?”151 Zloch also said that Lauer had to satisfy the SEC’s attorneys that the account was really Valentina Lauer’s before he would release the account.

Zloch was delegating his judicial power to the SEC, which also had to agree.152 After one and one-half years of litigation, Marra gave half of Mrs. Lauer’s money to the SEC.153 How much did it cost to deprive an 80-year-old widow of $3750 she needed to live?

We don’t know what the SEC’s tacky frolic cost U.S. taxpayers.

After the hearing, Marty Steinberg approached Lauer outside the Fort Lauderdale courtroom with two of his attorneys, Craig V. Rasile and Jeffrey B. Bast, and offered to “help” him obtain access to some of his money, but only if he agreed to testify against the “deep pockets.” Steinberg told Lauer, “the train has left the station, and you were just hit by the first car. The second car is coming 68

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next.” Lauer understood the proposal to mean that Steinberg would not oppose loosening the freeze order if Lauer would incriminate Bank of America, Citco, PricewaterhouseCoopers, and other entities that worked with Lancer and that Steinberg would talk to the SEC about softening its position against Lauer. Lauer also pondered Steinberg’s threat. Was Steinberg threatening Lauer with criminal procedure? Lauer did not know.

Lauer unequivocally replied that he did not know anything inculpating others and would have to perjure himself to please Steinberg, something he refused to do. Ignoring Lauer’s statement, Steinberg pressed Lauer, stating that he was an arm of the court and repeating, “think of your family.” Lauer responded: “It’s precisely because I think of my family that I won’t commit perjury.” Steinberg said nothing.154 Lauer shrugged and walked away. That was the only face-to-face conversation Lauer had with Steinberg. Lauer wondered why the SEC had delegated its job to Steinberg. After he rejected Steinberg’s offer, Lauer found Steinberg even more hostile.

Lauer frequently, indeed one could say relentlessly, filed motions to relax the harsh terms of the freeze order, including for money to hire an attorney and to pay for expert testimony.

After a while, the SEC started ridiculing Lauer’s efforts and labeling any motion that related to money as another attempt to relax the total freeze on his assets, labeling them, for example, as “Lauer’s seventeenth motion” to obtain money, no matter what he argued.155 Lauer’s persistence in challenging the SEC and receiver had the unfortunate effect of further antagonizing investors. Lauer’s insistence on challenging virtually every action by the SEC and receiver lost him whatever negligible amount of goodwill had managed to survive the lawsuit. His claims of innocence and his attacks on the SEC and receiver were proving counterproductive.

The SEC’s and receiver’s position boiled down to two precepts.

“The Court properly froze all of Lauer’s assets.”156 “Lauer has failed to demonstrate that he does not have access to nonfrozen funds.”157

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While Lauer had complained about the unsuitability of the Southern District of Florida as the situs of his case, commencing with his answer in August 2003, he did not file a formal motion to transfer the case to a more convenient forum because he had not realized he had to. He finally did that in March 2004, eight months after the SEC filed suit.158 Lauer’s grounds were straightforward. All the parties and related entities in SEC v. Lauer were located either in the northeastern part of the United States, especially New York, or in the British Virgin Islands.159 No important person resided in the Southern District of Florida, at least before the SEC had instituted its action, and nothing of significance happened in the Southern District of Florida concerning the allegations against Lauer. Moreover, Lauer’s four minor children and ailing mother needed his attention, and they were in the Northeast. Mrs. Valentina Lauer provided an affidavit to support the transfer.

Lauer argued that the case was brought in the Southern District of Florida because the Miami office of the SEC hungered for the case.

The SEC and receiver filed separate oppositions, which argued that it took very little to establish personal jurisdiction and that the plaintiff ’s choice of venue is presumptively valid, both true as stated. Lauer, they argued, had sent marketing material into the district, caused the funds to purchase interests in several nonoperational companies located in the district, and retained a firm in the district to perform bogus valuations of funds’ holdings. Neither the SEC nor the receiver gave specifics and neither tied any of the alleged actions to the charges against Lauer.160 Moreover, both they and the relevant records were now in the district. The district court was familiar with the case. Key witnesses lived in Florida, including Steinberg himself, they said.161 Finally, Lauer waived any argument based on venue by failing to have pursued it earlier, both Steinberg and the SEC argued.

While Lauer made some sound arguments, he faced an uphill fight, largely because of his delay in filing the motion to transfer, not to mention Zloch’s rigid pattern of ruling for the SEC and 70

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receiver. It seemed to Lauer that Zloch relished having the case.

Lauer’s lack of resources and inexperience again prejudiced his effort. He did not ask for discovery from the SEC for use in his motion to transfer, such as the names of any supposed Florida investors or people in Florida to whom he allegedly sent promotional material, none of whom the SEC had identified. He did not argue or cite cases that said the convenience of lawyers is not relevant on motions to transfer, that the SEC and the Steinberg’s law firm were national organizations with offices in New York City, or that the records were located in New York before Steinberg peremptorily removed them to Miami, or that the physical locations of the companies invested in were irrelevant.162 Lauer continued to do a more than a respectable job for a layman, but there was so much to do and so much he did not know about the American legal system and the complexity of securities and other relevant laws.

Whether by coincidence or not, Zinn resigned from the SEC effective April 30, 2004, the same day she filed her opposition to Lauer’s motion to transfer the case. She moved onto a betterpaying job in the private sector. The case was reassigned to her assistant, Christopher E. Martin.

In May 2004, the SEC moved for a “120-day continuance of trial and corresponding pre-trial deadlines.” The August 9, 2004, discovery deadline was looming as Lauer continued to press for a prompt trial. Lauer filed another motion “for an early trial to avoid undue delay…. that would further prejudice Lancer investors,”163 one of many efforts to obtain an early trial. The SEC’s main argument was that important entities were offshore and were refusing to produce subpoenaed documents. Also, potential witnesses whom the SEC sought to depose were pleading the Fifth Amendment privilege against self-incrimination.

In response to the SEC’s motion, Lauer filed a motion to dismiss the case as well as an opposition to the SEC’s motion for a four-month delay.164 He attacked the SEC for starting the case without key documents. He pointed out that the SEC had no jurisdiction over foreign entities to compel them to produce

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documents, and pointed out to the court that he had tried to have the case litigated in the British Virgin Islands. Lauer concluded by blaming the SEC and the receiver for many of the individuals’ Fifth Amendment pleas – “the receiver has been on the warpath against anyone and everyone who has ever done business with Lancer, threatening to sue them all. Is it therefore not surprising that given the all-around extremely hostile environment created by the receiver, that no one is voluntarily cooperative (they no doubt also see how Lancer was rewarded for its good cooperation.”)165 Zloch did not act promptly on the SEC’s motion for a continuance, a delay that benefited the SEC. On June 2, 2004, Zloch ruled against Lauer on a number of outstanding motions, although not the SEC’s motion for a continuance.166 No decision was tantamount to the grant of a motion to delay the trial.

On October 22, 2004, the SEC filed a motion asking the district court to hold Lauer in contempt of the asset-freeze order contained in the preliminary injunction (PI) against Lauer.167 The SEC accused Lauer of repeated violations of the district court’s order that denied him his assets or the proceeds of his assets. The PI had broadly ordered Lauer and the entity defendants to refrain from consuming or transferring assets, on pain of “a monetary penalty of $1,000 per day until the contempt is purged or Lauer sufficiently establishes his inability to do so.”168 The motion described Lauer’s actions as a “money laundering scheme.” The SEC previously called the activity a “Ponzi scheme.”169

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Chapter 7

Receiver Steinberg Liquidates A receiver’s most important assigned task is to recapture for the receivership and for investors assets that rightfully belonged to them rather than to any wrongdoers or third parties. Indeed, in virtually all receiverships and bankruptcies, that is his sole task, along with distributing the assets equitably, since receivers are ordinarily appointed in SEC enforcement cases after a finding of liability. As the receiver in SEC v. Lauer stated: “Normally a Receiver is appointed after the SEC has completed a substantial investigation and obtained a judgment. Often this occurs after the Justice Department indicts or convicts the guilty parties...”170 A judge oversees the receiver; the receiver works for the judge.

The order in SEC v. Lauer also required the receiver to maintain the status quo.

Usually, with a conviction or judgment in hand, the receiver proceeds to acquire funds for the victims of the established fraud.

The receiver proceeds against the principals and others who were not entitled to keep the money they received. Or someone to whom the subject made a gift during the fraud. Almost invariable, a receiver’s efforts follow extensive efforts by the SEC, DOJ, FBI, and perhaps others that have led to the judgment or conviction. Much of the work has already been done, including some efforts to locate the subject’s allegedly illegal acquisitions, which he has put into offshore accounts. Witnesses had been 73

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interviewed, deposed, and may have testified at a hearing or trial.

Moreover, the judgment against the subject, whether civil or criminal, has established that wrongdoing took place and many of its parameters.

After more than three months of nearly total neglect of the hedge funds and their assets, which he devoted mainly to relatively minor matters and building his large staff, Receiver Steinberg hired DDJ Capital Management, LLC, to replace Lancer Management.171 Lauer accused him of having appointed a “fund manager with the wrong skill-set. DDJ Capital Management (‘DDJ’) is a high-yield and distressed securities investor, Lancer is a ‘growth/value’ manager, which was as remote from growth investing style as day and night.”172 Zloch did not order the receiver to replace DDJ with a qualified company but did order him and his associates, including DDJ, to consult with Lauer.

This order was known as the “Lauer Protocol.”173 The receiver and DDJ simply ignored the order.174 As of October 28, 2003, three and one-half months after his appointment, the receiver admitted at a hearing he did not know that the FBI had most of Lancer’s and Lauer’s records.175 It soon became clear that the receiver and DDJ had no intention of managing the hedge funds, which largely explained the appointment of DDJ. Steinberg, Hunton & Williams, and DDJ began liquidating the investments held by the funds. The legal authority for the action was zero. A lawsuit had been filed (SEC v. Lauer), but nothing had been decided. Furthermore, much of what was going on made no sense. The SEC contended that Lauer had overvalued the investments owned by the victim investors to get higher fees and nothing else. For example, Lancer claimed that 100 shares of XYZ stock were worth $1 million, while the SEC claimed it was worth far less, perhaps nothing.

Why was liquidating the hedge funds (or even selling the stock) required in the circumstances? The SEC and receiver did not say.

There was no allegation that Lauer (or anyone else) had mismanaged or raided any company whose actions Lancer and

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Lauer controlled by virtue of their stock holdings. Moreover, the hedge funds had also invested in substantial companies whose stocks were actively traded on major stock exchanges, and there was no allegation of manipulation of their prices by Lauer or Lancer.176 Why shouldn’t the alleged victims, who were concededly sophisticated in financial matters, be permitted to decide what to do with their property, as victims usually are and Lauer had suggested? Alternatively, distributing the shares of stock to the investors without selling them made more sense than unloading them at a fire sale, which Lauer also suggested.

The investors owned the hedge funds and the assets in which the hedge funds had invested. Moreover, there was no claim that any individual other than Lauer had done anything wrong.177 Initially, investors in Lancer Partners supported Lauer when the negative columns appeared in the New York Post in 2002.

But when the SEC sued Lauer, it accused him of massive fraud.

Not only did investors understandably accept what the SEC told them, but they also had no basis for challenging its explosive statements that Lauer had committed massive fraud since they did not know the identity of the investments made by the funds in which they invested. The court-appointed receiver seconded the SEC’s allegations. And Judge Zloch’s harsh treatment of Lauer starting on July 10, 2003, suggested he agreed.

But the fact remained that no one challenged the placement of the hedge funds into receivership. Despite the hundreds of lawyers representing investors and the receiver, the sophisticated investors themselves, the SEC, and two federal district judges, no one objected to a fundamental and inaccurate assumption of the case, namely, that a receiver could and should be appointed for the alleged innocent victims of the charged fraud. There was no authority or reason to place nondefendant victims of alleged fraud (the hedge funds owned by sophisticated investors). If an accounting firm hired by a company embezzles money, no one places the victim company into receivership. No receiver sells off the victim company’s assets or makes it pay for an investigation.

It took a decade for someone to challenge that spectacular impropriety.

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Lauer argued vehemently and correctly that Lancer Management and the hedge funds had an irreconcilable conflict of interest: it was unethical for the same lawyer or receiver to attempt to represent both sets of conflicting interests. Under the SEC’s theory, Lauer argued, Lancer Management overcharged the hedge funds, which, if the SEC were correct, would allow them to sue Lancer Management for the excess. The hedge funds wanted to show that the alleged fraud was massive, while Lancer wanted to show that there was no fraud. That put the funds’ interests directly contrary to Lancer’s. Lauer concluded that Lancer should be permitted to retain separate counsel to challenge the receiver’s motion.178 Lauer cited the Model Code of Professional Responsibility and the ABA Rules of Professional Conduct, ethical codes for lawyers with potential conflicts of interest.

The receiver’s reply acknowledged that Lauer’s complaint might have some merit – if this were an ordinary suit involving potentially adverse parties.179 But this, he said, was different because a receivership was involved, and that changed everything.

Instead of blanket rules, the court must exercise its discretion on a case-by-case basis, as it does in bankruptcy matters, whatever that meant. The alternative would be to appoint a new receiver with new counsel. That would be wasteful, and there has been no showing that it is necessary. While there is a potential conflict, he argued, the mere potential without more was not enough.180 The receiver also argued, “the provisions of the Model Code cited by Lauer do not apply to the Receiver in this Proceeding, because he is not acting as an attorney for the Receivership Entities but as a fiduciary representative,” whatever that meant in the context of SEC v. Lauer, where the receiver operated through lawyers in his own firm. The receiver seemed to argue that a fiduciary could have a conflict of interest so long as he was not acting as a lawyer in SEC v. Lauer, which was nonsense both factually and legally. Second, the receiver argued, “the provisions of the Model Code cited by Lauer do not apply to Hunton & Williams in this Proceeding, because Hunton & Williams does not have multiple clients in this Proceeding, but a single client 76

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– the Receiver.”181 In other words, even though they would ordinarily have a prohibited conflict of interest, the law firm of Hunton & Williams satisfies its ethical obligation as a lawyer because one of its partners and client, Marty Steinberg, was the one who had a conflict of interest, and it was doing his bidding (while collecting in the process many millions of dollars for its partners, who included Steinberg and Rasile).

The receiver continued: “Any potential conflict threatened by any alleged intercompany claim between the Management Companies and the Funds is mitigated completely by the presence of Lauer outside the receivership.”182 Now Steinberg was saying that layman Lauer, the alleged wrongdoer whom the court had removed as manager, could and would alone protect the interests of the funds and investors he had been accused of defrauding!

(Actually, it was illegal for Lauer, a layman, to represent anybody else in SEC v. Lauer. Only a lawyer could represent others.)

There was, of course, an actual conflict between Lancer Management and the hedge funds; the former was accused of defrauding the latter. The receiver’s job was to collect proceeds from one set of clients and distribute them to another. A more severe actual conflict is difficult to imagine. In practice it meant that every time a dispute or difference in opinion arose between the hedge funds and Lancer (owned eighty percent by Lauer), the receiver would favor the hedge funds, who were paying his bills, even though fiduciaries cannot prefer one beneficiary over another, and he did.183 Marty Steinberg was actively representing both sides of an ongoing dispute.

Zloch sustained the receiver in all respects, although he articulated the reason differently: “[T]he Court notes that the Receiver is not confronted with a conflict of interest. The Receiver’s authorization requires him to act in the best interests of investors and receivership entities, and to protect the assets as a whole, not to represent each entity individually.”184 Once again, Zloch was spewing nonsense. It mattered not that absolutely nobody was looking after the interests of LMG and LMG II, which the SEC had sued, and which Steinberg had been appointed to protect.

To paraphrase George Orwell’s Animal Farm, all receivership 77

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beneficiaries are equal, but some beneficiaries are more equal than others.

Adding to Lauer’s burdens was a short motion the receiver filed on December 5, 2003, with the SEC’s endorsement. The motion sought Zloch’s permission for the receiver to consent to the entry of final judgment and an injunction against the two Lancer Management companies and the three hedge funds.185 The assault on the hedge funds was remarkable. The receiver, who had been appointed to protect the rights of, inter alia, the hedge funds and their investors, to whom he owed a fiduciary duty, sought to take the extraordinary step of fatally compromising their rights even without an accusation ever having been made against them.

They were not specifically identified as defendants; they were the alleged victims. The hedge funds’ fiduciary and the SEC wanted to admit that the hedge funds were guilty of something and have a permanent injunction entered against them when no one had even suggested they had done anything wrong, much less had sued them. How could somebody who was not sued consent to the entry of judgment? Or was the action further evidence that the hedge funds were de facto parties in SEC v. Lauer? Why would the victims of alleged fraud consent to the entry of a judgment against them? They were seeking to recover money from others, which could be impaired if a judgment were entered.

In fact, since the receiver also owed a fiduciary duty to defendants Lancer Management Group I and II, it was questionable that he could properly consent to the entry of judgment against them, either, even though they, unlike the hedge funds, had been sued.186 The receiver’s filing discussed whether a receiver has the power to consent to the entry of judgment against his beneficiaries and none on the wisdom or sanity of the action. “The law is well-settled that once a court appoints a receiver, management loses all power to run the corporation’s affairs” and “[t]he receiver obtains all the corporation’s power and assets,” including powers regarding lawsuits, the receiver said.187 The filing did not begin to explain the reasons for his consenting to the entry of a judgment against the innocent hedge funds or anyone else 78

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With a vitriolic twenty-page document, Lauer alone responded to the Receiver’s Motion for Leave to Enter Consent Judgment on January 20, 2004. Surprisingly, none of the investors joined his objection. Lauer’s opposition was an articulate plea for help with a surprisingly well-constructed legal argument that emphasized the destructiveness and irreversibility of the proposed action. It started: This plea is of utmost importance and urgency, as granting the conflicted receiver the motion for the permanent injunction, would be tantamount to a civil litigation equivalent of capital punishment, from which there would be no possible recovery. My eventual prevailing on merit would then at best attain a pyrrhic victory, as the value-mutilation from the dismemberment of holdings and the lawyer-looting of assets would be of irreparable harm to Lancer investors. As the matter at hand is much too important to be surrendered to the volleyball of pre-trial paper motions, I request a hearing with the Honorable Court.188 Lauer laced his response with irony and satire. He congratulated the SEC on winning the war without having to fight a battle. It had destroyed Lancer Management and the funds without having to confront the adversary. “Clausewitz, Sun Tsu and Machiavelli would be impressed,” he wrote.189 He accused the SEC and receiver of recklessness and condemned the receiver’s conflict of interest. He continued: To prove that I can still count my blessings, let me affirm that I feel eternally grateful that the individuals responsible for the civil complaint against Lancer did not choose to enter the medical profession. For if they did, their corresponding remedy for an individual suspected of having a cold (as the person did not actually complain of ills) would be to treat him/her with a fatal dose of cyanide. Afterward, they would smugly take credit for curing the suspected symptom of the malady.190

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One week later, Zloch entered a remarkable sua sponte order (an order he issued on his initiative) in which he incredibly asserted that Lauer’s opposition had not addressed the receiver’s motion to consent to the entry of a consent judgment on behalf of the receivership entities, and ordered him to do so in one week.191 “Upon Lauer’s failure to file said response, the Court may grant the SEC’s Motion without further notice or hearing.”192 Zloch had flagrantly misinterpreted Lauer’s action despite the rule that the filings of pro se litigants are construed liberally.193 Furthermore, Zloch had picked Lauer, a layman with no legal experience, to be the sole defender of the receivership entities, including those he was accused of defrauding, against their fiduciary receiver!

Unless the alleged criminal came to the defense of his victims, the court would further punish the victims! Zloch also bizarrely construed Lauer’s motion as a motion for summary judgment, which added to Lauer’s work. How Zloch could misconstrue Lauer’s opposition is inexplicable.

Following further filings and a hearing, Zloch granted the motion for a consent order on April 2, 2004, as part of an omnibus order.194 The only other record reference to the consent motion is a statement by District Judge Kenneth A. Marra (who, as discussed below, replaced Zloch in July 2004) that he “held up” implementing the consent order because he was uncertain of what would transpire if Lauer won, discussed at the end of Chapter 10.

Meanwhile, Receiver Steinberg was expanding his horizons.

Under the order that appointed him, with the court’s consent, the receiver could place in receivership any entity related to Lauer or Lancer when he “deems it necessary.”195 It did not even say he “reasonably” deems it necessary. The appointing order ignored centuries of law and hundreds of cases that set strict standards for creating a receivership, an event that deprived the owner of his property. Steinberg saw other entities and absorbed them. One was GH Associates, a firm owned equally by Martin Garvey and Eric Hauser, Lauer’s two junior partners who were not parties in the case. GHA provided administrative services to Lancer Management and owned the furnishings at Lancer Management’s 80

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premises, including valuable sports memorabilia. Other entities the receiver and Zloch summarily put into receivership were TRSOR and CLR, companies wholly owned by Lauer, which held his Manhattan condominium and a valuable MercedesBenz vintage C-11-05 race car.196 All entities had been formed and had acquired all or virtually all of their assets before the start of the alleged fraud. None had been shown to have violated any law, and none was a defendant. They had nothing to do with the hedge funds’ stock transactions. Lauer objected strenuously to placing his companies into receivership. He lost.197 As noted, while overwhelmed fighting the receiver and the SEC, Lauer worried about the hedge funds’ investments. He had a good reason. Steinberg and his professionals were selling for a pittance shares of companies that had enormous potential. Vast sums of money were involved, and the receiver’s sale of assets at a small fraction of their value was essentially irreversible. It meant that nothing could be done later to recoup the hundreds of millions of dollars that the receiver and his professionals were dissipating.

Of the shares of stock held by the hedge funds, Lauer was particularly optimistic about two. One was Continental Southern (CSR), later Endeavor International Corp. (END); the other was Zi Corp. (ZICA), both substantial companies (unlike the startups in which Lancer also invested). The funds owned many millions of shares of each company, worth tens of millions of dollars (far more than the startups). Lauer had personally bought millions of dollars of each company’s stock and held them in his account at Bank of America, having bought some at substantially higher prices than the funds did.

On January 2, 2004, the receiver filed a motion to sell the hedge funds’ Endeavor shares to RAM Trading, Ltd. for $5,280,948 in cash. RAM had contacted him about buying the END shares, and they had entered into a tentative contract to sell the shares after a bidding process that Steinberg said was at “a fair and reasonable” price.198 Lauer was outraged.

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The first sentence of Lauer’s opposition read: “Michael Lauer plead [sic] with the Court for a prompt hearing on this matter, as it is of utmost significance for Lancer fund’s long-term values.”199 He accused the SEC of making a “highly negligent and damaging decision to publicly publish the composition of Lancer’s active portfolio[;] one should assume that most of Lancer’s holding are depressed (the internet chat-rooms on the underlying positions tell the story), as the opportunistic traders anticipate an overwhelming and indiscriminate supply of stock to hit the market.”200 Lauer also complained that alternative bidders were not given sufficient time (six to nine business days during the holiday season) and that the receiver and DDJ lacked essential information about both the stock and the bidder. Lauer emphasized that the assets were intended to be harvested two to five years later. He also argued that RAM “has connections to the Company’s affiliates (or in fact are the affiliates) [and possesses] ‘insider’ information...The receiver’s overreach is unlawful, in bad-faith, and goes well beyond his mandate to ‘safeguard’ Lancer’s assets.”201 Lauer explained further: The fact is, that the asset the receiver is so eagerly proposing to divest for $0.37 cents per share, is presently worth over $13 per share, based on the discounted cash flow model of the anticipated production from the existing properties (the value was confirmed by a fully accredited, independent third-party valuation firm) that had access to the management’s forecasts, and that assumed that the natural price of $4 BTU (it is now over $7)...It should be also noted that the most recent private placement of CSR’s [now END’s] restricted shares to sophisticated investors were done at over $2 per share, yet the receiver has somehow concluded that a give-away of a free trading stock for $0.37 is a great deal for Lancer.

Additionally, a controlling position is worth a premium to the market price, something that also escapes Hunton & Williams and DDJ.202

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In his response, the receiver stated that DDJ (and he) possessed ideal qualifications to decide when to sell the CSR stock and that it was Lauer who lacked qualifications and was engaging in “wishful thinking”: “The Funds are a mess of Lauer’s creation, and the receiver and DDJ have been appointed to clean up the mess.”203 The receiver insisted: “The Receiver has no incentive to keep the price of an asset down...” A committee of investors supported the receiver.204 Zloch sided with the receiver, and the deal went through.205 By the end of April 2004, the END stock was trading an average of 100,000 shares a day at between $4.00 and $4.50, and the shares would have been worth between $80 and $100 million, even with all the adverse circumstances surrounding the hedge funds.206 One year later, in January 2005, Lauer expanded on the fire sale of CSR/END stock in another filing: [T]he Receiver’s unfathomable sale of Lancer’s Endeavour holdings instantly deprived the Funds’ investors of over $70 million in value (in exchange for less than $6 million in cash, which was consumed by the receivership’s expenses), with the future opportunity cost of the END sale likely to exceed $500 million to Lancer...

The Endeavor sale by the Receiver was manifestly illegal, as it was consummated with undisclosed insiders, and facilitated by a white-collar criminal (discussed in exhibit “A”), who spent more than a decade in federal prison for financial fraud. By concocting a fraudulent “auction” for Lancer’s holding in the END stock, the Receiver claimed that the incongruous price of $0.37 per share – at which the block of approximately 15 million of Lancer’s shares changed ownership – was reasonable, even though the then prevailing market price was approximately $2.50 per share.207 One year after he sold the Endeavor stock, the receiver filed a motion for permission to sell Zi Corp. (ZICA) stock, which the hedge funds held in substantial quantity.208 On January 19, 83

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2005, Lauer filed an emergency motion to stop the sale.209 Lauer accused the receiver of breaching his fiduciary duty to Lancer’s investors in the interests of quick cash that could be used to pay himself. “There is no reason to divest any healthy holding in the portfolios...”210 Zi Corp., Lauer asserted with documentation, had excellent prospects and should not be sold. Instead, a public announcement of the intention to sell the stock immediately depressed the price by one-third and was terribly self-destructive for someone trying to maximize the sales price, Lauer explained. The receiver was on the verge of selling Zi stock at several dollars a share, yet the expectations for the stock were $1.00 earnings per share. “[T]he stock could easily surpass its previous high of $40 per share, posted nearly 5 years ago. Therefore, at $20 to $40 per share, the value to Lancer’s investors of this one holding would be between $400 and $800 million.211 Although Lauer succeeded in delaying the sale of the stock of Zi Corp., the district court ultimately denied Lauer’s motion to stop the sale of Zi Corporation stock.212 The receiver continued to sell off assets of the Lancer hedge funds until at least April 11, 2007, the date of the last order permitting Steinberg to make such a sale.213 On the date the SEC filed its case, Lauer personally owned 4,265,400 shares of CSR/END and 2,470,546 shares of ZICA.214 Further evidence of Lauer’s good faith is that he bought many shares of ZICA at over $6 for his personal account.215 Lauer was not sticking the hedge funds with wildly overvalued stocks. He was a major holder of the stocks in his own right.216 There were reasons why the receiver and the SEC were anxious to sell the stocks held by the hedge funds quickly and at low prices, as long as there were assets to pay the receiver. Both the SEC and the receiver had stated on the record that many of Lancer’s investments were worthless and others grossly inflated.

Selling the assets at a low price supported their positions.217 Moreover, the worse Lauer’s fraud, the greater the receiver’s justification for spending additional time and money to discover its true extent, which is another reason why he would reject 84

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Lauer’s suggestion that stock be distributed to investors in kind rather than be sold. Even though the prices of stocks such as Zi and Endeavor were depressed far more by the announcement of their liquidation than they were by the SEC’s lawsuit, the receiver and the SEC went ahead with public announcements and sale of stock. Of course, the problem remained that it was in the interest of the funds (and investors) to minimize any loss and expense, but that goes back to the point that the same person should not have been appointed receiver of both Lancer Management and the hedge funds. As Lauer frequently argued, the receiver had an irreconcilable conflict of interest, once stating, “The SEC’s counsel’s declaration that his only goal is to protect Lancer investors is risibly disingenuous.”218 Even though no evidence had been introduced against Lauer, much less a judgment or finding he did anything wrong, the SEC and receiver seized many of Lauer’s assets, which the district court upheld. The court also allowed the receiver to sell some of Lauer’s personal assets and confiscate the proceeds. While a court may order a defendant prejudgment to maintain the status quo, no one cited any authority to sell a civil defendant’s assets during an SEC case merely because the government sued him.219 One battle over relatively small assets involving Lauer’s Denali pickup truck will be discussed in the text, with the three others described in an endnote that follows the discussion. The SEC’s effort to commandeer Valentina Lauer’s small bank account was discussed in Chapter 6. Lauer had bought a quotidian 2002 GMC Denali pickup truck with his personal funds but registered it as a corporate asset. The judge rejected Lauer’s uncontradicted evidence on the ownership of the vehicle. The judge also found that Lauer had lied to his insurer about his intended use of the Denali, particularly where Lauer would principally drive it.

Lauer had indicated New York rather than Connecticut, where it was garaged. However, the insurer was not harmed because the alleged falsehood increased Lauer’s payments of premiums to it.

Insurance rates are higher in New York City than in Connecticut.

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Accepting the recommendation of Magistrate Judge Ann E. Vitunac, to whom he had referred the matter,220 the district judge decided that the appropriate punishment for Lauer was to forfeit the vehicle to the receiver, who sold it for $17,500 after a year and a half of litigation.221 Lauer objected vehemently to the forfeiture principally because he had not acted improperly, but the judge ignored his objections. But even if Lauer had lied to his insurance company, no one explained why the receiver should get the vehicle. No basis was ever cited for a ruling that Lauer forfeited the Denali to anyone, especially not the receiver, who was a bystander to the insurance transaction.222 The insurance company never registered a complaint. It was like giving Lauer’s house to the receiver because he had made an error in his mortgage application.223 There were also battles over more valuable assets. Aside from his investments in the hedge funds, Lauer kept much of his personal wealth in a brokerage account he maintained at the Bank of America, which had a market value of approximately $30 million when the SEC sued. The statement of the account was an exhibit in his motion to limit the freeze on his assets.224 It listed the number of shares he held in each investment multiplied by its price as of the date of preparation. Almost all the investments were shares of stock also held by the hedge funds, especially Continental-Southern (symbol CSR), later known as Endeavor Corp. (symbol END) and Zi Corp. (symbol ZICA), both discussed earlier.

As part of the asset-freeze order, the SEC took over Lauer’s $30 million Bank of America account. It transferred custody to the receiver without even holding a hearing on whether any investments in the stock in his personal account had been bought with allegedly tainted assets. Lauer maintained that none of the allegedly tainted funds was used to purchase the stock held in his personal brokerage account, but the district judge sided with the receiver. From all indications, the receiver then ignored the account for years, even though several of the stocks in it were volatile and required careful attention and management. The receiver had sold some of the same stocks in the portfolio of 86

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the hedge funds. Fiduciaries have a continuing duty to monitor investments and remove imprudent ones.225 In 2006 Lauer filed a motion to sell some of his more speculative stock holdings and leave the sale proceeds in the frozen Bank of America account. The receiver objected, and the court signed an order that gave him an absolute veto over all transactions in the account without his having to provide a reason.226 With total control over the brokerage account, he continued to ignore the account and refused to let Lauer sell stock.

One of Lauer’s prized possession was an historic 1990 Mercedes-Benz C-11-05 race car, which he raced when Paul Newman was part of his team. Only five had been made. Zloch had placed the car, which was registered in the name of Lauer’s wholly owned company CLR Associates into receivership. The receiver filed a motion on February 2, 2005, seeking to have the car sold. 227 He wanted to sell the C-11 for $800,000; fully restored, it would be worth at least $5 million, according to Lauer. The receiver’s stated reason for selling the car was that it was expensive and inconvenient to maintain.228 At this point, Lauer was an ordinary citizen whom the government had sued in a pending case in which no findings had been made.

Lauer argued that the sale was improper, or at least premature.

The C-11 belonged to a company owned wholly by Lauer, and there was no legal principle that supported seizing and selling a corporate asset of a person who simply had been sued in a civil case. It had been purchased before the start of Lauer’s alleged fraud with untainted funds (although the receiver disagreed).

There was no finding of probable cause to believe CLR had done anything wrong, much less was there a judgment against CLR, which was not a defendant. The application, if granted, appeared to violate both the Due Process and the Takings Clauses of the Constitution.

After the court entered an order granting Lauer’s motion to stay the sale and permit some restoration work, Steinberg tried again. Lauer again objected. This time Steinberg obtained the court’s approval and sold the Mercedes for $2 million on January 87

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30, 2007, again before any finding of probable cause to believe Lauer had violated any law.229 The court had ordered the sale of an asset of a corporation owned by an individual defendant solely based on the SEC’s filing suit against the individual defendant and because it was inconvenient to maintain the asset. Then, and certainly by the end of the case, the car was worth many times $2 million in a competitive sale.230 Among Lauer’s financial problems was his delinquent $50,000 monthly bill to the IRS, which loomed as he struggled to care for his family and continue the litigation. The obligation to IRS came about because IRS decided that Lauer had essentially taken a substantial deduction one year too early.231 On the advice of his lawyers, Lauer had signed a one-year bridge loan to IRS secured by his Connecticut home to cover his obligation.

Because Lauer had not paid the installments to IRS since SEC v.

Lauer started, the unpaid balance of the assessment had risen from $2,588,493.69 at the time of the original assessment to $3,141,463.11. In September 2005, IRS filed a motion to intervene in SEC v. Lauer.232 Lauer considered it absurd that the district court denied the IRS access to his frozen funds to pay an acknowledged debt to the United States based on a speculative SEC suit and possible disgorgement. Lauer reached an understanding with the IRS agent that he would satisfy the tax lien out of his brokerage account at the Bank of America.

However, two weeks later, the IRS modified its motion to limit its foreclosure to its tax lien on Lauer’s Greenwich home.

What evidently happened was that Christopher Martin or Marty Steinberg contacted the IRS agent and convinced her to foreclose on Lauer’s Greenwich house rather than on his brokerage account.233 The IRS agent filed the modification to the motion without speaking to Lauer.234 By the end of the dispute over the lien, the participants had filed 174 pages in the effort. Eventually, IRS and its allies prevailed, and Lauer’s Greenwich home was sold during the summer of 2008, two-and-one-half years after the IRS filed its initial motion.

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to IRS. He moved into a rental apartment with his two oldest children. Lauer had hurriedly sold his Manhattan condominium in the meantime. The youngest children continued to live with his former wife (referred to as H.C. to preserve her and Lauer’s children’s privacy). Lauer scraped by, primarily on loans and gifts from family, friends, and former business associates in the United States and Poland. Still, he could not make child-support payments to H.C., who sued him for his deficiency.235

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The Noose Tightens While Lauer was disgusted with Judge Zloch, he felt (accurately) he was powerless to do anything about it – until Zloch rejected Lauer’s motion to relax the total asset freeze with the angry reply: “Are they any less painful by the way that you used your process of marking the close?”236 Zloch had decided that Lauer had marked the close and violated the law without hearing evidence. Using his rapidly developing legal skills, Lauer enterprisingly filed a motion on May 3, 2004, to recuse (or disqualify) Zloch from sitting on the case.237 The main thrust of Lauer’s 61-page motion was that the judge, who was going to have to decide dispositive motions and perhaps preside over a trial in the case, had made up his mind on the case before he had heard any evidence.238 Lauer’s supporting affidavit described Zloch’s other errors, including appointing an irreconcilably conflicted receiver for both the hedge funds and Lauer Management companies, freezing all of Lauer’s assets, permitting the fire-sale of stock to felons, prohibiting him from talking to investors, allowing the receiver to sell whatever he wanted at whatever price he saw fit, and more.239 Judicial disqualification is an important concern because the judicial system collapses without fair-minded and impartial judges and juries. A treatise published in 2007 entitled, Disqualification of Judges, by Richard E. Flamm is 1,208 pages long with an annual supplement that reached 958 pages in 2016. It 90

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described existing case law and recounted the various arguments made in the thousands of relevant cases that had been decided.

Judicial bias is but one of several grounds for disqualification; others are financial interest and a close personal relationship between the judge and a party or her lawyer. This case involved bias.

While the requirement that judges be impartial goes back centuries, the current analysis of judicial disqualification in federal courts starts with two federal statutes, 28 U.S.C. §§ 144 and 455(a). For most purposes, they are the same and require the disqualification or recusal of a judge who demonstrates he is biased or appears to be biased. Section 133 of the Code of Professional Conduct for Judges similarly provides that, “Any judge or magistrate judge of the United States shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned.” A provision only in § 144 requires federal judges to refer a motion to disqualify to another judge when a party files “a timely and sufficient affidavit that the judge before whom the matter is pending has a personal bias or prejudice either against him or in favor of any adverse party.”

A litigant alleging bias must demonstrate that the source of the alleged discrimination was not something emanating from the case itself. In most cases, that is clear. Thus, if a judge expresses hostility to a lawyer because he is always late or interrupts the judge or files repetitive and frivolous motions, and the litigant claims that the judge is biased against her, that claim will fail because the judge based his conclusion on his actual perceptions in the case. Any bias is not “personal.” The Supreme Court stated in Liteky v. U.S. (1994), “Judicial rulings alone almost never constitute a valid basis for a bias or partiality motion.”240 Despite the qualifying language (“alone” and “almost never”), the concept that a motion for disqualification must have an extra-judicial source is so well established that some judges (including Zloch) have erroneously cited it as an axiom without qualification.

On May 6, 2004, three days after Lauer filed his motion, Zloch denied it on the ground that his affidavit was legally insufficient because it did not claim any extra-judicial source for the judge’s 91

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alleged bias. Thus, Zloch viewed the motion as so lacking in merit that he did not wait for opposition or refer it to an independent judge.241 He wrote: [T]aking the allegations contained in the affidavit and Motion as true, there are no out of court statements or occurrences which would constitute an extrajudicial source and an improper personal bias against Lauer. The affidavit offered in support of § 144 recusal, therefore, is legally insufficient. Moreover, Lauer does not offer any extrajudicial statements or occurrences in support of his motion upon which “a disinterested observer fully informed of the facts would entertain a significant doubt as to the judge’s impartiality.”242 Zloch’s discussion was composed entirely of “boilerplate,” which is general language that pays no attention to the subtleties of the rule or its exceptions. None of the cases Zloch cited involved a judge’s expressing an opinion on the ultimate merits of the case. Moreover, in SEC v. Lauer, Zloch could not have reached his conclusion based on the court proceedings because there were no relevant court proceedings. There was some support for Lauer in cases that layman Lauer did not cite. If Zloch knew them, he ignored them.

This may be the rare case where it is not possible to identify the source of a judge’s bias. The question may turn on who has the burden of proof or how the issue is articulated. Must Lauer prove that it was an outside source, or is it sufficient to show that there was no “inside” source for his bias? It seems that a proper interpretation of the law would require the moving party to show that no source within the case accounted for the alleged bias. To establish the existence of an outside source would impose too great a burden on the movant in certain cases, including SEC v.

Lauer. The information is within the exclusive command of the judge. Zloch did not consider this question.

Limitations on judicial disqualification are based on the reasonable assumption that despite judicial criticisms of one of the parties, the judge will ordinarily act appropriately when it 92

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comes time to make the ultimate decision of which side should win or lose. The ultimate impartiality of the judge is the essence of the judicial process, and when it is compromised, there is no reason to have faith in the judgment of the judge. Zloch had announced his opinion on the ultimate merits of the case without having held a hearing or read briefs on the issues.

Four days after he denied Lauer’s motion to disqualify him, Zloch entered an order that was the first step in finding Lauer in contempt of court and imposing debilitating sanctions.243 Simultaneously, he denied Lauer’s motion to dismiss the case or to transfer the case to more convenient in the northeastern United States244 and his motion to dissolve the preliminary injunction, stating, “the Court finds that Defendants violated federal securities laws [and] that if the injunction were dissolved, Lauer, individually or through the [other] Defendants and Relief Defendants, would further likely violate federal securities law.”245 Zloch was exhibiting his power and rubbing salt in Lauer’s wounds.

One of Zloch’s principal grounds for denying Lauer’s motion to transfer the case out of Florida was that he was familiar with the matter and that it would be inefficient to require another judge to start from scratch.246 On June 15, 2004, Zloch voluntarily withdrew from the case, which was immediately reassigned to Judge Marcia G. Cooke in Miami, a new judicial appointee, who needed a workload.247 She had been an assistant county attorney in Miami-Dade County. As chief judge, Zloch knew Cooke was nominated on November 25, 2003, many months earlier, would be confirmed, and would be sworn in on May 18, and he would be reassigning SEC v. Lauer to her.

By denying Lauer’s motion and then voluntarily reassigning the case, Zloch all but eliminated Lauer’s ability to appeal and obtain a decision by the court of appeals holding that Zloch was biased and had made biased rulings, that Zloch’s previous rulings should be set aside, and that a new judge should be appointed for the case and start from scratch. A court of appeals would not spend time on whether a judge should have been recused if he were no longer in the case and there had been no decision. While Lauer had succeeded in getting a new judge, there would be no 93

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stigma attached to Zloch’s prior rulings because there was no decision that he had been biased. In fact, Zloch had ruled that he was not biased.

Nevertheless, the replacement pleased Lauer. First, Miami was more convenient for him (as well as for the SEC and the receiver, both of whom had offices in Miami) than Fort Lauderdale.

Moreover, Cooke would come to the case without Chief Judge Zloch’s baggage, and she was miles from Zloch’s courthouse.

But something happened. Cooke recused herself ten days later, without giving any reason and without there being any apparent reason.248 She was a new judge, had a light caseload, and there was no suggestion or evidence of a conflict of interest in a case involving a former hedge-fund manager from New York and Connecticut. After all, she had been assistant county attorney. It was strange, if not suspicious. Lauer was disappointed, but there was nothing he could do.

When the newly confirmed Judge Cooke could not or would not take the case, Zloch should have kept it; no new judge needed a workload, which was the reason he gave for the reassignment.

Nevertheless, when the case went back to Zloch, he recused himself on July 9, an act that, unlike the reassignment to Cooke, suggested that there might be a reason why he should withdraw, such as his treatment of Lauer (although he gave no reason for his recusal). The same day, Judge Kenneth A. Marra, who had a full caseload, was chosen to succeed him. Marra later said he was fully occupied when Lauer filed motions to have his trial expedited.

It seemed to Lauer that Zloch, who was chief judge, wanted to get rid of the case and wanted it to go to a judge he could influence rather than entrust the case to a randomly chosen district judge miles away. Marra had been appointed a year earlier and was assigned chambers in West Palm Beach. However because of hurricane damage to the West Palm Beach Courthouse, he was temporarily moved to Fort Lauderdale and assigned the courtroom next to Zloch’s. The virtually simultaneous action of Cooke’s recusal and the reassignment to Marra suggested to Lauer that there may have been collusion between Cooke and 94

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Zloch and between Zloch and the court’s assignment office, but he could not prove it.249 He did not pursue the matter further in 2004.

Born in 1951, Marra had gone to Stonybrook College in New York and Stetson School of Law in Tampa, Florida. After that, Marra practiced law in Queens, New York, and Florida, sandwiching three years in the Department of Justice, where he worked in the Indian Bureau. He then served as a Florida state trial-court judge. George W. Bush promoted him to United States District Judge in the Southern District of Florida, and he took his seat on September 13, 2002. There is no evidence that Marra knew anything about federal securities laws or hedge funds when he was selected to preside over SEC v. Lauer. It would have been remarkable if he did; federal securities laws can be litigated only in a federal court.

Lauer’s mother, Valentina Lauer, had serious medical conditions, including diabetes, ulcerative colitis, and severe osteoarthritis in both knees, which confined her to a powered wheelchair. She then developed a severe brain hemorrhage that placed her in critical condition in the ICU. Lauer filed a motion on May 26, 2004, to release his frozen funds and move the case to the New York area for financial and humanitarian reasons and to finance his mother’s medical emergency;250 Lauer was her principal support and caregiver, his motion explained.251 Zloch did not decide that motion before he recused himself.

Marra quickly demonstrated he would follow Zloch’s progovernment and anti-Lauer lead. Adopting the SEC’s argument, Marra denied Lauer’s motion without once referring to his mother’s medical emergency or her desperate need for physical therapy. “[T]he Court concludes that he has not demonstrated any material change in circumstances or other justification for modifying the Court’s prior orders.”252 Lauer called Marra’s denial “barbaric.”253 On August 19, 2004, following a status conference, Marra entered an omnibus order254 that specifically continued the orders Zloch had made (all adverse to Lauer). Rejecting Lauer’s 95

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argument that delay was extremely prejudicial to him, Marra denied his motion for an early trial on the ground that his criminal docket precluded trial before January 2005 at the earliest.

One ruling by Marra warrants a more extended discussion.

Lauer had filed a convincing motion on May 26, 2004,255 repeated on December 4, 2006,256 to require the receiver to advance his legal fees relating to his management responsibilities, as mandated by Lauer’s contract with Lancer and the investors in the PPMs. The agreement, made part of the motions, specified: Section 12.4: Expenses. To the fullest extent permitted by applicable law, expenses (including legal fees) incurred by the Manager in defending any claim, demand, action, suit or proceeding shall, from time to time be advanced by the Company prior to final disposition of such claim, demand, action, suit or proceeding upon receipt by the Company of an undertaking by or on behalf of the Manager to repay such amount if it shall be determined that the manager is not entitled to be indemnified as authorized in Section 12.2 hereof...257 The receiver opposed the motion, “Although Lauer has not yet been fully [sic] adjudicated ‘guity’ [sic], the Court has concluded that enough evidence exists to place the burden on Lauer to defend his actions.”258 But there had been no hearing and no “evidence,” and the receiver cited no authority for his position. There was no suggestion where Lauer was adjudicated “partially” guilty. There likewise was no burden-shifting in this context; the receiver simply made that up.

Marra denied Lauer’s motion on August 19 without a legal basis: “The indemnification provision does not apply if Lauer did not act honestly and in good faith.” Marra wrongly denied Lauer the funds to defend himself because he thought he could tell, even without a hearing and contrary to a valid contract, that a jury would find against Lauer when and if the case went to the jury, even though the law prohibited him from doing that. But there is more. A corporate officer is entitled to have his litigation expenses advanced under an agreement until he is proven to 96

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have acted dishonestly. If the officer ultimately loses, he must return the money advanced evidence or no evidence.259 A clear contractual right for advancement over expenses has precedence over an investor, who takes the risk that the business he invested in will not prosper. Otherwise, the provision would be almost worthless since any judge could deny it on any evidence or no evidence. Lauer should have had the counsel of his choice in mid-2004. Many cases so hold: The clear authorization for advancement rights presupposes that the corporation will front the expenses before any determination is made of the corporation official’s ultimate right to indemnification...Advancement ‘provides corporate officials with immediate interim relief from personal out-of-pocket financial burden of paying the significant on-going expenses inevitably involved with investigations and legal proceedings.’...

[A]dvancement implies a general obligation to repay if the underlying conduct is ultimately judged to be not identifiable...260 Lauer relentlessly continued to file motions to try to protect his rights. One week after Marra entered his August 19, 2004, omnibus order, Lauer filed an emergency motion asking Marra to issue a gag order to prevent the receiver “from collaborating with the tabloid press” and to revoke the broad immunity from liability for his actions that the order appointing him had provided.261 Lauer charged that the receiver was improperly providing information to New York Post columnist Christopher Bryon, whom Lauer and Lancer Management had sued for libel (which the receiver dismissed as to Lancer Management and Lauer dropped): If the Receiver wants the protection of the First Amendment, he needs only to relinquish his courtappointed and -supervised fiduciary position and speak as a private citizen. His comments to the tabloid press during the course of this litigation are outrageous and

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a clear violation of the Respondent’s right to a fair trial.

This is true where, as here, the Respondent has been ordered by the Court not to communicate with other Lancer investors. The Respondent is gagged, bound and precluded from talking with investor witnesses, while the receiver cites the protection of the First Amendment. This is fundamentally unfair, and is violative of due process.262 The receiver’s memorandum in opposition to Lauer’s motion was wrapped in the First Amendment, if not the flag, and relied on Supreme Court decisions in New York Times Co. v. Sullivan263 and similar First Amendment cases.264 The opposition never denied that he was the source for the New York Post’s columns. It did not deal with Lauer’s valid argument that as an officer of the court, particularly a judicial officer, the receiver’s actions were governed by a different set of rules.

Once again, Marra accepted the receiver’s flawed arguments, adding: “Lauer’s request is untimely and is not grounded upon evidence which could overcome the heavy First Amendment presumption against gag orders.”265 Marra, like the receiver, relied on cases involving prior restraints on the press rather than those dealing with participants in litigation who are under the court’s supervision and who are likely to have access to nonpublic, if not confidential, information. Lauer was not seeking to enjoin the press. Marra never explained why Lauer’s motion was untimely if the receiver was still leaking material to the media.

The law supported Lauer. The First Amendment recognizes a “distinction between participants in the litigation and strangers to it.” So said the Supreme Court in 1996 in a prominent case in which massive publicity and associated “bedlam” in the trial of Dr. Sam Sheppard, who was accused of and convicted of murdering his wife. The Supreme Court approved restrictions on extrajudicial statements by participants: “[T]he [trial] court might well have proscribed extrajudicial statements by any lawyer, party, witness, or court official which disclosed prejudicial matter.”266 The Court established the standard that permitted the regulation of trial participants, which required a showing only of 98

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“substantial likelihood of material prejudice” to impose restraints on speech in this context.267 Marra never discussed the actual law applicable to Lauer’s case.

Lauer was not only deprived of an attorney to be paid for out of his untainted funds, but, as noted above, he was also prohibited from defending himself by talking to actual and potential witnesses in SEC v. Lauer, something that was essential for a party defending himself.268 A judge would not think of telling an attorney not to talk to witnesses in a case. Marra never explained how the receiver’s speech could be protected by the First Amendment but that Lauer’s speech to investors could be enjoined.

The receiver did not sit back and await a ruling that Lauer had violated the law. In addition to supporting everything the SEC proposed or did, he went ahead with the SEC’s consent and for the SEC’s benefit. He wanted to show how Lauer violated the law, even though that was an executive-branch function and even though the SEC was actively conducting interviews and depositions.

Steinberg and his lawyers noted the depositions of five senior people connected with Lancer Management or the offshore hedge funds for late July or early August 2004: Martin Garvey and Gus Hauser, Lauer’s junior partners in Lancer Management; David Newman, a mid-level employee, and Richard Geist and John Bendall, Jr., independent directors of the offshore funds.

On July 9, 2004, Lauer responded with a motion whose title tells it all: “Motion by Michael Lauer to Prevent the Redundant Depositions by the Receiver Which Add Nothing to the Body of Information but Further Depleted the Lancer Estate While Unjustly Enriching the Receiver.”269 The receiver opposed the motion, and Marra perforce denied it as part of an omnibus order on August 19.270 Bendall and Geist testified while the other three pleaded their Fifth Amendment Privilege against selfincrimination.

In 2004, Receiver Steinberg and his lawyers filed multiple additional actions against Lauer and others to recapture money 99

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allegedly belonging to the funds (collectively referred to as Steinberg v. Lauer.)271 The actions took the position that the other defendants in those actions had acted improperly and had facilitated the fraud committed by Lauer and the management companies or, at the very least, were given money they shouldn’t keep but should be made part of the receivership. Most of the defendants were given a preference and had to give the money back. The suits were against people and entities that had connections with Lauer, Lancer, and the funds, including people who had worked at Lancer Management; at Lancer Management’s offshore service providers, such as Citco and PricewaterhouseCoopers; and against several individuals who had contacted persons who invested in the Lancer-managed hedge funds and received the standard finder’s fee. The cases were all assigned to Marra. Many of them settled. 272 By and large, the third-party cases moved slowly. It took years for the receiver to file a satisfactory complaint. For example, in Steinberg v. Lauer, the receiver filed a second amended complaint on April 16, 2008, almost exactly three years from the date of the filing of the original complaint in that action.273 Many of the defendants filed motions to dismiss the complaint or transfer the litigation, which extended the duration of the case. Some defendants could not be found or defaulted. Little of ultimate consequence occurred before the SEC filed a motion for summary judgment in January 2007, the subject of Chapter 12.

The receiver’s insistence on going ahead with his efforts rather than awaiting a judgment against Lauer meant that he started from scratch against third parties as well as Lauer in Steinberg v. Lauer. Rather than having a judgment in hand, as receivers usually do, the receiver had to establish the existence of wrongdoing. His principal weapon was his ability to wear down the opposition. The receiver had control over and use of the funds in the receivership (the investors’ money). The people and entities he sued had to pay lawyers out of their own pocket.

The record shows no analysis by the receiver of the prospects of winning a judgment or, perhaps equally important, reaching an outcome that provided a net return to the receivership, which 100

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is the case when a receiver is appointed in bankruptcy. Nothing found in the record indicates that the facts were presented to a district judge.

The strategy was expensive, although the exact amount is impossible to compute. By the end of the case, Steinberg and his senior lawyers were billing $750 an hour for their time, even though the SEC’s Zinn told Zloch at the TRO in a hearing in July 2003 that the receiver’s top rate would be $400.274 The rate increased eighty-seven percent in just over a decade. It was an extremely high rate for southern Florida. Typically, a client reins in a lawyer out of self-interest. There was nothing like that here.

Not only did the district judges bar investors from seeing the receiver’s bills during the pendency of the case, but the bills are still hidden despite repeated efforts to obtain them. There is no evident reason why the bills of the receiver and others are secret.

Steinberg and his lawyers’ suits against some investors sought to recover money that appeared to be a standard finder’s fee for bringing in other investors. One of these people sued was Richard Lombardi, who was highly knowledgeable about hedge funds and had an unblemished reputation. He was an experienced and sophisticated investor and served on a committee of investors who consulted with the receiver. When the receiver described Lombardi’s standard commissions for bringing in new investors to the hedge funds as “kickbacks” in a court filing, Lombardi was driven out of business. The receiver sued Lombardi for $2,439,476.00 but settled for $18,000 (less than one onehundredth of the amount claimed) after each had spent at least $200,000 on the litigation.275 The receiver never informed the investors, including Lauer, or Marra how many cases he filed, or how much the suits cost them compared to what he recovered from settlements. In many instances, it appears Steinberg and his professionals put into their pockets legal fees far higher than they collected for the receiverships in actions against Lauer or in third-party suits.

Both the trustee in bankruptcy for Lancer Partners, who was overseeing the bankruptcy proceeding involving domestic-fund Lancer Partners, and Receiver Steinberg demanded substantial 101

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payment from Lauer and Garvey to settle their actions against them, along with broad releases from potential liability. Lauer and Garvey refused; they were innocent, and, besides, they had no money. Finally, the receiver and the trustee reduced their monetary demands to zero, with the proviso that Lauer and Garvey would execute personal releases to the trustee, the receiver, and their attorneys, investigators, and others, provisions that had been included from the start of settlement talks. Again, Lauer and Garvey refused. The bankruptcy trustee nevertheless dismissed his case without the protection sought.

Still, the receiver continued to litigate against Lauer and Garvey in Steinberg v. Lauer, all the while continuing to insist that Lauer and Garvey provide his professionals with personal releases as a condition to settle the cases. The two felt that the receiver should not condition relief for the investors, to whom he owed a fiduciary duty, on getting relief for himself, especially while litigating with the investor’s money. But he did.

Adding to Lauer’s and the other investors’ financial burden and the receiver’s income was that he noticed depositions that duplicated those taken by the SEC. Lauer pointed this out in futile motions directed at the court to reduce the receiver’s activities.276 His motions, filed in mid-2004, had little effect on the practice of the SEC and receiver. Steinberg’s discovery efforts continued even after Marra had entered judgment in favor of the SEC and against Lauer in 2009 and an appeal was pending.

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In Contempt of Court Although the matters proceeded simultaneously, allegations of violation of the asset-freeze order and the discovery orders on the part of Lauer were legally separate violations and had potentially different consequences. Violation of discovery orders had a greater prospect to harm Lauer directly in SEC v. Lauer because those violations could arguably impair the SEC’s ability to present its case to the court. For that reason, the court could give such relief to the SEC as limiting Lauer’s proof or even granting judgment to the SEC. Much of the evidence seemed to point to the conclusion that the SEC’s goal was not to try its case against Lauer but to have him held him in contempt and sanctioned, which could restrict the evidence on which he could rely or, possibly, result in an order entering judgment for the SEC. At a conference before Zloch on October 28, 2003, Lauer’s temporary lawyer complained to Zloch about the SEC’s tactics – he informed Zloch that the SEC lawyer “has told us that they would not authorize one nickel for fees.”277 Zinn, who was the SEC lawyer, did not disagree, effectively admitting the allegation, for what representative of the United States would not dispute such a charge if it were false? It was a startling admission. Zloch ignored the fact that the United States was denying one of its citizens the right to be represented by counsel in a complex suit brought against him by the government, even when the citizen would pay counsel 103

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with his own untainted funds. In fact, Zloch was giving those untainted funds to the receiver so that he could use them against the citizen.

The SEC sought to hold Lauer in contempt for violation of discovery orders, which had the potential to grant the SEC victory in SEC v. Lauer. In civil litigation, each party may learn about the other’s evidence through an extensive and intricate set of procedures that are collectively known as “discovery.” Among the reasons for discovery are to prevent sandbagging and allow the orderly presentation of evidence at a trial. Among the available devices are written interrogatories, document production, oral depositions, and requests for admissions. Interrogatories ask the other party to provide relevant information in writing under oath. Depositions provide a party with the opportunity to question the adverse party’s witnesses or the party himself under oath before trial in a private setting. Document production requires a party to supply the other with copies of relevant documents under his control that have been requested. Requests for admission, the least-used method, ask the opposing party to admit specific facts, at pain of having to pay the cost to the other party of proving them if they are wrongly denied. District judges are given enormous discretion on these matters, including the power to award severe monetary sanctions for failure to make discovery and, in aggravated cases, enter judgment in favor of the wronged party.

Acting aggressively, the SEC filed its first interrogatories on July 10, 2003, the same day as its ex parte hearing with Zloch, before Lauer knew he was being sued. The first set covered a two-and-one-half-year period, was extremely broad in scope, and required the presentation and production of highly detailed information, a monumental effort. While not unprecedented, they were extremely burdensome. For example: 3. Identify by name, address and telephone number all persons who have knowledge about, or who assisted in creating, preparing, typing, editing, and distributing documents of any kind, including but not limited to correspondence, letters, press releases, marketing 104

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scripts, emails, brochures, pamphlets, investor packages, agreements, forms of private placement memorandum or other offering materials Relating To any offering of securities or other investment by Lancer Management or the Funds; and for each person identified state the basis and substance of their knowledge.278 Other interrogatories sought detailed information about how the hedge funds’ net asset values were calculated, people authorized to trade on behalf of the funds, the auditors, and the record keepers. Proper answers required access to Lancer’s records that the receiver had sequestered in Miami, plus significant manpower and time. That Lauer did not have access to the information held by the SEC and the receiver made no difference to the judges in the Southern District of Florida. Lauer did not know that he had to object promptly to improper or excessive discovery demands or lose his objections. He did not realize how much his failure to respond fully and promptly to discovery demands could prejudice him. Struggling in turbulent waters, Lauer tended to other, more pressing, problems.

On January 15, 2004, the SEC filed a motion to compel Lauer to answer the interrogatories filed on July 10, 2003.279 It argued that “a contempt order appears the only solution to finally convince Lauer to comply.” Lauer’s response was straightforward.

Receiver Steinberg had all his and Lancer’s records, and Lauer had no access to the documents. The SEC responded that Lauer never asked Steinberg for access to them. Lauer disputed that statement.280 The SEC agreed to make them available, but only in Miami, which Lauer lacked funds to visit.

Lauer’s opposition to the motion to hold him in contempt both defended his efforts and supplemented his answers.

Concerning his financial transactions, he responded: “My financial transactions were transparent and fully recorded by the brokerage firm and the Chase bank. To the best of my knowledge, the information was subpoenaed from the relevant institutions and is in the possession of both the receiver and the plaintiff [SEC].” The SEC and receiver never contended that they did not

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possess the information they asked the judges to order Lauer to produce upon pain of a contempt citation. Lauer explained to the court: I have spent days answering receiver’s questions, attended and testified under oath in both Court hearings related to this case and submitted hundreds of pages of briefs on relevant matters. I have never refused to make myself available (contrary to the SEC’s attorney’s claim, see exhibit 2), or asserted my privilege not to testify.

Indeed, I have repeatedly pleaded for an early trial date, so that the facts in this litigation could emerge, revealing the baseless nature of the plaintiff ’s complaint.

However, as I have been denied access to my personal assets to finance legal defense, my efforts have been pro se, and admittedly not always as timely as all parties would wish. The simple and understandable reality is that I have been overwhelmed by the receiver’s actions, which are propelled by at least 50 individuals from Hunton & Williams, all of whom are billing Lancer investors. Additionally, the plaintiff is arraying the limitless resources of the U.S. government in its campaign against the respondent. I stand alone, without any legal background or relevant education, trying to counter the assault...

I am not in possession of such information – while all records were made available to the receiver and the SEC by the relevant financial institutions – and it would take literally hundreds of hours to scrutinize this fundamentally irrelevant data. However, the exercise would certainly paralyze me in all other endeavors, mainly in trying to prepare relevant information in my defense. The vast majority of the information cited by the SEC requires production of information not within my possession, custody and/or control. In fact, it is either already in possession, or is easier accessible to the plaintiff. Because of the injunction [against Lauer’s

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contacting investors], the relevant third parties have been very reluctant to communicate with me.281 Significantly, Lauer presented a good defense on the equities and basic fairness, and he had a good response under the law that he had complied with the SEC’s requests. A party must produce documents only within his “possession, custody, or control.” The documents the SEC sought from Lauer were not in his possession, custody, or control; the receiver had seized them, or third parties held them. Lauer had no obligation to visit the person who controlled records, particularly when it was an adverse party.

Lauer had another valid legal argument that his answers satisfied his obligation. In lieu of answering interrogatories, a party can specify documents, even those documents within its custody and control, and make those documents available to the requesting party.282 Lauer had effectively done that, too. Thus, Lauer had three valid legal defenses (including burdonsomeness,) all of which Zloch and Marra ignored.

Zloch entered an order on May 10, 2004, that granted the SEC’s motion to compel more complete answers, although without specifying in which ways Lauer’s responses were incomplete. Zloch took the position that it was still up to Lauer to examine the records in Miami and provide answers and that if Lauer failed to provide complete answers, “the Court may issue an order which ‘in regard to the failure [is] just,’ including but not limited to an order refusing to allow Lauer ‘to support or opposed designated claims or defenses, or prohibiting [him] from introducing designated matters in evidence.’ Fed. R. Civ. P. 37(b)(2).”283 The order put Lauer in imminent legal peril.

The replacement of Zloch by Marra delayed action on the SEC’s interrogatories. After a series of additional motions, Magistrate Judge Ann E. Vitunac ordered Lauer to answer interrogatories by November 22, 2004. When Lauer failed to answer the interrogatories to her satisfaction by the due date, the SEC responded with an order to show cause why Lauer should not be held in contempt. It asked the court to strike Lauer’s answer and affirmative defenses. The case would be over.284 107

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Meanwhile, the SEC noticed Lauer’s deposition for four days in August 2004 at the SEC’s offices in Manhattan. Even though the federal rules presumptively limited depositions to one day, Lauer had unwisely agreed to submit to additional questioning because he still believed that he could convince the SEC and the courts that he was innocent. He risked a charge of perjury to prove his point. Unable to persuade the Miami SEC to hold the deposition in Connecticut, where his seriously ill mother lived, Lauer filed a motion to change the location. The SEC opposed Lauer’s motion to move the deposition, and Marra denied it.285 The SEC filed a motion to compel Lauer to appear for two days of deposition testimony in Manhattan on January 5 and 6, 2005, which Lauer opposed. Lauer had already appeared for four days of deposition in August 2004. Citing Lauer’s alleged prior agreement to sit for thirty-five hours of depositions and his failure to confer with the SEC before filing his motion for a protective order, as required by the local rules, Vitunac granted the SEC’s motion.286 On January 4, 2005. Lauer filed an emergency motion regarding his deposition scheduled to start the following day.287 Lauer denied that he had consented to thirty-five hours of deposition and attacked the SEC’s insensitivity to his mother’s plight; she had had a massive cerebral hemorrhage, most likely brought on by stress, and needed round-the-clock care, which Lauer could not afford. Yet the SEC tried to make the deposition inconvenient and was using it as a tactic to defeat him, requiring Lauer to come to New York City rather than holding it in Connecticut, he argued.

Vitunac immediately denied the motion in its entirety and ordered Lauer to sit for his deposition on January 5 and 6, 2005.

Lauer did not appear on January 5. He filed a response late on January 5 stating that he did not appear for his deposition because he could not ascertain that his emergency motion for reconsideration had not been granted. He did not learn of Vitunac’s denial of his motion for consideration until late in the day on January 5, when he returned home from visiting his mother in the hospital and found a FedEx envelope from the 108

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SEC. Almost simultaneously, Lauer recited, Martin telephoned him from the deposition site in New York and told Lauer they were returning to Florida. They would not give Lauer a chance to appear on January 6, and they would move to hold him in contempt.

Vitunac found that the motion was emailed, faxed, and sent

by Federal Express to Lauer, and that Lauer willfully failed to appear, even though he testified without contradiction that he was visiting his mother at the hospital and had not known of the order. Vitunac entered an order on January 13 to show cause why Lauer should not be held in contempt and scheduled an evidentiary hearing.

After several delays, on May 27, 2005, following an evidentiary hearing at which former Lauer lawyer Gerald Labush flew to Florida and testified at his own expense, Vitunac accepted all of the SEC’s arguments and signed a report and recommendation to Marra that Lauer be held in contempt of both the assetfreeze and discovery orders. She recommended to Marra that he “incarcerate Lauer until such time that Lauer fully complies with all outstanding orders,” along with ordering him to pay a daily fine of $1000, while striking his answer and affirmative defenses, which would end the suit in the SEC’s favor.288 Truly remarkable was that Vitunac wanted both to incarcerate Lauer until he complied with all outstanding orders (fining him in the interim) and to end the case immediately with the striking of Lauer’s answer and defenses. Since Lauer was pro se, he was the only one who could file interrogatory answers, but he would be in jail.289 But why would anyone want the answers if the case was over? Yet Vitunac wanted him jailed, the answers supplied, and the case dismissed. She seemed to be trying to outdo Zloch and Marra.

Two weeks later, Lauer filed 200-pages of “objections and response to Magistrate’s May 27, 2005, report and recommendation.” His main point was that the SEC and receiver had all the documents they accused him of not producing, and he did not. They had questioned Lancer’s and Lauer’s accountants

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repeatedly and at length. Lauer quoted a letter he had sent two months earlier to the SEC: As you are well aware, all of my tax preparations and the related record keeping of the copies submitted to the IRS was done by Hal Zoref CPA (exhibit 5). You and the Receiver have subpoenaed all of my tax records from Hal Zoref CPA and you have extensively deposed and interviewed the firm’s professionals. Therefore, upon information and belief, Hal Zoref CPA has long ago provided to you all of my tax submissions and information on my behalf, which was in addition to the records collected and in possession of the Receiver.

This contrasts with my own lack of accessibility to the same source of information, as my numerous attempts to contact Hal Zoref CPA went unavailing.290 There was another gap in the SEC’s argument that Lauer should be severely sanctioned in a manner that effectively destroyed his chances of winning the case, as opposed to, for example, paying the SEC’s expenses in coming to New York.

Nowhere did it demonstrate or even allege how it was prejudiced

by Lauer’s failure to produce documents – all or almost all of which the receiver and the SEC had – or failure to attend the fifth day of his deposition. The SEC did not even say what evidence it hoped to elicit in the deposition. The SEC merely quoted Marra, who said that the SEC was prejudiced.291 Lauer’s one-time lawyer, Carl Schoeppl from Florida, reappeared before Marra also without pay to argue against the contempt motion and sought another chance for Lauer to appear and testify and answer interrogatories. Marra rejected Schoeppl’s plea, stating that Lauer acted in bad faith throughout. Marra issued an order on January 24, 2006, that affirmed in large part Vitunac’s recommendation. “Lauer violated this Order by failing to provide his SFT Bank records, his signed IRS returns, and additional documents that he attached to his various pleadings.

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good faith to follow the Court’s directive.” Marra then praised the SEC and himself for their patience.292 Marra concluded that while the entry of default judgment impeded the SEC’s ability to defend itself against Lauer’s affirmative defenses and would be justified, “they should have minimal impact on the SEC’s ability to prove its claims, which presumably, it was prepared to do when it filed this case.”293 Marra’s distinction between the SEC’s proving its case and its defending against Lauer’s affirmative defenses was confusing, to say the least. As noted above, the affirmative defenses in Lauer’s answer were that the complaint failed to state a claim upon which relief could be granted, that the district court lacked subjectmatter jurisdiction, and that venue was improper in the Southern District of Florida.294 What discovery from Lauer had to do with these affirmative defenses was never articulated, especially since Marra had already denied motions by Lauer that mirrored the last two defenses. Moreover, the issues were all part of the SEC’s case in chief.

Nevertheless, Marra concluded, “Hence, while Lauer’s actions should preclude him from asserting his defenses to the SEC’s claims, it should not give the SEC a victory by default.”

He ruled: “At trial, Lauer will not be permitted to present any witnesses or introduce any evidence that has not already been disclosed and produced by him to the SEC. Lauer shall, however, be permitted to cross-examine and attack the credibility of the evidence presented by the SEC.” Noteworthy was the fact that Lauer could not introduce evidence even if the SEC had it – the order permitted only documents “produced by him,” as though it mattered where the SEC obtained the documents. Finally, Marra ordered Lauer to repay the proceeds from certain transactions he made and reimburse the SEC for its expenses in bringing the motion and its expenses traveling to New York for the January 5, 2005, deposition (which Lauer never paid).295 He was also ordered to pay a fine of $1,000 a day until he complied with the order. Marra did not order Lauer incarcerated.

Lauer was outraged, but it was Martin who moved for an order “clarifying” Marra’s order to specifically provide that Lauer 111

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could not testify at any trial or use his four days of deposition testimony to contest a motion for summary judgment.296 Marra’s contempt order had excepted witnesses previously identified by Lauer, and Lauer had included himself. Marra now barred Lauer’s testimony or use of Lauer’s deposition.297 Lauer offered to testify for a fifth and sixth day. When the SEC additionally deposed Lauer on January 5, 2007, it did not ask him a single question that related to its charges against him or any other subject that could advance the SEC’s motion for summary judgment, even though it was to file a motion for summary judgment a month later.298 It had also waited two years to conduct the deposition.

Marra’s order was Machiavellian.299 It forced Lauer to litigate possibly for years more in the district court without a realistic chance of winning and at an enormous personal and economic cost. Lauer pleaded in a new motion: “Lauer would urge the prompt entry of...a default judgment against him so he can pursue an appeal of the final order.”300 Marra refused to allow Lauer to surrender.

Denying Lauer the right to testify or use his deposition testimony was catastrophic, especially on the issue of his intent.

At his four-day, 936-page August 2004 deposition, he answered all questions and never asserted his Fifth Amendment to refuse to testify. Lauer testified that he did not get involved in valuations unless there was significant mispricing or he wished to be conservative.301 “Valuations are something that I prefer not to do myself and I prefer to leave it to the auditors.”302 “I do not have professional experience to say whether [the valuator] followed... [proper standards].”303 “I certainly assumed, Mr. Martin, that these numbers [valuations] were reasonable based on the presentations that I received.”304 Lauer rebutted the allegation of marking the close.305 “My business was always about picking stocks. I am a stock picker.”306 “I don’t trade. We have three traders at any time plus analysts who have discretion to trade.”307 “I don’t believe there is one illegal trade that is executed.”308 “I cannot believe that any of these trades were illegal. There was way too much supervision...[f]rom brokers from traders.”309 Lauer flatly denied instructing anyone to raise the price of the shares held in 112

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the Lancer portfolio.310 Lauer’s testimony provided a defense to the SEC’s charges that he had committed fraud.311 Finally, Lauer testified that it appeared that Cowen was forging his signature on many important documents and misrepresenting himself as a managing director of Lancer.312 Lauer appealed Marra’s contempt order to the United States Court of Appeals for the Eleventh Circuit. Carl Schoeppl, who appeared without payment, filed an excellent brief that argued that the severe sanctions against a pro se party were unwarranted.

The brief addressed Lauer’s inability to answer interrogatories and his violations of the freeze order, noting his pro se status, his good faith attempts to make discovery, the lack of prejudice to the SEC, and the harshness of the sanctions.

The SEC’s brief reiterated its arguments that it made to Vitunac and Marra, with the added advantage that all it had to show was that Marra’s order was not an abuse of discretion, which meant that anything for which it could give a respectable answer would win the case. It also argued: “In any event, Lauer’s argument (Br. 10) that he was ‘deprived’ of funds for counsel is meritless. He chose to proceed without counsel when he rejected the court’s order granting him $10,000 per month for legal and living expenses.”313 It did not mention that the sum was woefully insufficient or that payment was highly contingent (dependent on Lauer’s selling his home and netting a substantial sum of money from the sale, whenever that was).

The Eleventh Circuit heard oral argument on August 31, 2007, before a panel of Circuit Judges Joel F. Dubina and Stanley Marcus and a district judge from Alabama.314 Less than a week later, the court issued its short per curiam (unsigned) opinion.

The opinion did not discuss Lauer’s pro se status, his efforts to comply with the SEC’s onerous demands, or the SEC’s fatuous reasoning, all described in the brief filed on his behalf. The panel’s entire opinion read: The Securities and Exchange Commission (“SEC”) brought an action against Michael Lauer to obtain relief from his alleged violations of certain anti-fraud provisions of federal securities laws. This interlocutory appeal 113

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arises from the district court’s imposition of sanctions against Lauer for his failure to comply with his discovery obligations in the underlying case. After reviewing the record, reading the parties’ briefs, and having the benefit of oral argument, we affirm the district court’s imposition of sanctions based on its well-reasoned orders imposing sanctions filed on January 24, 2006, and March 24, 2006.

We do observe, however, that subject matter jurisdiction can be raised by any party at any time.315 There was a serious problem with the three-judge panel’s decision on the appeal; namely, Marra’s order was not appealable.

It was an interlocutory or interim (nonfinal) order that restricted a party’s evidence at a trial and operated as a sanction for failure of a party to make discovery. The issue was nothing more than the imposition of sanctions for failure to make discovery governed by Rule 37 of the Federal Rules of Civil Procedure, as Zlock had said. Without an order to incarcerate Lauer, it was just another pretrial ruling that governed the admissibility of evidence at a trial. The court of appeals should have dismissed the appeal, and the order holding Lauer in contempt should have been heard along with his appeal from the final judgment along with other alleged errors made by the trial court, which would have permitted Lauer to make his argument in the context of the many other errors of the district court. Someone should have asked whether the appeals court had jurisdiction. The United States Court of Appeals for the Eleventh Circuit had erred on a fundamental question of its jurisdiction. It was not its last.

Back in the district court, Schoeppl, who agreed to remain a while to assist Lauer, filed a motion to modify the freeze order to permit Lauer to use his funds to retain him as his attorney.316 The SEC filed a 184-page opposition, which accused Lauer of “violating the Court’s preliminary Injunction Order by failing to disclose assets and violating the asset freeze, having been found to have acted in bad faith throughout this litigation, and refusing to abide by Judge Zloch’s modification of the asset freeze.” The SEC made a fusillade of arguments, but sidestepped the most 114

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fundamental. Without citing relevant authority, Martin claimed in a section headed, “The Court Properly Froze All of Lauer’s Assets.”317 The short answer to the SEC’s argument was that the SEC had made the same argument before Zloch and had lost that argument.

Zloch’s asset-freeze order dated December 3, 2003, stated: “[W]hile a court may impose an asset freeze in order to preserve the status quo and prevent the dissipation of assets which may be used on behalf of allegedly defrauded investors, personal funds are ultimately only ‘forfeitable to the extent they are comprised of the defendants’ ‘ill-gotten gains,’” citing cases.318 That ruling became the law of the case until changed by the district court or court of appeals.319 That was the end of the matter. The SEC never even tried to change the ruling. It, Zloch, and Marra just ignored it. Moreover, as Lauer argued, there had been no computation of ill-gotten gains. In that relatively quiet month, Steinberg and his professionals alone billed investors $325,000.320 Some months Steinberg and his professionals billed several times that.

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Lauer’s Aborted Offensive Frustrated at the slow pace the case was moving and despairing of getting a fair hearing on the merits of the case, on January 24, 2005, amid litigation over Lauer’s compliance with the asset freeze and multiple discovery orders, Lauer filed a motion that sought an immediate resolution of the case in his favor. He entitled it, “Respondent’s Motion for Dismissal or Summary Judgment Pursuant to Rules 12 and 56 of the Federal Rules of Civil Procedure.”321 It was a monumental effort for a litigant proceeding pro se in a case in which the opposition inundated him.

The motion combined arguments based on two distinct rules. Rule 12 provides for motions to dismiss a case for various fundamental reasons, such as the complaint does not state a claim on which relief can be granted or that the court lacks jurisdiction over the case. The gold standard for motions to dismiss is lack of subject-matter jurisdiction under Rule 12(h). In these cases, the court has no power to hear the dispute, for example, an action brought in a federal court for a divorce or seeking an advisory opinion. A court without subject-matter jurisdiction simply lacks the authority or power to take any action in the matter. As the Eleventh Circuit noted in its decision on Lauer’s appeal from the contempt order, a motion asserting a court lacked subjectmatter jurisdiction can be made at any time. In fact, a court must dismiss a case that lacks subject-matter jurisdiction even if no party makes a motion.

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The first few pages of Lauer’s motion constituted his motion to dismiss under Rule 12(h) and argued that under the Constitution, the SEC lacked the jurisdiction (power) to regulate entities that were the subject of the litigation because the activities charged occurred outside of the United States, mostly in BVI. Lauer also argued specifically that the federal securities laws did not cover purchases and sales of stock that occurred outside of the United States, such as ones consummated on a foreign exchange. Lauer’s motion to dismiss under Rule 12(h) for want of subject-matter jurisdiction had promise; the SEC had never presented proof that relevant activities had occurred in the Southern District of Florida or in the United States, for that matter.

The same could not be said about Lauer’s sixty-four pages of text and exhibits that were his Rule 56 motion for summary judgment. Summary judgment disposes of a case without a trial based on a motion and documents submitted by a party.

The movant is almost always the defendant, who alleges that the plaintiff cannot meet his burden of establishing the elements of a viable claim, such as presenting evidence of fault or asserting a claim not barred by the statute of limitations.

Summary judgment under Rule 56 will be granted only when a party is entitled to judgment as a matter of law, that is when no jury acting in accordance with the law could lawfully find for his adversary. The rule requires the moving party to state the material facts (facts essential to his claim) he contends are not in dispute, the ones that require the court to grant him judgment as a matter of law. The rule also states: “A party asserting that a fact cannot be...genuinely disputed must support the assertion by... showing that the materials cited do not establish...the presence of a genuine dispute, or that an adverse party cannot produce admissible evidence to support the fact.” Summary judgment will not be granted when material issues of credibility of witnesses are present; those issues are for the jury.

Lauer’s motion for summary judgment described the structure of Lancer Management and many of the pre-complaint events recounted in Chapter 2, followed by a rebuttal to the charges, such as the absence of any documentary evidence in 117

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the form of emails or tape recordings that incriminated Lauer, that Lancer hired only well-known and reputable people and companies, that all of the trades were bona fide and not one was illegal, that many of Lancer’s trades were inconsistent with the allegations, that the funds were highly profitable and returned substantial redemptions, and that none of the sophisticated investors had complained. Further, no evidence supported the great majority of the SEC’s claims, or reliable documentary evidence refuted the SEC’s position, which, the motion pointed out, contained numerous internal contradictions. The exhibits that Lauer attached included excerpts from the audits performed

by PricewaterhouseCoopers, the PPMs, depositions taken in the case, and sworn testimony from U.S. v. Kelly, where the jury acquitted Kelly, one of the many licensed traders who had executed trades for Lancer. As noted above, the government had indicted Kelly as part of the FBI’s sting operation, Bermuda Short, and lost.

Although the motion for summary judgment demonstrated the existence of considerable evidence in Lauer’s favor, it did not, however, preclude the possibility that a jury could find for the SEC. His motion was a document that could convince reasonable people that the SEC was off, perhaps far off, base, maybe outrageously off base. Still, it was not a document geared to securing an award of summary judgment from a conscientious United States District Judge. Simply put, while Lauer seemed to have most of the evidence, it was clear that the SEC disputed that evidence with evidence of its own.

The rules require the moving party to file a statement of material facts that he contends shows there is no triable issue, providing specific citations to the record for any factual assertion.

However, Lauer’s motion included no statement of undisputed material facts and was nearly bereft of record citations. It was seriously deficient for those reasons alone.

Rather than file the customary opposition, the SEC filed a motion to strike Lauer’s dual motion; it asked Marra to treat it as a nullity.322 This aggressive and unusual action gave the SEC the initiative and dragged out the proceedings. If the SEC 118

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happened to lose its motion to strike Lauer’s motion, it would then presumably file its opposition to Lauer’s motion, possibly adding months to the proceedings. The SEC frequently moved to strike a Lauer filing, usually on technical grounds, even though the law required courts to be more understanding with pro se parties.

The SEC’s ten-page motion was a barrage of arguments, none of which dealt with whether Lauer’s dual motion had merit. The SEC argued that the motion exceeded the page limitation, did not include a concise statement of undisputed material facts, relied on evidence Lauer had not previously disclosed to the SEC, and more.

The SEC’s motion confused the issue by equating the two branches of Lauer’s motion and directing its attention to Lauer’s motion for summary judgment. The SEC’s entire argument against Lauer’s motion to dismiss under Rule 12(h) read (with citations to cases deleted): Since answering the SEC’s complaint on August 19, 2003 (DE 30), Lauer has filed two motions to dismiss that have been denied. (DE 207, 346 and 491)... A motion for reconsideration is not to reiterate arguments previously made...Lauer’s motion for Summary Judgment does not cite to any intervening change in controlling law, newly discovered evidence nor a need to correct a clear error nor manifest injustice. Instead, Lauer makes the same arguments that the Court has already considered and rejected. Accordingly, the portion of Lauer’s Motion for Summary Judgment that is based on Fed.R.Civ.P. 12 should be stricken.323 Lauer responded. “The Plaintiff ’s allegation that Responder’s Motion ‘uses documents that Lauer withheld from the SEC’ is breath-taking in its intended deception. Indeed, the Plaintiff is well aware that every exhibit used in the Respondent’s Motion came from Plaintiff ’s [the SEC’s] own inventory of documents (or is in the public domain), as all of the Lancer and the Respondent’s personal financial records were seized by the Receiver who 119

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‘parachuted’ into the Lancer’s offices on July 11, 2003.”324 He challenged the SEC’s motion to strike in other respects.

The SEC’s argument was incomprehensible. Contrary to the last-quoted sentence, Rules 12 and 56 are distinct claims with different grounds for relief and different legal requirements.

Lauer’s motion for summary judgment was not “under” Rule 12, as the SEC’s last sentence suggested, but was a separate motion asking the court to dismiss the action, in this case, because of the absence of federal-court jurisdiction over the matter. The SEC’s argument for striking Lauer’s Rule 12(h) motion argued that he was barred from filing a motion to dismiss for lack of subjectmatter jurisdiction because he had previously made two motions to dismiss under Rule 12. There was, in fact, nothing wrong with filing multiple motions to dismiss for lack of subject-matter jurisdiction. As the Eleventh Circuit correctly stated two years later, “subject matter jurisdiction can be raised by any party at any time.” But that was not the only thing wrong with the SEC’s position. It misstated what Lauer had previously filed.

There was no “motion for reconsideration.” As the SEC said, Lauer had indeed filed two motions to dismiss, but neither motion was based on the lack of subject-matter jurisdiction.

Lauer’s first motion was based on improper venue, namely, his claim the SEC’s case was filed in the wrong state. Thus, Lauer’s concluding sentence in that motion was, “The most appropriate venue for nearly all participants would be a District Court in New York City or Connecticut.” 325 Lauer’s other motion to dismiss was based on the SEC’s filing the case without evidence and having engaged in improprieties, which he combined with his opposition to the SEC’s motion for a continuance of 120 days.326 Nearly eight months after the SEC filed its motion to strike Lauer’s motion for summary judgment, on September 30, 2005, Marra granted the SEC’s motion.327 His order was little more than a regurgitation of the SEC’s motion with the conclusion, “the relief sought by the SEC is appropriate.” The order, however, failed to address Lauer’s Rule 12(h) motion to dismiss the case for lack of subject-matter jurisdiction. Instead, Marra wrote: “This relief is granted without prejudice to Lauer refilling a dispositive motion 120

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after the Court has ruled on the Report and Recommendation of Magistrate Judge Vitunac regarding holding in contempt and assuming Lauer complies with his discovery obligations and otherwise complies with the applicable procedural rules.”328 Marra’s order was flagrantly improper. A judge cannot tell a party to fulfill his discovery obligations before deciding whether the court has subject-matter jurisdiction over the case and parties.

Whatever a judge does without subject-matter jurisdiction is a nullity, which is why a judge must do nothing further in a case until he satisfies himself that he has subject-matter jurisdiction.

The Eleventh Circuit, which overseas Marra’s court, stated the established rule in another case: “‘[The] obligation on the court to examine its own jurisdiction,’ including whether the parties have standing, ‘continues at each stage of the proceedings.’”329 The Eleventh Circuit also stated, “a court must first determine whether it has jurisdiction.”330 Instead, Marra placed the subject-matter jurisdiction requirement on the back burner and continued to litigate other issues. But if the district court had no subject-matter jurisdiction, anything he ordered in the case would be illegal.331 There was more. Lauer couldn’t fulfill all his discovery obligations as defined by Marra. Lauer admitted he couldn’t. He did not possess the records that Marra insisted he produce to the SEC or rely upon to fully answer the discovery demands. Marra in substance prohibited Lauer from filing a revised motion to dismiss for absence of subject-matter jurisdiction. That was unquestionably erroneous.

On December 6, 2005, two-and-a-half years after the complaint was filed and two months after he denied Lauer’s motions under Rule 12 and 56, Marra held a rare status hearing, although not one to explore the legal issues in the case. The hearing produced a remarkable colloquy.

COURT (to SEC and Receiver):...I guess one reason I held up on that [entering the receiver’s consent judgments against the receivership entities] was I was wondering what if you go forward on the SEC complaint and you don’t prevail? How does that affect the whole receivership 121

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and your agreeing on behalf of those entities to consent to judgment?... But if the SEC doesn’t prevail in the end – SEC:... you could have conceivably a somewhat strange situation, you could have a receiver appointed but the person was found not to have violated the securities laws.

RASILE [counsel for the Receiver]: I don’t mean to speak out of school, Your Honor. I don’t know what will happen if that occurs. It will be certainly interesting.332 Marra admitted he was proceeding on the assumption that Lauer had violated the securities laws, but that had not been resolved. The SEC was raising a challenge to the very creation of a receivership of an innocent person. While the receiver was telling Marra that it would “be certainly interesting” if they destroyed the savings and investments of scores of investors before they learned that there was no legal basis for charging Lauer, the only sued individual, or his companies, the only other defendants, with wrongdoing. The SEC and receiver informed Marra how terrible things would be if he did not conclude that Lauer violated the law, which gave him a significant incentive to rule against Lauer.

No one asked whether the analysis showed that a mistake had already been made in placing the management companies, much less the hedge funds, in receivership and selling off their assets or whether any steps were required at the moment to correct errors.

As they said, what if Lauer were innocent and there had been no violation of the securities law?

The case had no resolution in sight. Marra had apparently removed himself from any effort to manage the litigation by setting a trial date or taking other steps to expedite the marathon.

He was letting the SEC decide the next major step, and he was willing to give the SEC whatever time it wanted to do so.

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Miami SEC Goes All In On January 18, 2007, two years and seven-and-a-half months after the SEC filed its motion for a “brief ” extension of time within which to file a motion for summary judgment,333 the SEC filed a motion for summary judgment against Michael Lauer along with “Plaintiff SEC’s Statement of Material Facts as to Which There Is No Genuine Issue To Be Tried (PSMF).”334 Strangely, the SEC did not name the Lancer Management Group, LLC or Lancer Management Group II, LLC as respondents in its motion for summary judgment even though they managed the hedge funds.335 Nor did the SEC discuss whether Marra had jurisdiction over the case once Lauer filed a notice of appeal from the entry of the order holding him in contempt, a matter still pending in the Eleventh Circuit.336 How could the SEC file, Lauer respond, and Marra decide a motion for summary judgment when no one knew whether Lauer could rely on his own deposition testimony to oppose the motion? No one said.

As discussed in the previous chapter, a motion for summary judgment takes the position that, based on the entire record and making all credibility judgments in favor of the nonmoving party, no reasonable jury could find against the movant. The moving party must recite the facts, with record references, that are essential to its prevailing and demonstrate that the material facts are “undisputed.” This recitation is usually a short document, which zeros in on only the facts that the movant must 123

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prove to prevail. Once the nonmoving party disputes with any evidence any of the material or essential facts relied on by the moving party, the district court is required to deny a motion for summary judgment and hold a trial.

The SEC had no incriminating documents, such as letters, memoranda, emails, or wiretaps, often the meat of prosecutions in financial crimes. Instead, the SEC was relying almost entirely on the oral testimony of witnesses. Contrary to black-letter law, the SEC’s motion required making judgments on their credibility.

Thousands of cases have held that evaluating credibility and drawing factual inferences are functions reserved for the trier of fact during a trial, who would listen to the evidence and make a decision.337 The presence of either requires the judge to deny the motion.

When the SEC took depositions, Lauer cross-examined the witnesses.338 Although a layman with no experience in cross-examination, he knew the facts, and some witnesses gave statements that contradicted the SEC’s claims. The SEC’s motion ignored the evidence favorable to Lauer and focused solely on evidence favorable to it. The motion should have been summarily rejected for that reason alone, a subject discussed below.

Furthermore, the SEC was the plaintiff in the case, which meant that it had the burden of proving the factual allegations. That is why defendants make most motions for summary judgment.

Moreover, summary judgment is rarely granted in cases in which a person’s state of mind is material, such as knowledge, bad faith, and fraud, unless it is admitted. How can you decide that Lauer indisputably intended to commit fraud if he denies it?

The SEC included in its motion: Lauer “maintains a position of innocence in the face of overwhelming evidence to the contrary and refused to recognize the wrongful nature of his conduct or accept responsibility for his actions.”339 The SEC was improperly turning Lauer’s denials into an argument against him in a motion for summary judgment, in which his denials disputed the SEC’s claims and had to be accepted as true. As noted, questions of credibility are decided in favor of the nonmoving party. Some might call the SEC’s motion for summary judgment “bizarre” or “outlandish.”

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The SEC’s motion for summary judgment, which contained its memorandum of law, started with language that shocked Lauer: This matter involves one of the largest hedge fund frauds in the history of the United States. Lauer masterminded this devious plot, which cost investors hundreds of millions of dollars while netting him more than $50 million. Lauer fashioned a web of deceit using nearly every fraudulent device imaginable. For nearly four years, Lauer lied to nearly everyone he dealt with, including his investors, employees, auditors, boards of directors, and the SEC and the Internal Revenue Service...340 Leaving aside the obvious hyperbole, the SEC did not explain how the amount lost by the investors was several times the amount taken by Lauer when the charge was that he inflated the fees the investors paid Lancer. A fraction of the money went from the investors’ pockets to his.341 Also, by saying that Lauer’s alleged fraud started four years before the filing of the SEC’s complaint on July 8, 2003, the SEC introduced yet another date for the commencement of the alleged fraud. For none of the dates did the SEC suggest why Lauer, many years after he had become a multi-millionaire and a respected figure in finance, would suddenly engage in complicated, multifaceted fraud.342 There was, however, one unmentioned explanation. All starting dates were around the time when Lancer retained Bruce Cowen to act as a consultant. Cowen was indicted in the Bermuda Short sting in August 2002 and began cooperating with federal authorities. Part of Cowen’s effort to obtain leniency was to incriminate Lauer. He had to have been there to accuse Lauer.

The SEC did not produce evidence of a change in Lancer’s investment policy at the start of the so-called fraud period. Lancer and Lauer employed the same personnel and investment strategy that had won them recognition a decade earlier, as evidenced by his 1999 interview with Jack D. Schwager, supposedly before he began engaging in his alleged scheme. If most of Lancer’s 125

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investments were worthless, as the SEC and the receiver claimed, Lancer could not have made redemptions to investors in cash. If the valuations were greatly inflated, where did Lancer obtain the money to pay investors over $500 million in redemptions? No one said.

Until the columns in the New York Post unsettled things, no one was denied a prompt redemption.343 Also, why would Lauer have stopped accepting new investors months before the SEC contacted him if he were engaged in a Ponzi scheme, as the SEC claimed? It would have been essential for Lauer to enlist new investors and their investments to pay the huge redemptions, among other obligations. The start of Cowen’s association with Lancer, coupled with his need to provide evidence against a more significant figure, said more about why Lancer would allegedly convert a highly successful legal business into an allegedly fraudulent one. Investigating that problem, however, was not on the SEC’s agenda. More about Cowen below.

The SEC’s statement of undisputed facts was a remarkably long thirty-plus pages with 153 footnotes (with one and onehalf spaces between lines rather than the usual two). Rather than the handful of allegedly undisputed material facts of the typical statement, the SEC’s had hundreds, most of them containing minute evidentiary detail, like paragraph 63, which indented and quoted two pages below.344 Notably, there were very few specifics and very few quotations from people on whom the SEC relied.

The SEC asserted that Lauer “direct[ed] hundreds of manipulative trades to artificially inflate the closing prices of securities held in the funds’ portfolios,”345 an unbelievable and unsubstantiated statement in itself. The SEC did not identify a single trade it claimed was illegal – not one, and not even any trade executed by Lauer. Unlike the complaint, the SEC did not specify a single alleged manipulative trade, much less a pattern of end-of-quarter trades. There was no statement along the lines.

“On March 31, 2001, Lauer directed Bendall to close the price of X stock at $2.00,” with a footnote to Bendall’s quoted testimony.

The SEC’s statement of undisputed material facts misleadingly reads, “Joseph Huard, John Doyle, and Bruce Cowen have all 126

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testified on numerous occasions that this manipulative activity occurred at Shamrock.” The placing of the word “numerous” was noteworthy. It was also false.

The SEC presented anecdotal evidence of only one unidentified trade allegedly made by Lauer, without identifying what was traded, yet claimed there were hundreds.346 Moreover, no evidence contradicted Lauer’s evidence that Lancer’s trades were executed by independent outside brokers, primarily hired

by Shamrock Partners and Hermitage Capital, none of whom the SEC charged with wrongdoing. Also, those independent brokers had to call upon market makers to trade a stock. The SEC did not explain how that could happen.

Many of Lancer’s purchases were in actively traded stocks on public exchanges, including the New York Stock Exchange.347 Not surprisingly, the SEC’s PSMF did not mention that the startup companies in which Lancer Management had invested for the hedge funds had real businesses but were bankrupted not by anything Lauer had done but by the receiver’s inattention.

Steinberg himself belied the SEC’s position that the reverse IPOs were worthless at a hearing before Zloch on December 2, 2003, when he acknowledged (“to be quite frank”) that many of the startups “depended on Lancer to survive … [and] because we have ceased that function … probably five or six of them are in bankruptcy.”348 There was no attempt to explain the discrepancies.

The SEC turned this admission on its head. Its statement of undisputed material facts read: “78. By July 2003, AUG, FFIRD, NUDZ, SMX, LHFF, and TFGP [smaller companies in which Lancer had made investments for the hedge funds] were not even operating or needed additional financing to survive that Lauer refused to provide.”349 Lauer’s assets had been frozen on July 10, 2003, and the receiver put in charge. Yet the SEC was asking Marra to rule that it was undisputed that the failure of the companies for lack of money was the fault and only the fault of Lauer.

The SEC stated as an undisputed fact that Lauer “[lied] about the existence of his offshore bank account into which he funneled millions.”350 Lauer did not include any personal foreign bank 127

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account in his sworn statement of his assets and liabilities or later in the deposition he gave the SEC. Suppose the government had evidence to the contrary. In that case, it could have charged Lauer with lying and committing perjury in a court document, a relatively simple case to prove, but it never did. The SEC and the receiver had all of Lauer’s and Lancer’s records. Yet, there were no documents showing unexplained payments or withdrawals

by Lauer, and no witness testified that Lauer had received money through a source that was not disclosed on Lauer’s and Lancer’s records. The funds in any hidden offshore bank account had to come from somewhere, but the SEC and receiver never identified a source of funds Lauer could have deposited in a foreign bank account.351 The deposits certainly did not come from scrutinized Lancer Management or the hedge funds. Indeed, the SEC’s and receiver’s persistent claim that Lauer had a secret offshore account demonstrated that they did not understand the case or trust their own theory. How could Lauer have overcharged investors except through Lancer?

The principal witnesses whose testimony was relied on by the SEC were Bruce Cowen and Joseph Huard. Neither had been a Lancer Management employee, and neither had worked out of its offices. The SEC’s key allegation, another allegedly undisputed statement of material fact, cited only Huard’s and Cowen’s general statements as support for its key statement of material facts not in dispute (PSMF): 63. The Funds’ valuation became a function of how Lauer wanted his Funds to perform in comparison to [stock-market] indexes. To achieve the valuation Lauer wanted, Defendants purchased blocks of certain thinly traded stocks, often at increasing prices at or near the close of the last days of the month. Typically, on the last of the month, Defendants would give orders to brokers to purchase shares in order to increase the prices of certain securities. Lauer gave Garvey instructions that he wanted the Funds to have a certain performance for the month, and the Funds achieved this performance by moving the closing price of stocks or by increasing the 128

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number of shares held in the portfolios in order to obtain an artificially inflated valuation that Lauer then provided to investors.352 The SEC had no support for its statements such as that Lancer “typically” marked the close. Huard was supervised by James Kelly, the independent broker who was more familiar with Lancer’s trades and who had been acquitted. Also, consultant Cowen and independent trader Huard, neither of whom worked on Lauer’s premises. Both pleaded guilty and testified for the government to obtain lenient sentences. Their sentences would be materially reduced if they implicated higher-ups, such as Lauer. The SEC relied heavily on Huard’s short declaration: Commencing in 1999 and continuing through December 2002, Michael Lauer, Bruce D. Cowen and Martin Garvey made calls to me...to instruct me to place orders to purchase stock at artificially high prices. The purpose of these trades, as told to me by Cowen and Garvey and others working with them, was to artificially inflate the market price of the stock. Cowen and Garvey instructed me to place these trades at specific prices, timed with and effect end-of-the month and end-of-thequarter accounting to Lauer’s investors at Lancer Group of investment funds...

Lancer, being Michael Lauer, was very concerned about the performance of his fund. So a few days before the end of the month, he would look at the performance of where the fund was compared to certain market indices, and then he would tell Martin Garvey how much he wanted the fund to be up, sometimes, rarely, down for the month. Based on that, Garvey would determine which stocks to buy oh [sic] the last day of the month to window dress the portfolio, to get it to the level Michael Lauer wanted.353 Little of the declaration was admissible on the SEC’s motion for summary judgment, which requires that the statement 129

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constitute admissible evidence if recited by the witness at a trial.

Most of it was hearsay or speculation, and key alleged improprieties were attributed to Garvey and Cowen (whom the SEC did not sue) and not Lauer. No foundation, i.e., a showing he had a legal basis for giving his testimony, existed for Huard’s statements. How did he know the content of monthly conversations between Lauer and Garvey? As noted, Huard did not work on the premises of Lancer Management, but rather at a different company at a different location, where he had superiors. Cowen was a part-time consultant to Lancer based in California, whose testimony actually contradicted Huard in part.354 Yet Huard swore that Lauer was gratuitously manipulating stocks at the end of each month.

It is evident from the face of the SEC’s motion that there were genuine issues of fact on who placed trades for Lancer and when they were placed, with most of the evidence in Lauer’s favor. The SEC scheduled a deposition for Huard for April 21, 2005, but canceled it.355 The SEC did not reschedule the deposition.

Missing also from the SEC’s filing was an affidavit or declaration of an expert witness. An expert witness appeared to be necessary to explain marking the close and manipulating the price of listed shares of stock to show that Lancer and Lauer had engaged in a pattern of improper trades. The SEC also seemed to need an expert to value the stock in the thinly traded companies in which the funds made some of their investments, many of which the receiver admitted he bankrupted. Without an expert, the SEC seemed to lack a basis for evaluating the value of the hedge funds’ holdings on July 6, 2003, or proving a pattern of improper trading.356 The SEC’s motion was insufficient for other reasons. There was no evidence or authority that valuating a company based on its market price (or discounted market price) was unlawful or improper. PricewaterhouseCoopers never withdrew its certifications of the valuation of the assets held by the offshore hedge funds. Milton Barbarosh of Stenton Leigh had prepared a report for the British Virgin Islands case that defended the

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valuations.357 The burden of proof was on the SEC to establish that the valuations were undisputedly fraudulent, but it did not.

One of the SEC’s principal charges in its motion for summary judgment was that Lauer created “fake” portfolios that had nothing to do with the actual holdings of the hedge funds but were designed to fool clients and potential clients. The SEC did not use the term in the complaint or in early filings; it called them “model portfolios” for years, as did the witnesses who had worked with Lancer.358 The SEC’s motion for summary judgment paraphrased a 2004 deposition of Bruce Cowen: “Cowen also testified that Lauer directed Garvey to prepare a ‘model’ portfolio for the pension fund. Cowen Depo. Pp.97-98.”359 The SEC invented the term “fake portfolios” well into the case. It never cited any person connected with Lancer Management who used that term. The SEC never presented evidence that the so-called fake portfolios did better or worse than the funds’ actual holdings. No one ever gave a credible reason, moreover, why Lancer Management would create a “fake” portfolio when everyone knew that Lancer Management did not disclose its holdings to investors. In fact, Lauer used the model portfolios as a selling devise that gave potential investors an inkling of the investments.

The SEC relied heavily on the contention that Lancer was using so-called fake portfolios. At depositions, Martin had witnesses compare the model portfolios and actual portfolios item by item. Then he spent page after page of his motion for summary judgment on this bogus claim. Thus, he could write: “In all, Lauer’s Fake November 2002 Portfolios represented 19 positions (valued at tens of millions of dollars) that were different from actual portfolios.”360 The SEC claimed that the portfolios were a major tool in Lauer’s scheme, asserting that their use fooled investors but did not explain how or why Lancer prepared them when it had consistently gone out of its way to keep investments confidential.

The SEC’s leading investor witness was Renée Mayrand from the University of Montreal pension plan, whose English was so deficient that she needed an interpreter when she later testified 131

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in Lauer’s criminal trial.. However, her deposition in SEC v.

Lauer was conducted in English. Her first language was French, and she admitted that she “make[s] mistake[s] in English.” She was hired to work as director of investments in June 2001.361 At her deposition in SEC v. Lauer on September 23, 2004, Mayrand testified she was employed elsewhere when the pension plan purchased the Lancer hedge fund. Hence, she had no personal knowledge of the circumstances of the university’s purchases of interests in the Lancer hedge funds. She had no admissible evidence regarding what Lauer or any other person affiliated with Lancer Management said to the people who bought shares of their hedge funds. Nowhere did the SEC allege that anyone had purchased a share of the funds because of the so-called fake portfolios (although the SEC doesn’t have to prove that to obtain a judgment).

No one suggested that the portfolios showed to actual or prospective clients of Lancer Management reflected the actual holdings of the hedge funds. Still, that unquestioned fact was repeated profusely and occupied three pages of the SEC’s statement of undisputed material facts.362 Furthermore, when questioned by Lauer at her deposition, Mayrand testified: “I understand that it was your clear policy...[I]t was clear in the prospectus that it said that you were not providing it [actual holdings].”363 It was a nonissue. Mayrand nevertheless claimed she was somehow misled. In fact, every representative of an investor had a strong incentive to blame Lancer and Lauer for losses. It was easier to say Lauer defrauded them.

Lauer’s position was that the portfolios were legitimate marketing devices to inform potential new investors of the kinds of investments Lancer made. The portfolios often included stocks the funds once but no longer held. Since both potential and actual investors knew from the PPMs, Schwager’s book, and elsewhere that the actual investments were not disclosed, the model portfolios, which identified specific stocks, could not deceive.

The SEC’s PSMF asserted that “Lauer failed to disclose shell companies valued at more than $350M [million].”364 The single 132

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cite to this inflammatory, extraordinary, but confusing claim was Mayrand’s deposition, but she was simply quoting something the SEC had said previously.365 She had no personal knowledge of how Lancer operated or with whom Lauer communicated. At her deposition, the SEC’s Martin asked her a parade of objectionable leading questions, including questions that had no foundation or were otherwise improper (which may have helped convince her that Lauer had acted improperly). For example, “Even in your wildest dreams, did you imagine that the Lancer Fund would be artificially increasing the marked market price?”366 “Does this strike you as being a fraud?”367 “What would have been the University of Montreal’s reaction if they were aware that Mr. Lauer had created 440 million dollars of fictitious holdings in a hedge fund at that point?” 368 Layman Lauer, representing himself without an attorney, did not object to Martin’s fantastic questions.

The SEC’s motion for summary judgment ended with a plea to the district judge to enjoin Lauer from violating the securities laws permanently. The SEC also asked the court to disgorge from Lauer his unjust enrichment. It gave three figures for the court to consider: $590 million, $85 million, and $48 million. Threeand-a-half years after it filed suit, the SEC had not figured out how much Lauer enriched himself by his allegedly unlawful scheme.369 In opposition, Lauer filed two documents on March 26 and 29, 2007. First was his statement of undisputed material facts (DSMF) and his challenges to the SEC’s statement of material facts as to which there was no genuine dispute, which included page-after-page of excerpts from documents and testimony given in depositions in SEC v. Lauer or the trial of U.S. v. Kelly.370 The other was his memorandum of law.371 Lauer’s opposition quoted freely from the PPMs. For traded securities, Lancer’s directors and its auditor PricewaterhouseCoopers set the NAVs of the individual stock at market price or, more often, at a discounted market price, sometimes as much as fifty percent below it. Not only did the SEC fail to prove that that price was unlawful, but the PPMs, 133

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the contracts between the sophisticated investors and Lancer Management, specifically authorized the use of market price for purposes of setting fees: The Board of Directors of the Fund, in consultation with the Investment Manager, will value the securities held by the Fund in accordance with the Fund’s Articles of Association. When no market exists for an investment or when the Board of Directors, in consultation with the Investment Manager, determines that the market price does not fairly represent the value of the investment, the Board of Directors of the Fund, in consultation with the Investment Advisor, will value such investments as it reasonably determines.372 Judge Ralph K. Winter of the United States Court of Appeals for the Second Circuit, who also was a professor at Yale Law School, wrote the same year as the SEC filed suit, “Where a private transaction imposes no substantial cost on society or third parties, the parties to it should be allowed to arrange their affairs in a way that satisfies them rather than some distant official.”373 Judge Winter could have been describing Lancer Management.

To establish that the SEC omitted evidence that created an issue of fact that precluded the entry of summary judgment, Lauer spent about one-half his opposition quoting sworn testimony.

The witnesses were licensed by the SEC and knew the rules applicable to trading securities. Broker John Doyle, who was lead trader and Kelly’s and Huard’s superior at Shamrock Partners, one of the firms used by Lancer Management to execute its trades: (“Q. As far as you were concerned, Lancer was complying with the law, right, sir? A. Yes.”) 374; ousted offshore-fund director and head of Hermitage Capital John W. Bendall, Jr. (“Q. Did you at any time during the time period you were acting for the account of Lancer believe that Lancer was attempting to manipulate the market price of any security? A. No.”); Lancer employee James Tsakni, assistant to Hauser who communicated regularly with brokers (“Q. So the orders that you gave to executing brokers as

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far as you know were legitimate? A. As far as I know, yes.”). Lauer quoted additional cross-examination of Tsakni: Q. At any time was there a discussion of doing anything deceitful vis-à-vis the investors? A. No. Q. Were there any discussions that you recall about doing anything improper as far as the market activity is concerned? A. No Q. In the morning meetings, do you remember anyone suggesting a strategy that would artificially inflate the Lancer portfolios? A. No.375 Andrew Pennecke, the Bank of America account representative for Lancer who succeeded David Newman, who went to work at Lancer Management, testified at a deposition noticed by the SEC and was cross-examined by Lauer: Q. In your dealings with Lancer, you have testified that your primary contact [at Lancer] was David Newman, is that correct? A. Yes...

Q. But previous to September of 2002, which is when negative publicity began [to] surround Lancer, do you recall speaking to me? A. I don’t recall ever speaking to you.376 The SEC had stated in its statement of undisputed material facts, “Harry Lander [an employee of Lancer Management] left his job as a trader for Lancer because, among other things, he felt it was a Ponzi scheme.”377 In his deposition, Lauer asked Lander, “So again, your departure in March or April of 2002 I believe you said was a function of losses that you generated for Lancer and our conversation and my decision that it would be better that you move on; is that correct?” Lander answered: “That is correct.”378 Lauer included that testimony in his opposition.

Cowen agreed it was not Lauer who provided instructions to brokers but wrongly identified Garvey, not Hauser, as the person who told traders which trades to make, demonstrating Cowen’s lack of knowledge of Lancer’s basic operations. In U.S. v. Kelly, Cowen testified: “Mr. Garvey would provide instructions to others in Lancer to, for the purchase of stock, and he would make direct calls to Shamrock for the purchases of stock on the last 135

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day of the month. These were decisions made by Mr. Garvey.”379 How the United States government could rely on such a defective witness has never been explained.

Lauer’s opposition also quoted trial testimony given on October 8, 2003, by Fordham Law School Professor Stephen Thel, defendant James Kelly’s expert witness in U.S. v. Kelly. As noted above, the SEC had no expert on these issues: Q. Okay. Have you heard of a practice called marking the close? A. Yes, I have.

Q. What is that practice? A. For a variety of reasons, the price of a security at the end of the day may be important, and to mark the close is to make the last transaction so that you set the closing price...That’s the practice of buying a transaction, setting the price at the end of the day.

Q. Is that practice prohibited by any of the rules and regulations, securities rules and regulations? A. No, the rules and statutes don’t prohibit that practice...

Q. Are you aware of the attitude of the SEC toward this type of practice? A. I think I am.

Q. What is that? A. The SEC’s attitude is quite hostile to marking the close and trading for the purpose of moving price.

Q. Is that the same as saying it’s illegal? A. No, it’s certainly not. The SEC has authority to adopt rules, but they haven’t done so. Being hostile is not illegal.380 Thel described what more than influencing or setting the closing price of a stock was needed to prove that a purchase was illegal. He answered that the prosecutor would have to prove such things as fictitious accounts, wash sales, after-hours sales, the use of nominees, the hyping of stocks, and the importance of dominating the market for weeks, or months, not hours or days. None of these was present in SEC v. Lauer. The expert had testified in a related federal case and seemed responsible at least in part for Kelly’s victory against the government. (Lauer quoted a longer excerpt from Thel’s testimony in his motion to obtain money to hire Thel as an expert.)381 136

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Lauer’s discussion of legal precedents was limited but cogent. He relied upon U.S. v. Mulheren, 382 a decision by the U.S. Court of Appeals for the Second Circuit that reversed a conviction for stock fraud, a case on which Thel also relied.

The Second Circuit’s decisions on securities laws have been well respected; the court is based in Manhattan and frequently deals with securities violations committed on Wall Street. Mulheren concluded: “Allegations that a defendant was motivated to commit securities fraud to enhance his incentive compensation or to raise capital are inadequate to establish scienter because the executives of virtually every corporation in the United States would be subject to fraud allegations...When a transaction is effected for investment purposes,...there is no manipulation, even if an increase or diminution in price was a consequence of the investment.”383 Lauer was telling Marra that the law allowed Lancer Management to buy and sell stock at any price it chose. Even if Lancer sought to raise the prices of the stocks it held and did that to enhance its and its owners’ compensation or raise capital, Lancer and its owners were acting lawfully unless they were engaging in other substantial improper activities.

The SEC challenged Lauer’s opposition with a motion “to strike selected exhibits,” including “excerpts of testimony given by a purported expert witness (Thel) from a criminal proceeding (USA v. Kelly) to which neither Lauer nor the SEC was a party.”384 The SEC’s motion to strike Thel’s testimony was baseless, indeed, ridiculous. It is well established that there is no requirement that sworn testimony must be in a proceeding in which one or both parties had participated. Any sworn testimony or statement is admissible in a summary judgment motion filed under Rule 56(c) of the Federal Rules of Civil Procedure, and thousands of cases say so. For all practical purposes, no limits exist on summary judgment to the use of sworn trial and deposition testimony, affidavits, and declarations, a fact that is well known to all practitioners. Thel’s testimony, moreover, was in the highest class of evidence employed on summary judgment. A federal judge 137

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had already admitted the testimony into evidence at a trial-and it had been subjected to cross-examination, unlike an affidavit. 385 In fact, Lauer had satisfied the SEC’s and Marra’s contrived standard, although Marra ignored this fact. The plaintiff was the same in both cases, and the plaintiff had the same incentive to challenge that testimony. The SEC is part of the United States government, which unsuccessfully prosecuted U.S. v. Kelly. In addition, the Federal Rules of Evidence give special status to the testimony like that elicited in U.S. v. Kelly. Not only was Thel’s testimony admissible on summary judgment, but it was also directly admissible at a trial because the opposing party had possessed the opportunity and motive to challenge it. Lauer’s attorney could have read the testimony to the jury.386 How could an experienced judge in both state and federal courts have made this mistake unintentionally?387 The SEC simultaneously filed a reply to Lauer’s opposition to its motion for summary judgment. The SEC’s response was replete with words like “often false” or “largely unsupported” or “oftentimes patently false,” along with nonlegal terms like “overwhelming evidence” supported the motion.388 The SEC asserted: “Evidence of Lauer’s scienter is plentiful...This pattern of deception is enough to establish Lauer’s scienter.”389 These claims were simply not pertinent to motions for summary judgment. The SEC conspicuously ignored the operative word “undisputed.” The burden was on the SEC to show that Lauer did not dispute the material testimony on which it relied. Only then could a court award summary judgment. Its claims came nowhere near meeting that burden. “Enough” does not cut it.

One section of the SEC’s reply to Lauer’s opposition was headed, “Lauer’s Criticism of Cowen and Huard Goes to the Weight of Their Testimony, Not Admissibility,” which argued that under the Federal Rule of Evidence 601, anyone, including felons, could testify. Rule 601 provides: “Every person is competent to be a witness unless these rules provide otherwise.”

The SEC’s section concluded, “Lauer is free to challenge their statements...but he is not entitled to have their testimony excluded.”390 138

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Aside from the fact that Lauer did not seek to exclude the testimony of Cowen and Huard, the SEC’s argument was correct in saying the testimony could not be excluded. Rule 601 saw to that. The SEC’s argument, however, conclusively conceded a fatal flaw in its motion for summary judgment. The essence of summary judgment is the absence of credibility issues; issues of credibility on material issues preclude a grant of summary judgment since the district court must construe all statements in favor of the nonmoving party, Lauer. The SEC’s inexplicable admission that its two most important witnesses had (serious) credibility issues “that Lauer is free to challenge” was a remarkable concession that alone required Marra to deny its motion for summary judgment.391 It was like not knowing in a chess match which way a chess piece can move. It seemed that no sensible judge could grant the SEC’s motion.

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Summarily Judged It took a full year for Marra, well known to be a slow judge,392 to grant the SEC’s motion to strike several exhibits to Lauer’s opposition, including probative and decisive testimony from the trial in U.S. v. Kelly, while Lauer and his family suffered.393 The SEC had contrived a rule out of whole cloth: to use trial testimony from a different case on summary judgment, the party against whom the testimony is used in the second case had to have been a party in the first case. Employing that invented rule and citing no authority, on March 7, 2008, Marra wrongfully struck Lauer’s reliance on critical sworn witness testimony given in a federal court in U.S. v. Kelly.394 After waiting six more months, Lauer received Marra’s decision granting the SEC summary judgment on September 24, 2008,395 one year and nine months after the SEC filed its motion and after the DOJ had indicted Lauer for essentially the same conduct as the civil complaint, discussed below in Chapter 15.

Marra entered a permanent injunction against Lauer, ordered him to pay disgorgement and interest in amounts to be computed later, and reserved jurisdiction to impose a civil monetary penalty against him. Astonishingly, even though he struck Lauer’s reliance on testimony from U.S. v. Kelly, Marra’s decision without explanation relied on testimony from that same case seventeen times to grant the SEC’s motion for summary judgment against Lauer, a case in which Lauer was not involved.396 This provided 140

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further evidence that no unintentional mistake had been made.

Marra would let the SEC do anything it wanted. His prejudicial double standard was irrefutable.

Marra’s opinion began with a page-and-a-half discussion of the law of summary judgment. The law is not complicated. The moving party, i.e., the SEC, must demonstrate its entitlement to judgment as a matter of law based only on undisputed facts, making all credibility judgments in favor of the nonmoving party. But that was not what Marra wrote (with emphasis added): “The failure of proof concerning an essential element of the non-moving party’s case necessarily renders all other facts immaterial and requires the court to grant the motion for summary judgment.” Henderson v. Carnival Corp., 125 F.Supp. 2d 1375, 1376 (S.D. Fl. 2000). Lauer presents lengthy challenges to the SEC’s Statement of Material Facts as to Which There Is no Genuine Issue to be Tried (DE 1744) but these challenges consist mainly of unsupported hyperbole demonstrating nothing of probative value and are therefore properly disregarded...

[The undisputed facts] are meticulously supported by evidence in the record, which evidence Lauer has not controverted by any evidence of his own.397 Initially, Marra’s quotation from Henderson v. Carnival Corp. made no sense. There is no such thing as “an essential element” of a defendant’s case. To defeat a motion for summary judgment, the non-moving party only must dispute a material fact of the moving party.398 In making the nonsensical statement, Marra demonstrated fundamental confusion about the nature of summary judgment. Second, the clause, “which Lauer has not controverted by any evidence of his own,” was demonstrably and indisputably false. So was the statement that Lauer had presented “nothing of probative value.” Lauer had supplied page after page of sworn testimony that there was no manipulation by him. The witnesses were all SEC witnesses, and the testimony was from the same depositions on which the SEC relied. How a United States judge could state that Lauer had not provided exculpatory evidence in face of the record in SEC v. Lauer is inexplicable.

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Marra wrongly demeaned the detailed evidence presented

by Lauer and discussed in the preceding chapter as unsupported “hyperbole.” “Hyperbole”’ means an exaggeration, which, of course, was a forbidden credibility judgment in favor of the moving party. Marra was broadcasting that his decision was flawed! The witnesses that the SEC called had repeatedly testified on cross-examination without objection that Lauer had done nothing wrong, and also included more specific statements in their testimony, such as that Lauer did make stock trades, that he did not tell his workers to mark the close, that he did not manipulate stocks, and that the alleged fake portfolios were “model” portfolios. Under the law, Marra, who simply ignored the specific testimony on which Lauer relied, had to accept the testimony quoted by Lauer as true. Marra also said Lauer’s opposition consisted of “mainly” of hyperbole. So what was the balance of Lauer’s evidence that was not hyperbole and what was wrong with it? Marra did not say.

After saying the facts were mainly taken from the SEC’s statement of material facts, Marra said, “Where Lauer has presented undisputed material facts supported by the evidence, these facts have been added below.”399 Marra’s combining Lauer’s undisputed facts favorable to him with the SEC’s statement of undisputed material facts favorable to it further demonstrated Marra’s lack of a grasp of summary judgment. The issue was whether Lauer disputed the SEC’s purported undisputed facts.

The nonmovant does not need to present undisputed facts.

The statement that the SEC’s allegedly undisputed facts “are meticulously supported by evidence in the record” was hyperbole as well as irrelevant. The SEC’s statements may be supported, but they had to be undisputed and not require the finder of fact to believe the witness, i.e., make credibility judgments. There were concededly factual disputes and issues of credibility. Marra also improperly made inferences in favor of the SEC. One of the most indefensible was Marra’s repeated inference without analysis or evidence (copied from the SEC’s statement of material facts not in dispute) that Lancer’s success in a bear market was the result of Lauer’s fraud rather than his abilities.400 142

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Lauer had repeatedly argued that he could not have manipulated closing prices because Lancer operated through independent brokers who themselves had to place orders with the market maker in the security. John Bendall, a director of the offshore funds and the head of Hermitage, one of the principal independent trading firms that traded for Lancer, testified under oath to precisely that. Marra wrote that Bendall “claims [sic] that he could not manipulate stock prices because he is not a market maker and clears through Pershing” and that Hermitage was not a market maker for any security that Lancer Management purchased through Hermitage.401 Marra made another impermissible credibility judgment. In fact, no one contradicted Bendall’s statement.

Marra rejected Bendall’s testimony not only because it was somehow “hyperbole,” but also because “Bendall suffers from memory loss due to depression and brain hemorrhaging from receiving a blow to the head, and was on Valium and antidepressant[s] during his deposition,” an impermissible credibility judgment and one based on superficial and marginal evidence.402 Under Federal Rule of Evidence 601, a judge must accept any witness’s testimony as true when presented by the nonmoving party, as noted at the end of the preceding chapter. The former Lancer Offshore and Omnifund director Bendall testified at length and quite coherently that Lauer was not a trader: Q. Did you at any time during the time period you were acting as broker for the account of Lancer believe that Lancer was attempting to manipulate the market price of any security? A. No. Q. And if I understand your testimony correctly, you received trading directions from one or two people; is that correct? A. No, it could be one of three people...

Q. And that person was not Mr. Michael Lauer, is that right? A. He was not.

Q. And to your knowledge Hermitage was not acting as a market maker for any security that Lancer purchased through Hermitage; is that correct? A. That’s correct. 403

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Bendall also testified that Lancer Management’s Eric Hauser “had complete control” over the trading strategy at Lancer and that Michael Lauer’s role was researching stock and communicating with investors, testimony that is quoted in the endnotes.404 Bendall was running his company, Hermitage Capital, when he gave his testimony, which he had done for twenty-five years. (The SEC conceded that “Bendall also controls Hermitage Capital Corp.”

405 ) Someone in the position of Bendall would have had to have been quite far gone not to remember whether his company was the market maker in the stocks it traded. That was an essential and integral aspect of trading. Bendall was competent to be a witness and his testimony alone created an issue of material fact.

Marra found for the SEC without identifying a single trade that Lauer allegedly manipulated or that any specific action of his violated any of the federal securities laws, yet found that “as of December 31, 2002, the NAV of Offshore was overstated by least 26% or $217M [million].”406 It was like charging someone with perjury without identifying a single false statement or with murder without identifying a victim.

Marra’s discussion of allegedly undisputed facts started on page 4 and ended on page 43 of his typed opinion. As Lauer read Marra’s opinion, he realized it seemed identical to the SEC’s Statement of Material Facts (PSMF). As he read on, he saw a spelling, then a typographical, error. In paragraph 25 on page 16 of Marra’s opinion and elsewhere, James Tsakni, a former employee of Lancer Management, was mentioned in the text and footnotes. In one footnote, however, the name was misspelled “Tskani.” Lauer turned to the SEC’s PSMF, and, sure enough, the identical misspelling was there.407 Not only did Marra copy the SEC’s submission word for word, but he even copied it letter for letter, comma for comma, and typographical error for typographical error.

Comparison of the two documents (done in an endnote) revealed at least a dozen instances of copied typographical errors, including sentences in footnotes that ended with a semi-colon or no punctuation, missing paragraph signs and parentheses, an extra space between the end of an abbreviation of a sentence 144

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and the period, and a missing numeral. 408 Marra also copied bizarre, nonessential, unsupported, fantastic, and obviously false statements, such as, “Lauer hid his compensation from the IRS by failing to declare more than $21 million he received during 2000 and lying about the existence of his offshore bank account into which he funneled millions.”409 There was no explanation how Lauer’s accountants who prepared his tax returns could have missed this or why the IRS did nothing. Even though it conducted its own investigation of Lauer’s alleged offshore account, the IRS never acted against Lauer, which suggests the SEC’s “undisputed facts” were false. (Even if the SEC’s allegations about Lauer’s failure to report income and the offshore bank account were true, they were not “material” facts that established securities fraud by inflating fees received by Lancer Management. However, the SEC claimed they were essential and, of course, they were disputed, unsupported, and false.)

Marra had simply scanned the SEC’s lengthy submission (and made a few cosmetic changes),410 a procedure that many courts have criticized (discussed in Chapter 17, below). Nevertheless, it took Marra twenty months to release his opinion scanned from the SEC’s submission, while Lauer suffered from the indecision and the freeze order. The august power of a United States District Judge had descended to, “Where Do I Sign?”

After the statement of material facts, Marra provided a 21page “Discussion,” which consisted of wholesale incorporation of the SEC’s motion for summary judgment, which also was filed before Lauer’s opposition, also with a few unsubstantial changes.

Marra’s pages 43 to 49 were identical to the SEC’s motion, with the omission of a few short passages. Marra changed some SEC topic headings: “1. Lauer Made a Plethora of False Statements and Omissions” became “1. False Statements and Omissions.”411 Marra also removed some boldface and underlinings. Pages 49 to 61 also were virtually identical to the SEC’s motion, with some of the same kind of cosmetic changes as well as the subdividing of paragraphs into smaller units.

The SEC’s principal charge in the case was that Lauer arranged to set the closing price of stocks at a particular dollar 145

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figure and that such an action should be found to have violated the securities laws. However, the SEC’s motion was utterly silent on whether the evidence it presented constituted a violation of the securities laws. It was silent even though years earlier, Stephen Thel had testified in U.S. v. Kelly that buying stock to achieve a specific price without more did not violate the law, and Kelly was acquitted, and Lauer had quoted his testimony and presented other authority to Marra in his opposition. Like the SEC’s motion, Marra’s opinion included no legal discussion of what constituted unlawful stock manipulation under the federal securities laws.

Marra also made other fundamental errors in his opinion.

He falsely said that Lauer was a “director” of the hedge funds.412 Investors in the offshore funds elected the independent directors, who were in charge of the offshore funds. The power of directors was considerable, and Lauer’s position would have been far more vulnerable if he had been a director. In fact, Lauer had repeatedly argued that the directors were in charge of the hedge funds, not he. The existence of outside directors was an integral component of Lauer’s defense. Directors made the key decisions. Marra did not comprehend Lauer’s opposition.

Marra also ignored Supreme Court decisions when he concluded Lauer was a “control person” under federal securities law with respect to the hedge funds, a basic and damning mistake explained in an endnote. Marra did not examine the facts concerning Lauer’s activities, as the decisions required.413 Marra’s statement of facts spent two pages discussing six witnesses who pleaded the Fifth Amendment privilege against self-incrimination. Marra drew adverse inferences against Lauer because witnesses, some of whom Lauer did not know, pleaded the Fifth Amendment. Marra concluded, “that evidence of a non-party’s invocation of the Fifth Amendment privilege is admissible so long as it is relevant, and its probative value is not outweighed by the danger that it may unfairly prejudice the party to that suit.”414 That was not and is not the law. The case Marra relied on permitted a judge in limited circumstances to use the assertion of the privilege by a corporate officer against 146

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the corporate entity. It also required an analysis of the prejudice to the party to use a corporate officer’s Fifth Amendment plea against the corporation.415 It is always improper to use a plea of the Fifth Amendment against any other individual. 416 Lauer had never once refused to testify of Fifth Amendment grounds or otherwise. The SEC did not make that argument on the subsequent appeal, even though it relied on other portions of Marra’s opinion.

Marra also erred in connection with the SEC’s charge that Lauer violated the Investment Adviser’s Act of 1940. Marra copied the following passage from the SEC’s motion: As demonstrated above, Lauer and Lancer Management violated Sections 206(1) and (2) of the Advisers Act, because the SEC has shown all the elements for liability under Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act, which are more stringent than the requirements to violate Sections 206(1) and (2) of the Advisers Act.417 Both the SEC and Marra misstated the law. To violate the Investment Advisers Act, one must have been acting as an investment adviser, as that term is defined in the act. Moreover, a person must have been in the “business” of acting as an investment adviser, which is not required with the other securities statutes. However, there was no evidence that Lauer acted as an investment adviser, much less that he was in that business, as opposed to managing hedge funds, selecting companies in which to invest, and making pitches to sophisticated clients and potential clients of Lancer hedge funds. The SEC never identified anyone for whom Lauer allegedly was the investment adviser.

Later, on appeal, the SEC’s appellate section again refused to defend Marra’s opinion.

While technical, the doctrine of collateral estoppel played an important role in SEC v. Lauer. The SEC’s only support for summary judgment not dependent on witness testimony was a claim of collateral estoppel. The doctrine is born of judicial 147

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economy and common sense: A person should not get repeated chances to litigate an issue. Once a court decides a fact against a party, he may be (depending on the circumstances and applicable federal or state law) foreclosed from relitigating that issue in other lawsuits, including against other parties. Collateral estoppel is a familiar legal doctrine. But it did not apply in SEC v.

Lauer, despite the SEC’s claim and Marra’s acceptance of it.

After the SEC sued Lauer in July 2003, private parties brought a California state-court action against him and others based on the alleged manipulation of a single stock (TGFP), which was also involved in SEC v. Lauer. The case was Hempstead v. Total Film, et al., No. SC 071112, L.A. Cal. Super. Ct. Lauer did not defend that case, and a default judgment was entered against him. Lauer did not defend the case because Judge Zloch had ordered him (and others) not to. Zloch’s Case Management Order of January 8, 2004, ordered all related litigation outside of the Southern District of Florida to stop (or be transferred to the Southern District of Florida) and prohibited Lauer and all others from participating in other related cases.418 The order plainly applied to the proceeding in California state courts. Lauer filed a notice of Zloch’s order with the California court.419 Lauer explained this in his opposition to the SEC’s motion for summary judgment.

Ignoring Zloch’s order to halt the litigation, the California state-court trial judge wrongly entered default judgment against Lauer. With full knowledge of the facts, Marra accepted that illegal default judgment as binding Lauer in SEC v. Lauer. In plain English, Zloch had lawfully ordered Lauer not to defend the case, Lauer obeyed the order, then Marra punished Lauer for obeying Zloch’s order. Even if one were to ignore this outrage, there was more. At most, the California judgment was collateral estoppel with respect to the issues in the California case. That case, however, involved only one of the many stocks at issue in SEC v. Lauer. Thus, the doctrine of collateral estoppel was totally inapplicable to the great majority of claims against Lauer in SEC v. Lauer.420 Furthermore, the authority on which Marra relied had nothing to do with collateral estoppel; it was dealing with rulings in the same case.421 148

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Despite his preoccupation with his pending criminal case (discussed in Chapter 15), Lauer had no choice but to spend his time and energy trying to reverse the grant of summary judgment entered against him. It was not easy for someone facing a prison sentence of twenty or more years to do.422 The tone of Lauer’s motion for reconsideration, however, was not likely to endear him to Marra: “The Motion seeks relief from the Order, pursuant to Rule 60 of FRCP [Federal Rules of Civil Procedure], because the text of the Order unmistakably indicates that the Court, likely through inadvertent error, omitted reviewing the Defendant’s Response/Opposition to Plaintiff Securities and Exchange Commission’s Motion for Summary Judgment.”423 Lauer is one who gets to the heart of the problem.

Lauer told Marra that rather than being meticulous, the SEC had acted improperly. “In fact, contrary to the Court’s good faith belief cited in the Order...the Court was being victimized by the Government’s evidence of suppression and manipulation...[in that it] manipulatively withheld from the Court the exculpating cross-examination sections of depositions of the same witnesses.”424 Lauer commiserated with Marra.

Thus, he said that “the Order’s sinister reading of Jimmy Tsakni’s (who was a trading assistant to the Lancer’s senior trader, Eric Hauser) perspective would not have occur[ed] if the Court had reviewed the Response (Response Ex. 12), or saw Tsakni’s entire deposition.”425 Lauer went on to discuss the extensive exculpatory evidence in his favor that required denial of the SEC’s motion, including Bendall’s testimony that the charge against Lauer was “impossible to do...I’m not going to manipulate a stock and I can’t if I wanted to...”426 Yet the SEC asserted, and Marra copied, “Lancer and Lancer Management engaged in this manipulative activity, through several brokers,” citing only Huard, a broker at a different company, as a source.427 Lauer’s motion to reconsider the grant of the SEC summary judgment reproduced additional lengthy exculpatory quotations from depositions the SEC took in the case, including pages of Bruce Cowen’s deposition. Lauer pointed out that felon Cowen was the only person who claimed to have observed 149

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Lauer possibly give an arguably unlawful order (one and only one – “I mean, I only heard once”428) – allegedly made about Lighthouse Fast Ferry to John Bendall, who testified that to his knowledge Lauer had not attempted to manipulate the price of any stock.429 Manipulation of Lighthouse was economically irrational because it was such a small holding. Moreover, much of Cowen’s testimony supported Lauer’s version of the facts. The Federal Rules of Evidence and countless cases required Marra to consider the additional portions of the depositions that Lauer presented.430 Lauer was destined to wait a long time for a decision on his motion for reconsideration of the award of summary judgment.

In fact, the next significant communication he received from Marra was an order setting a hearing on disgorgement. Evidently, mimicking the Queen in Lewis Carroll’s Alice in Wonderland, Marra was going to proceed with a hearing on how much money he was going to make Lauer surrender before he finally resolved whether Lauer had violated the law.431 While this book is factual, I will digress and speculate here on what led Marra to grant the SEC’s deficient motion for summary judgment and to scan pages of the SEC’s motion as his opinion, a conclusion I reached many months after I started representing Lauer in January 2012. It seems to me (and to Lauer) to be the most likely explanation for Marra’s action.432 I should note that none of the explanations we considered exonerated Marra.

Marra was confronted with a motion for summary judgment in a complex and challenging case in an unfamiliar legal area.

He had not held a single hearing on the merits, possibly because he would have had to engage the lawyers, and he was insecure in his command of the facts and the law. Marra usually decided motions on procedural grounds, such as that Lauer failed to consult with the SEC attorney before he filed a motion, rather than tangle with arcane substantive issues. A year went by after the SEC filed its motion for summary judgment, and Marra had not confronted the SEC’s motion. But he could not ignore it forever.

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Then, in early 2008 a federal grand jury indicted Lauer in U.S. v. Lauer on substantially the same charges that the SEC had brought against him.433 Based on his experience in the Florida state court supplemented with now over five years in the federal system, Marra may have concluded that Lauer could not resist the pressure to plead guilty to obtain a sentence greatly reduced from the thirty years indicated by the Federal Sentencing Guidelines (because of the enormous sums involved) if he were convicted on a substantive count following a trial. Since something like ninety-seven percent of criminal defendants get convicted in the federal courts one way or another, Marra may have thought that Lauer was certain to accept a plea bargain. In that situation, he would not appeal a grant of summary judgment entered against him in the civil case for the obvious reason that he would have admitted his guilt in the criminal case. Thus, the entry of summary judgment would get lost in the shuffle.

So, Marra decided he would return to the summary judgment motion and wrap it up. He would first grant the SEC’s motion to strike much of Lauer’s key evidence, which he did three weeks after the indictment was unsealed. Writing a difficult opinion in a complex case was more difficult. After unsuccessful attempts, he decided he would copy verbatim Martin’s initial statement of undisputed material facts, make a few stylistic changes, and combine it with Martin’s discussion of the law, with a little editing to make it read like a judge’s opinion. Not an ideal or even desirable solution, especially since it perforce ignored Lauer’s subsequent detailed response that he filed in opposition to the SEC’s motion, but it would have to do.

Marra’s secretary made it easier by using modern technology to scan Martin’s statement of undisputed material facts and large portions of his legal discussion. Marra may have had some reservations about doing that, but the facts and law were so complicated. Who would care or even notice that he plagiarized a lengthy document and ignored dispositive evidence Lauer had submitted in response? Nineteen months after the SEC filed its motion for summary judgment, Marra issued his opinion

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granting the SEC’s motion for summary judgment. He had executed his judicial farce.

As I said, I do not know whether this is what happened, but I believe it did.

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Disgorged An integral part of SEC v. Lauer, if the SEC won, was for Marra to decide how much money Lauer would have to disgorge as his “ill-gotten gains.” Marra’s opinion and order on summary judgment did not specify the amount of disgorgement, interest, and civil penalty to be awarded against Lauer, but left them for a later evidentiary hearing.

Disgorgement is a venerable equitable remedy designed to deprive the perpetrator of fraud his unjust enrichment caused by his wrongdoing, but not to act as a punishment. Other procedures serve to punish misconduct, such as prison and fines.

In most cases, the amount to be disgorged is readily computable.

For example, if a con man sells a novice the Brooklyn Bridge for $1 million, disgorgement will require the con man to return the $1 million (plus interest). Or, if a bogus corporation issues $10 million of worthless stock, disgorgement requires the return of each purchaser’s investment (again, with interest). Because it was equitable relief and not a common-law award of damages, a judge rather than a jury would decide the amount.

The proper disgorgement against Lauer was simple conceptually. Lancer Management was receiving as fees a percentage of both the total value of the investments and the increase in value of the investments, generally one percent of the total amount under management and twenty percent of any increase in the value of the investments each year. Lauer’s alleged 153

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scheme was to inflate the values of the hedge funds to obtain higher fees from the investors. The disgorgement would consist of the excess amounts of fees received from clients because of the alleged inflation of stock values.434 Of course, there would have to be many adjustments, but they had been computed every year

by Lancer Management and confirmed by Lancer Management’s auditors to compensate investors and Lancer.

Suppose, for example, Hedge Fund A held $100 million of the stock of XYZ Corporation on December 31, 2000, arrived at by multiplying the closing share price at the end of the year times the number of shares held. One year later, the same stock was worth $110 million because the stock’s price had risen ten percent. The manager of Hedge Fund A would receive from the investors one percent of $110 million ($1.1 million) plus twenty percent of the $10 million increase ($2 million), or $3.1 million for the year 2001. If the SEC claimed that the entire increase in value was fraudulent (fictitious), it would seek to disgorge $2.1 million from the manager.435 As SEC v. Lauer progressed, Lauer could not be sure how the SEC was going to proceed and he certainly did not know the amount the SEC claimed should be disgorged. Lauer filed a motion to obtain that information on January 24, 2005, one-andone-half years after the complaint was filed and two years before the SEC filed its motion for summary judgment. The motion sought “Specificity in the Amount of Possible Disgorgement.”436 Lauer complained that after eighteen months of litigation the SEC had stated neither a theory of disgorgement nor the amount which it sought to disgorge from him. The latter failure was particularly prejudicial because it meant that the court could freeze all his assets. If the SEC supplied a realistic figure for the disgorgement it claimed was due, Lauer could try to set aside that amount in escrow and recover access to the balance. He had been making that argument as early as September 2003, when he filed a twenty-page affidavit.437 Lauer made several factual points, such as the SEC had been inconsistent in the date the alleged manipulation began.438 More important, at the original ex parte TRO hearing, discussed 154

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in Chapter 5, the SEC’s Zinn admitted that the funds, through Lancer Management, owed Lauer $48 million, which did not include Lauer’s personal investment. This was the amount he was entitled to but had deferred receiving for five years. If, as was the case later, Marra found Lauer’s ill-gotten gains to be $43 million, that would be less than the funds owed Lauer. Therefore, the hedge funds would owe him $5 million. He argued that the proper amount of disgorgement should be zero, and there would be no prejudgment interest.

The SEC responded both with a motion to strike Lauer’s motion for information because Lauer had failed to confer in good faith with him about resolving the dispute before filing a motion and with opposition to Lauer’s argument.439 Lauer had not consulted with Martin because the rules were unclear, and it appeared that no one, including Martin, was consulting regularly at the time.440 In essence, Lauer was seeking discovery, not filing a traditional motion.

The SEC’s motion to defeat Lauer’s motion made two arguments.441 First, “Lauer’s Motion to Compel Disgorgement Amount is in reality yet another motion to dismiss the SEC’s Complaint and Modify the Asset Freeze Order.” It gave no reason why that was the case and cited only Lauer’s prior motions to dismiss the case and modify the freeze order. But Lauer’s efforts to alter the freeze order were directed at recovering from his frozen assets the use of his own money for him and his family immediately, based largely on their need. His current motion was to ascertain the total amount the SEC claimed Lauer improperly received from his fraud, which Marra would award if Lauer was found liable at the end of the proceeding. The SEC had radically and conspicuously misconstrued Lauer’s motion.

Second, the SEC argued that Lauer did not need the information sought. It was like a plaintiff telling a defendant in a personal injury action that he didn’t have to know how much the plaintiff was suing him for or not telling a criminal defendant what the maximum sentence was. Courts always require a plaintiff suing for money to state the amount of his claim before trial for various reasons, including to allow him to allocate his resources 155

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properly and facilitate settlement. The SEC’s opposition started: “Lauer has been given notice about the SEC’s legal theory of what constitutes Lauer’s ill-gotten gains and the approximate amount he would have to disgorge,” but did not say what he had said or where he had said it. He had not. There followed three distinct theories and corresponding amounts for disgorgement, which contradicted the SEC’s earlier statement.

Lauer raised over $1 billion dollars from investors and at the inception of this lawsuit over $600 million dollars of investors’ money remained invested in the [Lancer Funds]. Lauer may therefore be required to disgorge over $600 million owing to investors because when two or more individuals or entities collaborate or have close relationships in engaging in the securities laws violations, they may be held jointly and severally liable for the entire amount of the fraud. [Citations omitted.]... The Court could also hold Lauer jointly and several [sic] liable for all fees received by [Lancer Management]...In short, as Lauer was informed over a year ago, the Court could hold him liable for approximately $72 million received

by Lancer Management, which he controls. Alternatively, at a bare minimum, Lauer should be ordered to disgorge the full amount of monies that he received from Lancer Management and the Lancer Funds during the fraudulent time period, which began no later than March 2000. To date, the SEC has evidence to support that Lauer received over $600 million from these entities and over $44 million from 2000 through the present.442 Discovery requests are not answered with a multiple-choice test, especially not a confusing one. Moreover, Martin failed to list the obvious and only credible approach to disgorgement – the excess income Lauer supposedly received because of his unlawful inflating the assets of the hedge funds. Lauer had made a reasonable and straightforward request. It seemed he was entitled to an answer.

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Following the lead of Marra, Magistrate Judge Vitunac (to whom the motion was assigned) chose the procedural ground that Lauer had not conferred in good faith with Christopher Martin to learn vital information about how many tens, if not hundreds, of millions of dollars the SEC was seeking to take from him, even though the SEC’s response refused to give pro se Lauer any of the information he sought. It was clear that consultation would be fruitless.443 Martin, of course, had to know that the $600 million-dollar figure was bogus as a measure of Lauer’s supposed ill-gotten gains.444 Indeed, his motion for summary judgment had stated, “Lauer’s manipulation of the Funds’ holdings enabled him to illegally obtain tens of millions of dollars in fees by materially overstating the Funds’ valuations.”445 Why, then, did Martin proffer the fictitious $600 million figure? By floating that stratospheric number, he could be sure that Marra would deny Lauer’s efforts to unfreeze any portion of his assets, which would have allowed him to hire an attorney. While Lauer might be able to demonstrate that his assets were worth more than $43 plus million – the figure that Martin ultimately asserted years later as the total amount of money Lauer received during the identified fraud period – Lauer’s assets did not approach the $600 million figure advanced by Martin.

Two weeks after Marra’s order, Lauer refiled his motion, this time stating that he had conferred with Martin and that “it was apparent that the parties were still light-years apart as to the understanding of the statutory meaning of what the ‘disgorgement of ill-gotten gains’ constitutes.”446 Lauer’s memorandum ridiculed the SEC’s statement that he had provided Lauer with the amount of disgorgement sought.

The SEC’s response claimed that Lauer was filing a motion for reconsideration that the court should summarily deny; Lauer replied that he was trying to relitigate nothing. The court had not decided against his previous motion but had declared it void on a technicality. Lauer wanted specificity in the SEC’s theory and totals. He also correctly pointed out that none of the SEC’s theories had anything in common with alleged unjust 157

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enrichment. For example, the claim that relied on what Lauer had received during the alleged fraud period to measure his unjust enrichment neglected to consider that Lauer was operating on a cash basis while the hedge funds were on an accrual basis. Lauer was receiving from Lancer payments that he had earned up to years before the so-called fraud period and perhaps nothing that he had earned during it since he had deferred receiving compensation for five years. After three years, the SEC should have come up with a sensible theory, he argued.447 Vitunac denied Lauer’s motion, stating that it was “a thinly veiled effort to modify the Asset Freeze Order” and that “the SEC has provided Lauer sufficient notice of the approximate disgorgement amount so that he can defend this action.” Vitunac then added, “Although Lauer clearly refutes the amounts cited by the SEC, his objections do not automatically render the stated amount invalid. Rather, the final determination of the disgorgement amount, if any, will be made at the conclusion of this case.”448 This position was bizarre. In other words, a judge will allow the SEC’s range of “refuted” numbers to stand, even though they were false and clearly prejudiced Lauer by depriving him of specifics of the case against him in violation of the federal rules on discovery. Lauer would find out how much he owed in good time, namely, when the SEC tells him when it presents its evidence at the disgorgement hearing itself, perhaps years later.

So much for discovery.

Lauer, who was nothing if not indefatigable, filed a lengthy motion addressed to Marra, asking him to reject Vitunac’s order.449 Marra didn’t. He denied Lauer’s motion summarily: “ORDERED AND ADJUDGED that said motion be DENIED.”450 That is where things remained on disgorgement until after Marra granted the SEC’s motion for summary judgment three years later, the subject of the previous chapter.

In early 2008 the Department of Justice filed an indictment of Lauer, Garvey, and others in the Southern District of Florida, which is the subject of Chapter 15. With his criminal trial looming, Lauer asked Marra to postpone the disgorgement hearing he 158

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had set for December 12, 2008, so he could concentrate on the prosecution. This seemed a reasonable request since the criminal case could lead to twenty years behind bars (more than twenty years if he were convicted on multiple counts and the sentences were consecutive, which was possible). Also, Lauer had no money to disgorge in any event; Receiver Steinberg had it all, so the disgorgement would not change the circumstances. Without waiting for a response from the SEC, Marra denied Lauer’s motion.451 Not only would Lauer be diverted from the criminal case, but he would have to proceed pro se in the disgorgement hearing without the discovery to which he was entitled. He was flying blind in a crippled plane.

On December 9, 2008, Lauer filed a notice of appeal from the award of summary judgment to the SEC.452 The notice seemed improper on its face; there was no final judgment because the amount of the liability had to be determined, an essential part of a money judgment.453 The court of appeals dismissed Lauer’s appeal and returned the case to Marra.

However, Lauer’s notice of appeal was valid, which nobody at the time realized, or at least acknowledged. The notice of appeal was proper because Marra’s order contained a permanent injunction against Lauer’s engaging in the securities business.

Parties have a statutory right to appeal the entry of an injunction relating to their activities outside the courtroom. Indeed, quoting 28 U.S.C. § 1292(a)(1), the Judge William Pryor, Jr., has stated in another cases “We have jurisdiction over ‘appeals from...[i] nterlocutory orders...granting injunctions.”454 If Lauer had had counsel and pursued his appeal from the entry of a permanent injunction, he would probably have been able to postpone the disgorgement hearing until after the criminal case. Jurisdictional arguments are not easy, but they should not be beyond the competence of a federal court of appeals.455 For a second time, the Eleventh Circuit got its jurisdiction wrong, this time denying Lauer his right to appeal, rather than hearing a case that should not have been before it, namely, the sanctions dispute in 2007.456

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On December 11, 2008, a day before the hearing, the SEC filed a proposed “Order Setting Disgorgement and Prejudgment Interest Against Defendant Michael Lauer.”457 It was short and recited no facts but ordered Lauer to pay disgorgement, but left the amount blank. It also provided instructions regarding the payment of the disgorgement, and it explicitly maintained the asset freeze order.

Lauer appeared at the December 12, 2008, disgorgement hearing not only without a lawyer or expert witness but ignorant of what approach and what evidence Martin would use to prove the amount the SEC claimed Lauer should disgorge. At the hearing, Martin took an aberrant approach without offering any authority for his position and without explaining his failure to adhere to accepted measures of unjust enrichment.458 The SEC produced a single witness, Soneet Kapila, who had been hired by the receiver and paid for by the investors (including Lauer) out of the hedge funds that had been wrongly placed in receivership. Kapila was employed by the neutral judicial branch, not the executive branch to which the SEC belonged. Nevertheless, he was improperly called to testify on behalf of the executivebranch SEC.459 No one paid attention to that fact. Kapila, a CPA who had extensive involvement in fraud investigations, had no experience with hedge funds, was not a securities analyst, and was not involved in computing any purported overvaluations of the funds’ assets, so could not be effectively cross-examined.

His role in the case was narrow: “my role is limited to being a consultant and basically limited to being a testifying expert.”460 His final bill that he submitted to Marra for payment described his role as “Testifying Expert for the Receiver.”461 Kapila testified he did “a forensic analysis of the amounts that the funds and the management companies Mr. Lauer received in this matter,”462 i.e., he added up the numbers the SEC and the receiver provided him. The total (gross) amount that went to Lauer “directly or indirectly”463 during the alleged fraud period was $43,688,000, the lowest of the SEC’s multiple-choice answers in its discovery response on the issue.

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On cross-examination by Lauer, Kapila denied knowing how much he had been paid, a rather surprising development for a witness whose job was to crunch numbers. Later, Steinberg submitted to Marra and Marra approved without question payment to Kapila of $1 million for the period up to the disgorgement hearing and $1,514,991.40 as total compensation.

Missing was an explanation of, among other things, why a person paid for by the investors and hired to perform neutral, judicialbranch functions should be a witness for the SEC in pursuing its executive-branch law-enforcement assignment to ascertain whether and to what extent Lauer violated federal law.

When pressed for the source of his information, Kapila testified, “I got it from the Securities and Exchange Commission...”464 Kapila included a payment in his total without regard to whether the money Lauer received was income earned before the period of the alleged fraud and thus untainted, was a return of capital, or was reimbursement for expenses.465 He did this even though for years other courts have held that taking from a defendant all the money he received rather than his net profits (plus statutory interest) was unlawful.466 Gross receipts as a measure of disgorgement are universally rejected.

Kapila likewise ignored the admission made by SEC lawyer Zinn at the TRO hearing on July 10, 2003, and confirmed by PricewaterhouseCoopers’s certified audit of Lancer Offshore, that “at [Lauer’s] election he deferred another forty-eight million. dollars in fees which he has earned and is entitled to have.” Marra found as a fact that “PWC stated that it had conducted its audit in accordance with international auditing standards and Offshore’s financial statements presented fairly, in all material respects, in conformity with international accounting standards.”467 At the hearing Lauer repeatedly challenged the SEC’s approach and evidence and presented probative evidence that the valuations of assets held by the funds were substantially accurate, as demonstrated by the certified audits of PricewaterhouseCoopers.

Lauer also presented additional evidence that Lancer had deferred paying him for five years amounts he had earned before the alleged fraudulent period.468 Had Lancer lied to PWC, it would 161

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have been irresponsible and worse of PWC to allow its audits to stand. Yet, PWC never wavered in its defense of its audits; even after Steinberg sued it and settled the case, PWC still did not withdraw its certification.469 Lauer cross-examined Kapila about an SEC exhibit introduced by Martin at the hearing, a certified unqualified audit by PWC of one of the hedge funds, which alone established that $18,742,173 of income was incontestably earned before the alleged fraud. Kapila testified, “I don’t know what PricewaterhouseCoopers was doing, other than they were auditors of the financial statements.”470 Lauer asked, “How am I going to appeal an expert witness if he’s relying on a ruling I’m appealing?” Marra responded, “You’ll have to talk to the Eleventh Circuit on that one.”471 Ignoring Lauer’s evidence, arguments, and objections, Marra accepted the SEC’s novel approach, although Marra’s explanation made in response to an objection made by Lauer seemed to find that Kapila’s figure was unrelated to the amount of Lauer’s illgotten gains or disgorgement. Thus, Marra said, “[Kapila] didn’t say that he was basing his valuation on my ruling...[H]e didn’t value the portfolios...He’s just – again, he’s just pointing out where the money went, how much went where, when.”472 That was precisely Lauer’s point.

No evidence tied the amount Lancer Management, and eventually Lauer, earned during the so-called fraud period to the amount he physically received during the same time. There was no necessary connection between the two numbers, and, perforce, no testimony related one to the other. It was, in fact, evident that the two numbers were unrelated. The reason was simple, aside from the fact that Lancer Management and Lauer used different accounting systems. What Lancer Management received from the Lancer hedge funds and what Lauer received from Lancer Management was within Lauer’s sole discretion. He owned eighty percent of Lancer Management, and he decided how much the owners of Lancer would withdraw from the hedge funds of the total amount owed to Lancer. Money earned by the hedge funds did not become money earned by Lauer (or the minority owners) until he said so. He just as easily could have 162

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withdrawn nothing from the hedge funds during the so-called fraud period or withdrawn $48 million more than he did since the hedge funds owed Lauer that sum through Lancer . The amount Lauer physically received during the so-called fraud period had nothing to do with the amount of his allegedly illgotten gains. And nobody said it did.

On December 29, 2008, Lauer filed “Defendant Michael Lauer’s Proposed Disgorgement Order Finding,” which “respectfully requests that the Court adopt a finding of no disgorgement liability against the Defendant in the case of the SEC v. Lauer et al., and therefore, also, no prejudgment interest liability.”473 The thirty-five-page submission included, along with seven exhibits, various legal and factual arguments, such as the claims that Lauer was entitled to a $48 million credit and that prejudgment interest was impermissible for the undisputed reason Lauer had no access to the disgorged funds. It was another substantial effort on the part of Lauer.

The SEC moved to strike the submission: “Lauer has transparently submitted a supplemental brief or sur-reply under the guise of a ‘proposed disgorgement order” and that Lauer neither conferred with the Commission nor sought leave of the Court.”474 Yet this was Lauer’s submission on the merits of the amount of disgorgement, a crucial document, which was entirely appropriate when none had been submitted earlier. The SEC routinely included a proposed order along with its motions (as it did in this instance),475 so why should Lauer be permitted to file a counter-order? Moreover, Martin’s argument that Lauer should have conferred makes no sense in cases of dispositive motions and, in fact, the court rule did not apply to them. The rule, which is quoted in an endnote,476 by its terms applies only to non-dispositive “motions.” Moreover, it covers only litigants represented by counsel, although this was ignored at the time.

Lauer argued that what he submitted was a proposed order, just like the SEC had.477 The SEC’s reply ridiculed Lauer’s “frivolous arguments.”

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With a minor technical change, what Lauer had filed was a proposed order in form and substance, which was unquestionably proper even under the SEC’s highly technical standard. Orders can have lengthy explanations, as did Zloch’s six-page order denying Lauer’s recusal motion and Marra’s sixty-page decision granting the SEC’s motion for summary judgment. Lauer labeled his filing, “Defendant Michael Lauer’s Proposed Disgorgement Order Finding,” which certainly sufficed. But he ended his filing: “In Conclusion, the evidence abundantly documents that the Defendant owes no disgorgement or prejudgment interest, and consequently, the Court should issue an order finding that the Defendant is not liable for any of the SEC-sought funds.” That sentence suggests it is part of a brief or memorandum. To have complied with the rules without question, Lauer needed only to put a period after “interest” and add a signature line for Marra at the end of his submission. That was the total of pro se Lauer’s deficiency. Given that the law provides that filings by pro se parties should be construed liberally,478 Martin’s argument should have been rejected out of hand. But, once again, that is not what happened. Once again Marra’s order accepted the SEC’s presentation in its entirely: IT IS ORDERED AND ADJUDGED that Defendant Michael Lauer, a resident of New York, New York, shall pay disgorgement in the amount of $43,688,249.00, representing the ill-gotten gains he received as a result of his violations of the federal securities laws...In addition, Michael Lauer shall pay prejudgment interest in the amount of $19,908,558.74, for a total of $62,596,807.74...

The Court rejects Defendant’s defense that the amount of disgorgement should either be eliminated or reduced because all or part of the monies in question were earned as fees prior to the fraudulent period found by the Court.

All of the monies ultimately received by Defendants were acquired by the relief defendants [the hedge funds] during the fraudulent period as a result of Defendant’s fraudulent conduct. To hold otherwise would permit Defendant to profit from his wrongful conduct.479 164

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Marra’s statement, “All of the monies ultimately received by Defendants were acquired by the relief defendants [the hedge funds] during the fraudulent period as a result of Defendant’s fraudulent conduct,” was flatly contradicted by his own findings and the record.480 The receiver stated he recovered over $130 million from the sale of hedge-fund holdings.481 The hedge funds held significant holdings in actively traded companies with substantial assets. Indeed, the receiver wrote in a motion, “the Receivership Funds and Partners hold several positions consisting of securities issued by certain public corporations, which securities trade on public exchanges, including the New York Stock Exchange (NYSE), the American Stock Exchange (Amex), the NASDAQ National Market System (NMS)” and others.482 For Marra’s order to have been accurate would have required the hedge funds to have been worth nothing since Lancer was entitled to one percent of the total value of the funds’ holdings.483 Marra elsewhere stated that in 1999 and 2000, Lancer’s unlawful pricing of the NAV’s was substantially less than one hundred percent of the stocks’ value.484 And there was the SEC’s own admission made at the ex parte TRO hearing.485 Lauer filed an eighteen-page motion for reconsideration of Marra’s disgorgement order that included these arguments in greater detail, including that the amount of income Lauer deferred was earned before the fraud period and that the hedge funds had the assets to pay the amount deferred.486 Lauer argued that his position was consistent with the testimony of Soneet Kapila, the SEC’s expert.487 He again argued against the award of interest on money to which he had no access.488 This time, however, there was no question concerning his right to file a motion for reconsideration.

The SEC’s opposition stated that Lauer was simply repeating “the same arguments he has previously made”489; that the investors lost more than Lauer claimed the funds owed him; that Lauer had not satisfied the demanding standard for reconsideration (“an intervening change in controlling law, newly discovered evidence, or a need to correct a clear error or manifest injustice”); that exactitude is not required on disgorgement; and that Lauer 165

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should pay interest because he “should not be allowed to profit from his wrongful conduct.” The SEC called Lauer’s motion ridiculous, frivolous, outrageous, and insulting to the defrauded investors.490 What the opposition (and Marra’s order) did not do was answer Lauer’s arguments.

Marra did not rule on Lauer’s motion for reconsideration until the day before he entered final judgment on September 22, 2009, ten months after the disgorgement hearing, when he disposed of the SEC’s case against Lauer in the district court.491 By refusing to rule on Lauer’s motion in a timely fashion, Marra denied Lauer the right to learn whether his submission had been rejected on its form or merits. Marra effectively denied Lauer the opportunity to file a corrected motion that met all the technical requirements.

Judge Marra, with the help of Magistrate Judge Vitunac, had denied Lauer his most fundamental constitutional rights, just as Judge Zloch had. Having fled from the courts and other weapons of the tyranny of the Soviet Union and its pawns, Lauer had counted on the judicial system of the United States to give him a fair hearing. As much as the loss of the case to the SEC, Lauer was stung by the indifference and hostility of the judges of his adopted country. He would continue to fight back, as he did in Poland, although he could not guess to what result.

Finally, Marra entered a civil penalty against Lauer for $500,000, the amount the SEC sought.492 What made the award of the penalty unconstitutional was that at the disgorgement hearing, Lauer had unequivocally asserted his right to a trial by jury guaranteed by the Seventh Amendment regarding the amount of the penalty.493 THE COURT:...as I understand it, disgorgement is for the Court to determine, but a civil penalty requires a jury determination where a jury trial’s been requested...Mr. Lauer,...do you want a jury to make that determination, or do you want me to make that determination?

MR. LAUER: Your Honor, I’d like the jury to make the determination.494

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Marra denied all Lauer’s outstanding motions in September 2009 on the ground that they were moot or lacked merit and entered a permanent injunction against Lancer Management Group and Lancer Management Group II, as well as against Lauer.495 Marra’s order entering judgment was entitled, “Final Judgment Granting Permanent Injunction and Other Relief Against Defendant Michael Lauer.” Marra concluded: “There being no just reason for delay, pursuant to Rule 54(b) of the Federal Rules of Civil Procedure, the Clerk is ordered to enter the final judgment without further notice.”496 At common law, a losing party could not appeal until the claims of every party had been resolved. When one person sued another person and won or lost, that ended the case, and the losing party could appeal. However, if other parties or claims remained, there would be no appeal until everything had been resolved. Because that created long and sometimes prejudicial delays, Rule 54(b) of the Federal Rules of Civil Procedure was drafted to permit a district court to divide multiparty (and multiclaim) cases and allow one party’s case to be appealed while the remaining parties litigated their dispute in the district court when he concluded that that was in the interests of justice.497 The rule also said: “any order or other decision, however designated, that adjudicates fewer than all the claims or the rights and liabilities of fewer than all the parties does not end the action to any of the claims or parties and may be revised at any time before the entry of a judgment adjudicating all the claims and all the parties’ rights and liabilities.”498 SEC v. Lauer had multiple parties, including Lancer Management Group and Lancer Management Group II. At times the SEC and receiver treated the hedge funds as parties.

The receiver had brought many cases against suppliers, investors, and others under the umbrella of SEC v. Lauer and others under Steinberg v. Lauer. Also, the receiver and his professionals were applying for fees and expenses in SEC v. Lauer.499 The certification under Rule 54(b) meant the case would continue.500 However, it was not clear what the Rule 54(b) provision covered under Marra’s order or what remained in the district court after 167

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Marra’s “final judgment.” To repeat, only claims covered by the Rule 54(b) certification must be appealed.501 On January 12, 2010, the SEC filed a motion, which it noted was unopposed, to dismiss its claims for disgorgement, prejudgment interest, and civil penalties against Lancer Management Group LLC, Lancer Management Group II, LLC, Lancer Partners, LP, Lancer Offshore LLP, Omnifund, LLP., and the other entities owned by Lauer and Garvey that the receiver had placed in receivership with the approval of Zloch or Marra.502 The purpose was to give the receiver the opportunity to recover money for the investors. There was no mention of Rule 54(b) in that order, and the order did not end what remained before Marra. Marra promptly granted the motion on January 21.503 The dismissal of claims against the hedge funds. including for disgorgement, was further evidence that they were treated as defendants.

Aside from what remained of SEC v. Lauer, Lauer had his appeal in SEC v. Lauer. There were early deadlines, starting with a notice of appeal, which started the calendar in the Eleventh Circuit. Lauer had filed his notice of appeal on October 6, 2009.504 The next stage of the appeal process will be discussed in the next chapter. Most serious, however, was the indictment that had been filed against him in U.S. v. Lauer, discussed in Chapter 15. As Lauer saw it, SEC v. Lauer involved money, but U.S. v.

Lauer could land him in prison for the rest of his life. Even for seasoned Lauer, this was very serious. But the Eleventh Circuit could not be ignored.

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To a Higher Court Lauer’s reintroduction to the United States of Appeals for the Eleventh Circuit in SEC v. Lauer following the entry of final judgment against him came while he was immersed in his criminal case. Notwithstanding, he was required to pursue his appeal. While he believed he had a good case, he remembered when he lost his appeal from the contempt order and sanctions.

Appellate litigation is a specialty that requires a good legal mind, experience in doing legal research, an understanding of the appellate process as well as trials, and skill at making legal arguments. Of paramount importance is judgment, knowing which arguments have a chance of prevailing, and knowing how to frame arguments to maximize the chances of winning. These are different skills than negotiating a contract or even trying a case. Also, while laypeople see trials on television, most laypeople know little about proceedings in an appellate court. There are technical legal and procedural rules. Most appellate judges are very sophisticated, and untrained intuition does not take a litigant very far. To force a litigant to proceed without a lawyer, especially in an important and complex case, can be disastrous.

Many laypeople (and some lawyers) think an appeal is an extension of the trial, a rehearing before a more august and discerning panel of three judges in the federal courts. It is not.

An appeal reviews the trial judge’s handling of the case in the district court, focusing on the trial judge’s errors and whether the errors likely affected the outcome.

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The appellate process is more akin to the pretrial motion practice in which Lauer had been immersed, rather than a trial, but it is structurally different. An appeal is a legal argument before three judges with a set record that was established in the trial court. A party is not permitted to call witnesses on an appeal, despite what some television series say. The district judge gets the benefit of the doubt,505 except that the appeals court is required to review questions of law independently. Rulings that are debatable, such as many evidentiary rulings, are virtually immune from challenge. Since an appeal is a review of the trial judge’s handling of the case, it is rare for a court of appeals to reverse the trial judge unless the party appealing objected to the ruling at the trial and gave him the opportunity to correct his mistake.506 Even then, the error must be serious enough to warrant reversal; appeals courts often conclude that many errors are harmless and did not adversely affect the substantial rights of the losing party, and they affirm.

Appeals from grants of summary judgment are different from customary appeals, where a jury or a judge found for the other party after a trial. The trial judge granted summary judgment without seeing and hearing any witnesses. He decided that the law gave him no choice but to decide in favor of the moving party based on facts that could be viewed only one way. The issues are legal, not factual. Courts of appeals are required to decide appeals from the award of summary judgment de novo. Appellate judges approach the motion for summary judgment as though they were the first court to decide it. That means that the judges who sit as a panel on the court of appeals must give no deference to the trial judge but must read the record for themselves.

An appeal starts with the losing party’s filing a notice of appeal in the district court, a short document that identifies the proceeding, the orders appealed from, and the parties to the appeal. That is followed by filing a series of forms submitted to the appeals court, such as a form showing that the appellant ordered and paid for preparing all necessary transcripts. Once that phase is completed, the clerk of the court of appeals sets a briefing schedule.

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The first brief is the appellant’s, which argues that the judge committed errors of sufficient severity that the judgment should be reversed. You live and die by what you have argued below and then what you argue within the four corners of your initial appellate brief. However, in rare instances, a court of appeals reverses for “plain error,” usually in a criminal case. Rules and traditions govern the structure and length of the brief and how it should present claims of error. The brief must include a history of the case, followed by a statement of the facts necessary to understand the legal arguments, then the legal argument.

The rules require specific citations to the record. Distinct legal arguments must be presented separately, usually consecutively numbered with concise headings. Cases, law-review articles, and treatises should be cited to demonstrate legal errors. The law limits what sources are permitted. Current newspaper accounts are out. Precision is critical. So is focusing on the precise error addressed. Lauer was taking time from the preparation of his criminal case to write his brief. Not only was he distracted by U.S. v. Lauer, but three years had passed since the SEC filed its motion for summary judgment, and many of the events and documents were not fresh in his mind. Moreover, the appeal was costing Lauer money that he desperately needed to support his family and to pay for travel, room, and board in the criminal case above his $172 weekly allowance in that case. The fee for filing an appeal in 2009, for example, was $500. Copying, mailing, and other expenses brought the financial burden even higher.

Although he had filed hundreds of pages in the district court, Lauer had never written an appellate brief.507 It started strong, with a concise summary of his principal grievances, including that the district court had wrongly denied him funds to hire a lawyer, improperly ignored his evidence, that the evidence showed that he had committed no fraud, and that the disgorgement and award of interest were without basis. Lauer provided record references to support his claims. Lauer also stressed that the SEC’s motion for summary judgment had omitted all of Lauer’s exculpatory evidence, seriously distorted the facts, and lifted quotations out of context. Then he turned 171

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to a chronological summary of the events predating the filing of the complaint. Here, he made a mistake (in my opinion) that is common among lawyers who are not proficient in appellate litigation and more so with laypeople. He wanted to show that he had been wronged and innocent of wrongdoing rather than that the district judge committed reversible error. He spent too much space on facts that were not integral or even relevant to legal arguments that could win his appeal.

For example, the FBI sting and how the SEC came to investigate Lauer were unsavory, and probably unlawful, but not tied to any issues Lauer was arguing in his appellate brief.

Moreover, wrongdoing had not been definitively established in the record. The discussion would raise new nondispositive issues of fact. That the SEC supplied the Department of Justice with documents that Lauer and Lancer gave them exclusively for the SEC’s use in the civil case did not prejudice Lauer in the civil case, but only in the criminal case, which was not before the court. The myriad false statements made by the SEC to Judge Zloch at the TRO hearing on July 10, 2003, such as that mutual funds held shares in the Lancer hedge funds or that he had an offshore bank account, were peripheral to the issues on appeal.

The court was only interested in alleged errors that prejudiced Lauer in SEC v. Lauer.

The next half-dozen of the fifty pages were a capable and persuasive summary of errors in the grant of summary judgment, such as striking Lauer’s evidence from the U.S. v. Kelly and the judge’s verbatim copying of the SEC’s thirty-page statement of undisputed facts.508 Almost all of the rest of the brief provided quotations from the testimony that Lauer had presented the district court in opposition to the SEC’s motion for summary judgment, which established that the allegedly undisputed facts were vigorously disputed. This was rightly the heart of the brief. It also was well done, indeed overwhelming. Lauer argued that his district-court filings “demonstrate[d] that not only did Appellant proffer more than adequate evidence to controvert each substantive allegation to overcome the MSJ, but that the Response, unlike the MSJ, relied on the complete sworn testimony 172

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of the very same witnesses that were only discriminately and self-servingly cited in the MSJ, and thus the Order.”509 Lauer’s pro se appeals brief repeated the same testimony he presented to the district court, along with citations to the record and where he had quoted the testimony that showed he disputed the SEC’s evidence with evidence of his own. The SEC wrongly provided portions of declarations and depositions, he argued. ”[C]ourts have repeatedly held that when a party has made use of only a portion of a document, as did the SEC in this instance, by withholding the depositions’ cross-examinations from the MSJ, the prejudicial information should be stricken.”510 He repeated his exonerating cross-examination of the SEC’s witnesses.

John Doyle, Huard’s and Kelly’s superior at Shamrock, a major independent trader for Lancer, was asked, “As far as you were concerned, Lancer was complying with the law, right sir?” and “And at no time did you ever receive a direction from Mr. Michael Lauer, my client, is that right, sir?” Doyle answered, “Yes” to both questions.511 John W. Bendall, Jr., a director of the offshore funds and head of Hermitage Capital, a trading company used by Lancer, testified that Lauer did not make trades (Hauser did) and Lauer had done nothing wrong.512 Lauer attacked Marra’s rationale for rejecting the testimony of Bendall.

“Unable to overcome Mr. Bendall’s MSJ-undermining testimony (Hermitage, an SEC-registered and NASD-regulated firm, was never charged with any wrongdoing)...Bendall continues to run a successful brokerage firm, as he has done for over 25 years.”513 Lauer quoted from Marra’s finding of fact (scanned from the SEC’s filing), which said that Bendall suffered from a memory loss, although that was not relevant under Evidence Rule 611.

The SEC nevertheless claimed that it was undisputed that Lauer manipulated closing stock prices. Marra had said that Lauer presented “nothing of probative value.”514 Next, Lauer discussed the testimony of Huard and Cowen, making the points discussed above, and then some. He pointed out that the SEC had included an edited version of Huard’s declaration and, that the SEC distorted Huard’s declaration to say Lauer did things that others did.515 Lauer pointed out that 173

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felon Cowen was the only person who claimed to have observed Lauer possibly give an arguably unlawful order (one and only one – “I mean, I only heard once”516) Lauer’s brief also stated that Cowen testified, “I don’t believe I saw him [Lauer] give orders to Shamrock.”

Lauer’s brief also noted: “Perhaps the most striking absence of inculpating evidence is in regard to the Funds’ valuations.

This is particularly odd because the SEC’s entire case appears to be about a grievance in connection to the Lancer’s NAV valuations.” The complaint’s charge against Lauer was that he “overinflated” valuations. In addition, the SEC ignored the PricewaterhouseCoopers audits presented at the initial TRO hearing and later, which exonerated Lauer. Finally, Lauer discussed the case law relating to marking the close, including U.S. v. Mulheren.517 One of Lauer’s most cogent arguments refuted Marra’s reliance on collateral estoppel, which appeared in the section of the brief that emphasized the acquittal in U.S. v. Kelly. Lauer framed the issue clearly and provided unanswerable support for his argument: [T]he District Court chooses to disregard a documented fact that the latter part of the Hemstead vs.

Total Film et al., (Case No. SC 071112) [Los Angeles Super Ct. Cal.] (Hemstead) litigation against the Appellant took place in contravention of the District Court’s own order. The record in the SEC v. Lancer et al., shows that the District Court entered its Case Management Order (CMO), which, among other things, enjoined all parties (with a few noted exemptions) from commencing or continuing litigation against the Appellant on 1/8/04 (DE 123), while the trial date for Hemstead was set for 2/9/04...

Additionally, the exhibit “3” cited in Appellant’s pleading (DE 1944) shows that he filed with the Superior Court of California a Notice of Stay of (Hemstead Proceedings (dated 2/2/04) pursuant to the District Court orders entered by District Court on 7//17/03 and 1/8/04. The notice states: 174

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“To the Honorable Gerald Rosenberg, The Court Clerk, Plaintiff Hanna Hempstead And Her Attorneys Of Record. Please take notice that as of July 17, 2003, all parties in this action were and remain prohibited from pursuing any legal actions against Michael Lauer, including executions of judgments, pursuant to the July 17, 2003 and January 8, 2004 Orders of the Honorable William J. Zloch, Chief United States District Court Judge …”518 Lauer left, however, little space for his other arguments, namely, the errors in the disgorgement process, the award of prejudgment interest (one-half page), the impropriety of Southern Florida as the venue (one page), and the total assetfreeze (argued, but not under a separate heading). On the subject of prejudgment interest, Lauer argued both that no basis existed for charging him prejudgment interest because he was denied use of his funds and that the long duration of the case was the responsibility of others.

There was no mention of other possible arguments, such as Zloch’s order to Lauer not to communicate with witnesses (investors), Marra’s order denying Lauer’s contractual right to have his legal fees and expenses advanced, the receiver’s violation of the separation of powers by allying himself with and providing succor to the SEC, or Zloch’s placing the innocent hedge funds into receivership. Lauer did not make most of these other arguments because he was unfamiliar with the law. He did not argue about not communicating with investors because he had had several conversations with other investors and was concerned that a judge might question him on the subject at oral argument. But he was seriously prejudiced because he denied some contacts with investors, and third parties were reluctant to speak with him.

Christopher Martin did not represent the SEC on the appeal. A separate appellate section, housed in the main office in Washington, D.C., does. Its job is to sustain the SEC’s victories 175

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and reverse losses in the district court. They have a more dispassionate view of the case and a better knowledge of the law.

But they are also committed to winning.

The SEC’s principal brief in response repeated many of the findings of fact that the district court had copied from the Miami SEC’s motion for summary judgment. What was clear to a seasoned litigator, but not to a layperson, was that the SEC’s brief read as though it had won following a trial, just like SEC’s motion for summary judgment and Marra’s decision. The language used was “ample” and “overwhelming” or that “there was evidence that,”519 and one instance of “it was entirely possible that,”520 but not that the evidence was “undisputed,” the legal standard on summary judgment. The important question was not how much evidence the SEC had presented but what evidence Lauer had presented. If Lauer had placed material evidence in the record, the SEC’s motion was not undisputed, no matter how much evidence the SEC had assembled. A jury was free to accept Lauer’s witnesses.

Regarding U.S. v. Kelly, Lauer had quoted extensively from testimony in the trial transcript to show that the facts were disputed. However, he had argued more strenuously that the verdict of acquittal in Kelly should count heavily in his favor because the two cases were very similar. The latter point was dead on arrival because jury verdicts have no precedential value and because the prosecutors in Kelly had to prove their case beyond a reasonable doubt.521 The former point, however, was absolutely valid. The testimony from Kelly was both admissible and powerful. The SEC’s brief tried to make it appear that Lauer’s only claim was that Marra erred in not giving weight to Kelly’s acquittal; it ignored the extensive probative evidence that Lauer quoted from the trial transcripts in Kelly.522 The SEC’s major defense to Lauer’s arguments on disgorgement was the general one that a district judge has considerable discretion to fashion disgorgement. Its brief did not deal with Lauer’s argument that the SEC had made no showing that the amount ordered disgorged had anything to do with the amount of Lauer’s ill-gotten gains. Once again, the SEC ignored Lauer’s stronger argument. Its brief also ignored the conceded 176

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fact that the hedge funds owed Lauer $48 million, which should have been subtracted from the SEC’s claimed amount.

On prejudgment interest, the SEC argued that the interest rate was proper and that it was not responsible for the length of the period between the filing of the case and judgment, issues Lauer had raised. But the SEC did not confront Lauer’s principal claim that he should not be liable for any interest because he had been denied access to his funds.

On October 10, 2010, Lauer sent to the court of appeals an important recent decision of the United States Supreme Court, Morrison v. National Australian Bank Ltd. (2010),523 decided the previous June. The case was an important one that narrowed the reach of federal securities laws. Lauer correctly stated that Morrison “clarifies that § 10(b) of the Securities Exchange Act does not apply extraterritorially but ‘only [to] transactions in securities listed on domestic exchanges, and domestic transactions in other securities...’ Id. at 2884.”524 Before Morrison, events other than stock trading in the United States could provide the basis for the government to sue someone for fraud in the United States. For example, if a key discussion took place in the United States to sell stock abroad, the federal courts might have jurisdiction. After Morrison, fraudulent securities trades of the entity’s interest in question, such as Omnifund or Lancer’s Offshore, had to have taken place in the United States.

The holding was directly applicable to SEC v. Lauer.

The case made another important change in the law. The Justices unanimously held that the issue in Morrison was not one of federal-court jurisdiction but rather one of statutory construction. Congress has the power to make it a violation of the federal securities laws for events other than trades to have taken place in the United States. But the existing federal securities laws as written require the fraudulent securities trades had to have taken place in the United States. Before Morrison, the proper objection was that the district court did not have subject-matter jurisdiction (or the judicial power) over the events involved; afterward, it was that the securities laws did not cover the defendant’s actions.

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The court of appeals did not set an oral argument until February 1, 2012, leaving Lauer time to attend to his criminal case through his trial. SEC v. Lauer, however, was not entirely dormant in the district court. And there was Receiver v. Lauer, which was the receiver’s action to recover money from a host of individuals and companies, including investors and service providers. The receiver took depositions at a time impecunious Lauer and Garvey alone remained as defendants in Steinberg v. Lauer and at a time Marra’s award of summary judgment to the SEC and against Lauer was awaiting oral argument in the court of appeals. These included the deposition of Joseph Huard, discussed above, where he denied knowledge of wrongdoing

by Lauer and contradicted his earlier declaration that favored the SEC and receiver.525 They also took the deposition of H.C., Lauer’s domestic partner until 2006, on December 11, 2011, shortly before the argument on the direct appeal. While she was not disposed to be generous to Lauer because of his delinquencies in paying child support for the three children that lived with her, she had several important things to disclose.

After the direct examination of H.C. by one of Hunton and Williams’ lawyers, which revealed little of value, the crossexamination by Garvey and Lauer showed that the receiver had engaged in questionable conduct directed at Lauer. This conduct included paying H.C. to search Lauer’s home and computer without a warrant after they had been separated, arguably bribery and illegal search and seizure in violation of the Fourth Amendment since they were committed by an arm of the court who was working closely with the SEC. H.C. explained: [The receiver’s investigators]...told me to spy on Michael Lauer. They knew I had a key to his apartment, that I could use that key to get into his apartment. They said they needed his computer. They wanted me to give them all files...Mr. Steinberg and his private investigators were very well aware that I would have access to his files.

And they asked me – to use a flash drive, to get into his computer and to make – to make copies of documents on his computer... And after they did that, they expected 178

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me to provide them with every – with copies of his computer...I was sent a camera.526 Q. [T]he receiver or his agents actually paid for the rent [of $25,000] of an apartment for you and your children, correct? A. That is correct...And they paid directly to the building, the landlord...After telling them that I don’t know anything, he [one of Steinberg’s assistants] handed me some cash and told me that if I do remember, that would – you know, again, that they are here to help...I did receive cash payments...[T]hey proceeded to tell me point blank that that was what I needed to do in exchange for helping me financially... [Investigators for the receiver] and others offered me financial compensation as well as incentives to provide incriminating evidence against Mr. Lauer...They told me about emails that he [Lauer] had, which they never would never be able to know unless they had gone through his emails.527 Q. Ms. [C] isn’t it your understanding that those monies were from frozen assets of Mr. Lauer’s? A. That was my understanding...528 Q. Did the receiver or any of his representatives tell you that these payments were court approved? A. Yes, absolutely.529 H.C. testified that the receiver’s professionals told her Judge Marra authorized the payments to her during an ex parte hearing.530 When Lauer and Garvey filed a motion to gain additional information from the receiver, there was total silence from his quarter, whether about any ex parte hearing or about H.C.’s sworn allegations that she had received payments to spy on Lauer and invade his Fourth Amendment rights.531 When the matter was brought to Marra, he simply ignored the sworn allegations of criminal conduct committed by Marty Steinberg’s professionals and denied any personal knowledge of the matter. Indeed, Marra later wrote there was “no evidence” of misconduct.532

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DOJ to the Rescue, Not Seven years after the FBI first approached Lauer in the Bermuda Short sting in 2001 (the FBI sting based in Florida in which Lauer rebuffed multiple unsavory solicitations), four years and seven months after the SEC filed its civil charges against Lauer, and one year, one month, and eleven days after the SEC filed its motion for summary judgment against Lauer (which was still pending), the United States Attorney for the Southern District of Florida filed an indictment in United States v. Michael Lauer et al. that charged Lauer and four others with conspiracy to commit wire, mail, and securities fraud and multiple substantive counts of fraud.533 It closely mirrored the civil charges in SEC v.

Lauer.

Lauer had had no clue that a grand jury was investigating his activities. He believed the investigation had ended years earlier.

In 2005 receiver attorney Craig V. Rasile telephoned Gerald M. Labush, who had represented Lauer. Rasile told Labush that the DOJ no longer needed Lancer’s and Lauer’s records and asked Labush if Lauer would object to DOJ’s giving them to the receiver.

He did not. When they heard the news, Lauer and Labush opened a bottle of Champagne. Celebration, however, was premature.

The indictment in U.S. v. Lauer, filed January 29, 2008, also named as defendants Martin Garvey and Eric Hauser, each of whom owned ten percent of Lancer Management; Laurence Isaacson, who was president of a company named Biometrics 180

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and head of a small investment bank, both based in Florida; and Milton Barbarosh, who was president of the firm Stenton Leigh and a prominent independent valuation expert, who performed appraisal valuations for the Lancer hedge funds in early 2002 to show to Citco and PWC and in the late spring of 2003 to submit to the authorities in the British Virgin Islands in the case involving the offshore hedge funds. None of the other persons indicted compared to Lauer in stature.

The Department of Justice stated in the first paragraph of its press release that if convicted, Lauer faced a maximum sentence of up to twenty years and a $250,000 fine for each count of securities fraud and a maximum sentence of five years and a $250,000 fine for the conspiracy count. The release said that Lauer was charged with manipulating the prices of thinly traded shares and falsely valuing the shares to increase his fees from investors.

Simultaneously, an SEC press release noted: “The Indictment’s allegations are based on the same conduct underlying the Commission’s July 8, 2003, Complaint against Lauer in the United States District Court for the Southern District of Florida.”

Neither press release explained the long delay in filing criminal charges.

Barbarosh and Isaacson were presumably included in the same indictment as Lauer and Garvey at least in part to secure jurisdiction and venue in southern Florida. The connections of Lancer, Lauer, and Garvey with Florida were thin. Lauer did no business in Florida. Lauer had never met Isaacson and had met Barbarosh only once, and then in New York. Bruce Cowen, former Lancer consultant indicted in the Bermuda Short sting, knew both Barbarosh and Isaacson. Cowen had asked Isaacson to fill in as interim president of several small companies acquired

by Lancer and its funds, who were the focus of the case. None of the valuations Barbarosh had prepared for Lancer was made public or sent to investors. Lauer’s British Virgin Island attorney Simon Pascoe sent Barbarosh’s 2003 valuations to the BVI authorities under seal in June 2003.

The most likely reason DOJ revived the prosecution of Lauer in 2008 was to put additional pressure on Lauer in the civil case. It 181

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is not an exaggeration to say that the SEC’s motion for summary judgment was shaky. Aside from its serious facial deficiencies, such as its detail, concessions, and contradictions, the motion had been in Marra’s hands for a year at the time of the indictment of Lauer. A trial in SEC v. Lauer seemed likely, and the result was uncertain. Help was needed to pressure Lauer to settle that case.

A problem for the United States Attorney for the Southern District of Florida, however, was that those individuals who had lost the prosecution of James Kelly had left the U.S. Attorney’s office, and no one at DOJ or in the U.S. Attorney’s office knew the case involving Lancer. They solved the problem by transferring Harold Schimkat to the Miami U.S. Attorney’s office to revive the prosecutions. He worked for the Miami SEC in SEC v. Lauer and was privy to information that Lancer and Lauer had provided to the SEC solely for its use. Assigned to assist Schimkat was DOJ attorney Jack P. Patrick.

In the second week of February of 2008, while Lauer was visiting Kyiv, Ukraine, on business, the local security services (“SBU”) informed him that the FBI had contacted them, seeking some “compromising” information on him (they had none). Understandably concerned, Lauer promptly canceled his remaining business-development travel plans in Eastern Europe and flew back to New York from Kyiv . While the civil case was money, a conviction in the criminal case could put him in prison for decades. Lauer was worried about what the future held not only for himself but for his family. It was very, very serious.

While Lauer was going through customs at the JFK airport, an FBI team arrested him on an arrest warrant issued by a federal court in Miami based on the indictment filed against him. The FBI and U.S. Marshals refused to allow Lauer to appear voluntarily for arraignment in Florida. The FBI agents confiscated and searched Lauer’s laptop computer and iPhone without a search warrant. The government then gave the contents of the iPhone and computer to the receiver for use against Lauer, according to sworn testimony by H.C. Magistrate Judge Chris M. McAliley, to whom Judge Adalberto Jordan, the Southern District of Florida judge assigned to U.S. v. Lauer, referred Lauer’s objections to 182

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the search and seizure. McAliley found that an FBI agent had testified misleadingly under oath at a hearing on the search and seizure of Lauer’s property.534 (There was nothing incriminating on either the laptop or the iPhone.) Later, Judge Jordan granted Lauer’s motion to suppress and to prohibit any dissemination or use of information obtained from the electronic devices.535 Once Lauer was arrested, the prosecutors fought intensely to keep him incarcerated until trial. DOJ claimed Lauer was a “flight risk,” based mainly on Lauer’s alleged multiple, undisclosed bank accounts in Poland (not Ireland, as the SEC had claimed in 2003) that purportedly held many millions of dollars. Lauer had denied owning such accounts, and the government presented no evidence that he had an undisclosed offshore account. Nearly five years after the SEC filed suit, the U.S. government and the court-appointed receiver, who had spent millions of dollars tracking Lauer’s assets, did not know which offshore bank accounts, if any, belonged to Lauer.536 When Lauer’s attorney wrote demanding the government’s evidence that there were offshore accounts, there was no response. His letter made it clear there were no undisclosed offshore bank accounts and offered to assist DOJ with its search. Indeed, the insistence by the SEC and the receiver five years after the SEC filed its complaint seems to demonstrate that they did not understand the facts, despite extensive investigation. Since the charge was that Lancer and Lauer overcharged investors through Lancer Management and the transactions were fully documented, where did the money in Lauer’s alleged undisclosed offshore account supposedly originate?

Bail was set at $1 million, which required a cash deposit of $25,000.

Most people accused of committing a white-collar crime appear voluntarily for their arraignment after the federal prosecutor alerts them or their attorneys. The case for proceeding by notification rather than issuing an arrest warrant was especially compelling for Lauer. As a flight risk, Lauer was way down on the list. He had no money with which to abscond,

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and he had five minor children (then ranging in age from four to eleven) and an elderly infirm mother in the United States.

Moreover, he had been actively litigating the same charges for four and one-half years in SEC v. Lauer, and he had returned from abroad voluntarily. He pondered: Although I was understandably shaken by the arrest, as well as my new government-arranged living accommodations (federal detention center in Brooklyn), I felt upbeat and confident about my prompt release and eventual exoneration because I knew that the indictment’s charges were absurd. While going to a bond hearing the following Tuesday might have been my “Darkest Day” ever, I was more than shocked when I heard the representative of the United States, a federal prosecutor, KNOWINGLY lie to the judge and pleading with the court to keep me locked up, due to my being a “flight risk” because of my previously undisclosed bank accounts in Europe, into which I supposedly channeled tens of millions of dollars. But what I recall most during the Tuesday hearing was a startling realization that if the government was willing to fabricate and lie about a highly prejudicial claim – such as a supposedly undisclosed bank account (a serious crime all by itself), why wouldn’t they fraudulently manufacture evidence in regard to other indictment-related charges?

None of Lauer’s four codefendants was arrested. Remarkably, no one notified Garvey, the defendant closest to Lauer, that he was indicted and had to report for arraignment. A friend of Garvey’s read about the indictment in the newspaper and called him. Garvey arranged to report for arraignment in Florida on his own and was immediately released.

What followed was Lauer’s remarkable odyssey through three federal detention centers around the country.537 The journey, ostensibly for the government to deliver Lauer ASAP for a court hearing in Miami, lasted about two months. It started with his two-week stay at the Metropolitan Detention Center in Brooklyn, where Lauer befriended several co-detainees, mainly 184

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Gambino “family” members recently apprehended in a massive FBI sweep. Lauer was flown on the fed’s “CONAIR” aircraft (a very old but specially equipped Boeing 727) for a two-week sojourn to the federal detention facility in Oklahoma, then predominantly populated by Mexican drug-trafficking gangs, as well as members of various Aryan Brotherhood affiliates. Every time Lauer arrived at a new detention facility, the authorities tried to subject him to a new set of X-rays. He initially refused in Oklahoma but finally agreed so he could leave. After three sets, he refused.

After he left Oklahoma, another CONAIR flight led to an approximately a one-month stay in Miami’s detention center.

The feds had arranged for Lauer to be assigned to the facility’s “C West” ward, which was internally known as “Charlie Worst,” a moniker that was well earned, as the menacing ward housed the institution’s most incorrigible criminals. As noted, the ostensible purpose of this journey was to deliver Lauer for prompt arraignment in the Southern District of Florida district court.

Lauer was finally able to make bail, thanks to his family and friends who guaranteed his appearance since he was not allowed to use any of his frozen funds for bail. Without that serendipitous development, he would have languished in jail, while his ailing mother and minor children would have had to manage on their own. Still maintaining that Lauer held secret offshore bank accounts, the DOJ fought to have him incarcerated, and he was not freed even after he made bail. DOJ demanded that he remain on house arrest wearing an ankle bracelet, perhaps to pressure him to plead guilty, and the court agreed. When he was confined to his home, he received random calls around the clock, which he regarded as torture, but whose primary purpose seems to have been to catch him in violation and return him to prison.538 This was the treatment of someone who still enjoyed the presumption of innocence.

However, later, when Lauer later argued that he was the primary caretaker of five children and wanted to take them to Lake George, northeastern New York State, Judge Adalberto Jordan, to whom the case was assigned, granted his request. In 185

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other words, when Lauer was in Manhattan, he was under closely monitored house arrest. Still, he could travel with all his children to near the Canadian border, effectively out of touch because the signal from his ankle bracelet was too weak to reach New York City. Why? Perhaps by then, Jordan, if not the government, had realized there was no case against Lauer.

Lauer needed to hire an experienced and competent lawyer to defend him. He retained Norman Moskowitz, a prominent Miami lawyer specializing in white-collar defendants, who, on May 28, 2008, filed a motion in SEC v. Lauer to free some of Lauer’s frozen assets so he could hire him.539 Moskowitz focused on Lauer’s Sixth Amendment right to counsel and that substantial assets pre-dated any fraud, including his Manhattan condominium and his Bank of America brokerage account.

Courts have carefully scrutinized efforts to deny a defendant money to hire counsel in a criminal case.

Both the receiver and the SEC opposed Lauer’s attempt to free money to hire Moskowitz.540 Since Marra had imposed the order freezing Lauer’s assets, it was he who held a lengthy hearing on November 6, 2008.541 At the suggestion of Marra, both the SEC and Lauer submitted proposed findings of fact.542 Ten months after Moskowitz moved to modify the freeze order, Marra denied it on March 26, 2009.543 More than a year had elapsed from the time DOJ indicted Lauer.

Adopting the SEC’s arguments, Marra wrote. “A defendant’s right to use his own assets to retain counsel of choice is limited to use of assets which are legitimately obtained.” Lauer sought to use the profits from the sale of the condominium he had bought in 1997 before the alleged fraud started. The mortgage was an interest-only mortgage, so tainted funds were not used to pay for the apartment. That fact made no impression on Marra.

“The Court concludes, for purposes of this case, that when tainted funds are used to pay costs associated with maintaining ownership of the property, the property itself and its proceeds are tainted by the fraud...Lauer directly profited from using tainted funds to pay for the property. That profit includes any appreciation in value.”544 186

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The single case on which Marra relied involved forfeiture under a particularly harsh narcotics law, 21 U.S.C. § 881(a)(6), which had nothing to do with the historic equitable standard applicable to Lauer’s motion to use his money in a securities case. The cases on which Lauer’s attorney Moskowitz relied included a court of appeals case binding on Marra that stated: “Disgorgement is remedial and not punitive. The court’s power to order disgorgement extends only to the amount with interest by which the defendant has profited by his wrongdoing. Any further sum would constitute a penalty assessment.” 545 Another binding case Moskowitz relied on said: “‘The mere pooling or commingling of tainted and untainted funds in an account does not, without more, render the entire contents of the account subject to forfeiture...Forfeiture of commingled funds is proper when the government demonstrates that the defendant pooled the fund to facilitate or ‘disguise’ his alleged scheme.”546 There was no such demonstration or even claim in SEC v. Lauer or U.S. v. Lauer.

An order denying Lauer use of his funds to defend himself against the criminal charges was not immediately appealable.

As a result of Marra’s decision, he could not afford Moskowitz.

Lauer could do nothing about the order until after the trial was over, when, if convicted, he could appeal, claiming that as error along with other claims of error, and possibly receive another trial. Meanwhile, he would be in some form of custody.

For his trial in the complex securities fraud case, the impecunious Lauer was represented by Public Defender Michael Caruso547 and his assistants R. D’Arsey Houlihan III and Vanessa Chen. Lauer had obtained an experienced, able, and conscientious lawyer, but for understandable reasons, his expertise was in violent crime and narcotics offenses. Caruso had handled exactly one securities case in his career and none that involved hedge funds.548 Against Lauer were the U.S. Attorney’s Office from the Southern District of Florida and the DOJ’s Economic Task Force, aided by the resources of the SEC and the receiver, who had available to him dozens of lawyers and other professionals from his firm, Hunton & Williams. Simply put, DOJ outgunned Lauer.

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As with SEC v. Lauer, the Florida situs of U.S. v. Lauer posed serious logistical problems for Lauer. There was the critical problem of care for his mother and young children while away from home for weeks, if not months. There was also a new monetary problem. While the government supplied him with a lawyer free of charge, he had other substantial expenses. Lauer sought funds from the government to pay his travel and living expenses when he had to be in Florida during U.S. v. Lauer. When the prosecution refused, Judge Jordan announced that he would transfer the case to New York unless it paid Lauer a per diem to cover his living expenses. The prosecutors capitulated and paid Lauer $172 a week (or less than $25 a day), a totally inadequate sum. Lauer never learned how that amount was determined.

While far less extensive than in civil cases, pretrial activity in criminal cases may nevertheless be significant. To Lauer’s surprise, his codefendants Barbarosh and Isaacson filed a pretrial motion to dismiss the case because of prosecutorial misconduct. In mid-2010, Jordan held a two-day evidentiary hearing on the pending motions, from which Lauer learned a considerable amount. The motion to dismiss harked back to the spring of 2003, before the SEC filed its civil case against him. As discussed in Chapter 3, after the authorities in the British Virgin Islands began investigating the two Lancer offshore hedge funds, BVI authorities hired major accounting firm Deloitte Touche to analyze the funds’ portfolios. Its highly confidential and sealed May 21, 2003, report criticized the method and valuations of many of the assets of the Lancer offshore hedge funds.549 That was when Lancer Management retained Milton Barbarosh of Stenton Leigh to prepare a rebuttal.

Unknown to Lauer and Pascoe, Barbarosh’s lawyer contacted the Miami regional SEC office and told it about Lancer’s and Pascoe’s request to Barbarosh to assist the offshore hedge funds in the BVI proceeding. Barbarosh agreed to spy on Lancer and Lauer, while at the same time he assisted the Lancer offshore hedge funds in BVI, a conflict of interest. To do his work, Barbarosh secured a copy of Deloitte Touche’s report from Lancer, which he surreptitiously gave to the SEC, along with a chart that disclosed 188

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the identities of the companies that the hedge funds owned. The Deloitte report did not identify the names of the companies in which Lancer invested but used a code.550 In computing the value of the start-up companies the hedge funds owned in whole or in part, Deloitte’s report endorsed the conservative net book value rather than the alternative based on fair market value, the one used by the Lancer funds’ directors, PricewaterhouseCoopers, and Barbarosh, which was based on the companies’ income and prospects and was much higher. Pascoe filed Barbarosh’s rebuttal to the Deloitte Report on June 27, 2003, also under seal.

At the hearing before Judge Jordan on the motion of Barbarosh and Isaacson to dismiss the indictment, Barbarosh’s 2003 lawyer testified that John C. Mattimore, the SEC official in charge of the Miami office, excitedly told Barbarosh and him on June 10, 2003, that the Deloitte report was “the proof [they] needed to go file the lawsuit” against Lauer and Lancer.551 The lawyer also testified he told Mattimore that Barbarosh’s giving the report to the SEC violated Lauer’s attorney-client privilege and could create problems for the SEC, namely, that the SEC obtained the key evidence it needed to proceed against Lancer and Lauer improperly.552 The hearing before Jordan explained why the Miami SEC was in such a hurry to file the complaint in SEC v. Lauer, which it did on Tuesday, July 8, 2003. The judge in the BVI investigation gave Deloitte until July 11, 2003, to file a reply to Barbarosh’s report.

Uncertain over what Deloitte would say, the SEC was anxious to file the case against Lauer and appoint a receiver for Lancer Management before Deloitte issued its reply. Zloch’s order appointing Steinberg, drafted by the Miami SEC and discussed above, specifically provided that all mail addressed to either Lauer or Lancer would go to the receiver.553 When the SEC filed suit on July 8, 2003, and secured the appointment of a receiver on July 10, 2003, the receiver rather than Lancer and Lauer received Deloitte’s sealed second report. Lauer and Garvey first learned of the second Deloitte report at the 2010 hearing.554 Deloitte’s second report backtracked from its first report and insisted that it was not criticizing any particular methodology 189

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of valuation: “[O]ur May Report was not intended to, and did not express, a valuation opinion of the securities held in the Funds’ portfolios nor did it recommend an appropriate valuation methodology to do so...[W]e do not intend to engage in substantive argument on the merits of valuation methodologies.”

Deloitte’s reversal created a problem for the SEC. It solved the problem to its satisfaction by concealing the second report from Lauer and Garvey, but that meant the SEC could not use the first report in SEC v. Lauer.

Barbarosh’s and Isaacson’s motion claimed that the SEC had reneged on its agreement that the two would act as confidential informants or agents and had misled them into turning over documents and making statements, which the government was now using against them.555 The government denied that any such deal existed.556 Jordan denied the motion to dismiss because there was no evidence the SEC knew that Barbarosh and Isaacson were going to do anything illegal (if they did).557 However, Jordan allowed the two to raise the issue at their criminal trial. Meanwhile, Eric Hauser, Lauer’s junior partner in Lancer Management and the person in charge of its trading activities,558 pleaded guilty and cooperated with the government after Jordan imposed the harsh and coercive sentence of sixty months in prison. A man in his 60s, Hauser apparently could not face the possibility of many years in prison.

Jordan summarized Cowen’s vulnerability and his incentive to give testimony favorable to the SEC based on facts that were on the public record when the SEC filed its motion for summary judgment in SEC v. Lauer: At the evidentiary hearing, Mr. Cowen testified that he had believed that he was innocent...and intent on fighting the charges against him. He also explained that he had pled guilty because the government took a “sucker punch” at him by threatening to prosecute his wife, Kathryn, who in his opinion had not done anything wrong...As Mr. Cowen recalls, the prosecutors told him... that if he did not plead guilty he and his wife would

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not see their young son for 20 years. The government’s threats, said Mr. Cowen, were the “driving force” behind his plea.559 The attorneys for Lauer and Garvey filed a motion to sever the trial of Barbarosh and Isaacson from the trial of their clients on the ground the dispute over the relationship between the SEC and them would be such a distraction that the jury would be unable to evaluate their clients’ guilt or innocence fairly.560 Although Jordan said that he had never granted a motion to sever before, he granted this one.561 Jordan scheduled the trial of Isaacson and Barbarosh to proceed in mid-2010. Lauer and Garvey would face a jury in the spring of 2011.

The presentation of U.S. v. Lauer to the grand jury also raised questions. The government’s records indicated that Lauer was indicted by the fourth grand jury involved in the case, but there was no information on what happened in the first three grand juries. Moreover, no trial witness on the SEC witness list had ever appeared before any grand jury.562 The testimony before the grand juries was all or virtually all secondhand and hearsay, presumably by a federal agent who gave a summary, a practice that the Supreme Court has criticized in complex cases and for which the Second Circuit had dismissed an indictment in an opinion by Judge Henry J. Friendly.563 Jordan ruled that none of these developments warranted entering an acquittal in favor of Lauer and Garvey and ordered their trial to proceed.

There was yet another unusual development. When Lauer and Caruso examined the indictment, they found that the signature of the foreman of the grand jury had been blacked out and could not be identified. Even though there were supposed to be three signed copies of the indictment, Lauer was told no signed copy could be found. Jordan proceeded with the trial even though no copy of the indictment signed by the foreman could be found. He had threatened not to let the case go to trial, but later relented.564 A 2015 FOIA request by Lauer also failed to turn up a copy of the indictment signed by the foreman. The absence of a signed copy has never been explained.

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Caruso was obligated to tell Lauer precisely what he faced.

While confident the prosecution’s evidence was weak, he could not assure Lauer he would be acquitted. He sent Lauer an ominous email: “Overall, the guideline range would be at least close to life. Let me know if you have any questions.” Caruso repeated his admonition as the trial date approached: Not to belabor the point, but are you instructing me not to reach out to Schimkat as to what a possible offer would be? I’m sure you’ve heard the phrase “bet the company” litigation; this is, as you know, a “bet your life” trial. My obligation is to put you in the best possible position. We are prepared to try the case, but I owe you an obligation to pursue the best possible settlement of the case. Let me know.

Lauer replied: The only settlement I would entertain is along the lines of my “Let’s Settle” email I forwarded to you in November 2010. I was quite serious then, but I may be flexible about the Christmas timing of that kiss on the ass.

The trial of U.S. v. Lauer consumed four weeks. There was an early surprise. Seated at the prosecution’s counsel table with Schimkat and Patrick was someone Lauer had never seen before, a Black DOJ attorney. Her ethnic background matched that of most of the jurors. As far as Lauer could tell, her entire role in the case consisted of sitting at the government’s table in the seat closest to the jury.

The principal government witnesses were Cowen, Hauser, and Barbarosh, all of whom had pleaded guilty and were testifying in the hope of leniency in sentencing. New to the case against Lauer were Hauser and Barbarosh, who pleaded guilty to a single lesser charge (conspiracy) rather than face trial.565 Joseph Huard, whose affidavit figured so prominently in the SEC’s motion for summary judgment, did not appear as a government witness.

His 2011 deposition in Steinberg v. Lauer, while it was taken after

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Lauer’s criminal trial, shows how ineffective he would have been as a witness. On cross-examination by Lauer and Garvey, Huard disowned any implications in his declaration and admitted that he had no incriminating evidence against Lauer. 566 Eric Hauser testified that “Michael [Lauer] would tell me directly or Marty [Garvey] would tell me, ‘Michael wants the stock to close at a price at the end of the month.’”567 Hauser could not, however, be more specific. Because no one at Lancer Management was licensed to buy or sell stocks directly on an exchange, Lancer employees Hauser and James Tsakni always gave the trades to independent licensed brokers. Almost all trades involved two independent brokers. A broker who did not make a market in a stock, which was the overwhelming majority of them, including Heritage Capital run by offshore-fund director John Bendall, would have to go to the market maker in the stock to complete a trade. Critically, Hauser never testified what he told the broker or market maker (if he spoke to him). In answer to a leading question, “did you make trades to affect the market valuation of stock held by Lancer Funds,” he answered, “Yes, sir.”568 The DOJ apparently believed that alone constituted illegal marking the close. As noted above, the jury had been instructed to the contrary in U.S. v. Kelly, and that was also clearly the law in the influential Second Circuit.569 On Caruso’s cross-examination Hauser, who had been in the securities business for forty years, testified he did not think he was breaking the law, never questioned Lauer or Garvey about the instructions, never complained to the authorities or anyone else, and did not quit his job.570 Hauser was not accused of misconduct in any specific transaction involving Lauer.

Nevertheless, he pled guilty to conspiracy rather than risk a twenty-year sentence under the Federal Sentencing Guidelines if convicted of a substantive count. He testified that he hoped his sentence would be “one day” because of his cooperation.571 It turned out to be one month – later reduced from his original sentence of five years – or less than one percent of what he could have received under the Sentencing Guidelines if he went to trial and was convicted of a substantive count.

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Most significant, however, was the contrast between Cowen’s deposition testimony in SEC v. Lauer and his testimony in U.S. v. Lauer, where Michael Caruso cross-examined him. The thrust of Cowen’s testimony on direct examination in U.S. v. Lauer was that Lancer had purchased many of the funds’ shells for pennies a share, that there was nothing of value in the shells, yet that Lancer had valued the entities at dollars a share to bill hedge funds. Citco and PWC had asked pointed questions about Lancer’s investments in early 2002, and Lauer asked Cowen to prepare a memorandum to respond to their concerns.572 On cross-examination, Cowen acknowledged that Lauer was not involved in the subsequent discussions and did not write the memorandum. Cowen also acknowledged that the memorandum informed Citco and PWC that many investments were illiquid and would take several years to liquidate, facts the SEC charged Lauer with concealing. “Citco had...full knowledge of what Lancer paid for a position and what it was recording on its books,” Cowen testified. Involved were some of the same small companies from which the receiver cut off funding and forced into involuntary bankruptcy. To rebut the government’s claim that the so-called shells were worthless, Caruso’s examination of Cowen also revealed the extent to which Lancer Management was searching for and finding potentially successful start-ups or other companies to invest in, companies that it would acquire through the shells and would support during their formative stages in the hope that their stock would soar, something Lancer had done for years.573 Lancer was paying Cowen to perform due diligence on companies it was evaluating for investment by and for the hedge funds. If the start-ups were worthless, government witness Cowen was deceiving Lancer and Lauer.

Cowen admitted on cross-examination that while working for Lancer and without Lauer’s knowledge, he and others had been improperly receiving payments from the acquired companies as well, a conflict of interest in which Lancer and Lauer were the victims.574 At the same time Lancer was paying Cowen money to evaluate the companies in order to acquire the worthy ones at the lowest possible price, Cowen had taken money 194

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from those companies, which were interested in obtaining the highest possible price to be paid by Lancer Management and the hedge funds. Cowen alone received hundreds of thousands of dollars from the companies. When Lauer found out about those payments, Cowen testified, Lauer told him he could not take that money.575 Cowen also admitted that earlier in his career, the SEC had sanctioned him for embezzling $700,000 in stock options from his employer and other misconduct, for which he was barred for five years from holding certain positions with securities firms.

He had withheld that information from Lauer when Lancer hired him as a consultant.576 Cowen’s testimony, it must be emphasized, was by a government witness who had been pressured to give as good testimony for the prosecution as he could to save his wife from prosecution.

Because of the pressures and risk of going to trial, Barbarosh pleaded guilty to a lesser violation of the securities laws and testified for the prosecution. He gave his testimony against Lauer while awaiting sentencing. While he had every incentive to incriminate Lauer, Barbarosh also did not materially harm him.

Barbarosh defended his analyses and evaluations of the Lancer hedge funds he performed for Citco and PWC in early 2002 and for the BVI proceeding in June 2003, which he continues to do to this day.577 He also corroborated portions of Cowen’s testimony relating to the payments from third-party companies.

The prosecution called several witnesses, including Renée Maynard of the Montreal University’s pension fund, who were individual investors or who represented institutions. The two principal areas addressed on direct examination were, first, that they understood that Lancer would invest in small-cap companies worth about $1 billion rather than start-ups and, second, how they lost their investments, including unsuccessful attempts to redeem them following the negative columns in the New York Post.

Cross-examination of the investors centered on the sophistication and expertise of the investor-witness, the good reputation and record of Lauer and Lancer, the high quality of 195

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Lancer’s service providers, and on the texts of the PPMs and other documents supplied to investors. The witnesses conceded that the documents they signed made numerous references to risk and disclosed that Lancer followed a flexible approach to investments and did not exclude the kinds of investments Lancer had made for the hedge funds. Lancer also followed its stated position on redemptions.

As to the alleged mispricing of the funds’ investments, no expert for the government testified that valuing a company at a heavily discounted market price, as much as fifty percent, or even at the full market price was illegal and fraudulent.578 While DOJ argued that the discounted market price was not the best or even a good gauge of the value of Lancer’s investments, under traditional analysis, the market price of stock reflected their value, and discounting their market value was conservative.

The precise issue was whether the prices set for assets held by the hedge funds were fraudulent, and the SEC did not present authority that they were fraudulent.

The DOJ never established that Lauer was responsible for placing any specific trades or how many trades, if any, Lauer placed.

Thus, the SEC’s central claim that Lauer engaged in the practice of marking the close was unproven, much less undisputed. Also, the SEC never suspended trading in even a single stock alleged to have been manipulated. That failure suggested that the national SEC was not convinced by the allegations of manipulation made by the Miami SEC in SEC v. Lauer.

While a prosecutor cannot call a defendant as a witness, the prosecutors in U.S. v. Lauer had available to them five days of sworn testimony that Lauer had given in depositions to the SEC in the civil case and five more days of testimony he had given to the receiver. The government could have introduced any portions of that testimony as part of the government’s case and read them to the jury to show that Lauer had done something illegal or had a guilty intent. But they did not. Nothing in those depositions harmed Lauer. Also, if the prosecution had offered excerpts from Lauer’s depositions, he might have been able to introduce other portions, noted above, which would have exonerated him.

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With hundreds of trades a year, inevitably, there were transactions of virtually every description over the course of the alleged criminal conduct. Despite the prosecution’s efforts, no direct evidence showed that Lauer had marked the close, the central charge in the indictment. Therefore, an expert witness was essential to sort out the various transactions and testify on the basis of statistics (usually with at least a ninety-five percent certainty) that there was a pattern of last-minute trading at the end of each quarter (or year) to boost the stock price and hence the commissions the investors paid to Lancer. In the absence of direct testimony of marking the close, only an expert witness who examined all the trades could supply the proof. Yet, the government did not call an expert witness. Steinberg and his professionals, who were collectively paid tens of millions of dollars in fees, did not testify, not even Soneet Kapila. After nearly eight years, they had nothing to contribute to the prosecution of Lauer and Garvey.

When the government rested, Lauer, Garvey, and their lawyers were relieved how weak the prosecution’s case was, even with the addition of witnesses Eric Hauser and Milton Barbarorsh.

Lauer’s greatest fear was that the prosecution would produce manufactured evidence, either knowingly or unknowingly, but it hadn’t. Lauer was relieved.

Caruso shocked Lauer when he proposed they rest without calling Lauer, Garvey, or other witnesses to refute the prosecution’s case. Caruso was ready with strong expert testimony from an expert witness, Professor Stephen Thel, who had testified on behalf of the acquitted James Kelly, which Lauer had included as part of his opposition to the SEC’s motion for summary judgment which Marra wrongly struck, discussed above. Thel would have explained that even if there had been evidence that Lauer had made stock trades as alleged, that evidence would not have warranted conviction. But his testimony might have misleadingly suggested to the jury that Lauer had engaged in setting the closing price of a stock and thereby confused its members. Lauer became persuaded of the merit of Caruso’s proposal, and all involved decided that it was not necessary to mount a comprehensive defense, just call two collateral witnesses – a character witness 197

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and a handwriting expert. It was a wrenching decision for Lauer and his codefendant Martin Garvey because of the size of the stakes. If the jury convicted Lauer and Garvey, there would be no do-over. There are no Mulligans in federal criminal prosecutions.

Judge Jordan’s instructions to the jury accepted the legal position of Lauer and Garvey. They relied on the same authority Lauer had relied upon in his opposition to the SEC’s motion for summary judgment in SEC v. Lauer, namely, U.S. v. Mulheren.579 Quoting Mulheren, Jordan told the jury that it was not unlawful to buy stock to enhance the closing prices, at least not without additional improprieties. He instructed the jury: Allegations that a defendant was motivated to commit securities fraud to enhance his incentive compensation or to raise capital are inadequate to establish scienter [guilty state of mind] because the executive of virtually every corporation in the United States would be subject to fraud allegations. A plaintiff must also demonstrate that the challenged misrepresentations in dispute were material, he relied on them, and that as a practical result, he was damaged...When a transaction is effected for investment purposes, the theory continues, there is no manipulation, even if an increase or diminution in price was a foreseeable consequence of the investment.580 Jordan all but told the jury that the government had not proved its case. Had Marra applied the same law, he could not have granted the SEC summary judgment.

The jury acquitted Lauer and Garvey on April 27, 2011.

Notes from the jury to Jordan during its deliberations and jurors’ statements to the press and the defense team after their verdict showed they had little trouble deciding the case. For example, the Associated Press reported that one of the jurors stated to a reporter, “There just wasn’t enough proof.” Lauer was particularly gratified that a jury had decided his innocence. While he would have gladly accepted the prosecution’s dismissal by a judge, he found that justice administered by a jury of his peers gave him a special thrill and was especially gratifying.

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The two defendants were freed from the specter of decades in prison. Lauer was triumphant. In his euphoria at winning, he told Garvey that he was going to go outside the courthouse and wait for the prosecutors so that he could confront them. Lauer could see Garvey’s face drop. He was worried that Lauer would do something that would indeed land him in jail. Lauer also wanted to thank the jurors and learn what they thought. The jurors vindicated his faith in the jury system, especially when a couple called the prosecutors “buffoons” and derided their evidence and presentation. Lauer glared menacingly at the prosecutors, including Schimkat, when they left the courthouse.581 From 2011 on, Lauer celebrated April 27 as V-Day – for “victory” and “verdict” – with a bottle of Champagne. Lauer remained angry at the prosecutors, who caused him to spend two months in jail after he was arrested at JFK Airport and then three years under house arrest, denied him his choice of lawyers, and visited upon him other unwarranted indignities.

Ground down by the process, Garvey was less resilient and more pessimistic than Lauer. Defending the criminal case had left Garvey broke. He could not get a job in the securities business, even with the acquittal, and he had no other sources of money.

His marriage destroyed, he had to move back in with his parents.

Steinberg was still suing him in Steinberg v. Lauer, which he now had to defend pro se, like Lauer.

What happened to the individuals who succumbed to what Lauer calls a “conviction-extortion racket” and testified for the government? The people who pleaded guilty and cooperated did quite well. Bruce Cowen, who committed various crimes despite his protestation of innocence, was sentenced to two years in prison, while none of the others, Hauser, Huard, and Barbarosh, spent longer than a month in custody. Judge Jordan rewarded Hauser for pleading guilty and testifying by reducing his prison sentence by fifty-nine months (to one month),582 even though his testimony did not hurt Lauer. Jordan seemed willing to go along with the prosecutors, at least up to a point. Lauer was convinced that if he had settled his civil case, he never would have been 199

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indicted. If he had pleaded guilty and testified against Lancer’s service providers PricewaterhouseCoopers and Citco, he would either have received a nominal prison sentence or even none.

As a result of the pressures to forego a trial, more and more innocent people are pleading guilty because prosecutors largely control the criminal justice system, and they want to get as many convictions as possible as quickly as possible. They often give a sweetheart deal to a defendant who cooperates but demand a Draconian sentence for someone convicted after trial. In many cases, an innocent defendant’s decision to plead guilty is entirely rational.583 Even innocent people sometimes get convicted.

It helps a defendant, whether guilty or not, if he can provide evidence against a more prominent individual. His sentence will be adjusted, often radically, based on the productivity of his cooperation with the government, as seen in U.S. v. Lauer. The system, especially in the hands of the less scrupulous prosecutors, encourages defendants to turn on other, more important individuals, regardless of the latter’s guilt.

Plea bargaining has been broadly criticized. Federal District Judge Jed S. Rakoff condemned the system that gives inordinate power to prosecutors rather than to judges and juries, and he has written a book on criminal justice.584 Defense attorneys agree.

“Prosecutors are able to secure plea bargains in ways that make it nearly impossible for normal, rational, self-interested calculating people to risk going to trial...[The] inescapable conclusion [is] that the federal criminal justice system has become a crude conviction machine instead of an engine of truth and justice.”585 Judges generally go along with the plea-bargaining process because that is the system, and it clears their calendars without being burdened by trials. Without guilty pleas, the criminal justice system would collapse. The system also takes away from trial judges the job of deciding upon the appropriate sentence for a convicted defendant, which many judges find onerous.

Occasionally, a judge will object to a sentencing agreement, but those instances are rare. The problem is particularly acute in prosecutions under the securities acts where Congress legislated a sentence of up to twenty years for substantive securities crimes 200

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(but not for conspiracy), many times what any other country in the world imposes for a first-time conviction for a nonviolent white-collar crime.

This is not what Lauer expected of the United States government when he came to the country he adopted. He had imagined an equal and open contest between prosecutors and defendants and their lawyers before upright judges and juries.

Instead, from Lauer’s perspective, he faced a conviction-extortion racket. Lauer saw himself as the protagonist in Franz Kafka’s The Trial, a frightening description of a vague prosecution of a defendant virtually bereft of rights in an unnamed totalitarian country, which he knew was far from fiction.586 The prosecution’s conviction rate was appalling for defendants who went to trial in cases that grew out of the FBI’s Bermuda Short sting, which was because those indicted may have been far less culpable than those who lured them into the scheme and testified against them. After one Bermuda Short trial, a juror described the pair as “slime.”587 The standard conviction rate in the federal system is around ninety-seven percent, which includes defendants who plead guilty and those who are convicted after trial.588 The DOJ’s tally in trials arising out of Bermuda Short was four out of eleven or thirty-six percent.589 The upshot of U.S. v. Lauer was that Lauer was declared innocent of criminal wrongdoing based on the facts presented to the jury by the government’s witnesses. Even after the passage of nearly eight years following the filing of the SEC complaint against Lauer, no documents incriminated Lauer, such as letters, memoranda, emails, or wiretaps. Because Lauer did not testify, the record he presented in defense of the charges against him did not radically differ in the criminal prosecution from what was presented to Marra.

The government’s case had been enhanced by two new witnesses, Eric Hauser (who, as noted, was the person at Lancer Management Group whom Lauer placed in charge of trading stock) and Milton Barbarosh (who had defended the valuation of many of the companies in which Lancer Management had made investments). Both had become available to the prosecution 201

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through intervening plea bargains, so its case against Lauer was stronger than the SEC’s. But when the government’s witnesses were subjected to the ultimate test of cross-examination, they and their sponsor, the U.S. Government, failed. The jury unanimously acquitted Lauer and his codefendant Martin Garvey. Since the government’s case depended on the testimony and credibility of its witnesses, Marra had no business granting summary judgment to the SEC. Finally, if the government could not prove its charges beyond a reasonable doubt, how could anyone conclude, as Marra did, that the SEC’s nearly identical evidence was undisputed?

To remind you, when I refused even to discuss a plea deal with the prosecutors, they said, in sum and substance, that it doesn’t matter what the actual evidence is or isn’t because we could get convicted of the “crime” of being “white, educated and rich.” Suffice it to say, none of the jurors were white, educated (other than the alternate, none had a college degree) or rich...And recall the jury-affinity charade by the prosecutors. She was black [and] female, mirroring about half the jury members’ physical profile.

Her only job, other than to stand up and enthusiastically wave to the jury when ostentatiously introduced each morning [by Schimkat], is to sit within a hand-holding distance of the jury box, with a perma-smile glued on her face. It is truly amazing to what lamentable lengths these prosecutors were willing to go to try to convict two defendants (and send me to prison for the rest of my life!) whom they knew to be innocent (speaking of Kafka!)

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Chapter 16

Lawyers to Lauer’s Rescue, Sort of What remained in SEC v. Lauer was oral argument in the Eleventh Circuit. After Lauer’s acquittal in the criminal case, the court of appeals scheduled oral argument for February 1, 2012, in Atlanta. Lauer still hoped to get an attorney to argue the appeal. Not surprisingly, he was having trouble finding a lawyer who would agree to study the eight-year record and argue the appeal for nothing. Hiring a lawyer on a contingent basis seemed equally out of the question. Lauer owed the United States over $62 million, plus accumulating post-judgment interest.590 Lawyers rarely represent defendants on a contingent basis. Defendants do not receive money when they win, and Lauer’s situation was far worse than most. However, there was the prospect of his receiving millions of dollars if he could reverse the judgment against him after a trial and then sustain the reversal in another appeal. But that would require additional years of litigation without payment. Moreover, even if the court of appeals reversed the judgment against Lauer, it would likely focus on one or two errors and return the case to the district court for further proceedings since presumably, the errors would not be repeated.591 This could lead to a trial, another appeal, and possible reversal, followed by another trial...

Norman Moskowitz, who had initially represented Michael Lauer in the criminal case, knew Allan Gerson, a prominent lawyer in Washington, D.C., who specialized in international 203

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law. Moskowitz told Gerson about Lauer and asked him if he would argue the forthcoming appeal, then just three weeks away.

Incidentally, Moskowitz added, Lauer had no money to pay lawyers and would not have money unless the Eleventh Circuit reversed the judgment, and then some. Gerson’s ability to handle the case was hampered by the fact he was busy. Moreover, the issues were not international law but federal securities law.

Gerson knew me from when both of us were Of Counsel at the law firm Hughes, Hubbard & Reed, and I had assisted him with the lawsuit involving the terrorist grounding of Pan Am 103.592 Gerson and I reviewed the documents Lauer sent me. Based on a preliminary review, I concluded there were potential winnable issues, but neither of us could estimate the chances of winning or what “winning” would mean. Most of the errors were the kind that would not get the case dismissed but merely sent back for a trial in Florida, a lengthy trial, perhaps before Marra.

The extent of the unconscionable behavior by the SEC, receiver, and the district court angered me, so I agreed to argue the appeal if a satisfactory financial arrangement could be worked out with Lauer. Lauer knew he needed help, but he insisted that he would be responsible for paying fees only out of the recovery of his frozen funds and then only after he provided necessities for his family.

Ultimately, with Gerson handling the negotiations, we agreed that Lauer would pay us $2 million if we somehow got the case dismissed and $1 million if we got the case sent back to the district court and Lauer eventually recovered enough of his frozen funds to pay us. Lauer would pay expenses. Because the amount of work seemed limited, we agreed that our representation of Lauer would include seeking review in the Supreme Court from any unfavorable decision of the court of appeals. We did not discuss what would happen if the court of appeals reversed summary judgment and remanded the case for a trial.593 In practice, first Gerson and then I paid virtually all out-of-pocket expenses, including travel expenses, filing fees, printing, and postage.

I immersed myself in the case before Gerson signed off on the terms of a retainer agreement on January 19, 2012. With the size 204

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of the record overwhelming – some 2500 documents had been filed in the district court in the case, some of them hundreds of pages long – I started with Lauer’s brief and reply brief in the court of appeals, which would provide an introduction. More importantly, they would define my arguments. I then reviewed other documents filed in the district court, including the SEC’s motion for summary judgment and Marra’s opinion granting it. I frequently emailed Lauer for explanations, and he patiently educated me. Even though I worked twelve-hour days for two weeks, I did not feel entirely comfortable with the voluminous material. It was not a good feeling. It was presumably one that Lauer shared.

Lauer and I disagreed over the importance to the appeal of the events that led up to the SEC’s complaint against him in 2002 and 2003 and his acquittal in the criminal case in 2011, two years after Marra entered final judgment and after he filed his brief on appeal. Lauer believed that his chances would increase dramatically if the court saw the entire picture. However, courts of appeals looked for reversible errors, not abstract unfairness.

The acquittal occurred after Marra had entered judgment, and Marra could not be faulted because he ignored an event that had not yet happened. The SEC had an airtight answer to reliance on the criminal case. I told Lauer I would try to inject the acquittal as much as possible, but it was a stretch.

A few days before argument, the Eleventh Circuit’s website listed the panel as Circuit Judge Beverly B. Martin, Senior Circuit Judge James C. Hill, both from the Eleventh Circuit, and visiting Senior Circuit Judge David B. Ebel from the Tenth Circuit. Judge Martin had graduated from Georgia Law School, had been appointed U.S. Attorney by Clinton, district judge by George W. Bush, and in 2010 circuit judge by Obama. In his late 80s, Judge Hill had been appointed to the United States District Court by President Richard Nixon in 1974 and promoted to the court of appeals by President Gerald Ford two years later.594 He had gone to Emory Law School. Judge Ebel, who Reagan had appointed, had a splendid record, including Editor-in-Chief of the Michigan Law Review, law clerk to Supreme Court Justice Byron White, 205

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and a senior lecturer at Duke Law School. The panel seemed fine to me, intelligent and experienced. Best was a panel that would not hesitate to reverse if it found prejudicial error, one that would call a spade a spade.595 Lauer, Gerson, and I flew to Atlanta and met for dinner the evening before the argument. We decided that I would start my oral argument by telling the judges that Zloch and Marra had committed an error by making him proceed pro se, one of the issues on appeal.596 The rest of the time would pinpoint specific errors, especially the grant of summary judgment. Unless the judges – more specifically their law clerks under the judges’ orders – were prepared to do a considerable amount of work, the outcome was iffy. Our goal was to make the judges want to reverse. We met for breakfast and then walked the few blocks to the courthouse.

When the case was called, the SEC’s appellate counsel, Hope Hall Augustini, and I walked to our respective tables in front of (and below) the three seated judges.597 Judge Martin was the panel’s chief judge and sat in the center. Before the argument had gotten far, she interrupted to ask me to file a supplemental brief in the case, one of full length, a very auspicious beginning, although requiring considerable work. Augustini asked for and received the right to file an opposing brief thirty days after.

Ebel cautioned that the new brief could not raise any new issues, and only those points specifically included in the portion of Lauer’s brief labeled “Argument” could be considered.598 Lauer, a pro se layman, had included some of his contentions in the factual section and had not framed some of the arguments he made as strongly as he might have. He also may have missed good arguments. Laypeople were supposed to be given leeway under the law of the Eleventh Circuit. Ebel, however, seemed to go out of his way to constrain what Lauer could argue. Later in the argument, Ebel challenged my position that the SEC’s motion for summary judgment was required to present and dispose of evidence favorable to Lauer to satisfy the requirements. I was positive he was wrong. How could a movant demonstrate there were no issues of material fact without discussing all the 206

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evidence?599 I tried to explain the problem, but Ebel did not seem convinced.

When Augustini rose to argue, Hill asked her about the proposed modification of the order that would have given Lauer $10,000 per month to support his family and retain legal representation. When she defended the amount as sufficient for these purposes, Hill responded, “What planet are you on?” 600 Hill and Ebel pressed her on procedural matters to the point that she had to consult with SEC trial counsel Christopher Martin, who was sitting in the audience, to answer some of the questions.

Hill also questioned Augustini about the acquittal in Lauer’s criminal case, which I had mentioned in my oral argument. The panel barely interrupted the second half of her argument, which seemed to be a good sign.

It was obvious that I would write the supplemental brief with Lauer and Gerson providing comments and suggestions.

The asset freeze, summary judgment issues (including collateral estoppel), the motion to transfer the case out of Florida, the offshore location of the hedge funds and their not being subject to federal jurisdiction or covered by securities statutes, the computation of the disgorgement award, the award of interest on frozen funds, and more made their way into what we called Appellant’s Post-Argument Brief. I argued that the district court had no jurisdiction under any statute. In some instances, the brief recharacterized what Lauer had argued, such as his characterization of the SEC’s failure to include in its argument evidence favorable to him, which he called a violation of “the rule of completeness.”601 The writing of the brief progressed. Lauer, in New York City, made his comments by email. Lauer could not come to Washington because his mother needed his attention. I did not want to take the time to travel to New York.602 Lauer especially wanted two points emphasized in the new brief. The first was the start of the FBI’s and the SEC’s investigations of Lauer, including the events relating to Bermuda Short and what is referred to as “Cat’s Paw,” the name some give to the improper use of information obtained in liberal civil discovery to build a 207

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criminal case. The SEC and DOJ had undoubtedly engaged in an improper exchange of information; the SEC gave material to the FBI that it said it would keep confidential, and the DOJ had issued a search warrant for secret grand-jury documents that it gave the SEC. Nevertheless, I disagreed with Lauer. Those facts were extensively discussed in Lauer’s pro se brief, and the relatively sparse record had no direct impact on the issues we were arguing on appeal.603 The other point that Lauer wanted to be featured was his acquittal on the criminal charges. For Lauer, the acquittal was a major event in his life, and justifiably so. He had faced a prison sentence of over twenty years. The draft mentioned that fact once in the history of the case. I repeated to Lauer that review by the court of appeals was confined to evidence that had been (and could have been) presented to the district court, so the acquittal was legally irrelevant.604 Also, the court knew about it. Giving attention to the acquittal might distract the court from other arguments that there was a chance of winning. A second reference to the acquittal was made, but Lauer remained unhappy with its cursory treatment.

I had a long-planned vacation scheduled in late February 2012, so to be sure that there would be no problem when I returned a few days before the brief was due, I filed a motion for a one-week extension of time until April 7 to file the brief and also for permission to file a brief with 3,000 extra words, both of which Lauer wanted. The brief seemed to be in good shape.

When I returned to Washington, there was no word from the appeals court on the motion for an extension of time, so I decided to file the brief to meet the earlier deadline.605 I spoke to Lauer on the telephone two days before the deadline. To my surprise, he ordered me not to file the brief even though we had not received the extension. When I explained the risk, Lauer repeated he did not want the brief filed. When I asked why, he said “because it’s terrible” but would not say why. I was baffled. I replied I was obligated to file because I was his attorney and an officer of the court. Lauer told me I was fired. I replied that I had no choice but to file the brief as an officer of the court because I was directed 208

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to submit it.606 Lauer said he would get another attorney. I was confused. I did not know what Lauer had in mind, but I was scared that something bad would happen concerning the brief and our appeal. Very scared.

Lauer insisted that I include a letter with the brief that stated that the brief was being filed over his objection. Despite our entreaties, neither Gerson nor I could convince him that the brief was fine and that sending the letter was a terrible idea and could lose the case. He was adamant. With great reluctance, we filed the 70-page brief along with a letter that included that it was filed over the objection of the party, noting a “cc” to Lauer on the letter. Gerson and I saw our chances of winning the appeal slip away. For reasons that bother me even today, I did not consider refusing to send Lauer’s criticism to the court; what was filed was up to the lawyer. But if I had refused Lauer’s request, it is likely he nevertheless would have brought it to the court’s attention with the result that I could be disciplined for refusing his request. I still feel I should have been able to do something, although I’m still not sure what607 I still did not know what made the brief “terrible.” Besides, what Lauer regarded as a mistake could reflect the poor state of the record in the district court, something beyond my control. I couldn’t raise the problem with the court of appeals since it might suggest that Lauer was irrational or I was incompetent or worse, and I might also violate my ethical duty. I decided that the best course was to do nothing further regarding Lauer’s criticism. If the SEC’s brief asserted factual or legal errors in the filed brief, my successor could deal with the problem in a reply brief. It could be handled professionally while informing the court of appeals that there was nothing of consequence wrong. That was something Lauer’s new attorney could explain to the court in a reply brief, something I could not do.608 On April 9, 2012, Lauer tried to file his brief pro se to replace the brief filed. When I read his brief, which Lauer sent me the same time as he mailed it to the Eleventh Circuit, I was surprised to find that the major difference between the two briefs was Lauer’s seven-page introductory discussion about the 209

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criminal case and his acquittal, but no correction of errors. His brief pointed out that the prosecution had failed to rely on key witnesses, including Receiver Marty Steinberg; the prosecution did not employ an expert witness; and Cowen had testified that the prosecutors threatened to indict his wife if he did not testify, which was in Lauer’s initial pro se brief. The brief included inadmissible characterizations and quotations from jurors printed in newspapers.609 The clerk of the court rejected Lauer’s brief because an attorney represented him.

In mid-March the SEC filed a motion to extend the time for it to file its opposing supplemental brief for sixty days: The Commission seeks a 60-day extension of time until June 1 to file its brief because it requires more time to address arguments that have never been raised before in this appeal, and because of conflicts in my work schedule. Mr. Lauer’s new brief contains no statement of facts, and a one and half page of “introduction” followed by 67 pages addressing thirteen discrete arguments. At least six of these arguments have never been raised in this appeal, and three of these arguments challenge Mr. Lauer’s liability under various federal securities law. In addition, Mr. Lauer argues that the summary judgment should be reversed because he was deprived of money to pay for legal representation.610 Over Lauer’s objection, I filed an opposition to the motion, which cited the long history of the proceeding, the enormous resources of the SEC, and the prejudice to Lauer of further delay.611 Lauer had not replaced me, and I was still counsel of record and felt bound to do the best job I could. I did not expect to win on the motion, but I wanted to take the opportunity to tell the court of appeals how the delays had prejudiced Lauer.

Meanwhile, Gerson, who maintained a civil relationship with Lauer, tried mightily to restore the relationship between Lauer and me, but without success. There was still no word from the attorney Lauer said he retained, and I began to wonder whether he would get one. Separately, very separately, in fact, Lauer, 210

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Gerson, and I settled in for what all thought would be an early ruling granting the SEC’s motion for an extension of time to file its brief and a far longer wait for the court’s decision. The estrangement between Lauer and me was to end unexpectedly.

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Chapter 17

Down the Drain The court of appeals rendered its decision on April 19, 2012, without deciding the SEC’s motion for a sixty-day extension of time to file its brief and without receiving its response to our newly filed brief.612 The opinion was short, dismissive, and per curiam (unsigned) with the legend on the top, “Do Not Publish.” Unpublished per curiam opinions are the lot of routine cases with no significant legal issues, not major cases that involve difficult questions of law. Eleventh Circuit Judge William H. Pryor, Jr., whom we shall encounter later, wrote in an op-ed piece in the New York Times: “Today, courts use unpublished opinions to issue quick, reasoned decisions in routine cases based on settled precedent.

For example, thousands of petitions to review deportations and denial of Social Security benefits turn on discrete facts determined by administrative judges; hearing oral arguments and issuing published opinions in most cases would only delay decisions that should be speedy.”613 Pryor was not describing SEC v. Lauer.

The judges backtracked on the negative statements they made at oral argument about the denial to Lauer of funds to defend himself and found that Marra had done nothing improper.

“Heavy-handed,” they now called it, without any discussion of the facts or the law. The opinion also demonstrated that the court was seriously confused about the case. It had crucial facts wrong.

It also ignored Lauer’s and my valid arguments.

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The first page of the opinion stated, “The pertinent facts and procedural history are capably set forth in the district court’s Order and Opinion.” Capably set forth? The district court had scanned the SEC’s unorthodox and defective statement of undisputed material facts and legal arguments! Other courts of appeals have condemned a district judge’s copying a party’s filings and presenting the product as its own creation. Citing a “ghost-written order,” the Ninth Circuit reversed a district judge and ordered the case reassigned to a different judge on remand.614 An opinion by Judge Frank H. Easterbrook from the Seventh Circuit based in Chicago excoriated the practice, concluding that, “Unvarnished incorporation of a brief [by a federal judge] is a practice we hope to see no more.615 The Eleventh Circuit celebrated it.

The Eleventh Circuit’s opinion did not provide a single citation to the district-court record, even though the opinion said, “We review a district order granting summary judgment de novo.”616 The court of appeals must decide the case as though it was the first to decide, viewing all facts in the light most favorable to Lauer as the non-moving party and drawing all inferences in his favor. The opinion was little more than an impermissible summary of the district court’s opinion instead of a review of the record compiled in the district court. Although it never said so, the opinion ignored Appellant’s Post-Argument Brief, which the court itself requested. Apparently, the court had silently revoked its explicit ruling, allowing Lauer an additional brief, as a punishment for complaining about his lawyer.

The opinion, which filled only five and a fraction pages of the printed reports of unpublished opinions, summarily disposed of our arguments on the freeze. “By offering only estimates as to his net worth, Lauer did not meaningfully rebut the SEC’s showing that his potential disgorgement exceeded his net worth... As a result, the district court would have been unable, based on the information before it, to freeze specific assets while releasing funds that Lauer claims should have been excluded...[T]he district court’s decisions...though perhaps heavy-handed, were not an abuse of discretion.”617 There was no explanation. That was it.

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Lauer’s presentation under oath of his finances to the district court was more than satisfactory. Of course, one’s net worth would be an estimate; it changes by the minute. Lauer had filed a financial statement under oath prepared by his accountants that listed his assets and liabilities separately on a form the court and the SEC provided to Lauer. He had attached to his motion his brokerage statement, which showed $29,573,178 in securities, and the value of his share in his companies of $39,800,384. He listed which stocks he owned and how many shares of each. The SEC had conceded that the hedge funds owed approximately him $48 million in cash. Neither the SEC nor the receiver ever challenged Lauer’s financial statement. The appeals court’s actions were gratuitous.

The court ignored the SEC’s obligation to establish a reasonable figure for the asserted disgorgement, about which Lauer had repeatedly written. After all, the SEC and district court had frozen for five years all the assets of someone whom no one had found to have done anything wrong, including adding a provision prohibiting him from selling stock in his brokerage account and leaving the proceeds in his account. The court also simply assumed that the district court was entitled to freeze Lauer’s assets up to the amount of possible disgorgement without any showing of probable cause to believe he had done anything wrong or proof that Lauer’s assets were tainted.

Also unmentioned by the judges were Lauer’s financial obligations, especially to his now five minor children, elderly mother, and the IRS. Depriving a litigant of his constitutional right to use his own money to feed his family and to litigate against the forces of the United States certainly was heavy-handed, but most people might think a stronger condemnation was in order, such as violating Lauer’s due-process rights.618 Lauer had been drastically hobbled during his battle in the district court.

The court of appeals also rejected Lauer’s effort to transfer the suit out of the Southern District of Florida. The court noted Lauer’s delay in filing a motion to transfer. It also said: “The SEC staff, Steinberg, and all of the evidence were located in the Southern District of Florida; and numerous motions were 214

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pending before the district court, which was by then familiar with the case. Thus, while transfer might have benefited Lauer, it would have inconvenienced all the other actors in the case, and was not therefore required.” The judges ignored that just days after his decision denying Lauer’s motion, Zloch had reassigned the case to a new judge, who had no familiarity with the record. Zloch had undoubtedly made up his mind earlier.

They also ignored cases cited to it in the Post-Argument Brief that the convenience of the lawyers is irrelevant, especially since the SEC was a national entity and that the receiver, a partner in a national firm with a New York City office, had grabbed the records and computers and moved them to Miami from New York and Connecticut without explicit authority. That is why the evidence was situated in Florida. The grounds for bringing the case in south Florida were extraordinarily weak.619 Next, the panel dealt with Lauer’s argument that his was primarily an offshore operation and the SEC could not sue based on offshore transactions and activities. The opinion noted that the argument, based on Morrison v. Australia National Bank Ltd. (2010), was “not jurisdictional, but is a merits question...As a result, Lauer had to raise this at the district court, even though the authority for his argument was decided after he filed his initial brief in this Court...Lauer did not raise the argument, so the argument was waived.”620 The court was doubly wrong. First, Lauer did not have to raise that specific argument in the district court. In Morrison itself, the defendant argued in the district court only lack of jurisdiction and not that there was a statutory violation, so the Supreme Court had deemed that argument sufficient to raise the statutory issue, at least for pending cases. Like in Morrison, Lauer’s case was on direct appeal. The court invented a rule that prejudiced Lauer, namely, that he had to make an objection more specific than required at the time.

Second, Lauer did raise the precise argument in the district court. His motion to dismiss the complaint, which the court of appeals read or should have read, stated: “However, and indisputably, the [Securities and Exchange] Act does not 215

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authorize or empower the SEC to force registration, regulate or undertake enforcement actions against foreign companies whose shares are listed exclusively on offshore exchanges (or not listed at all...”621 This was Lauer’s pro se motion to dismiss that Marra wrongfully struck, discussed in Chapter 12. It was made at a time the defect was jurisdictional, which meant the district court was required to entertain the issue even if no party raised it. Most likely, the court of appeals had not read key documents in the record in the district court, even though it was obligated to review the record in the trial court de novo. The court of appeals without basis refused to consider a meritorious argument that Lauer had made in both the district court and the court of appeals.622 The court then made yet more major errors: “Lauer waived his argument...that he should be able to rely on expert testimony in his criminal proceeding.”623 But Lauer sought to rely on expert testimony given years earlier in U.S. v. Kelly. Lauer wrote his pro se brief in the court of appeals before his criminal trial, which was clear from the briefs. In fact, there was no expert testimony in his criminal case, which took place two years after Lauer had appealed Marra’s decision. There was also no waiver.

Lauer did correctly argue, however, that Marra wrongly rejected the expert testimony given years earlier in U.S. v. Kelly.

The appeals court’s opinion never explained how Lauer had waived his argument, which he raised in the district court and the court of appeals. Marra had granted the SEC’s motion to strike Professor Thel’s expert testimony on the baseless ground the parties in the two cases were different. Lauer’s lengthy quotes of Professor Thel’s testimony on multiple occasions make the court’s argument ridiculous.

The remaining handful of typewritten pages reviewed the grant of summary judgment and the disgorgement, a paltry amount of attention to the issues and still without a single citation to the district-court record. The court’s discussion of the SEC’s proof of manipulation and Marra’s finding of collateral estoppel based on the default judgment entered by the state court in California was in toto:

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Though Lauer argues that he could not have manipulated the stocks, the California judgment estops him from arguing that he did not manipulate TFGP stocks; and, even apart from those facts Lauer is estopped from contesting, the district court found ample [sic] evidence of stock manipulation as well.624 The court ignored the unanswerable argument contained in both Lauer’s pro se Brief and the Post-Argument Brief that Zloch had ordered Lauer not to defend that suit, so how could he be punished for following the court order? Moreover, the California case related to a only one of the stocks the SEC alleged Lauer had manipulated.

The Post-Argument Brief gave another reason why there was no basis for applying collateral estoppel; namely, Lauer had never litigated the issue in a prior case, but instead, a default judgment was entered against him based on his failure to participate in the litigation. Default judgments do not support collateral estoppel with respect to California decisions.625 A party is entitled to litigate an issue at least once. The Eleventh Circuit, which had relied on an ambiguous lower-court case in California,626 missed the fact that California’s highest court required that there be actual litigation in the first case for collateral estoppel to apply, as discussed in an endnote.

The statement “the district court found ample evidence of stock manipulation as well” was an elementary and huge mistake. “Ample” means “more than enough,” not “all.” That is language upholding findings of fact following a trial where the issue is whether the finder of fact had an evidentiary basis for its position and the jury’s judgment cannot be attacked on appeal.

The operative word in summary judgment is “undisputed.” Also, the court of appeals overlooked its obligation to review the record de novo. It should have been basing its decision on the record in the district court without reference to Marra’s opinion (“the district court found...”).627 That is not de novo review. Although it may be hard to accept, the opinion suggests that the panel did not carefully read Lauer’s brief in its court. The mistake involving 217

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U.S. v. Kelly has been noted. So has Zloch’s order that Lauer refrain from litigating Hemstead, the California case, quoted in Lauer’s brief.

The appeals court also wrote: “Lauer asserts a ‘rule of completeness’ violation since the SEC submitted only partial depositions into evidence. Although Lauer is correct that the SEC did this, Lauer never submitted the remaining portions he desired and never moved the court to compel the SEC to submit the complete documents, as the Federal Rules of Civil Procedure permit. See Fed. R. Civ. Proc. 32(a)(6). As a result, no rule of completeness violation occurred. See Fed. R. Ev. 106.”628 That statement was demonstrably wrong. As noted, Lauer complained to Marra about the SEC’s failure to include evidence that exculpated him and quoted page after page of deposition testimony favorable to him in his opposing opposition to summary judgment, his motion for reconsideration in the district court, and on appeal.

The opinion of the appeals court read: “The district court had before it overwhelming evidence of Lauer’s knowing false statements, coming in a number of forms (PPMs, monthly newsletters, fake portfolios, and conference calls), pertaining to a variety of issues (portfolio positions, the status of audits, concerns of auditors, and staff backgrounds), and made to several investors, auditors, and potential investors.”629 The word “overwhelming” is not the same as “undisputed.” “Overwhelming” is argumentative and subjective. It suggested a large majority. The best reading of the facts was that Marra had before him many statements

by Lauer that SEC witnesses testified were false. There was no incriminating documentary evidence. There was only oral testimony given by vulnerable and impeached witnesses. The jury was entitled to disbelieve the SEC’s witnesses.630 The case did not warrant summary judgment.

The Eleventh Circuit upheld Marra’s ruling that Lauer was an investment adviser as a matter of law. Ignoring the incorrect ground quoted in Chapter 12, namely, that a finding that Lauer violated another securities statute required finding that Lauer violated the Investor’s Advisers Act of 1940,631 the appeals court 218

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relied on a Sixth Circuit case. There, the defendant, who was a hedge-fund manager, argued that as a matter of law he could not be both a hedge-fund manager and an investment adviser.

The Sixth Circuit disagreed, holding the issue was a question of fact for the jury and that the district judge did not commit error in “[p]ermitting the jury to determine the existence of a fiduciary relationship.”632 Lauer had claimed that the facts failed to show he was an investment adviser. The case supported Lauer, not the SEC. Once again, the Eleventh Circuit was wrong on an elementary matter.

Turning to disgorgement, the Eleventh Circuit then wrote: “Evidence supports the district court’s findings regarding illgotten gains. At the evidentiary hearing, the SEC’s expert witness provided a reasonable approximation of Lauer’s ill-gotten gains.

Lauer failed to rebut the initial showing by the SEC.”633 There were at least two conclusive answers to this statement.

First, the SEC had presented only the gross amount received by Lauer during the so-called fraud period. But only by introducing proof that Lauer’s ill-gotten gains were somehow similar to what he physically received during the same period can the court’s statement be true. But there was no evidence of that. All Kapila said was, “But for the fraud, he wouldn’t have received this money.”634 The SEC had simply assumed they were closely related, but that was not evidence and, besides, was false, as explained in Lauer’s pro se brief on appeal and in the Post-Argument Brief, which among other things, explained that Lauer was on a cash basis while the hedge funds were on an accrual basis.635 That Lancer Management and the funds owed Lauer $48 million alone was conclusive proof that the income of Lancer and Lauer was not the same during any calendar period. In addition, the amount Lauer received from the funds was within his sole discretion, so there was no necessary connection between the two.

Second, Lauer rebutted the SEC’s initial showing with uncontradicted proof that the hedge funds owed him $48 million, established by the SEC’s admission at the TRO hearing on July 10, 2003, and PricewaterhouseCoopers’ audits, copies of which were exhibits at the hearing. The court of appeals had not read the transcript of the disgorgement hearing, either.

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Finally, Marra charged Lauer prejudgment interest, i.e., interest before final judgment, even though Lauer had been denied access to the funds on which interest was charged. The district court had decreed that Lauer could not use his money, so how could he be charged interest? It was like a bank charging someone interest for not taking out a loan. Lauer’s pro se brief had cogently argued the right to charge interest and that the long duration of the case was not his fault, so he should not be charged interest. The appellate panel dealt with Lauer’s principal objection by ignoring it. It discussed only the rate of interest: “Here, the district court did not abuse its discretion by applying the commonly-used IRS underpayment rate.”636 The amount involved, it bears repeating, was $19 million (plus post-judgment interest on that amount from 2009).

My anger then turned to Lauer. Lauer was responsible for alienating the court of appeals with his complaints about me.

While the judges were sympathetic at the oral argument (except for Ebel), they now seemed vindictive. But was that realistic?

These were federal circuit judges, each with more than a decade of federal judicial experience. Could a spat, or even a war, between a lawyer and his client cause the court of appeals to do what it did, which was to punish a client for objecting to what his lawyer filed as incorrect? The court punished what, on all accounts, appeared to be an honest client who objected to his lawyer’s apparent distortions and other misconduct. Surely, a panel of dedicated courts of appeals judges would not act that way, I told myself half-heartedly.

Another possibility is that they could not stomach the mess created by two district judges and would refuse to perpetuate the mess. Nine years of litigation had destroyed Lancer Management, Lancer Management II, and three hedge funds collectively valued at over $1 billion by a fire sale of valuable stock and other actions; scores of investors were irrevocably harmed. What could a district judge, even a competent and conscientious one, do to rectify the wrongs done if the court of appeals reversed and remanded for trial, and the verdict was in Lauer’s favor? The 220

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metaphor of unscrambling an egg seemed appropriate. The court of appeals could avoid many of these problems by affirming.

In fact, there was no misconduct or mistake by me. Weeks later, Lauer explained that he was outraged by my failure to emphasize his acquittal in the criminal case, which had almost consumed him. The acquittal was on virtually the same record as summary judgment. If there was no proof beyond a reasonable doubt in the criminal case, how could there not be disputed issues in SEC v. Lauer? It was an appealing point, but it was legally flawed. Evidence not admissible at trial cannot be relied upon on summary judgment. Moreover, even if the acquittal was inconsistent, that might not work. But that was no longer the issue. We had filed the brief, Lauer had sent the letter, and the court of appeals had affirmed.

What to do next? The obvious course was to file a petition for rehearing in the court of appeals, seeking reconsideration by the three-judge panel or, in the alternative, all the active judges on the Eleventh Circuit. However, we could not complain that the panel ignored our Post-Argument Brief because we had no proof that the judges did. And even if the judges had, it would not have been clear that that constituted reversible error. Certainly, the panel would not reverse itself for that reason. The hurdles to obtain review and reversal by the entire complement of active circuit judges (a rehearing en banc) were also forbidding. A majority of the judges would have had to grant a rehearing en banc. But all this was beside the point. I had been fired.

What came next was a shocker. Lauer sent Gerson and me an email in which he expressed remorse. Reading the opinion of the court of appeals made him recognize we were right about the acquittal’s legal irrelevance.637 Sometimes quick to anger, Lauer was equally quick to acknowledge he was wrong. He said he very much wanted us to write a petition for rehearing.

While I had mixed feelings about continuing to represent him, I agreed. Lauer’s attitude towards lawyers had been poisoned by his adversaries, the judges in SEC v. Lauer, and the other lawyers in the case.

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As I wrote the petition for rehearing, Lauer could not have been more agreeable or more helpful. Reluctantly, we had to omit several arguments from the petition; space was limited (fifteen pages), and some arguments had a better chance of winning than others. We focused on rulings that contradicted Supreme Court decisions since we had little hope the panel would reverse itself and hoped the court en banc would act.638 Lauer and Gerson reviewed my drafts. Lauer responded enthusiastically, often along the lines, “Great, but have you considered...?” Before long, Lauer was ending his emails with a smiling-face emoji, :-) and occasionally a grimace.

On June 20, 2012, the court of appeals released its decision. It was one word – “DENIED” – with the notation that not a single judge had voted for rehearing en banc. The Eleventh Circuit had routed us. Lauer described what the Eleventh Circuit did as a “betrayal of their oath of office.” The only place to continue the fight was in the Supreme Court.

A century ago, the Supreme Court decided all cases presented to it, however trivial and however little they had to do with the federal government or federal law. Today, the mandatory jurisdiction of the Supreme Court is a negligible percentage of the total. It is relegated to suits brought by one state against another and objections to legislative redistricting by the states.

Otherwise, the Supreme Court decides which cases it would accept.

The problem we faced was that there was no realistic chance of getting the Supreme Court to hear the case. Approximately 8,000 petitions for certiorari are filed each year in the Supreme Court. The Court accepts about eighty, or one percent. Accepted are cases where two or more courts of appeals disagreed over the meaning of a federal statute or, occasionally, the Constitution, or when federal law is otherwise uncertain in an important area. It would be unseemly for parties identically situated to win in one part of the country and lose in another because federal law was construed differently. Moreover, entities that operate in multiple parts of the United States want to know the applicable law since 222

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they might be sued anywhere. The Supreme Court pronounces the law of the land. As Justices are fond of saying, the Supreme Court is not there to correct lower-court errors. It does not have the time.639 My anger blinded me to the fact that a petition would be Quixotic. But since I would be paying for the $3000 or so printing costs myself (documents filed with the Supreme Court must be printed) and not billing a client for my time, I did not have to worry about wasting a client’s money. Legal ethics rules do not protect a lawyer from squandering his own time and money on hopeless endeavors.

Despite my best efforts, I could not credibly cram Lauer v.

SEC into the traditional mode of a split in the courts of appeals.

Although the Eleventh Circuit’s opinion was inconsistent with opinions in other circuits, the opinion was clearly an aberration, and besides, the incorrect law was not articulated clearly. It had simply ignored Lauer’s arguments. However, one helpful fact was that between 2002 and 2007, the SEC had disgorged $10 billion from defendants. Disgorgement was important, we argued. We also argued that the Eleventh Circuit had failed to follow Supreme Court precedent, which theoretically is a ground on which certiorari can be granted. On August 27, 2012, we filed a petition for certiorari in Lauer v. Securities and Exchange Commission.

Supreme Court cases in which a department or agency of the United States is a party are handled by the Solicitor General, an elite figure in the Justice Department and second in line to become Attorney General after the Deputy Attorney General.

The SG’s assistants are brilliant career lawyers or younger lawyers who usually had clerked for a Supreme Court Justice. They are more objective than the SEC; they are also usually smarter and experienced in how the Supreme Court operates. They are also busy.

The SG had thirty days to file his response plus an automatic thirty days more upon request. A respondent may also waive the right to respond, often the wisest and most economical course, when a petition appears to lack merit on its face or in the rare case in which a response might make it more likely that the 223

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Supreme Court will take a case. On September 27, the SG waived his right to reply. If the respected Solicitor General did not think the petition warranted an opposition, what chance was there?

That came as a disappointment, although in retrospect, it should have been fully expected.

Hope expired at 10:00 a.m. on Monday, October 29, 2012, when the Supreme Court posted its orders on its website. It had denied certiorari without comment. With the denial, Allan Gerson withdrew from the case. He had agreed to participate through certiorari, and he had other matters to attend to. I could not, however, let go.640 Deep down, I probably recognized my task was hopeless because it seemed the judges would do everything in their considerable arsenal to prevent us from succeeding. Still, I refused to stare the facts in the face.

At roughly the same time as Gerson left, Martin Garvey, Lauer’s former colleague at Lancer Management, agreed to help.

While he was not a defendant in SEC v. Lauer, the receiver had sued him in other cases, so he knew the facts and legal arguments.

He had even worked as a paralegal at a major New York City law firm. He was bright, knowledgeable about financial matters, had an active mind, and an uncanny way of coming up with helpful documents from the mountain of records in the cases and elsewhere. He was unemployed and broke, but he was willing to spend his time and energy helping Lauer and agreed to act as an unpaid volunteer paralegal. He hoped his efforts might rebound to his advantage.

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Chapter 18

Second Chances, Anyone?

It was early 2013, and Lauer was back in the district court after the Supreme Court denied review. Almost all cases are long since over after ten years. Most decisions are not appealed. An appeal followed, occasionally, by an unsuccessful petition for certiorari ends virtually every other case. For one thing, litigants are not permitted to reargue contentions already rejected. For another, the standard for obtaining reversal tightens. Litigants also get exhausted, financially and otherwise.

The federal rules have specific provisions relating to setting aside final judgments, but, for sound reasons, they are narrow.

Most grounds for setting aside a judgment require the losing party to act within one year of the applicable judgment of the district court, for example, fraud by the opposing party.641 The district court’s judgment had been entered in 2009, and it did not matter that the appeal process dragged on into 2012. Only three legal avenues remained three years out. One required proving that “the judgment is void.”642 Another permitted relief to “set aside a judgment for fraud on the court.” 643 A third provision, “any other reason that justifies relief,” sounds encouraging but is very narrowly construed by the courts.644 Finality is important, especially when the interests of third parties are affected.

Lauer was determined to continue, and I agreed to continue to represent him. We would try to come up with grounds to set aside the judgment against him in SEC v. Lauer, but we had 225

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nothing specific in mind. We knew that the odds were against us even if Marra had made other serious mistakes. During 2012, we had concentrated on the direct appeal and petition for certiorari, both of which were limited to the issues raised by Lauer.

I first turned to those criticisms of the process that Lauer had made to me in 2012, including that the Miami SEC had failed to obtain the required authorization to file suit from the five SEC Commissioners. My research indicated that no court case had raised the question, so it was theoretically an open question, at least if we had argued the question on the direct appeal. A second argument related to the reassignment of the case from Judge Zloch to Judge Marra in mid-2004. Lauer believed that Zloch had violated court procedure when he did not refer the reassignment back to the clerk of the court after Judge Marcia G. Cooke of Miami recused herself, but Lauer was unable to pursue the matter in 2004. We investigated the reassignment.

We thought there was something wrong with it. It was the best I could do.

It turned out that the deputy clerk who had overseen the reassignment had died. In a letter to me, Steven M. Larimore, Clerk of the United States District Court for the Southern District of Florida, simply said the reassignment was proper. I wrote to Judge Cooke, the judge to whom the case was originally reassigned, to ask about the reassignment, but she directed me to communicate with Larimore. Of course, Larimore would not know whether Zloch had asked Cooke to recuse herself, but she ignored that fact. We converted the limited information we had about the reassignment into a motion to disqualify Marra, which we filed at the same time we filed a motion to vacate the judgment against Lauer. Both were longshots. Fundamentally, the events and arguments were available to Lauer in his direct appeal, and the SEC could argue that the issues should have been raised then.

Marra summarily denied our filed motions, stating only that our arguments “are also without merit and offer no valid reason to render the Final Judgment void.”645 There was nothing to do except appeal, which we did on July 9, 2013, even though our chances of winning were slim, to say the least. The appeal 226

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slogged its way slowly through the appellate process while the case continued in the district court.

Working on the case in 2013, I concluded that the district judges had committed two additional errors. Both were serious and never before raised by any of the scores of investors (or their lawyers) who were seeing their investment disappear as the receiver sold assets for a fraction of their value Lauer as well as incurring fees and expenses.

One new issue was the placement into receivership of the innocent hedge funds, which Zloch had done on July 10, 2003.

As discussed in Chapter 5, only defendants who were found to create an imminent danger of further misconduct could be placed into receivership. The hedge funds were neither defendants nor the likely creators of any danger, imminent or otherwise. While the placing of the funds into receivership had occurred in 2003, the receiver was not a party to the direct appeal. As noted earlier, no receiver should have been appointed until Marra had decided that there was a violation of the law, which was in 2008.

The other error was a violation of separation of powers. While not mentioned explicitly in the Constitution, separation of powers is a fundamental part of it. The executive branch must enforce the laws contained in Article II. Justice Scalia wrote: “Prosecution of individuals who disregard court orders (except orders necessary to protect the courts’ ability to function) is not an exercise of ‘[t] he judicial power of the United States Const., Art. III, §§ 1, 2...

It is accordingly well established that the judicial power does not generally include the power to prosecute crimes.”646 Enforcing the law by prosecution and by an SEC enforcement action is indistinguishable in this context. Federalist No. 78 instructs that a neutral and independent judiciary is essential to protect the citizenry is a cornerstone of constitutional separation of powers: “so long as the judiciary remains truly distinct from both the legislature and the executive. For I agree that ‘there is no liberty if the power of judging be not separated from the legislative and executive powers.’”647 The court-appointed and court-supervised receiver (frequently described as an arm of the court), whom the 227

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investors paid from the their funds, was limited to performing judicial functions. While the receiver had been working arm in arm with the executive branch SEC to enforce the law, no one seemed to notice or care. I concluded that while the receiver had acted improperly, it was incontrovertible that many of those facts were there for everyone to see before final judgment was entered in SEC v. Lauer. The receiver could argue that we were obligated to have raised it in the direct appeal from the judgment entered in 2009.

I examined specific evidence of a violation of the separation of powers, many of which predated the direct appeal. In the spring of 2004, to justify his fee, the receiver wrote in a court document that the work involved in the case was “enormous” and the SEC lacked sufficient resources. “Accordingly,” he said, the receiver, his accountants, and his law firm “have become ‘command central’ not only for the Receiver’s investigation, but for the SEC, the Department of Justice, the Internal Revenue Service, and other federal agencies.”648 Soneet Kapila, who was on the receiver’s, i.e., the judicial, payroll, was a witness in the disgorgement hearing. This was additional evidence of the receiver’s unconstitutional funding of the executive branch with funds not authorized by Congress.649 Even though the SEC’s activity against Lauer had ended in the district court, the receiver continued to operate in SEC v.

Lauer as well as in Steinberg v. Lauer. In the latter case, Lauer basically litigated pro se with limited assistance from me. In early 2013 each side filed a motion for summary judgment against the other in the latter case. The receiver relied heavily on res judicata, at least with respect to Lauer.650 In contrast, Lauer and Garvey relied on claims that the receiver had no jurisdiction, the receiver’s lawsuit was futile since they had no money, the lawsuit was duplicative of the SEC’s, and the doctrine of in pari delicto.651 The receiver recognized that the situation was unusual: In this unusual case...the Receiver was tasked with performing many of these measures...[T]he Receiver’s massive discovery and analytical efforts helped to create the evidentiary and legal basis for much of the SEC’s 228

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Enforcement Action, the U.S. Attorney’s criminal action, and the Group and Class actions. As a result of the Receiver’s efforts, he and his professionals were able to recover and review hundreds of thousands of documents and build a central, searchable database of documents and information that facilitated actions by the SEC, the U.S. Attorney’s Office, the Group investors and the Class investors.652 The statement that the receiver “was tasked” with work strongly supported our argument, since to task means to assign, and the clear import was that the receiver was taking marching orders from the SEC and DOJ to engage in legal research and other activities that the executive branch of the government needed to obtain judgments. We incorporated the receiver’s admission in a motion to dismiss.653 The receiver’s response in Steinberg v. Lauer also exonerated ousted offshore-fund directors John W. Bendall, Jr., and Dr. Richard Geist: John Bendall and Richard Geist were directors at the Offshore Funds. The Receiver has not filed suit against either of these former directors of the Funds because the Receiver has no evidence that they participated in or had knowledge of the various fraudulent actions committed

by Lauer and Garvey as outlined in the Second Amended Complaint...[T]hey were innocent directors at the Funds...654 Bendall and his company Hermitage extensively traded stocks for Lancer Management. Thus, one of the outside directors of Lancer Management Group as well as at least some of the traders of stock for the hedge funds had concededly done nothing wrong. Why would Steinberg say such a thing? The receiver was making the allegations against Lauer appear all the more unlikely. He responded to Lauer’s argument that he could not be found liable because other participants, including the directors of funds, had not been charged. The doctrine is sometimes called 229

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in pari delicto. But it was not the receiver’s problem, and the SEC had already won its case even though it had not sued either of the directors. Also, the doctrine applied only in civil cases where the plaintiff was tainted.

The receiver’s statement led to another development. Zloch had ousted Bendall and Geist as directors on July 10, 2003, and replaced them with the receiver. With Garvey’s help, they filed a motion pro se in SEC v. Lauer to be reinstated either back to 2003 or, alternatively, at present, even though they still had concerns that they could be sued or prosecuted.655 I did not want to represent them because I wanted the directors to appear independent of Lauer.

In the fall of 2013, acting on his own, Lauer had filed a motion to disqualify Marra in Steinberg v. Lauer. (Lauer remained pro se in that case, although I occasionally advised him.) Lauer included in his motion that Marra’s rulings were biased, that he allowed inordinate and prejudicial delay, and that his reassignment from Zloch was illegal because Zloch had improperly engineered it, among a catalog of complaints. 656 Because I was certain Lauer’s motion would be unproductive and Marra might award sanctions, I did not file a companion disqualification motion in SEC v. Lauer. However, I did file a motion to discharge the receiver in Steinberg v. Lauer based on a series of actions he had taken, including seeking to have a judgment entered against his beneficiaries and his refusal to dismiss the case against Lauer and Garvey without their releasing him from liability.657 I wanted the receiver’s conduct described on the record.

As expected, on November 22, 2013, Marra denied Lauer’s motion to disqualify him in Steinberg v. Lauer in all respects.658 Most of the order denying the motion was what lawyers call “boilerplate,” a general summary of the law, along with recitations that there was no evidence that Marra was biased, that adverse rulings alone do not form a basis for recusal, that delays happen, nothing was extrajudicial, etc. One paragraph, however, surprised me: Lauer’s assertion (which he has made multiple times) as to how the original SEC case was assigned to me is 230

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factually incorrect. As set forth in the affidavit of Edward Sieber, attached hereto as Exhibit “A” and made part of this order, the original SEC action was randomly assigned to Judge William J. Zloch. When Marcia G. Cooke was appointed to the bench, Judge Zloch transferred the case to Judge Cooke, along with many other cases, as part of cases assigned to a new judge in this district. Judge Cooke then recused herself for an unstated reason, and the case properly went back to Judge Zloch in accordance with local administrative rules. It was then that Judge Zloch recused himself. Upon Judge Zloch’s recusal, the case was randomly assigned to me.

The order was odoriferous. Marra had said he knew from personal knowledge that “the case was randomly assigned to me,” although it was unclear how he would know that from personal knowledge unless he was involved in the reassignment. Marra said that “to set the Record straight,” he obtained and made a part of his order an affidavit from Edward Sieber, a deputy court clerk in the United States District Court for the Southern District of Florida.659 Sieber was subordinate to Zloch and Marra and was someone unavailable to Lauer as a witness. (Sieber’s immediate superior, Clerk of the Court and Court Administrator Steven M. Larimore, denied my request to interview Sieber.) Presumably, Zloch and Marra told Sieber that they wanted to demonstrate that Lauer’s accusations were false; it was unlikely that they told Sieber to search for the truth wherever it takes you.660 There was no indication that Sieber had been involved in reassigning the case from Zloch to Marra. Instead, he seemed to be a convenient and accommodating witness that Marra and Zloch could utilize to stack the record.661 Marra had created new evidence without notifying the parties in advance.662 That was one violation. He also denied Lauer the opportunity to cross-examine Sieber or introduce contrary evidence of his own before he accepted Sieber’s testimony as true and incorporated it in his order that denied Lauer’s motion to disqualify him. That was a separate violation.

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Why was Marra doing the SEC’s and receiver’s work for them, including contacting a possible witness and securing an affidavit from him? The answer was clear. We were broadly attacking Marra’s performance while the SEC and the receiver were defending him. A judge (also a receiver), however, is supposed to be impartial, neutral, and indifferent to who wins; he does not take sides. Marra had gone beyond propriety by relying on his personal knowledge and then personally gathering evidence supporting the receiver’s and the SEC’s position. The violation was very serious and required the proceeding to stop and possibly begin over again before a different judge, if it was established. Unbiased judges are a critical part of the judicial system and a component of due process.

No. 10 of the legendary The Federalist stated, “No man is allowed to be a judge in his own cause, because his interest would certainly bias his judgment, and, not improbably, corrupt his integrity.” Richard A. Flamm wrote in his treatise entitled Judicial Disqualification: “a judge must not abandon her proper role and assume that of an advocate...[W]hen a judge becomes personally involved in a suit that is pending before her, or even appears to have done so – or when she has by her own action, injected additional facts into the record – doubt will be cast on the judicial process, due process may be offended, disqualification may be appropriate, and reversal may be ordered on appeal.”663 That statement was directly on point. Our case was stronger because Marra had a reputational interest in the outcome of his ex parte conduct, and the constitutional right to a fair trial was directly involved.

Other authorities supported disqualification. The Eleventh Circuit wrote: “A trial judge’s findings are not necessarily tainted simply because he brings his ‘experience and knowledge to bear in assessing the evidence submitted at trial.’ The trial judge may not, however, undertake an independent mission of finding facts ‘outside the record of a bench trial over which he presides.’”664 The federal Court of Appeals for the Second Circuit reversed and removed from the case a district judge who had on his own and without notifying the parties visited the premises involved 232

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in the case.665 A third court of appeals stated: “This case presents an especially troubling example of defective fact-finding because the facts Judge Hillard ‘found’ involved her own conduct, and she based those ‘findings’ on her untested memory and understanding of the events.”666 Yet another court of appeals disqualified a district judge for bias when he responded to a petition for a writ of mandamus rather than leave it to the litigants.667 A motion to disqualify Marra was then filed in SEC v. Lauer based on the evidence relating to Sieber. Marra denied the motion, asserting that he did nothing wrong and that Lauer was in effect seeking to have him disqualified because of the rulings he had made in the case. He added that he knew nothing that he had not learned in the course of presiding over SEC v. Lauer and Steinberg v. Lauer (which seemed an artful and dubious way of framing his argument).668 It took us a while to realize that something else was wrong.

Lauer had invested money in the hedge funds both personally from his IRA. He had also lent the hedge funds money through Lancer Management. Garvey had done the latter. Why then weren’t they receiving communications from the receiver about loans and investments? Could it be that the receiver was taking the position that the funds did not owe Lauer and Garvey any money? How? Even if Lauer had violated the law, he did not forfeit his investment. If someone robs a bank in which he has deposited money, he does not lose his deposits even if he is found guilty of the robbery.

Potential barriers, however, did stand in the way of Lauer’s and Garvey’s, whom I represented by then, recovering some of their apparent losses. Claimants had been required to file claims.

The receiver had announced that anyone who was a claimant had to file a claim form by April 1, 2004.669 If no claims had been filed on behalf of Lancer, Lauer, or Garvey, the receiver or could argue that they lost their rights to share in the recovered amounts.670 While we could make a claim for malpractice against the receiver for failing to file a claim, there was virtually no chance it would be successful. There was also the hurdle of overcoming laches, 233

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a defense made in a case in equity when unreasonable delay in asserting a right was prejudicial.

The explanation concerning Lauer’s substantial personal investment in the hedge funds, which was worth tens of millions of dollars by the start of 2003, was tragic but mundane. Under oath and otherwise, Lauer maintained that he had prepared with the help of his civil lawyer, Gerald M. Labush, a detailed and documented claim and sent it to the receiver. But Steinberg rejected it on grounds that Lauer did not comprehend. In the chaos, it was not followed up and not appealed. Also, Lauer could not find his copy. There was nothing Lauer could do, and his significant stake in the hedge funds had disappeared. But we would try nevertheless.

We had an argument. With respect to the amounts Lauer had personally invested in the hedge funds, we concluded that investors, as opposed to creditors, did not have to file a “claim” for their investments. When General Motors went bankrupt, an owner of shares of its stock did not have to file a claim to participate in the bankruptcy proceeding. An investor was an owner of the company, not a creditor or claimant. Only creditors, such as suppliers and landlords, had to file claims. (Bankruptcy law is sometimes taught in a course called Creditors’ Rights.)

This argument, which would apply to all investors, was far from airtight, but it was something. We basically needed more information.

Different were the sums that Lauer had left in the hedge funds through Lancer Management. This was the $48 million that the SEC had conceded was owed to Lauer. This was a claim (not an investment), and it seemed that a debt of the hedge funds would have priority over the investors, although it seemed highly unlikely that a court would favor Lauer over his investors.671 Since Lancer was in receivership and under the control of the receiver, Lauer had not filed a claim on its behalf.

I wrote to the receiver’s lawyers to ask them why Lauer, his IRA account, and Lancer Management were not receiving information and distributions. When we received unconvincing responses that reiterated the obligation to file timely claims, 234

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we filed motions in the district court in mid-2014 seeking recovery for Lauer, Garvey, Lancer Management, and the other receivership entities for their shares of the receivership estate.672 The receiver had also taken and sold Lauer’s assets while the case was being contested, including Lauer’s multimillion-dollar Mercedes-Benz C-11 race car, which Lauer owned through a wholly owned corporation, CLR. Lauer asked for the tens of millions of dollars otherwise due him, including his Bank of America account. Garvey’s motion included his fifty percent interest in GH Associates (GHA), which could net him nearly $400,000, based on GHA’s assets.

The receiver responded to Lauer’s pro rata-share motion in late July 2014 after receiving six extensions of time.673 We anticipated most of the arguments, but there were two big surprises. He disclosed that he had indeed filed timely claims on behalf of the Lancer Management companies and the other receivership entities. That was an unexpected break. The good news was followed by bad. He stated he had filed a motion in 2010, which Marra granted without objection, which had terminated the interests of Lauer and Garvey in the receivership entities.

Everyone was baffled. What motion, we asked each other.

What order? How could the receiver terminate the claims of receivership entities, especially without a hearing? It made no sense. After reviewing the lengthy docket in SEC v. Lauer, we finally figured out what had happened. In late 2010, after the conclusion of the SEC’s case in the district court in 2009 and while Lauer’s appeal and the criminal proceeding were pending, the receiver had filed a motion innocuously entitled, “Receiver’s Motion To Approve Procedures for Distributions.”674 The unrevealing caption had lulled Lauer and Garvey, preoccupied with their criminal case, into believing that the motion had no substantive consequences and did not require their attention.

Lauer was concerned about the recipients of the receivership assets and had not imagined anything else could affect him.675 The receiver had also filed a motion entitled, “Motion for Order Authorizing First Interim Distribution of Estate Assets,676 and Lauer had filed an opposition to that.677 235

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The receiver’s motion asserted his accountants faced problems trying to figure out who owed whom how much. Part of the problem, he said, was undocumented transfers of assets between Lancer Management Group, LLC, and Lancer Management Group II, LLC. Buried on page 11 of the motion was what the receiver had referred to: “By substantively consolidating the assets and liabilities of the Receivership Entities, the investors and creditors of all of the Receivership Entities will share pro rata in the assets of all of the Receivership Entities... First, the Receiver believes that all of the assets of the Receivership Entities should be consolidated for distribution purposes only.” And a few sentences later, “Similarly, the Intercompany Receivership Entity Claims will not participate in the distributions.” 678 What did they mean by “Intercompany” claims? There was no explanation. Did “not participate in the distribution” mean anything different from their claims being eliminated? How did that square with the statement that all receivership entities would share “pro rata” in the receivership assets or with a fiduciary’s obligations? The receiver’s proposed order that accompanied their lengthy and complex motion simply stated that the motion was “granted” and provided no description of the relief ordered, which orders customarily include.679 What exactly was it that Marra had ordered by his statement that the unopposed motion was “granted”? It was very opaque. Yet it arguably eliminated tens of millions of dollars to which Lauer was entitled as well as Garvey’s money.

The receiver had apparently consolidated the claims and liabilities in the hedge funds, which he said were causing confusion because they allegedly transferred money between themselves without documentation, and of duplicate claims by investors against the hedge funds. He also had eliminated claims between the entities owned by Lauer and Garvey (including Lancer Management, Lancer Management II, Lauer’s CLR, and Garvey’s GHA), on the one hand, and the distinct hedge funds, on the other, which seemed incredible. However, the language of the description of what he had done was imprecise. The receiver never explained why consolidation of claims of just the 236

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hedge funds would not suffice. In fact, if an investor claimed ownership of both Lancer Offshore and Omnifund, the receiver could not combine them without knowing whether there were two investments or one. Also, the receiver never explained how his remedy solved the alleged problem. The receiver also did not state the significance or magnitude of the alleged problems.680 Moreover, the order appeared to take money from Lancer Management, which had been dismissed from the case months earlier, including specifically for claims based on disgorgement.681 It seemed the receiver and Marra had performed the ultimate in conflict-of-interest resolution. They had settled a dispute between adversaries to all of which the receiver owed a fiduciary duty and had favored some over others; namely, he favored the entities that were paying his bills. This was precisely the kind of irreconcilable conflict Lauer had objected to a decade earlier and which Zloch rejected as a ground for contesting Steinberg’s multifaceted appointment. Now, Marra signed off on it.

In a motion to vacate the 2010 order – the only thing we could think of to do – we first argued that the language should not be construed to violate the receiver’s fiduciary duty to Lancer Management.682 Given how the receiver construed the order, including excluding Lauer and Garvey from participating in the distributions he had made, we were not optimistic. Still, we could not ignore this argument and, besides, we wanted to stress how obscure any warning had been. Alternatively, we argued that a construction of the language that eliminated the receiver’s fiduciary obligation to Lancer was illegal and would make the order void. Notice was totally inadequate. We also claimed the receiver misstated the facts.

Throughout the case, the receiver had claimed the books and records of LMG and LMG II were terrible shape, in one place referring to “[t]he absence of books and records.”683 Lauer had vehemently disputed assertions of the existence of undocumented transfers. None of the competent service providers for Lauer Management, such as Bank of America, Citco, or PWC, had ever complained about Lancer’s books, records, or data. Nor did any of the investors. Steinberg did not say which important 237

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books and records he lacked. When pressed earlier, the receiver conceded that he did not know whether the FBI’s search and seizure was the cause of the disorder.684 Moreover, the receiver was prepared to distribute money to all investors, so he had to know the precise amounts due, we argued.

We also filed a separate motion in mid-2014 to declare the judgment against Lauer satisfied.685 At the disgorgement hearing in 2009, Lauer argued that the amount of disgorgement should be zero because the hedge funds concededly owed him (through Lancer Management Group) $48 million686 while the SEC (through Soneet Kapila) claimed that his ill-gotten gains were $43 million. Marra refused, however, to credit Lauer for the $48 million Lancer concededly owed him.

Our new motion argued that since the $48 million was not allowed in 2009 as a set-off to Lauer’s “ill-gotten gains,” the obligation should be credited to Lauer’s satisfaction of the judgment against him. Marra had not rejected Lauer’s claim for that money as much as he simply ignored it. Also, the $19 million in prejudgment interest that Marra awarded on the $43 million judgment was more than offset by the interest to which Lauer was entitled on the $48 million and other sums owned to him since 2003. Even if this motion did not win the case, it would, if granted, effectively end the SEC’s efforts to collect money from Lauer.

Unlike the pro rata share motion, the SEC and receiver could not argue that Lauer had unduly delayed making his claim based on satisfaction of judgment and was therefore guilty of laches.

Judgment against Lauer was not entered until 2009, and the appeals from the judgment were not concluded until the end of 2012. There was no unreasonable delay. Satisfying the judgment, moreover, was an ongoing process that followed the judgment. It could never be too late to pay the judgment.

Other sums should be credited to satisfying the judgment against Lauer, as well, we argued in filings. The SEC/receiver (sometimes it was difficult to determine who) confiscated Lauer’s Bank of America brokerage account in the summer of 238

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2003, and the receiver precluded Lauer from exercising control over it and mitigating financial pain by engaging in transactions that were profitable or which would have avoided losses. At that time, the account was valued at about $30 million. Two of the largest holdings were about 2.8 million shares each of Zi Corp.

(ZICA) and CSC/END. Zi was trading at $3.78, and Endeavor was trading at $2.53 on June 10, 2003, although we claimed the receiver’s neglect and gross negligence, such as publicizing the sale of the stocks, had caused the holdings to drop millions of dollars in value. Even if the judgment was not overturned, the SEC might actually owe Lauer money! Our argument might permit Marra or the court of appeals to give Lauer half a loaf without disturbing previous payments to the other investors or vacating the SEC’s summary judgment.

Following several extensions of time, the SEC and receiver responded in early September 2014 to Lauer and Garvey’s motion to share in the receivership estate. The SEC’s response arrived first. Its main argument was that the SEC was entitled to recover more than the $43 million plus $19 million in prejudgment interest provided for in the 2009 final judgment entered against Lauer. The judgment, the SEC argued, was only a first step or installment in recovering Lauer’s ill-gotten gains.687 It was a losing, indeed, risible, argument, we explained in our reply. A judgment embodies all possible available claims that a plaintiff could have made in his complaint.688 A plaintiff does not get to split his action however he wants. In fact, we told Marra, the SEC had argued on appeal that, “It was well within the district court’s discretion to rule that measurable proceeds received during the fraud is the relevant measure of Lauer’s disgorgement liability. The Commission provided a reasonable approximation of Lauer’s ill-gotten gains.”689 That statement alone required rejecting the SEC’s position that it was entitled to more money, and it quickly abandoned the argument.

The receiver’s response claimed we had failed to contest his 2010 motion and were out of luck; we had our chance, and we lost it. His current response referred to the earlier motion only as “Receiver’s Motion To Approve,” which omitted important 239

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language that had lulled Lauer (that the motion referred to “procedures”). Also, the order presented to Marra and which he signed did not explain what it was supposed to accomplish. All it said was that the motion was “granted.” Our reply tore into Steinberg’s actions, calling them “fraudulent,” “deceptive,” and other epithets.690 The war continued between Marra and Lauer, although it was like the uneven contest between a jailor and the jailed. The jailed had to be satisfied with tiny victories, such as getting a rise out of the jailor or obtaining personal satisfaction derived from his continued adherence to principle in the face of pervasive adversity. Getting a ruling in our favor seemed beyond what we could expect. Marra seemed to be struggling to maintain selfcontrol, but not without lapses, including his ex parte acquisition of clerk Sieber’s affidavit, to stop us from saying bad things about him.

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“Shut Up,” They Explained While proceeding in the district court, we filed three matters in the U.S. Court of Appeals for the Eleventh Circuit, where Lauer had lost in 2007 and 2012. Simply put, it was our only alternative to Marra, and we hoped that we would do better.

We filed an appeal from the first pair of motions to set aside the judgment and disqualify Marra, which he had denied, along with a challenge to the reassignment from Zloch to Marra.691 Before we had a chance to file our brief, the receiver filed a motion to intervene in the case in support of the SEC. He sought permission of the court of appeals to argue against our effort to obtain communications between the SEC and the receiver on the issue of the attorney-client privilege between the SEC and the receiver. “The Receiver and the SEC obviously share a common interest in discovering facts underlying the fraud perpetrated against Lancer Funds and its investors, and in preserving and collecting the most assets for the benefit of innocent investors,” he argued. Indeed, we were delighted at the prospect of bypassing Marra and possibly litigating in the court of appeals. The Eleventh Circuit granted Steinberg’s motion to intervene, which we did not oppose, even though we disagreed that the judicial branch receiver had an interest in discovering facts underlying the alleged fraud.

Our first post-decision filing in the court of appeals was our brief. For tactical reasons, we did not include our motion 241

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to discover the SEC-receiver communications but dealt with the issues relating to the SEC’s authority to file suit and the reassignment from Zloch to Marra.

Our second filing in the court of appeals was on behalf of Lauer, a petition for a writ of mandamus to challenge Marra’s denial of his motion to recuse (or disqualify) himself in Steinberg v. Lauer.692 Mandamus in the court of appeals is the standard method to challenge an unsuccessful motion to disqualify a district judge. As noted above, Lauer had a litany of grounds.

Third, we filed a petition on behalf of the ousted directors.693 A Petition for a Writ in the Nature of Quo Warranto was an ancient and rarely used petition of which few lawyers have ever heard. The literal meaning of quo warranto is “what warrant,” which originally challenged a right derived from the king, converted over time to any sovereign authority. It translated into the argument that the court’s appointment of a receiver for the innocent hedge funds was improper, if not unconstitutional.

Since the receiver had no legal basis (warrant) for holding his position, the duly elected directors should be reinstated. What allowed us to proceed directly in the Eleventh Circuit was that the receiver had filed a motion to intervene in our 2013 appeal to protect his communications with the SEC.694 That subjected him to the jurisdiction of the court of appeals.

Courts of appeals give priority to motions ahead of direct appeals. As a result, the court decided the petition for a writ of mandamus and the petition for a writ of quo warranto first. The same three judges decided both petitions: Beverly Martin, who had sat on the panel in the 2012 appeal, William H. Pryor, Jr., and a district judge. Without seeking a response from the SEC or the receiver, the panel denied both petitions on March 27, 2014. It dismissed Lauer’s mandamus petition based on Marra’s ex parte investigation with a curt and uninformative: “Petitioner Michael Lauer has failed to establish a clear and indisputable right to the extraordinary remedy he seeks.” It was reminiscent of Ring Lardner’s line in The Young Immigrants: “‘Shut up,’ he explained.”

The court’s decision on the directors’ detailed petition to be reinstated was a mite longer but breathtakingly cryptic: 242

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“Petitioners John W. Bendall, Jr., and Richard Geist did not previously assert their purported rights, and the district court retains discretion [sic] over the contested receivership.” Whether the court meant to say “jurisdiction” rather than “discretion” cannot be determined. If it were a Freudian slip, it fed my belief that the court of appeals was not paying attention and would endlessly defer to the district court. It should be noted that federal circuit-court opinions do not usually contain Freudian slips.

Even though Bendall and Geist had filed an original proceeding in the court of appeals, its opinion seemed to say that they had to raise the issue first in the district court, but that was not clearly stated and, besides, made no sense. The issue was who should represent particular interests on an original petition in the court of appeals. That court could not properly proceed without deciding who properly represented the hedge-fund investors in a case before it, i.e., who had standing.695 The court was defying its own opinions as well as the Supreme Court’s. In SEC v. Energy Mgmnt. Group (11th Cir. 2014), an opinion written

by Pryor supported unequivocally what we were arguing in SEC v. Lauer: [S]tanding “is the threshold question in every federal case, determining the power of the court to entertain the suit.”... “In the absence of standing, a court is not free to opine in an advisory capacity about the merits of a plaintiff ’s claim and the court is powerless to continue.”...

And “th[e] obligation on the court to examine its own jurisdiction,’ including whether the parties have standing, ‘continues at each stage of the proceedings.’” 696 When the court summarily rejected the ousted directors’ petition to represent the hedge funds, the Eleventh Circuit had got its jurisdiction wrong in SEC v. Lauer for the third time. We decided to seek Supreme Court review only on behalf of the directors. Standing was constitutional fare on which the Supreme Court regularly dined. Nevertheless, the Solicitor General and receiver chose not to reply. On June 9, 2014, the case was on the list of denials of certiorari.

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Because it appeared that the Eleventh Circuit would never grant a petition for a writ of mandamus, we filed a vulnerable notice of appeal from Marra’s refusal to recuse himself in SEC v.

Lauer.697 There was no final judgment, which is usually required, but there was an outside chance of finding an exception to the final judgment rule.698 The brief we filed included a lengthy list of motions and their dispositions, which showed that with one relatively minor exception and excluding decisions that gave something to both sides or involved motions for extension of time, the SEC and the receiver won every substantive motion but one in SEC v. Lauer. The list occupied eight pages in the brief and listed over 120 motions. (Later, the chart was amended to show that Lauer and Garvey had won nothing; it was 100 percent to the SEC and receiver.699) The brief argued that those wildly unbalanced results constituted proof of bias, or at least established that Marra gave every appearance of being biased.700 As feared, the SEC responded with a motion to dismiss the appeal on the ground that a denial of a disqualification motion was not an appealable final order, and none of the handful of exceptions applied. Our opposition made some creative arguments against the motion to dismiss,701 but finally asked the court of appeals to treat the appeal as a petition for a writ of mandamus if it dismissed the appeal. Courts usually honor such a request, if only to prevent unnecessary duplication of effort.

The Eleventh Circuit, however, did not. Two days after denying the directors’ quo warranto petition, the judges entered the following sparse order: The U.S. Securities and Exchange Commission’s (“SEC’s”) motion to dismiss appeal no. 14-13931 for lack of jurisdiction is GRANTED. The district court’s March 10, 2014, order denying recusal of the district judge, and subsequent August 19, 2014, entered order denying reconsideration of the same, are not final, appealable orders at this time. 28 U.S.C. § 1291; [Citations omitted].

We decline to treat Michael Lauer’s notice of appeal and supporting documents in case no. 14-13931 as a petition for a writ of mandamus, as he suggests.

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To the extent that Lauer seeks to have us consider his brief in appeal no. 14-13931 as a supplemental brief in appeal no. 13-13110, his motion is DENIED. [Citation omitted].

While the order was peremptory and failed to provide any explanations for the court’s actions, there was nothing we could do. We made appropriate changes in Lauer’s rejected appeal brief and filed a petition for a writ of mandamus on Halloween.

News on Lauer’s petition came on Christmas Eve. The opinion, signed by Circuit Judges Pryor and Julie Carnes,702 simply said.

“Petitioner’s petition for writ of mandamus is DENIED.” The Eleventh Circuit’s actions were becoming more serious than simply refusing to reverse a judgment sought by a citizen.

Its rulings insulated from review and correction inappropriate conduct by federal district judges and undermined the enforcement of federal statutes designed to ensure the integrity of federal judges. The court was telling litigants, the public, and lower courts that judges were immune from federal statutes requiring impartiality and accountability, a dreadful development. What the Eleventh Circuit did went to the jugular of the legal process.

Judging cases by fiat, moreover, is arbitrary and tyrannical and flouts the rule of law.703 It was no surprise to learn from an article that the Eleventh Circuit has a record of protecting its judges, including district judges in its circuit.704 Judges and scholars have explained why single-word decisions are unacceptable. The late Judge Patricia M. Wald, who served twenty years on the U.S. Court of Appeals for the District of Columbia Circuit, including five as Chief Judge, wrote that she and fellow judges write opinions “to demonstrate our recognition that under a government of laws, ordinary people have a right to expect that the law will apply to all citizens alike...Even to approach a goal of consistency, litigants, lawyers, reviewing judges, the press, and ordinary citizens need to know why a particular judge came to a particular decision in a particular set of circumstances.”705 Circuit Judge Richard A. Posner wrote that an opinion consisting of the single word, “Affirmed,” was “suggestive of a miscarriage of justice.”706 Circuit Judge Jeffrey 245

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Sutton said, “Courts do not just announce their decisions; they have to explain them.”707 Justice Scalia stated: “the judge must conduct himself and his court in a way that inspires confidence in the public in the process by which the decision was reached.”708 We filed a petition for certiorari, which included a few colorable issues, such as what aspects of the creation of a receivership must be appealed immediately, where there arguably were different approaches among the various courts of appeals.709 Both the Solicitor General and Steinberg waived responses, the latter by letting the time to respond run out. On May 18, 2014, the Supreme Court denied the petition for certiorari without comment.

Meanwhile, after several postponements, the Eleventh Circuit set argument on our 2013 appeal (the first post-judgment appeal) for April 15, 2015. The panel of Gerald Bard Tjoflat, William H. Pryor, Jr., and a district judge barely tolerated my argument.710 Tjoflat had been appointed to the district court by President Richard Nixon and to the court of appeals by President Gerald Ford, and Pryor had been appointed by President George W. Bush, and both were steadfast conservatives. Pryor, who had been president of the Tulane Law Review, had published an article that recognized the obligation of a federal appellate court to issue writs in aid of its appellate jurisdiction and that also celebrated separation of powers.711 The panel took just six days to decide the case and write a short per curium, unpublished opinion denying us relief, primarily on the ground that our evidence of error was weak.712 After nearly twelve years of fighting the SEC, the receiver, and the courts, Lauer was seeing his confidence in the American judicial system go down the drain. He could have settled early for a relative slap on the wrist, but he had gambled his wealth, his future, and the future of his children to vindicate himself.

As he had said to me early on, he was not going to escape from behind the Iron Curtain to the United States to confess to doing something he did not do. Lauer was a supreme optimist, and his silence was disheartening. There was nothing I could say that would help.

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Marra’s Send-Off To highlight their cause, Lauer and Garvey repeatedly emailed me articles and other items where judges acted badly and reversed. Typical of Lauer’s missives was, “Justice Robert H. Jackson once wrote that ‘procedural fairness and regularity are of the indispensable essence of liberty.’”713 Lauer’s idealized view of America, so common among first-generation immigrants, crashed into the reality of the injustices he sustained at the hands of the government and, especially, the courts. But he remained determined.

Garvey, who was born in the United States and gone to an elite college, was flummoxed. His valid point was that the SEC had not sued him, and while the Department of Justice indicted him, he was acquitted. As for Lancer Management, in which he had a ten percent interest worth millions of dollars, the SEC sued it but had dismissed its monetary claims against it. So, Garvey asked reasonably why he wasn’t getting his money back from Lancer Management and GH Associates, which the SEC never even sued. Garvey wanted to file a motion demanding the immediate return of at least the hundreds of thousands of dollars that reflected his interest in GHA. Sadly, no procedure existed for forcing the SEC and Steinberg to return his money immediately, even though there was no basis for denying him relief.

Then, without any apparent reason, Marra scheduled a status conference for July 22, 2015.714 The day before the scheduled 247

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conference, however, Steinberg filed a motion that requested Marra to (1) declare the receivership over; (2) affirm the receiver’s undisclosed payments to date; (3) pay the receiver additional millions of dollars without Lauer or other investors ever seeing his bills; (4) release the receiver and his professionals from all liability; and (5) dismiss the case brought by the receiver and pending against only Lauer and Garvey in Steinberg v. Lauer.715 It appeared that someone from the receivership, perhaps Marty Steinberg personally, was communicating ex parte with Marra.

Steinberg probably would have replied, why not, to the charge.

After all, he was an arm of the court, even though he was an antagonist of Lauer’s and an ally of the SEC. The relief the receiver sought would give him and his professionals all the money they requested plus full releases.

The receiver wanted Marra to allow him and his professionals to walk away with up to $80 million without any inquiry into his fees and expenses (including the hunt for the nonexistent Lauer offshore account, the work the SEC should have done, and his charges for preparing fee applications), despite broad challenges to their legality and to his performance. The law of fiduciaries, of whom the receiver was indubitably one, requires fiduciaries to make full disclosure to their beneficiaries, which we claimed he consistently failed to do.716 But if he won his motion, he would never have to tell investors what he had done to warrant the enormous compensation since the details of his bills were effectively sealed. He would not have to defend against the claim of violation of separation of powers and a variety of other charges we leveled against him and his professionals.

The status conference proceeded with representatives of the SEC and of the receiver in Marra’s Florida courtroom, while Lauer, Garvey, I, and a couple of other investors were on the telephone at remote locations. The receiver’s motion was the sole focus, even though the conference had been scheduled before he filed his motion. The tone of the conference was, as usual, tense but civil. When given a chance, I attacked the motion as ridiculous and worse, itemizing our objections. At first, Marra challenged my statement that the pending motions we had 248

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filed would be moot if he granted the receiver’s motion. Still, he accepted it when I provided the page reference to the receiver’s memorandum that said as much, and neither the receiver’s lawyer nor the SEC spoke up. I told Marra he would have to decide many of the pending motions, including our motion to remove Marty Steinberg in Steinberg v. Lauer. There was also a likely trial in Steinberg v. Lauer if he denied the pending motions for summary judgment both sides had brought in that case.

Slowly, we were gaining some information on the finances of the receivership, although far less than what the receiver should have provided. Also, some of the information seemed to be imprecise. The receiver’s 23rd Report dated November 7, 2014, said he had collected $142,445,220, while his motion to close the receivership filed November 21, 2015, said he had collected “over” $130 million.717 To compute fees and expenses, we deducted amounts paid to claimants and investors, about $44.4 million as of the date of the motion. About $6.8 million had gone to the SEC in partial satisfaction of Lauer’s judgment.718 The receiver’s motion stated he had about $8.4 million on hand. The last three sums added up to about $60 million. The balance presumably went to the receiver and the professionals he retained.

Receivership fees had eaten up over $70 million and perhaps $80 million, which was nearly double what the SEC said were Lauer’s ill-gotten gains. If the investors had returned to them $50 million, that would mean receivership fees were some fifty percent more than what the investors received. If the receiver’s motion was granted, Lauer and Garvey would lose everything.

Investors other than Lauer and Garvey would lose about ninetyfive percent of their holdings despite investing in a successful hedge fund. Who ever heard of a fiduciary trustee or receiver getting much more than the beneficiaries of the estate received?

The usual rate in bankruptcy cases was closer to five percent of the estate! Yet Marra seemed unperturbed. The conference ended without a decision by Marra.

The law unequivocally requires a fiduciary to charge reasonable fees and not to enrich himself at the expense of his beneficiaries, among other requirements.719 That a court-appointed fiduciary 249

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could be discharged without his making a full accounting to the court and his beneficiaries, and without the court’s holding of a hearing, seemed incredible. The Bankruptcy Code, which can be seen as an analogy, provided that final fees are awarded after “notice to the parties in interest...and a hearing.”720 Also, the SEC mandated that receivers in SEC enforcement actions could not charge their beneficiaries for time spent in preparing fee applications,721 yet Steinberg and his professionals charged hundreds of thousands of dollars for that self-serving activity throughout the case. The receiver never disputed our position.

Since the hearing before Marra had not resolved the receiver’s motion, we filed an aggressive opposition that likened the motion to a motion by a prosecutor to proceed with the execution of a condemned inmate, which would make moot the inmate’s pending petition for a writ of habeas corpus to reverse his conviction. The receivership in SEC v. Lauer was a contender for the opaquest receivership in the history of the federal courts, we argued. The opposition also called the receiverships a “rape of the investors” and “an act of desperation that insults the Court,” adding: “The motor is running on Steinberg’s get-away car. Accomplice SEC is the driver.”722 No one commented on the colorful language.

Finally, we requested that our opposition to the motion to terminate the receivership be circulated to all the investors and claimants, who were getting only what the receiver chose to send them. Although he posted on Hunton & Williams’s website and sent electronic copies to the investors of his and the SEC’s filings and the judicial orders, he did not send them copies of some filings by Lauer, even though he had the fiduciary obligation to keep the beneficiaries fully informed. Our filings included summaries of opinions in which judges chastised receivers and trustees for failure to provide complete information to the beneficiaries. Marra chose not to decide the receiver’s motion.

We decided to add pressure on the receiver (and Marra) by filing oppositions whenever the receiver or one of his professionals, such as Hunton & Williams, the accounting firm he retained, or DDJ, filed a new request for fees.723 The oppositions 250

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to the fee requests argued that a hearing was necessary to resolve outstanding objections to the fees paid and sought.

Meanwhile, Lauer wanted to get Richard Lombardi, an investor in the hedge funds, to help us. Earlier, Lombardi had shown interest when we asked him to support Lauer’s efforts to obtain documents from the receiver. While he was the most sympathetic of the other investors, he and his lawyer were fearful of retaliation by Steinberg if he sided with Lauer. So, they did nothing. What an investor could do now was join Lauer’s challenge to the receiver’s fees and support Lauer’s motion for a hearing. However, we were in no position to guarantee that the receiver would not retaliate against Lombardi, although that possibility seemed remote at this stage of the proceeding.

Unexpectedly, Lombardi said he would try to contact other investors to see if they would join him. But there was little interest despite the hostility of many to the receiver, perhaps the result of exhaustion and a fear of the receiver that many investors shared with Lombardi. Instead, Lombardi would write a letter addressed to me to forward to Marra, which I did on October 22, 2015.724 We hoped that Marra would not ignore a plea for help by an investor-victim of the fraud he had found. While I had assisted Lombardi with his letter, he wrote one paragraph alone.

It stood out both because of its perspective and verve: In further petition, we are interested in your observation that there should never have been a Receivership in the first place by the Florida Courts imposed over the heads of qualified, sophisticated investors and their directors. You might note, in the same regard, that prior to the imposition of the Receivership, an Investment Committee of key investors, of which I was a member, was already in formation to undertake an orderly disposition, and as if needed, of the Funds in question. This was just prior to the Receiver’s disorderly raid – like a “drug bust” – on the Park Ave. offices of the Lancer Management Group. I will not go into the “shock and awe” that this entailed, the frivolous and 251

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costly litigation that followed as well as the decimation of whatever remained of the Lancer Management portfolios.

This is history. Yes, bitter for all!

On November 24 and 25, 2015, Marra filed five orders that denied every one of our pending motions, including the assorted motions directed at obtaining shares of the money acquired by the receiver and not eaten up in his fees.725 Marra had accepted the receiver’s version of the facts and law in its entirety.

Marra’s denial of the motion to vacate the judgment for violating separation of powers stated that our motion was too late and without merit. He did not discuss the reason we gave for the delay in filing, namely, our claim that the most important facts that supported our motion started in 2013, and we had not received sufficient notice of the violation until 2013-14.

Also, we argued that the receiver’s constitutional violation was a continuing one, so it could never be too late. Marra dismissed our substantial evidence that the receiver was both coordinating and taking assignments from the SEC with the statement, “The application of this doctrine, however, does not prevent the SEC and Steinberg from cooperating.”726 That cryptic description (and wild understatement) of the receiver’s role was precisely what the receiver and the SEC had argued. Marra, as was his custom, did not explain. He said that there was nothing wrong with the receiver giving the SEC “access” to the documents within his control, which was clearly an inaccurate description of what he had done for the SEC.727 There was no mention that the SEC gave only the receiver and not Lauer documents. Elsewhere, Marra said that we had to show that the receiver “usurped” the power of the SEC to show violation of separation of powers, which was clearly wrong.728 Marra failed to discuss what Steinberg had done for the SEC, detailed in our filings. “Cooperate” could describe a wide variety of conduct, but does not include being “command central” for several federal agencies, we argued. The general term “cooperate” also could be better understood if we had been granted the discovery of contacts between the SEC and the receiver we had 252

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sought, but Marra ignored our request for discovery. Moreover, Marra did not deal with the violation of Article I, section 8, which gave Congress the exclusive power of the purse to fund governmental action. Once again, Marra simply accepted without questioning what the SEC and the receiver said.

Marra said that there was “no evidence” of certain allegations, including ones for which we had presented sworn testimony, such as H.C.’s testimony that in her mother’s presence, the receiver’s professionals had paid her rent and more in exchange for her taking some items from Lauer’s home and giving it to the receiver in apparent violation of Lauer’s Fourth Amendment rights.729 (The receiver was acting in the name of the federal court and in concert with the SEC, so the Constitution applied to his actions.)730 Three of Marra’s other orders denied motions of Lauer and Garvey to recover assets that the receiver had taken from them with Zloch’s or Marra’s approval. These included their interests in the Lancer Management Group and Lancer Management Group II, Garvey’s interest in GH Associates, and Lauer’s interest in his brokerage account at Bank of America and in corporations that owned his Mercedes race car and other assets.731 Marra’s denial of these motions brought the total of substantive motions decided by Zloch and Marra to approximately 140.732 The SEC and receiver won every single one that resolved a substantive issue in favor of one party or the other (as opposed to, e.g., agreeing to a party’s request for an extension of time or giving something to both sides).733 We won none, zero. A record of 0-140 does not happen by accident. It screamed bias. While we could not argue that we had an equal chance of winning all motions, it was clear that something was amiss. In one filing in the court of appeals, we had listed the motions we were talking about up to that point by name and number.734 At that time, Lauer’s record was 0-122. Neither the SEC nor the receiver challenged the tabulation. Now, Marra ignored it.

Marra’s fifth and final order ironically denied the ousted directors’ motion for reinstatement on the ground that they had withdrawn their motion to intervene in SEC v. Lauer.735 253

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Marra neither cited authority for that remarkable decision nor suggested why the directors were obliged to seek to intervene or how they could intervene. The brief passage read: At the outset, the Court is compelled to advise Movants that this case is closed and, as they know, they are not parties to this suit. Since Movants have withdrawn their request to intervene, they have no standing to make this motion...Once again, Movants have withdrawn their request to intervene and no other rule or legal is presented as grounds for bringing the instant motion before the Court.

Years earlier, the SEC had convincingly explained that the law prohibits intervention in an SEC enforcement suit without its permission.736 Its opposition to the ousted directors’ motion to intervene and be reinstated read: “Section 21(g) [of the Securities Exchange Act] acts as an ‘impenetrable wall.’” Since the motion to intervene had no chance of winning, I had withdrawn the motion to intervene (but not reinstatement) to prevent confusion and to prevent Marra from denying the directors’ motion to intervene while ignoring their motion for reinstatement, as judges had done before, especially on Lauer’s direct appeal of the final judgment.737 Intervention was also unnecessary; the ousted directors were seeking to be instilled as the ones who controlled a party or entity (standing). Since we had been trying to set aside the judgment and obtain money from the receiver for several years, the reference to the case being “closed” (whatever that meant) seemed strange. Marra seemed to take the remarkable position that his taking the administrative or statistical step of marking a case “closed” selectively limited his Article III powers.

The case was still going on. It may have been “closed” but it was not over. Finally, Marra was taking the position that the receiver was a party, which strengthened our position that the case involving the receiver was pending.

The powers of a court of equity extend to those beyond the named parties to a lawsuit. Zloch had prohibited everyone with notice of his case-management order from pursuing lawsuits 254

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with respect to the subject matter of our case. Marra’s final judgment against Lauer applied to those with knowledge of it.

Adversely affected third parties can obviously petition a court for relief, especially when an ex parte order of a court harms them.

Martin Garvey was actively litigating his rights in SEC v. Lauer without anyone suggesting that he was proceeding improperly.

The idea that a court can unconstitutionally deprive a nonparty of his property, but he has no recourse without filing a motion to intervene when a statute specifically prohibited the intervention without the permission of the adverse party is too unbelievable to be contemplated.

Aside from motions of Steinberg and his professionals for more money for fees and expenses and our objection to those fees and expenses, nothing remained before Marra that mattered.

On March 31, 2016, Marra denied our request for an accounting by the receiver and a hearing to review the appropriateness of his and his professionals’ fees and expenses. Even though the case was over and there was no reason to keep communications by the SEC and receiver confidential, Marra denied that portion of our motion that sought access to the unredacted bills, which contained some of the information needed to challenge the receiver’s compensation.738 Finally, Marra denied Steinberg and his professionals a relatively small amount of the fees that had been withheld from them as part of an agreement but pointedly said that he was doing so based on the application by another investor, not Lauer or Garvey.739 While imprecise because of a lack of information provided by the courts and the receiver, the final tally gave the investors approximately $53 million out of the “over” $130 million that the receiver stated he collected on behalf of the investors. About $6.8 million was credited to the satisfaction of the judgment against Lauer. That left a balance of over seventy million dollars, and possibly considerably more, collected by the receiver and his professionals or unaccounted for. (In the absence of an audit or even a final report by the receiver these numbers are spongy.) Marra’s decision left the issue of the receiver’s excess fees, involving tens of millions of dollars, forever unexamined.

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Even though they received much more than the investors, the receiver and his professionals never had to face an accounting or challenge.

There was nothing to do but file notices of appeal and try to convince the Eleventh Circuit to reverse.740 Lauer noted: Another point that really troubled me is the remarkable dissonance between the criminal and civil cases, which in fact was the same case, as far as evidence was concerned.

(In fact, the criminal case was stronger for the government because they flipped Eric Hauser.) The civil courts were indifferent to my fervent desire for a trial-based presentation of facts, and they did everything possible to deny me a jury trial (actually Marra defrauded me of two jury trials, including one on the amount of the statutory penalty). The Eleventh Circuit knew that the criminal trial and acquittal revealed the hollowness of the government’s claims. So, the appeals court KNEW it was causing injustice by allowing the judgment against me to stand, but didn’t seem to care.

Now, that is terrifying!!!

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Chapter 21

Hi Ho, Hi Ho, to Higher Courts We Go By the end of 2015, I represented three clients or sets of clients: Lauer, who was trying to set aside the judgment against him in SEC v. Lauer, but also to recover money from the SEC and the receiver or at least reduce or eliminate the money judgment if he failed; Garvey, who was trying to recover money from the receiver; and Bendall and Geist, who were trying to get back their positions as hedge-fund directors and back directors’ fees. The main issues for the court of appeals were the wrongful appointment of a receiver for other receivership entities, a violation of separation of powers, the wrongful denial of Lauer’s motion to disqualify Marra, the receiver’s misappropriation of funds belonging to Lauer and Garvey, the wrongful denial of the directors’ motion for reinstatement, and the compensation of the receiver.741 The court of appeals notified us that briefs were due on a date in late February 2016. Oral argument would come later if there was one. I immediately started work on the brief and the appendix. I decided to include in the brief a description of the debacle with Lauer in late February 2012, when Lauer instructed me to tell the court of appeals that the brief was terrible and contained errors. We had nothing to lose, especially since Judge Beverly Martin had sat on that appeal and had almost certainly given Judges Pryor and Tjoflat an account of what had happened.

Even though there was nothing about it in the record of the case, the brief described the events surrounding the filing of the 257

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Post-Argument Brief, including that Lauer had written a letter to the court of appeals that said the brief was wrong, that I did not respond because I felt that I could not, that in fact nothing was wrong with the post-argument brief, and that the panel ignored the arguments we made. The brief emphasized that the panel had punished Lauer for blowing the whistle on his attorney, whom he thought had done something improper. While Lauer was incorrect – he had failed to understand that the court of appeals could not consider his acquittal in his criminal case because it occurred after the appeal had been filed and involved a more demanding standard of proof – the court had summarily punished the honest party. The court did not even ask me to explain our conflict. The incident continued to grate on me.

Then, a remarkable thing happened. Rather than wait until they received our appeal briefs and file opposing briefs, the SEC and receiver each filed a motion to dismiss the appeals or for summary affirmance. The SEC’s motion argued that the issues we could raise were frivolous. The receiver argued that the passage of time wiped out our claims; the courts could no longer fashion meaningful relief since virtually all the money had been distributed.

While there are times for motions to dismiss appeals, this was not such a situation. The complex facts, law, and issues warranted full briefing. We had serious claims. The receiver held some money that Lauer could reach. In addition, we claimed the receiver had both overcharged and improperly obtained fees for the time spent preparing fee applications that could result in additional funds available to pay Lauer and others. What are appeals for?

The motions to dismiss our appeals seriously circumscribed and prejudiced us. Under the order entered by the court of appeals, we would go first and last and have 20,000 words to argue our case initially, plus a reply brief of 7,000 words. With motions, however, the SEC and Steinberg would go first and last, and we would have only 6,000 words. The motions would also delay the proceedings for months. We filed oppositions to the motions to dismiss the appeals. Our task was to explain why 258

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the case warranted full briefing rather than to present the usual argument of why we should win, although in practice the efforts were similar. I felt it was an absurd and wasteful exercise, but it had to be taken seriously. All filings were completed on February 26, 2016.

May 16, 2016, brought a new dimension to the case. Donald J. Trump, who was then leading in the race for the Republican nomination for President, released a list of eleven names of lowercourt judges who, he said, would make good successors to Justice Antonin Scalia, who had died suddenly in February. On the list was William H. Pryor, Jr., who was a controversial candidate because of his extremely conservative and anti-abortion views.742 There was the disturbing possibility that to maximize his chances of being nominated, Pryor would do nothing controversial, such as setting aside an affirmed $62 million judgment for securities fraud against a former hedge-fund manager from New York City, even if he were so inclined. But, obviously, there was nothing we could do. We had to soldier on with a court of appeals that not only was consistently hostile to our pleas but now had a member who had a personal interest in our losing.

On July 26, 2016, exactly five months after the briefing on the motions had been completed, the Eleventh Circuit released its opinion on the motions of the SEC and receiver.743 The court rejected the SEC’s motion to dismiss. It also rejected the receiver’s claim that the court was powerless to grant effective relief. It set the case for full briefing on the appeal. We had won. Or so it seemed, for a few seconds. The court’s decision, however, did not stop there. It went on to drastically limit the scope of our appeals on grounds no one had suggested before, without seeking the parties’ input. The court’s sua sponte order said we could appeal adverse orders relating to the receiver the district court had entered in November 2015 and the last motion to disqualify Marra, but nothing else. The court listed a host of protected orders, starting with placing the hedge funds into receivership that had occurred before 2009 and a few filed later. The core of the decision read:

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Michael Lauer and Martin Garvey’s notices of appeal, and John W. Bendall, Jr. and Richard Geist’s separate notice of appeal, are each untimely to appeal from the district court’s judgment, which the court entered on September 22, 2009 and certified for immediate appeal pursuant to Federal Rule of Civil Procedure. Accordingly, we lack jurisdiction over the appeal from the judgment.

[Citations omitted.]...

Moreover, Mr. Lauer has already appealed once from the judgment against him, and we have already affirmed the district court. His current appeal is therefore duplicative and is not properly before us. [Citation omitted.]...

Finally, the appeal of Mr. Lauer and Mr. Garvey, and that of Mr. Bendall and Mr. Geist, are untimely to appeal from the following orders by the district court in connection with the receivership:... [List of orders omitted.]...744 The court said, “Mr. Lauer has already appealed once from the judgment against him.” Even though the appeal decided in 2012 had nothing to do with the receiver or receivership, the court treated the contrary as true.745 The 2009 certification and 2012 opinion related to the SEC and was certified under Rule 54(b). If the earlier appeal involved the receiver, he should have participated. But it didn’t, and he hadn’t. Moreover, the whole point of Rule 54(b) is to permit multiple appeals. The court was shortcutting argument on one of the most complex areas of federal-court jurisdiction.

The court’s order deprived us of the opportunity to argue that many of the things that the receiver did were improper, including placing the hedge funds and Lauer’s personally-owned corporations into receivership on motion by the receiver. The order also seemed to wipe out the interests of Lauer and Garvey in all the corporations placed in receivership. Gone was the claim that the receiver’s wrongfully abolished claims of Lancer Management against the hedge funds, which Lauer and Garvey 260

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alleged were based on a deceptive motion filed in late 2010 and violated the receiver’s fiduciary duty. 746 The court doomed out separation-of-powers argument,. Also, the ousted directors had asked for reinstatement retroactively to July 10, 2003.747 Alternatively, they sought reinstatement immediately. The court had a continuing power to change the directors. Marra replaced the directors with a receiver and just as easily could have replaced the receiver with the directors. But all reinstatements, too, were lost under the court’s rationale.

What made the court’s action particularly wrong and inexplicable was that both the SEC and receiver unequivocally conceded that we were not required to appeal the creation of the receiverships or other orders affecting the receiverships prior to the end of the case, and they provided good authority for their position (discussed in an endnote).748 The court’s superficial order had no meaningful discussion but stated conclusions and cited statutes and cases that once again stated general rules, such as that appeals had to be filed within a specific time limit, but not cases that dealt with the issues in the case. The court of appeals also ignored that we had filed motions to modify a portion of the district court’s 2009 judgment under Rule 60(b) of the Federal Rules of Civil Procedure, which deals explicitly with motions to set aside judgments entered more than a year earlier. The situation involved one of the most complex issues in federal-court litigation, known as the final-judgment rule, and the court was deciding issues sua sponte that affected hundreds of millions of dollars with clichés. This error became the fourth time in a single case that the United States Court of Appeals for the Eleventh Circuit had made a mistake regarding its jurisdiction.749 The Supreme Court said: “A ‘final decision is generally one which ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.”750 The general rule in federal courts is that a party is required to await the conclusion of his case before appealing, at which time he appeals everything he contends was error, including, for example, pretrial rulings on discovery. Otherwise, many rulings could immediately be 261

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appealed, and the case could drag on. Sometimes, the issues may be simply too fundamental to have to wait. Examples are a claim of immunity or a claim of double jeopardy case where a party should be spared the burden of even going through a trial.

A party can appeal immediately if he wants to or, alternatively, he could await the end of the case. Federal statutes make a few appeals before final judgment optional by statute.

Two exceptions to the final-judgment rule were relevant to SEC v. Lauer. One was a federal statute, 28 U.S.C. § 1292(a)(2), which gives a court of appeals “jurisdiction” to hear appeals from an order creating a receivership (or other ruling that deprived the owner of an entity of his property).751 That statute gives the court the power (which means the same as jurisdiction) to hear the case at the time of the entry of such an order, whereas before the statute the party would have no legal right for the court to entertain the claim prior to final judgment). That a court has jurisdiction (or power) to hear a case without more, however, imposes no obligation on anyone to exercise it. The statute did not silently or by implication remove cases from the finaljudgment statute, which sets the time to appeal as the conclusion of the entire case.752 In fact, the statute does not mention the finaljudgment rule, which alone strongly suggests it did not change it.

This law made certain interlocutory appeals optional.753 The other relevant provision was the previously discussed Rule 54(b) of the Federal Rules of Civil Procedure, under which final judgment was entered in the SEC’s suit against Lauer in 2009. Rule 54(b) allows a district judge to enter final judgment on fewer than all parties or issues when he certifies there is no just reason for delay.754 The judgment then becomes a final judgment against those identified parties or issues and requires the losing party to appeal that portion of the judgment promptly or lose his appeal.755 It does not make any changes as to the remaining parties or issues for which there was no certification.

That’s the whole point of Rule 54(b). Rule 54(b) was why Lauer appealed against the SEC in 2009. He had to. Marra’s order left behind in the district court the SEC’s case against the entity

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defendants (Lancer Management and the hedge funds) and all the proceedings involving the receiver. The receiver simply was not part of the 2009 appeal.

What was left after the court’s sua sponte decision was arguably...perhaps nothing. We probably had a claim that Marra should be disqualified, but from deciding what? There was a possible claim against the receiver for overcharging, for which a hearing might be ordered, and it was possible that others would have a share of anything recovered, but not Lauer, Garvey, or the directors, whose claims were gone. That seemed to be all.

For example, there was no appeal from the order wiping out the claims of Lancer Management and Lauer against the hedge fund or the claim that placing the hedge funds into receivership was error. The directors were wiped out. That left us with little or no chance to recover money for any of the clients and, by extension, me, especially since the receiver was distributing all the money to investors as we sat there. We promptly filed a motion for reconsideration of the sua sponte order, making for the first time the arguments we would have made if the court of appeals had given us a chance to do so. While it seemed hopeless, it seemed our best chance was to convince the court that it had made a mistake.

Two months later, on September 22, 2016, the court of appeals filed a two-page order and opinion that denied our motion for reconsideration. It was somewhat more enlightening than the previous one and made some new points and new reasoning, but it appeared just as incorrect and devastating. It also lacked citations to cases or law-review articles that dealt with the specific problem. It was only one paragraph, but for clarity, it is divided here into two parts: An order that appoints a receiver, refuses to wind up a receivership, or takes steps to accomplish the purposes of a receiver, is immediately appealable as an interlocutory order. See 28 U.S.C. § 1292(a)(2). Because the relevant receivership orders were entered between July 10, 2003 and October 7, 2010, and the notices of appeal were filed

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in December and January of 2015, Mr. Lauer is years late to appeal from any receivership order pursuant to § 1292(a)(2). See Fed. R. App. P. 4(a)(1)(B).

Moreover, assuming arguendo that, as Mr. Lauer argues, a party does have the option of waiting until final judgment has been entered before appealing from a receivership order, Mr. Lauer’s time to appeal from most of the receivership orders began to run no later than January 21, 2010, when the judgment against the corporate defendants in receivership became final. The October 7, 2010 order, which was entered post-judgment, was individually and immediately appealable as a final, post-judgment order.756 The court confused appealability and jurisdiction to hear an appeal, on the one hand, with the requirement to appeal, on the other hand, even though we had explained its mistake. It is the elementary distinction between being able to do something and being required to do something. (The word itself tells the story – “appealable.”) The court provided fiat, not reasoning. The word “why” was not part of its lexicon.

In fact, once again an earlier decision binding on the Eleventh Circuit was dispositive of the issue in our favor: “An interlocutory appeal is permissive rather than mandatory, and as an aggrieved party may, at his election, decline to appeal an interlocutory order but an appeal from the final determination of the case and at that point raise all questions involved in the case.”757 That accurate statement of the law should have been applied, just as the court regularly applies it to appeals from injunctions, where the enjoined party has the option of taking an immediate appeal.758 Another court of appeals said, “all interlocutory orders are reviewable on appeal from the final decree” and other circuits take the same position.759 No court had ever construed § 1292(a)(2) to require an immediate appeal from the creation of a receivership. Also damning for the Eleventh Circuit is that an injunction is appealable immediately, but the court never said that Lauer was precluded from challenging the

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injunction because of that. In fact, the court dismissed Lauer’s appeal after an injunction had been entered against him before the disgorgement hearing. The court was blatantly inconsistent.

The receiver did not file a motion to close the receivership until July 21, 2015. The receiver was still in active litigation. Lauer was entitled to appeal in 2015 and 2016 all decisions involving the receiver. This was the Eleventh Circuit’s fifth jurisdictional error in the case.760 The court of appeals also erred with respect to the January 21, 2010, order, which dealt only with the rights of the SEC against the entity defendants Lancer Management Group, LLC, and Lancer Management Group II, LLC. It had nothing to do with the receiver. That order did not dispose of everything that remained in the case, and there was no Rule 54(b) certification.

There was no final decree as to the receiver in 2009 or 2010, so the court’s discussion of post-judgment law was irrelevant as to the receiver (who is not ordinarily appointed until after there is a judgment against the wrongdoer.)761 Moreover, we were claiming that the receiver’s motion about procedures entered October 7, 2010, was deceptive and fraudulent, which would have eliminated the order, if we were correct. Also, the receiver specifically called the motion the “first interim” one,762 so it was not “immediately appealable as a final, post-judgment order,” as the appeals court said. This was the Eleventh Circuit’s jurisdictional error number six.

We could not leave the sua sponte order and its progeny alone, so we searched for some way to revive any claim that we thought possibly alive; we filed a motion for partial reconsideration and clarification in the Eleventh Circuit, which addressed only new issues raised by the second appeals court decision.763 The SEC and receiver asked the court to deny our motion for reconsideration.764 We awaited a decision.

In mid-November, I left on a long-planned vacation out of the country, after filing with the court of appeals a notice that I would be unavailable for two weeks and unable to do anything relating to the case. It was a precaution I regularly took when I 265

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was going abroad or otherwise unavailable, so the court would not require me to do anything while I was away. In this instance, my wife and I would be on a ten-day cruise off Alaska and out of touch.765 Hours after I returned home on Sunday, November 27, I dropped by my office. I saw an email from the Eleventh Circuit dated November 22. It was a shocker. Not only did the judges deny our last motion for reconsideration and clarification, but they denied our request to postpone the briefing in the case, a request that was included in all motions and which the court had routinely granted. They had dismissed our entire appeal, something that neither the SEC nor receiver had sought! Our motion both for relief and for additional time to file briefs was “DENIED.” The court gave as its reason “failure to prosecute,” a remarkable statement in the context of SEC v. Lauer. We had apparently committed a mortal sin by filing a second motion for reconsideration from the court of appeals’ previous sua sponte decision even though it did not give us more bites at the appeal than would have occurred if the SEC or receiver had filed a motion! The order ended the case. The best precedent was the phantasmagorical (real in some totalitarian countries) injustices contained in Franz Kafka’s The Trial, which I had recently reread at Lauer’s suggestion.766 In dismissing the appeal, the panel had not only acted outrageously; it once again ignored its own precedents. A case binding on the court referred to “non-jurisdictional [defects] in the prosecution of [t]his appeal, which we consider insufficient to warrant dismissal.”767 That case also involved the late filing of a brief and was a clear precedent in our favor. That principle had been followed several times, including a decision twenty days after the order of dismissal by a panel that included Pryor and Tjoflat.768 It was settled law. The two had again singled out Lauer for special treatment that repudiated established precedent they were legally obligated to follow and which they continued to follow in other cases. This was the court’s sixth mistake on jurisdiction since it did not overrule its precedents.

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The court’s order stated that to reinstate our appeal, we had to file our brief and appendix along with a motion that explained why the court should reinstate the appeal, on Tuesday, December 5, 2016, now only eight days away. The court had ignored the letter that I was unavailable and cut down our time to the point where it would have been impossible to write the brief and assemble all the required documents from scratch.769 We did not want the SEC and receiver to win by default. To prevent that result, I had to write and file both electronic and multiple paper copies of a brief, appendix, and a motion for reinstatement, and have them in the court’s hand in Atlanta by Tuesday, December 5. Everything had to be finished by Monday evening, December 4. Luckily, I had written a decent draft of the brief before I left on vacation, but it did not include the recent motions and rulings, which required rewriting a significant section of the brief, while the rest required editing.770 I had not, however, written a motion for reinstatement. I had assembled one copy of most of the documents in the appendix, again without the recent orders. There was plenty of writing, copying, and assembling to do.

The brief covered a wide swath of issues, including the placing the hedge funds and entities other than Lancer Management into receivership, the receiver’s violation of separation of powers, the exclusion of Lauer and Garvey in the money distributions of the receiverships, Marra’s denial of our motion to disqualify him, the reinstatement of the directors, and the fees of the receiver.

Included were claims that the court of appeals struck. Without those issues, “winning” was most likely a pyrrhic victory. There was an outside chance that we could convince the court of appeals that we still had a viable argument that the $48 million that Marra refused to credit in disgorgement should be credited in satisfaction of the judgment.

No one had an idea what our chances were of getting the dismissal reversed if we got everything to the court on time. We were pretty sure, however, that our chances were nil if we didn’t.

Working long hours, I completed writing everything by Sunday night, December 3, including a motion to reinstate the appeal, to 267

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which was added my sworn declaration that explained what had happened with respect to the dismissal, including that this was the first time that Lauer had been delinquent since he acquired an attorney in 2012 and that we had acted in complete good faith. The brief on appeal was 106 pages, including attachments, quite close to the maximum length the court had awarded us.

The appendix to the brief was just over 1,000 pages in three volumes and included the lengthy list of docket entries and the key documents, which was a volume in itself. We filed on time.771 The receiver and SEC responded to the motion to reinstate the appeal – the receiver supported the court of appeals. At the same time, the SEC’s appellate attorney, Benjamin Vetter, suggested an intermediate position that narrowed the arguments we would be permitted to appeal, evidence that our motion should be considered. We embraced that argument. We were desperate.772 On April 20, the Eleventh Circuit denied our motion to reinstate the appeal. Once again, the Eleventh Circuit gave no reason why it denied our motion. The order said simply that the motion was “DENIED.”773 There was another noteworthy aspect of the Eleventh Circuit’s denial. Recent decisions in the Eleventh Circuit had been issued by Judges Pryor, Tjoflat, and Martin.

The April 20 decision was signed by only Pryor and Tjoflat.

There was no explanation why Martin did not participate. We will never know if she disagreed with the denial of reinstatement and chose not to join the order rather than file a dissent or had an unrelated reason. However, we did know that the Eleventh Circuit had succeeded in burying the mistakes committed by the two district-court judges and itself.

We filed a petition for certiorari again.774 On October 9, 2017, the Supreme Court announced that the petition for certiorari was denied without dissent or comment.775 Fourteen years, three months, and one day after the case was filed against Lauer, it was over.

Lauer, who had been worth over $100 million, was effectively bankrupt, Garvey, who was entitled to millions of dollars, was penniless. John W. Bendall, Jr., and Dr. Richard Geist had lost hundreds of thousands of dollars each. Other investors lost about 268

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ninety-five percent of their holdings, which were once worth one billion dollars. Many of them had incurred enormous legal fees, besides.

The federal courts had saved the hedge funds by destroying them.

I, as would my parents, viewed the adventure as an opportunity to shine, under horribly adverse circumstances (which is the only time one can show one’s true character)...

My primary motive for my fighting the government was a moral and not material imperative, which is why I refused to cut a plea deal and wagered my life (and not just my wealth) on my innocence and thus the belief in my eventual exoneration. I most certainly do not regret doing so. The “wealth” and “riches” I accrued as an individual – through my exposure to the corrupt and dishonest Florida federal court – is splendid and beyond mere monetary quantification. The “education” certainly changed my perception as to what is sanctimoniously “preached” about the American judicial system, and what is actually “practiced.” This experience also gave me a real purpose in life.776

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Afterword How could the federal courts have permitted the denial to investors of ninety-five percent (95%) of their over $1 billion invested in the Lancer hedge funds on the basis of an allegation that Michael Lauer diverted $43 million from his investors to himself? Why had the United States Court of Appeals for the Eleventh Circuit acted so outrageously in rejecting and then dismissing Lauer’s sound arguments? There are so many questions. The judges aren’t saying, so we do not know for sure why the appeals court allowed this, although no possible reason seems to excuse their extraordinary failure to follow the law or do justice.

One major possibility is that the appellate judges saw the chaos that would result from deciding in favor of Lauer, whether in 2012 or 2016. Many hundreds of millions of dollars of investor money had been wiped out in a proceeding rife with error. The appeals judges would be forced to acknowledge that the courts and the government had made a devastating mistake, costing perhaps as much as a billion dollars to investors, including Lauer.

The fire sale of the investors’ assets and other events could not be reversed. There was simply no way to restore to the investors in the Lancer hedge funds the moneys that had wrongfully been taken from them. Indeed, by the end of the case, if the appeals court had reversed the district court, there could have been little or no money left for Lauer and Garvey (or me) even if they ultimately prevailed. No correction or explanation would work, so the court of appeals acted as though the district judges had

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not made serious errors. It was a coverup. This is the scenario that Michael Lauer believes.

Another possibility is that the judges were so outraged by my conduct as described by Lauer in his letter to the court of appeals in February 2012 that they would make sure that we would get no relief. The court would punish both of us. The appeals judges first disregarded the law in their 2012 opinion (I’m leaving aside the opaque and superficial decision in 2007), which followed Lauer’s accusations against me. The judges acted at a time when Lauer unequivocally opposed the filing of what he said was a misleading and inaccurate brief (which was before our reconciliation after the decision). On the record Lauer was a whistle-blower in February 2012. The explanation of our dispute and reconciliation that I ultimately gave to the court – which appeared in the final brief I submitted in December 2016 – was simply too little and too late, according to this scenario. I favor this explanation.

I have considered a third possibility, namely, that the appeals judges may have been convinced that they were not required under the law to set aside the 2009 district-court judgment or otherwise grant any relief, whether in 2012, 2016, or in the interim. That is a possibility, but so unlikely as not to warrant serious consideration. The errors are too serious and too numerous to accept that as a likely explanation. Distortions of both substantive law and procedural law permeated the Eleventh Circuit’s actions. Easily found factual fallacies were everywhere.

Superficiality triumphed. The judges mangled not only statutes and rules but fundamental constitutional principles such as due process and separation of powers. If there were any doubt, the unprecedented sua sponte 2016 dismissals were flagrant.

Nothing can be done at this late date for Michael Lauer, Martin Garvey, or the other investors, who were collectively deprived of over $1 billion. But perhaps something institutional can be done. What reforms are necessary will depend on why the appellate judges acted so badly. Perhaps nothing structurally can be done to prevent recurrence if those judges simply wanted to bury the wrongful conduct of the district judges by committing 271

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wrongful conduct at least as serious. If the primary motivation of the appeals judges was to punish litigants because of the apparent misconduct of their lawyers, a different view could be taken, perhaps one more focused on the education of the judges.

It should be noted, however, that the appeals judges who sat on SEC v. Lauer were very experienced, with several decades collectively on the federal bench. At a minimum, efforts should be made to find out what happened.

I can make no suggestion that relates to the two district judges who presided over SEC v. Lauer. Their errors were simply overwhelming and relentless. Their subservience to the government was almost beyond belief. Their unwillingness to confront the facts unforgivable. Their treatment of Lauer and his mother barbaric. Enhancing his supervisory powers of the chief judge of the district court to supervise and discipline district judges would not have helped, since Zloch was the chief judge for much of the case. The Eleventh Circuit, which had the power to do something, did nothing but aggravate the situation. Based on their performances in SEC v. Lauer, neither should have been a judge.

I will not address the deficiency in the performances of the SEC, especially the calamitous ones at the district-court level. Their lawyers said and did things that never should have happened. But I know nothing of the dynamics of the SEC’s Miami Regional Office during the case. I do not know whether its performance has been repeated elsewhere. It is incumbent of the SEC to investigate what happened, including whether the trial attorneys had proper training and supervision, especially in a case that involved $1 billion. The district judges supervised the receiver. Perhaps enough said. In any event, the appointment, role, and supervision of receivers must be examined.

I read thousands of pages of transcripts and exhibits in U.S. v. Lauer. It was obviously conducted on a different level than SEC v. Lauer. My criticisms of the judges in SEC v. Lauer should not be considered as applying to U.S. v. Lauer. I do not have much information on how or why the Department of Justice commenced the case. It obviously should not have been brought, 272

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at least not against Lauer or Garvey. (I do not know the facts respecting the other defendants well enough to give an opinion,) To maintain their independence the Constitution gives federal judges life tenure during good behavior and limits outside discipline against them to impeachment (and conviction) by Congress. We do not want to have a system where judges’ independence can be circumscribed because of the way they perform as judges, especially when they preside over controversial cases. The judges (and magistrate judges) in SEC v. Lauer were not, however, deciding controversial issues in an unpopular way.

They did not make decisions for reasons that might lead to their impeachment, such as a bribe or taking action to favor a relative or friend. Nor did they do so because they lost the mental abilities required to perform as judges. Impeachment has never been an option to remedy what occurred in SEC v. Lauer. And it should not be. Similarly, judges properly cannot be sued for how they decided cases.

Nevertheless, for judicial abuses to be prevented, whether in criminal or civil cases it is imperative that conduct such as occurred in SEC v. Lauer be exposed and judges held to account before the public and their peers. The possibility of exposure would act as a curb on the judges. The problem is a difficult one, however, when the court of appeals is complicit and the issues may not warrant the Supreme Court’s attention.

The decisions of the thirteen United States Courts of Appeals are effectively final in all but a narrow class of cases. Justice Robert Jackson wrote that the Supreme Court was not final because it was infallible, but was infallible because it was final.777 Article III of the Constitution reads: “The Judicial Power of the United States shall be vested in one Supreme Court, and in such inferior courts, as the Congress shall from time to time ordain and establish.”

The Supreme Court has repeatedly stated it cannot do the difficult and time-consuming retail job of overseeing even the most outrageous actions of courts of appeals. The Court does not and cannot actively supervise possible misconduct by appeals judges in individual cases.778 Supreme Court Rule 10 states: “A 273

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petition for a writ of certiorari is rarely granted when the asserted error consists of erroneous factual findings or the misapplication of a properly stated rule of law.” While the same rule says that a ground for granting a petition was that a court of appeals “has so far departed from the accepted and usual course of judicial proceedings, or sanctioned such a departure by a lower court, as to call for an exercise of this Court’s supervisory power,” recent rulings on petitions for certiorari have declined to use the Court’s supervisory power to remedy individualized injustices.779 Judges on courts of appeals know the miniscule chances of Supreme Court review in ordinary cases. Moreover, courts of appeals know how to decide cases so that the chances of the Supreme Court’s accepting the case for review are effectively zero, for example, by adding an alternative ground to its decision or obscuring the legal questions. Also, an opinion or order that says nothing other than “affirmed” or “reversed” or “granted” or “denied” does not misstate the law. It does not distort or confuse other litigants. It does not create a bad legal precedent. It certainly does not create a split in the circuits, the holy grail for certiorari applications. It is safe from Supreme Court review, and circuit judges know that. Although the Eleventh Circuit engaged in a cover-up, courts of appeals operate in the shadows. That is not to say that the overwhelming majority of circuit judges do not do their jobs well; rather, that there is no effective remedy for the exception.780 We do not know how many times courts of appeals have acted outrageously. We do not know when something like SEC v.

Lauer will happen next, and it is unlikely anyone will learn about it when it does. The judges involved will not tell us. Probably, no one else will, either. Lawyers rarely write books about cases they lose (or win for reasons other than their own perceived brilliance). There is no easy solution. However, one change in the Supreme Court’s practice could produce some improvement without creating a substantial burden, although I fear it will barely make a dent in the problem of failures in the courts.

There are many cases in which simply ordering the respondent on a petition for certiorari to defend the decision of the court of 274

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appeals will demonstrate the inanity of its decision or, in a case involving the Solicitor General, possibly a confession of error.

A serious error might be revealed. A response will not, as they say, “write.” Even one confession or suggestion of error by the Solicitor General could have an impact. A dozen or two requests a year by individual Justices for a brief opposing certiorari could make a difference.

The added burden on the Supreme Court would be minimal.

The suggested practice would mean each Supreme Court law clerk – each Justice has four law clerks and the Chief Justice has five – would at most have one more respondent’s opposition to certiorari to digest each year, since almost all the Justices rely on a single clerk’s summary of a case. I spoke with the late Justice Antonin Scalia about this suggestion shortly before he died. He found the idea intriguing. He said he had never considered the employment of a request for a response as an aid to supervising the lower federal courts. He did not say that as an objection.

275

Acknowledgments Many people assisted me with the case and some who helped me with this book who deserve acknowledgment. Topping the list is Michael Lauer and the late Allan Gerson for the year he worked on the case. While Lauer has been willing to talk to me after we lost, the book does not reflect his views but mine. During the case’s progress, I talked to others who had participated in the events and assisted me, including Milton Barbarosh, John Bendall, Michael Caruso, Martin Garvey, John Bendall, and Richard Lombardi.

Nonparticipants who gave valuable advice while I was engaged in the case were friends and former colleagues, especially Marc Fleischaker, Michael Mitchell, and Alan B. Morrison, but also Norman Dorsen (my late brother), Dr. Ira Dosovitz, Jack Friedenthal, Stephen E. Kaufman, Douglas Liebhafsky, Daniel Murdock, Stephen Newman, the late Robert O’Neill, Dina Perry, George Perry, and Kenna Peusner-Dorsen (my wife). From time to time, I discussed the book at monthly luncheons in Washington with members of the Harvard Law School Class of 1959. I appreciate everyone’s sympathy and suggestions.

I want to thank others who read the book in whole or in part before publication and made constructive comments, including Michael Caruso (who read the chapter on U.S. v. Lauer), Marc Fleischaker, Michael Mitchell, Steven Newman, Dina Perry, and my wife.

I also want to thank Mike Aronson. He was my esteemed editor at Harvard University Press when it published my first book, Henry Friendly, Greatest Judge of His Era, in 2012. After 276

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he retired, he advised me on my second book, The Unexpected Scalia: A Conservative Justice’s Liberal Opinions, published by Cambridge University Press in 2017, and then on this book. I applaud Mike’s professionalism and generosity with his time.

I wrote to many major participants in SEC v. Lauer not associated with Lauer to ask each for an interview or for answers to specific questions I posed in my letter. These included the federal judges on the case and people associated with the SEC and the receiver. When I included questions in my requests for an interview, I noted fundamental questions, such as: What basis was there for putting the innocent hedge funds into receivership?

Why did the receiver sell the assets of the innocent hedge funds?

Why was no expert called as a witness by the SEC or Department of Justice? How can extracting interest from Lauer be justified?

What were the reasons you voted to dismiss and not reinstate Lauer’s final appeal? No one provided information, no one agreed to an interview, and very few chose to respond at all. The clerk of the Eleventh Circuit wrote to say that Judges Pryor, Martin, and Ebel would not respond to the questions I posed and that I should not write them again. There does not appear to be any restrictions on judges discussing cases on which they sat after the conclusion of the case.781 I have tried to the best of my ability to present the facts undistorted by bias. I believe I have been successful, in large part because my analyses of virtually all events discussed in this book are supported by documents and references in the court files of this case or among published cases. As a result, the book presents a rare window on deficient actions by federal courts and government officials, employees, representatives, and perhaps others. Moreover, it does so in the context of an important case that involved over $1 billion of assets. Proceedings in the district court took place in a major judicial district and were appealed numerous times to the United States Court of Appeals in Atlanta.

Five times the Supreme Court refused to hear the case. It was not a case that was lost in the shuffle or infected by a single miscreant or mistake.

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The endnotes are extensive and provide citations that both support the statements and explain and amplify some of the legal and factual issues in the case, which I feel necessary to include because of the seriousness of the allegations in the book. Reading them, however, is not essential to understanding the narrative.

But I like to think it helps.

The many court documents I cite in the endnotes on which I rely are mostly available online by visiting www.Pacer.gov, although some transcripts of testimony are not available.782 The documents are part of the official court record in SEC v. Lauer (03-cv-80612, S.D. Fla.) (the principal case against Lauer), In re Lancer Partners, LLP (04-cv-80219, S.D. Fla. (the bankruptcy court case), Steinberg v. Lauer No. (05-cv-60584, S.D. Fla.) (the principal one of the cases brought by the receiver against Lauer and others), and United States v. Lauer (08-cr-20071, S.D. Fla.) (the criminal case brought by the Department of Justice against Lauer and others in 2008 and in which he was acquitted in 2011).

In the United States Court of Appeals for the Eleventh Circuit, the individual appellate proceedings are entitled United States v.

Lauer or under the name of the petitioner and are numbered separately, and the case numbers appear in endnotes.

I conclude by emphasizing that any opinions (other than those specifically attributed to another person) and all errors in the book are mine and mine alone. I can be reached at Dorsen35@ aol.com.

278

Appendix A

Participants in Events Discussed in the Book Participants mentioned in this book other than Michael Lauer are listed by category, in alphabetical order within each category.

Lauer’s Family and Friends Stefan Dobrowolski – identity assumed by Bernard Lauer during World War II H.C. – Michael Lauer’s former domestic partner Bernard Lauer – Michael Lauer’s father Valentina Selukov Lauer – Michael Lauer’s mother Simon Wiesenthal – friend of the Lauer family Lancer’s and Lauer’s Business Associates and Other Individual Business Relationships Milton Barbarosh – evaluator of businesses, who worked for Stenton Leigh, a business evaluation firm, who pled guilty to securities charge John W. Bendall, Jr. – independent director of Lancer Offshore and Omnifund and head of Hermitage Capital, which executed trades for Lancer Management Bruce Cowen – consultant to Lancer, who pled guilty to securities charges arising out of FBI sting John Doyle – worked for Shamrock Partners supervising Kelly and Huard, traded for Lancer, Martin Garvey – 10% owner of both Lancer management companies and co-owner of GH Associates, who was acquitted with Lauer Richard Geist – independent director of Lancer Offshore and Omnifund Eric Hauser – 10% owner of both Lancer management companies and co-owner of GH Associates, who pled guilty to a securities charge 279

Joseph Huard – worked for Shamrock Partners, traded for Lancer, who pled guilty to securities charges arising out of FBI sting Laurence Isaacson – Florida businessman and interim CEO of several shells, who was convicted of conspiracy to violate securities laws James T. Kelly –worked for Shamrock Partners, traded for Lancer, who was acquitted of securities-law violation Harry Lander – Lancer Management employee George Levie – associate of Milton Barbarosh David Newman – Lancer Management employee James Tsakni – Lancer Management employee under Hauser Lancer Management, Hedge Funds, and Service Providers Bank of America – primary broker for offshore funds Citco – manager of Lancer Offshore, Inc., and Omnifund, Ltd. GGK – accountants for Lancer Partner, PC, division of American Express GH Associates – firm owned by Garvey and Hauser, which serviced Lancer Management Hermitage Capital Corporation – SEC-licensed stock trading company headed by John Bendall used by Lancer Management Lancer Management Group, LLC – management company that managed offshore hedge funds, Lancer Offshore and Omnifund Lancer Management Group II, LLC – management company that managed domestic hedge fund, Lancer Partners Lancer Offshore, Inc. – offshore hedge fund managed by Lancer Management Group, LLC Lancer Partners, LLP – domestic hedge fund managed by Lancer Management Group II, LLC Omnifund, Ltd. – offshore hedge fund managed by Lancer Management Group, LLC Pershing, LLP – a clearinghouse for stocks used by Lancer PricewaterhouseCoopers – accountants for Lancer Management companies Shamrock Partners – SEC-licensed stock trading company used 280

by Lancer Management that employed James Kelly and Joseph Huard Lauer’s and Lancer Management Group’s Lawyers and Accountants Richard M. Asche – lawyer who represented Lauer early in SEC v. Lauer Michael T. Caruso – Public Defender, who represented Michael Lauer in his criminal trial Vanessa Chen – Public Defender’s office and Associate of Michael Caruso David M. Dorsen – attorney retained by Lauer from January 2012 to October 2017 and author of book Allan Gerson – attorney retained by Lauer from January 2012 to November 2012 R. Darsey Houlihan – Public Defender’s office and associate of Michael Caruso Gerald M. Labush – lawyer who represented Lauer early in civil case Norman Moskovitz – lawyer who represented Michael Lauer early in criminal case Simon Pascoe – BVI lawyer for offshore hedge funds, Lancer Offshore and Omnifund Carl F. Schoeppl – lawyer who represented Michael Lauer in contempt proceeding Neal Russell Sonnett – lawyer for Lauer early in SEC v. Lauer Stephen Thel – expert witness for James T. Kelly Harold Zoref, CPA – accountant for Lauer and Lancer Companies in which Lancer Management Invested (partial list) Biometrics Security Technology, Inc. Continental Southern Resources, Inc., later Endeavor Corporation Endeavor Corporation Fidelity First Financial Corporation Lighthouse Fast Ferry, Inc. 281

SMX Corp.

Total Films XtraCard Corp.

Zi Corporation Judges, Magistrate Judges, and Court Personnel Ed Carnes – chief judge of 11th Circuit during portion of case Julie Carnes – 11th Circuit Judge who sat on Lauer’s petition for a writ of mandamus Marcia A. Cooke – district judge in the Southern District of Florida assigned to SEC v. Lauer after Zloch transferred the case to her in 2004, who immediately recused herself Joel F. Dubina – 11th Circuit Judge who sat on Lauer’s contempt appeal Frank H. Easterbrook – court of appeals judge from 7th Circuit David M. Ebel – visiting judge from 10th Circuit who sat on Lauer’s 2012 direct appeal James C. Hill – 11th Circuit judge who sat on 2012 direct appeal Adalberto Jordan – district judge in the Southern District of Florida who presided over Lauer’s criminal case, now on 11th Circuit Steven Larimore – Clerk, U.S. District Court for the Southern District of Florida Stanley Marcus – 11th Circuit Judge who sat on Lauer’s contempt appeal Kenneth A. Marra – district judge in the Southern District of Florida picked to succeed Zloch in July 2004 Beverly B. Martin – 11th Circuit judge who sat on Lauer’s direct appeal and other appeals and petitions Chris McAliley – Magistrate Judge assigned to Judge Jordan Gerald A. McHale, Jr. – Bankruptcy Trustee of Lancer Partners, LLC, sat on the case involving Lancer Partners John K. Olson – Bankruptcy Court Judge in the Southern District of Florida who sat on case involving Lancer Partners Richard A. Posner – retired judge on 7th Circuit William H. Pryor, Jr. – 11th Circuit judge who sat on multiple appeals and petitions by Lauer 282

Jed S. Rakoff – district judge, Southern District of New York Barry S. Seltzer – magistrate judge of the Southern District of Florida under Judge Zloch Edward Sieber – district court deputy clerk in the Southern District of Florida who signed affidavit for Judge Marra Gerald Bard Tjoflat – 11th Circuit judge who sat on multiple appeals and petitions by Lauer Ann E. Vitunac – magistrate judge in the Southern District of Florida under Judge Marra Patricia Wald – former chief judge of D.C. Circuit William J. Zloch – judge of the Southern District of Florida initially assigned to SEC v. Lauer, who was chief judge at the time Justice Department, FBI, and SEC Personnel and Associates Hope Hall Augustini – first SEC appellate lawyer David William Jones – career criminal used by FBI in Bermuda Short Sting Christopher Martin – SEC attorney initially under Zinn in SEC v. Lauer, then lead attorney starting in May 2004 John C. Mattimore – head of SEC Miami office during Miami SEC investigation Michael Palusek – FBI agent who testified in U.S. v. Kelly about attempts to pull Lauer into FBI sting Jack P. Patrick – prosecuting attorney against Michael Lauer and Martin Garvey in U.S. v. Lauer Harold Schimkat – initially SEC attorney working on SEC v.

Lauer, then prosecuting attorney against Michael Lauer and Martin Garvey in U.S. v. Lauer Robert Schlein – career criminal used by FBI in Bermuda Short Sting Benjamin Vetter – second SEC appellate lawyer Kerry Anne Zinn – lead SEC attorney initially assigned to SEC v.

Lauer who resigned in May 2004

283

Receiver and His Professionals Jeffrey B. Bast – attorney for receiver with Hunton & Williams Berkowitz, Dick, Pollack & Brant – accountants for receiver DDJ Capital Management, LLC – company receiver selected to liquidate hedge funds Susan V. Demers – special counsel for receiver Juan C. Enjamio – successor to Craig V. Rasile as counsel for receiver, with Hunton & Williams Fasken Martineau Dumolin, LLP – special Canadian counsel for receiver Hunton & Williams, LLC – principal attorneys for receiver Richard E. Johnston – special Canadian counsel for receiver Soneet Kapila – testifying expert hired by receiver who testified for the SEC C.L.A. Piper – special counsel for receiver Price Findlay & Co. – special counsel for receiver Craig V. Rasile – counsel for receiver, initially with Hunton & Williams, then with C.L.A. Piper Marty Steinberg – Miami attorney and court-appointed receiver for Lancer Management Group, LLC, Lancer Management Group II, LLC, Lancer Partners, LP, Lancer Offshore, Inc., Omnifund, Ltd. Touchstone Investigative Group – investigators for receiver, initially owned by Marty Steinberg, then by Hunton & Williams Investors Mentioned in Book Richard Lombardi – investor in Lancer Offshore hedge fund whom the receiver sued Renée Mayrand – employee of University of Montreal Pension Fund and SEC and DOJ witness Harry G. Pappas, Jr. – investor who complained to Marra about receiver’s fees Morgan Stanley – investor in Lancer hedge funds

284

Media and Writers Christopher Byron – New York Post reporter whom Lauer and Lancer Management sued Sebastian Mallaby – author of More Money Than God (2010) Miami Herald – Miami newspaper New York Post -- New York City tabloid New York Times – New York City newspaper Jack D. Schwager – author of Stock Market Wizards; Interviews with America’s Top Stock Traders (2001) Timothy Snyder – author of Bloodlands: Europe Between Hitler and Stalin (2010)

285

Appendix B

Major Events in Litigation Involving Michael Lauer Date 8/15/02 2/14/03

Event Bermuda Short indictment filed Lancer Management and Lauer sue New York Post for libel 2/03 Lancer Partners files for voluntary bankruptcy 5/03 Agency in British Virgin Islands files complaint against offshore hedge funds 5/11/03 Deloitte Touche files confidential report in BVI 6/12/03 FBI executes search warrant on Michael Lauer and Lancer Management 6/27/03 Barbarosh files rebuttal report on behalf of offshore funds in BVI 7/8/03 SEC files complaint, motion for TRO, and motion for asset freeze in SEC v. Lauer 7/10/03 Ex parte hearing between Judge Zloch and SEC 7/10/03 Zloch signs SEC motions and appoints Marty Steinberg as receiver 7/10/03 SEC files interrogatories directed to Lauer 7/11/03 Receiver seizes Lancer offices in Manhattan and Connecticut 7/11/03 Deloitte Touche files reply report in BVI 7/17/03 Lauer’s lawyers consent to the entry of a preliminary injunction (PI) 8/19/03 Lauer files answer 10/23/03 Steinberg files motion to appoint DDJ Capital Management, LLC as manager 11/20/03 Zloch approves appointment of DDJ 12/3/03 Zloch denies Lauer motion to amend TRO and orders him to sell Greenwich home and receive $10,000/ month from proceeds 12/5/03 Receiver files motion to enter consent judgment against Lancer Management and hedge funds 286

1/8/04 1/14/04 2/2/04

3/7/04 3/10/04

6/04 4/30/04 5/3/04 5/3/04 5/6/04 5/10/04 5/15/04 5/21/04 6/2/04 6/15/04 6/15/04 7/9/04 7/26/04 7/30/04 8/04 8/19/04 8/25/04 8/26/04

Zloch files case management order SEC files motion to compel Lauer to answer interrogatories Receiver files motion to sell hedge funds holdings of Continental Southern (CSR), later Endeavor International (END) Lauer files motion to change venue from Florida to New York Omnibus hearing before Zloch at which he says to Lauer, “Are they any less painful by the way that you used [in] your process of marking the close?”

SEC files motion to seize Valentina Lauer’s bank account SEC attorney Zinn resigns from SEC and Martin takes over SEC files motion for 120-day continuance of deadlines Lauer files motion to disqualify Zloch Zloch denies Lauer’s motion to disqualify him Zloch grants SEC’s motion to compel Lauer to answer interrogatories Lauer files motion to require receiver to advance his legal fees Lauer files motion to protect Valentina Lauer bank account Zloch denies all of Lauer’s pending motions Zloch recuses himself from SEC v. Lauer SEC v. Lauer assigned to Judge Marcia Cooke SEC v. Lauer is reassigned to Marra Lauer files motion to move deposition Marra denies Lauer motion to move deposition SEC takes Lauer’s deposition for four days Marra adopts all Zloch’s orders and denies all outstanding Lauer motions Lauer files motion to bar receiver from collaborating with New York Post Marra denies Lauer’s motion to bar receiver from collaborating 287

10/24/04 SEC files motion to have Lauer held in contempt for violation of PI 12/16/04 SEC files motion to compel Lauer’s deposition in New York City for January 5, 2005 1/4/05 Lauer files emergency motion to move deposition 1/4/05 Marra denies Lauer emergency motion move deposition 1/11/05 Lauer files motion to obtain details of disgorgement 1/19/05 Lauer files emergency motion to bar receiver from selling hedge funds’ stock in Zi Corp. (ZICA) 1/11/05 Marra strikes Lauer motion to learn details of disgorgement 1/24/05 Lauer files motion to dismiss case or for summary judgment. Marra orders that Lauer forfeited 2002 Denali 2/1/05 Steinberg files a motion to sell Lauer’s MercedesBenz 5/2/05 Marra strikes Lauer motion for details of disgorgement 5/28/05 Lauer files motion for reconsideration of denial of details of disgorgement 9/6/05 Vitunac files order that pleadings filed without consultation with opposing counsel will be stricken 9/12/05 IRS files motion to intervene in SEC v. Lauer 9/30/05 Steinberg files motion to place CLR into receivership 9/30/05 Marra denies Lauer motion to enter judgment against him 1/24/06 Marra rules that Lauer violated orders to make discovery and holds him in contempt 7/27/06 Marra orders sale of 2002 Denali 9/19/06 Marra grants IRS motion to intervene 10/29/06 Marra postpones trial 11/30/06 Lauer files motion for indemnification of legal expenses 1/3/07 Marra denies Lauer motion for indemnification of legal expenses 1/8/07 Lauer files motion for searchable index to Lancer documents 288

1/18/07 1/19/07

SEC files motion for summary judgment Marra denies Lauer motion for searchable index to Lancer documents 2/2/07 Lauer files notice of appeal from contempt order 2/21/07 Motion of H.C. to gain access to Lauer funds to pay child support 3/20/07 Lauer files opposition to SEC’s motion for summary judgment 4/1/07 SEC files motion to strike Lauer’s exhibits from his opposition 4/11/07 Marra last order permitting Steinberg to sell hedge fund asset 5/1/07 Marra denies Lauer motion to sell his stock and leave proceeds in account 5/2/07 Marra denies H.C. motion to access funds for child support 9/6/07 Court of Appeals affirms Marra’s contempt order 1/29/08 Indictment filed under seal in U.S. v. Lauer et al.

2/19/08 Indictment unsealed in U.S. v. Lauer 3/7/08 Marra grants SEC motion to strike Lauer exhibits 5/28/08 Lauer files motion to use funds in U.S. v. Lauer 7/15/08 Lauer files motion to stay SEC v. Lauer during criminal case 9/23/08 Marra grants SEC motion for summary judgment 9/24/08 Marra denies Lauer motion to stay SEC v. Lauer 11/6/08 Hearing on Lauer’s motion to use funds in U.S. v.

Lauer 11/5/08 Lauer files motion for reconsideration of order granting summary judgment 12/9/08 Lauer files notice of appeal from award of summary judgment 12/9/08 Lauer files motion to continue hearing on disgorgement 12/10/08 Marra denies Lauer motion to continue hearing on disgorgement 12/12/08 Hearing on disgorgement 12/29/08 Lauer files proposed disgorgement order 289

1/15/09

SEC moves to strike Lauer proposed disgorgement order 3/26/09 Marra denies Lauer’s motion to permit him to use his assets in U.S. v. Lauer 5/6/09 Marra files disgorgement order 6/18/09 Jordan grants Lauer motion to exclude iPhone and laptop 8/19/09 Marra imposes statutory penalty on Lauer 9/22/09 Marra enters final judgment against Lauer under Rule 54(b) 10/6/09 Lauer files notice of appeal from entry of judgment 12/18/09 Lauer files pro se brief on appeal 1/20/10 Marra orders open claims dismissed 4/13/10 Jordan orders trials of Lauer and Garvey severed from that of Isaacson 7/20/10 Isaacson found guilty in U.S. v. Lauer 9/17/10 Receiver files motion resetting “procedures” for distribution 10/7/10 Marra files order granting receiver’s motion to set “procedures” 3/14/11 Trial starts in U.S. v. Lauer and Garvey 4/27/11 Verdict of Not Guilty entered in U.S. v. Lauer and Garvey 1/19/12 Lauer retains Allan Gerson and David Dorsen in SEC v. Lauer 3/2/12 Lauer (Dorsen) files post-judgment brief in court of appeals 4/19/12 Court of appeals affirms Marra 10/29/12 Supreme Court denies Lauer’s petition for certiorari 1/22/13 Steinberg files motions for summary judgment against Lauer and Garvey in Steinbergv. Lauer 2/20/13 Lauer files first post-judgment motion in SEC v.

Lauer 3/18/13 Lauer and Garvey file motions for summary judgment against Steinberg in Steinberg v. Lauer 7/9/13 Lauer files notice of appeal from denial of second set of post-judgment motions 290

10/17/13 Lauer files motion to disqualify Marra in Steinberg v.

Lauer 11/14/13 Directors file motion for leave to be reinstated 11/22/13 Marra denies Lauer’s motion to recuse in Steinberg v.

Lauer 12/26/13 Lauer files motion to recuse Marra in SEC v. Lauer 3/10/14 Marra denies Lauer’s motion to disqualify him in SEC v. Lauer 3/31/14 Lauer files motion to dismiss Steinberg v. Lauer for receiver misconduct 4/1/14 Receiver files motion to enjoin Lauer from filing additional motions 4/10/14 Lauer and Garvey file motions to have their assets returned 5/21/14 Lauer files motion to deny receiver attorney’s fees 7/22/14 Lauer files motion for entry of satisfaction of judgment 8/4/14 Lauer and Garvey file motion to share in receivership estate 8/19/14 Marra denies Lauer motion to reconsider denial of motion to disqualify Marra 4/15/15 Oral argument on Lauer’s initial motions to set aside repeal in 2013 4/21/15 Court of appeals affirms Marra’s denial of Lauer’s motions to set aside judgment 3/12/15 Marra denies without prejudice the receiver’s motion for a filing injunction 7/21/15 Receiver files motion to close receivership in SEC v.

Lauer 8/31/15 Steinberg dismisses Steinberg v. Lauer 11/24/15 Marra files omnibus order and three other orders denying Lauer and others’ motions for relief in SEC v. Lauer 11/25/15 Marra files order denying director’s motion to intervene 12/15 Lauer files multiple notices of appeal

291

2/16

SEC and receiver file motions in court of appeals for summary affirmance 3/31/16 Marra denies Lauer’s motion for hearing on receiver’s fees and expenses 3/31/16 Marra orders receivership closed in SEC v. Lauer 7/26/16 Court of appeals sua sponte dismisses portion of Lauer appeal 9/22/16 Court of appeals denies Lauer motion for reconsideration 11/22/16 Court of appeals dismisses Lauer appeal 12/5/16 Lauer files motion to reinstate appeal, along with his brief and appendix 4/20/17 Court of appeals denies Lauer’s motion to reinstate appeal 4/24/17 Supreme Court denies Lauer’s fourth petition for certiorari 10/9/17 Supreme Court denies Lauer’s fifth and final petition for certiorari 11/5/19 Case ends (DE 3104)

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Endnotes 1 2 3 4

5 6

7

8

The auditors on the great majority of the assets was PricewaterhouseCoopers or GGK/American Express.

Roberts, John, 2013 Year-End Report on the Federal Judiciary, U.S. Supreme Court, 2013, at 2.

Brady v. Maryland, 373 U.S. 83, 87 (1963).

One judge exclaimed in open court that Lauer had acted unlawfully before hearing a single word of evidence on Lauer’s behalf. Another judge, without notifying the parties, personally obtained an affidavit from a witness and relied on it to defeat a motion made by Lauer. The judge even made the affidavit part of his order denying Lauer’s motion before Lauer had seen the affidavit. Lauer filed a motion for reconsideration of the judge’s order which explained what the judge had done, which the judge denied.

The costs to taxpayers included the expenses of the court system.

This account draws primarily on Bloodlands and Michael Lauer’s experiences.

For a book that considers some of the leading citizens of Lviv and their role in framing the concepts of crimes against humanity and genocide, see Philippe Sands, East West Street (Vintage Books 2016).

Lauer email to author. Lauer’s email continued with an account of what an officer told him when he suggested how things could be done better in Quantico. The officer told him to forget about what makes sense. “We were not there to be “schooled’’ although we’d learn a lot. We were there to be ‘broken.’ In their minds, OCS did not stand for Officer Candidate School but Officer Candidate Screening. They wanted to see whether the candidates would give up under enormous duress and how they functioned, including in leadership roles, when massive stress came. A magical thing happened when he told me the part about the real purpose of OCS and looking for the human ‘breaking’ points,” Lauer recited. “It’s as if my body gained another 100-horsepower, a huge surge of energy, just because the purpose of the endeavor was reframed in my mind. Now everything made sense, just as it does in my legal battles. It may not be pretty, but it all makes sense.”

Lauer admired Wiesenthal’s integrity and calling. Wiesenthal called the Nazi war criminals “scum,” and Lauer fantasized about getting his hands on the scum he hunted, who had collectively wiped out his father’s family, including the first Michal Lauer. Lauer reveled in his good fortune at getting back at Nazi war criminals. He traveled with Wiesenthal, including on a mission to Buenos Aires. Lauer gives as an example of Wiesenthal’s integrity the issue of Kurt Waldheim, who ran for president of Austria in 1985. During the campaign, Waldheim was denounced as an officer in Wehrmacht throughout the war rather than in a hospital as he had claimed. Despite enormous pressure on Wiesenthal, primarily from Jewish power brokers in the United States, Wiesenthal did not accuse Waldheim of war crimes because he had no evidence, although he called Waldheim a liar and unfit to be president. While both Wiesenthal and Eli Wiesel were nominated for the Nobel Peace Prize, only Wiesel received the coveted prize. Many believed that Wiesenthal’s 293

9 10 11

12 13

14

15 16 17 18 19 20

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principled stand on Waldheim was responsible. Lauer admired Wiesenthal’s unwillingness to falsely accuse a person against whom evidence was lacking, no matter how unattractive he might otherwise have been.

See Jack D. Schwager, Stock Market Wizards; Interviews with America’s Top Stock Traders 49 (HarperCollins 2001).

Sebastian Mallaby, More Money than God 130 (2010).

SEC TRO Ex. 3 at 10. “The descriptions in this memorandum of the specific activities in which the Partnership may engage should not be construed to limit in any way the types of investment activities or the allocation of Partnership capital among such investments which the Partnership may make.” “[I]t is possible that a significant amount of the Partnership’s equity could be invested in the securities of only a few companies.” SEC TRO Ex. 4 at 19.

During the case, the principal law firm for the court-appointed receiver, Hunton & Williams, maintained a website www.Hunton.com/Lancer that posted documents filed in the case, but which was taken down after the case ended. The documents the firm posted on the website were not a complete record of the proceedings in the district court, but omitted many that Lauer had filed and in which he explained his positions and criticized the proceedings. The receiver separately emailed or mailed copies of his filings and the courts’ rulings to the investors, but did not similarly send them copies of many of the documents filed by Lauer. Unfortunately, the courts charge patrons for copying documents.

See, e.g., DE 115 at 5. (“DE stands for “docket entry” and refers to SEC v.

Lauer unless otherwise stated.)

SEC TRO Ex. 4 at 11; DE 1923 at 6. The directors selected the manager of the funds and had absolute discretion over the valuation of the funds. SEC TRO Ex. 6 at 15; DE 1823 at 7.

Prior to joining Lancer in 1995, Garvey worked for U.S. Senator Bill Bradley (D-NJ), for the Senate Iran-Contra Committee, as a paralegal for the major law firm of Arent, Fox, and for Paine Webber for four years. He held a BA degree from Williams College and a master’s degree from George Washington University. Prior to joining Lancer in 1997, Hauser worked as an equity trader at Morgan Stanley, UBS Securities, and Montgomery Securities, before joining Oppenheimer & Co. as Senior Vice President, trading securities for entities that included hedge funds and asset-management firms. Lancer hired David Newman, a senior employee, from Bank of America. DE 1823 at 2-3; see DE 1744 at 11.

My discussions with Lauer.

SEC TRO Ex. 6 at 15. The directors had “absolute discretion” to employ or not employ the market price to value an asset. Id. SEC TRO Ex. 5 at 11.

Id. at 1.

Sebastian Mallaby, More Money than God 284 (2010).

Moreover, the valuation process understates risk. The market prices of illiquid investments swing sharply, but smooth out over time, concealing the volatility of the investment. Sebastian Mallaby stated, “The risk-adjusted

21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

36 37

38 39

returns look wonderful because some of the risk goes unreported.” Id. (HarperCollins 2001).

See DE 319 at 7-8 DE 49 at 12.

DE 91 at 2.

For a review of the history and practices of hedge funds see Mallaby, More Money than God, supra.

Jack D. Schwager, Stock Market Wizards; Interviews with America’s Top Stock Traders 34-36 (HarperCollins 2001).

Id. at 36-40. In the next eighteen months Microsoft dropped from around 35 to around 25, while Dell dropped from the low 40s to around 20. Id. at 43-44.

Id. at 40.

Id. at 33.

Id. at 45-48.

Id. at 49-50.

Lancer stated its practice both in the PPMs and in PricewaterhouseCoopers’ audit reports.

Id. at 31.

Out of respect for their privacy the book says almost nothing about Lauer’s five daughters and little about his wife.

Lauer recalled that Paul Newman, a civil rights activist in the 1960s, was upset that he was not among the top three on Nixon’s infamous Enemies List and that he was, in fact, below Marlon Brando. Newman’s excellent race-car driving, like his acting, was hard earned and did not come naturally to him, unlike with Brando’s acting ability. Newman told Lauer that if James Dean had not been killed in a road accident just before the filming of “Someone Up There Likes Me,” which became Newman’s breakthrough role, he would not have been a superstar. Newman was a strong believer in the randomness of life and its corollary, serendipity, beliefs he shared with Lauer.

Paragraph in italics are from emails from Lauer to the author. Starting in January 2012, Lauer and I (David Dorsen) exchanged hundreds of emails.

This summary of Bermuda Short is taken primarily from CMKX Shareholder Home Page, http://camrhon.com/index.cgi?board=safe&action=display&thr ead=6016, Sept. 1, 2012, and my discussions with Lauer.

David William Jones and Robert Schlein.

The case that seems to best describe the applicable standard is U.S. v. Kelly, 707 F.2d 1460 (D.C. Cir. 1983), where the court upheld the government’s approach to a Florida congressman, Richard Kelly, as part of the famous Abscam sting.

The court used the standard for rejecting the government’s approach of an individual is if it meets “a demonstrable level of outrageousness.” The court in Kelly affirmed the conviction, but was troubled. Because there was no court hearing on the subject, there was not a full record in the courts on the issue with respect to Lauer, but there is reason to believe that it would not have been upheld. See John Ashcroft, Attorney General, Office of the Attorney General, The Attorney General’s Guidelines on the Federal Bureau of Investigation Undercover Operations (2002), which require a “reasonable indication” that the subject of a sting is likely to engage in illegal conduct.” It 295

appears that the FBI approached Lauer in 2001.

40 For example, Lauer’s brief on his direct appeal from the judgment entered against him (at 11) included the following question and answer from the cross-examination of the FBI agent who approached Lauer. “Q. [Lauer] is saying that he is not agreeing to control the price of the stock with them, is he? A. That’s correct. That’s what he is saying.” U.S. v. Kelly, Nov. 9, 2004, Tr. at 18-19.

41 DE 319 at 13.

42 Partners had filled the maximum 100 investor slots.

43 Lauer Dep., SEC v. Lauer, Aug. 4, 2004, at 323-30.

44 DE 319 at 11 (affidavit of Michael Lauer).

45 Lauer said that Partners should simply have redeemed the panicking investors with the underlying securities, an in-kind redemption permitted by the partnership agreement. He added, “but if you go to a bankruptcy lawyer for advice, guess what [advice] you’re going to get.”

46 DE 1198 at 46.

47 Lauer Dep., SEC v. Lauer, Aug. 3, 2004, at 145-48. Lancer had initially employed the services of Barbarosh in early 2002, when Citco, the hedge funds’ manager, raised questions about the valuations of the hedge funds’ investments.

48 Id. at 38-39.

49 Id. at 5.

50 Testimony of Mattimore in U.S. v. Lauer, 08-cr-20071, S.D. Fla. 51 DE 1198 at 49, SEC v. Lauer; see Lauer pro se brief on direct appeal in SEC v.

Lauer at 13.

52 DE 107 at 196-97.

53 The law does not appear to require the sending of a Wells notice. Mark J. Astarita, “The Wells Notice in SEC/FINA Investigations,” (http://seclaw.com/ docs/wellsnotice.htm) seclaw.com (operated by VGIS Communications, LLC), retrieved Oct. 6, 2017.

54 Two other entities were named, but they are not germane to this book.

55 DE 10, DE 11.

56 Id. at 2.

57 DE 1 at 10.

58 Id. at 11.

59 Id. at 12-14.

60 The prices of a number of these stocks declined somewhat when the filing of the complaint was announced. DE 107 at 115; author discussion with Lauer.

61 The complaint listed trades in seven stocks as involving marking the close. For three of those stocks the complaint provided some information on specific trades. One was Lighthouse Fast Ferry, Inc., in which Lancer held a small position that comprised less than 1% of its portfolio. The complaint alleged that “Lancer Management’s manipulative trading caused Lighthouse’s stock price to rise dramatically on October 31, 2001, to $2.15 on per share from the previous day’s closing price of $1.60 per share a 34% increase over the previous day). Defendants then valued the Funds’ holding in Lighthouse at the materially overstated value of $2.15 per share.” However, October 31 was 296

62 63 64 65

66

67 68 69 70 71

72 73 74 75

not the end of a quarter and the price on that date was not used for Lancer’s compensation. It is also noteworthy that the complaint did not provide the closing price on the previous day for the two other stocks for which it gave some price information and in which Lancer had a substantial holding, namely, Fidelity First Financial Corp. and Biometrics Security Technology, Inc. Thus, the SEC did not show that Lancer’s purchase inflated the price of the stock. The inclusion of the data for Lighthouse and not the others suggests that the facts did not support the SEC on the others. https://definitions.uslegal.com/m/marking-the-close/, retrieved April 28, 2021.

SEC TRO Ex. 6 at 13.

Id.; DE 49 at 9-12; see, e.g., DE 319 at 20, DE 352 at 2-3.

The complaint mixed together serious with trivial allegations, some of which seemed no more than alleged minor breaches of contract. Obviously, allegations of marking the close and of placing large valuations on worthless assets were serious and went to the core of the SEC charges. But what about the claim that the PPM stated that most investment would trade on listed exchanges, but that was not always the case? Or that the funds would not take control of the issuer of any underlying investment, but did when that was required by business necessity? Or that a newsletter said that a specific company was a “small” position, when it made up 3.33% of a fund’s investments? DE 1 at 13.

If Lancer bought shares for nothing in a worthless company for a hedge fund and valued it at $1 million, Lancer would collect fees of $210,000 from investors at the end of the year. If 25% of the investors in the hedge fund redeemed their investment, they would receive $250,000. Furthermore, as Lauer argued, such a scenario was not self-sustaining. The hedge funds would dispose of their investments eventually and would register a total loss if an investment was worthless.

DE 1 at 4.

DE 352 at 3.

DE 1852 at 10.

As noted, italicized paragraphs are lightly edited emails from Lauer to the author. The criminal case against Lauer is discussed in Chapter 15.

“I [Lauer] could not find one instance in the annals of the SEC enforcement where a private investment vehicle such as Lancer was subjected to a TRO, preliminary injunction, and receivership solely on an allegation of ‘marking the close.’” DE 292 at 5; see DE 319 at 5.

DE 11.

Id. DE 10.

SEC Investor Bulletin: 10 Things to Know About Receivers, Aug. 27, 2015, filed as DE 3005; Carr v. CIGNA Sec., Inc., 95 F.3d 544, 547 (7th Cir. 1996) (“A fiduciary relationship places on the fiduciary a duty of candor . . . .”); Insurance Co. of North America v. Miller, 765 A.2d 587, 597 (Md. 2001) (it is the “duty of a fiduciary ‘to make full disclosure of all known information that is significant and material to the affairs of the fiduciary relationship’”).

297

76 77 78 79 80

81

82

83

84 85

86 87 88 89 90

298

DE 18 at 3-7.

Id. at 3.

Id. at 11.

Id. No explanation was provided how the receiver could exercise his fiduciary duty and at the same time be excused from negligence.

DE 10 at 2 (emphasis added) (citations to cases omitted). The proposed order also noted that in the order granting the TRO against Lauer “the Court found that the Commission presented a prima facie case that Defendants have violated and are likely to continue to violate federal securities laws . . . .” In the interests of readability, footnotes within quotations have omitted without noting that fact. Deletions of text are noted with ellipses. All indications of emphasis, such as italics and boldface, are in the original, unless specifically noted otherwise.

Netsphere, Inc. v. Baron, 703 F.3d 296, 305-06, 310 (5th Cir. 2012); Santibanez v. Wier McMahon & Co., 105 F.3d 234, 241-42 (5th Cir. 1997); In re McGaughey, 24 F.3d 904, 907 (7th Cir. 1994); SEC v. Cherif, 933 F.2d 403, 413-14 (7th Cir. 1991).

DE 3005 (10 Things to Know About Receivers, released Aug. 27, 2013) (receiverships limited “to property controlled by a person sued in a court case”).

SEC v. Cavanagh, 445 F.3d 105, 109 n.7 (2d Cir. 2006), quoting SEC v.

George, 426 F.3d 786, 796 (6th Cir. 2005); CFTC v. Kimberlynn Creek Ranch, Inc., 276 F.3d 187, 191 (4th Cir. 2002); SEC v. Colello, 139 F.3d 674, 675-76 (9th Cir. 1998). In 1882 the Supreme Court held that the citizenship of a nominal party in a diversity case was immaterial because a nominal party is not a party. Bacon v. Rivers, 106 U.S. 90, 194 (1882). A court of appeals held that subject-matter jurisdiction over a relief defendant was not required.

CFTC v. Kimberlynn Creek Ranch, Inc., supra. Federal courts have said that a nominal defendant “is not a real party in interest.” SEC v. Colello, supra; see SEC v. Founding Partners Capital Mgmt., 639 F.S.2d 1291, 1293 (M.D. Fla. 2009) (same).

Jared Wilkerson, “Investors and Employees as Relief Defendants in Investment Fraud Receiverships,” 3 Financial Fraud Law Reporter 300 (2011).

The official name of the firm during SEC v. Lauer was Hunton & Williams, LLP. The firm merged in 2018 with Andrews Kurth & Kenyon, LLP. The new firm is Hunton Andrews Kurth, LLP. The name Hunton & Williams will, however, be used in this book.

Rasile so informed Lauer at a meeting later in July 2003. Lauer Affidavit, Oct. 15, 2013.

DE 10 at 21.

DE 18 at 3.

Ex parte, that it is a hearing at which only one party appears.

The hearing started at 9:20 a.m. with an exchange of pleasantries. Zloch signed the two orders, which totaled 24 pages, at 9:57 a.m. after a recess of unspecified length. DE 19. Zloch called a recess after the SEC made its presentation and showed him the complaint and two emergency motions and proposed orders that they asked him to sign. He retired to evaluate the

motions.

91 DE 1648 at 11. The hearing is noted as DE 20; the hearing transcript is DE 1648.

92 Id. at 8-9.

93 Id. at 9.

94 SEC TRO Ex. 48.

95 Lauer had submitted a financial statement under oath in the district court.

It made no mention of any personal offshore account. If the SEC or the receiver had proof that he had lied, they could have referred the case to the Department of Justice for a quick felony conviction. That never happened.

96 DE 1648 at 7.

97 See DE 1317.

98 DE 1648 at 13-14. Zinn continued: “However, the SEC began actively working the case when it became aware that there was manipulation, and that the Funds in fact were overstated.” Zloch asked: “When was that?” Zinn replied, “This past spring.” Id. at 14. According to Zinn’s story, the Miami SEC ignored the case for six months.

99 Id. 100 Id. at 18.

101 Id. at 9.

102 PricewaterhouseCoopers’s certified audits were SEC exhibits at the ex parte TRO hearing.

103 DE 136 at 14; Jack D. Schwager, Stock Market Wizards; Interviews with America’s Top Stock Traders 31 (HarperCollins 2001).

104 There were other wrong or disputable statements made by Zinn at the TRO hearing. On Feb. 27, 2007, Lauer filed in SEC v. Lauer a 65-page critique of the SEC’s presentation on July 10, 2007, that he filed with the Inspector General of the SEC. DE 1800.

105 DE 20 at 31.

106 U.S. v. James Daniel Real Property, 510 U.S. 43, 55-56 (1993); United Student Aid Funds, Inc. v. Espinoza, 559 U.S. 260, 276 (2010) (person must be “afforded full and fair opportunity to litigate”); Fuentes v. Shevin, 407 U.S. 67, 81-82 (1972) (“If the right to notice and a hearing is to serve its full purpose, it is clear that it must be granted at a time when the deprivation can still be prevented.”). As noted, the order which Zloch signed gave the receiver total control over the assets of the hedge funds, virtually without limitation.

107 E.g., DE 107 at 204-07; DE 214 at 38-39.

108 See DE 107 at 137.

109 On October 28, 2003, the fixtures and the extensive collection of sports memorabilia and art in Lancer Management’s offices were auctioned off to a bulk bidder for $28,000, a fraction of their value. DE 75, DE 87, DE 104.

They were owned by GH Associates, which was not a defendant. Lauer had no financial interest in the company.

110 U.S. v. Lauer, 08-cr-20071, S.D. Fla., March 23, 2011, Trial Tr. 33. Hauser insisted that his account was correct despite the efforts of the government attorney questioning him to remind him that what he described took place when the FBI executed its search warrant several weeks earlier. Id., March 24, 299

2011, Trial Tr. 93.

111 There were about 105 boxes of records and 44 computer disks. DE 107 at 13132.

112 See DE 119 at 3.

113 DE 107 at 21.

114 The receiver complained about how small the number was; Lauer argued that the small number demonstrated the efficiency of his operation. DE 49 at 12.

115 The firm merged in 2018 and is now known as Hunton, Andrews Kurth, LLP. 116 DE 62.

117 I found nothing in the record that disclosed these facts to the judge or to the investors.

118 Among other professionals the receiver added were accountants Berkowitz Dick Pollack & Brant, LLP, DE 60, DE 88; DDJ Capital Management LLC, DE 105; attorneys Susan V. Demers and Price Findlay & Co., DE 138; attorneys Foley & Gardner, DE 737; testifying expert Sonnett Kapila, DE 106; attorneys Greenberg Taurig, LLP, DE 604; FTI Consulting, Inc., DE 618; Reid & Riege, PC, DE 1038; Canadian attorneys Richard E. Johnston and Fasken Martineau Dumolin LLP, DE 1252. All sought and received generous compensation.

By the end of 2006 DDJ had filed 17 applications for compensation. Not included are payments by the receivership to professionals hired by groups of investors, e.g., DE 1192, or one-tune auctioneers of assets, e.g. DE 1215. Fees of the receiver and his professionals are discussed below.

119 See DE 762 at 22, filed May 1, 2013, in Steinberg v. Lauer, 05-cv-60584, S.D. Fla. 120 See DE 319 at 19-20.

121 DE 685 at 5.

122 DE 22.

123 While a party’s concession cannot create subject-matter and personal jurisdiction, the order court made such a concession.

124 DE 44 at 2-3; see DE 52.

125 DE 30. Lauer received some legal advice in this regard.

126 DE 31, DE 32. E.g., SEC v. Comcoa Ltd., 887 F.S. 1521 (S.D. Fla. 1995), aff ’d sub nom., Levine v. Comcoa Ltd, 70 F.3d 1191 (11th Cir. 1995); SEC v.

Grossman, 887 F.S. 649, 661 (S.D.N.Y. 1995); SEC v. Current Financial Serv., 62 F.S.2d 66 (D.D.C. 1999). The frequently stated rationale is that it would be improper to have the victims of a fraud pay for the perpetrator’s lawyer.

127 DE 203 at 5.

128 DE 251 at 4. Lauer argued that the SEC had its facts wrong. For example, the SEC was wrong when it said that the stock Lauer held was restricted.

Lauer also argued that the SEC’s false information led Zloch to issue drastic orders, so they should be vacated. Lauer also argued: “I also plead with the Court to note how persistently ill-informed, ethically challenged and Lancer value damaging the plaintiff ’s [SEC’s] efforts have been since the complaint was filed nearly ten months ago. I renew my request for an early trial date, so that the complaint can be adjudicated on the merits, and not by the SEC’s improper tactics designed to preordain the outcome of the case, in part by inflicting unfair hardship on the respondent.” Id. at 6.

300

129 130 131 132

DE 31 at 9-12, 40.

DE 214 at 12; DE 292 at 41.

DE 49, see DE 91.

DE 107 at 101-02. It is impossible to reconcile this comment with the teaching of Brady v. Maryland, 373 U.S. 83, 87 (1963), that, “The United States wins its point whenever justice is done one of its citizens in the courts.”

It is well known that “individuals not represented by lawyers lose cases at a considerably higher rate than similar individuals who are represented by counsel.” Jed S. Rakoff, Why the Innocent Plead Guilty and the Guilty Go Free: and Other Paradoxes of Our Broken Legal System 186-87 (Farrar, Straus & Giroux 2021).

133 DE 108 at 2-3.

134 Id. at 3-4.

135 Id. at 5.

136 The SEC said the payments to the IRS were not included in the $10,000 per month, DE 214 at 16, but Zloch’s order contained no such provision.

137 DE 249; see DE 107 at 172-79 (transcript of conference).

138 DE 453 at 1.

139 DE 214 at 10.

140 See DE 49 at 14-16 (discussion of cases in affidavit of Lauer).

141 Lauer was plagued by a perennially hoarse voice. He submitted to an operation years later.

142 DE 214 at 72.

143 Andrée Mayrand Dep., SEC v. Lauer, Sept. 23, 2004, at 94-95.

144 DE 34 at 6.

145 E.g., DE 319 at 25-28, DE 539 at 7.

146 DE 91 at 1.

147 DE 94.

148 DE 214 at 11.

149 Id. at 70-71; see id. at 40.

150 Id. at 47-55, 60-63.

151 Id. at 52. Zloch made Lauer tell him publicly in open court the names of the people who were providing support in the face of a total freeze on his assets.

Id. at 69.

152 Id. at 69. Lauer explained later that his mother was a proud person and found the effort to take her pension checks and gifts from her son humiliating and stressful. Zloch assumed that the ultimate burden of persuasion was on Lauer. Yet it was the SEC that was asserting its right to assets in the name of others.

153 DE 258, DE 337, DE 350, DE 385, DE 491, DE 653.

154 Author discussion with Lauer. As noted below in the Acknowledgments, Steinberg and others refused to speak to the author.

155 DE 1368 at 1.

156 Id. at 8.

157 Id. at 18. The SEC and receiver, along with the court, put the burden of proving a negative on Lauer.

158 DE 207.

301

159 The SEC has a major office in New York City.

160 The SEC never produced evidence to support its first statement; the second statement was irrelevant; and the valuations were never shown to investors, but only Lancer Management and its providers.

161 DE 321 at 5.

162 In re Horseshoe Ent., 337 F.3d 429, 434 (5th Cir. 2003).

163 DE 414.

164 DE 346.

165 Id. at 6.

166 DE 376.

167 DE 567.

168 Id. 169 DE 1744 at 10.

170 DE 762 at 22-23, Steinberg v. Lauer, 05cv-60584, S.D. Fla. 171 DE 74 (motion, Oct. 23, 2003), granted DE 105 (order, Nov. 20, 2003). The first mention of the stocks held by the hedge funds was Dec. 9, 2003, when Steinberg asked Zloch for permission to sell publicly held stock in the funds’ portfolios. DE 115. On Jan. 26, 2004, Zloch granted Steinberg’s motion to sell one holding. In other words, in all but one stock there was no trade in stocks for over 6 months in a highly volatile situation.

172 DE 152 at 4.

173 DE 105.

174 My discussions with Lauer.

175 Steinberg testified at a hearing on that date that he had not seen the records the FBI seized in June 2003 and did not know the quantity of the records the FBI seized. When asked if he had been in touch with the FBI, he testified, “We have been in touch with the Justice Department.” DE 107 at 111-12.

176 See DE 115, DE 121.

177 The most intelligent course of action, assuming dissolution of the hedge funds was justified, was to distribute their assets to the investors in kind, under the supervision of a committee of investors, and create a mini-market in the various stocks to allow investors to trade and sell them among themselves, a course of action Lauer advocated in the circumstances. That would have avoided the millions of dollars paid to the receiver and his professionals, especially DDJ. 178 DE 156.

179 DE 189. The SEC filed a short reply that joined the receiver. DE 187.

180 It is worth noting that Zinn and Steinberg could not conceive of a receiver without an attorney, even though he was an attorney.

181 DE 189 at 7-8.

182 Id. at 6. The SEC’s joinder with the receiver’s reply stated: “Even if the Receiver has a fatal conflict of interest, the answer is not to turn over the reins of Lancer Management to an accused fraudster.” Id. at 3.

183 E.g., Perilla v. Johnson, 79 F.3d 441, 447 (5th Cir. 1996).

184 DE 249 at 3. This would be like the same lawyer representing the husband and wife in a contested divorce proceeding on the theory that his job was to represent the marriage and not to represent the individual parties.

302

185 DE 111.

186 This is another problem created by appointing the receiver on July 10, 2003.

187 Id. at 3.

188 DE 136 at 2. All indications of emphasis, such as underlinings, italics, and boldface, are in the original, unless specifically noted otherwise.

189 Id. at 5.

190 Id. at 6.

191 DE 145.

192 Id. at 3.

193 Loren v. Sasser, 309 F.3d 1296, 1301 (11th Cir. 2002); Brown v. Sykes, 212 F.3d 1205, 1209 (11th Cir. 2000).

194 DE 249.

195 DE 18 at 6 (the receiver can “[a]ssume control of [Lancer Management, Lancer Management II, and the hedge funds] . . . and, upon order of this Court, of any of their subsidiaries or affiliates; provided that the Receiver deems it necessary . . . .”

196 DE 36 was labeled “agreed motion.” The motion and order placed Alpha Omega and GH Associates in receivership. The order, parroting the motion, states that they, “through their counsel and principals, consent to the inclusion in the receivership.” DE 40 at 2-3; see DE 36 at 5-6. However, neither Lauer nor Garvey (who owned 50% of GHA) consented; Eric Hauser (who owned the other half of GHA) was still adverse to the SEC in 2003. Neither GHA nor Alpha Omega had an attorney. None was identified. Lauer filed a motion to remove Alpha Omega and TRSOR from the receivership. DE 151.

197 DE 151, DE 249 (denying Lauer’s motion), DE 1072 (granting receiver’s motion to add CLR Associates and Lauer’s Mercedes-Benz race car to receivership).

198 DE 119.

199 DE 152 at 2.

200 Id. at 5.

201 Id. at 4.

202 Id. at 8-10. Lauer’s analysis occupied 20 pages and included: “To divest a major Lancer asset without any substantive diligence is tantamount to malpractice, even by the meager standards established by Hunton & Williams. Where is the industry study, company/management visit, field trip, etc.?” Id. at 14.

Lauer repeated his objections and warnings. E.g., DE 319 at 29-33.

203 DE 173 at 10. Steinberg added: “The Receiver has no incentive to keep the price of an asset down . . . .” Id. at 7. But he obviously did, if only to emphasize for the benefit of his sponsor, the SEC, that asserted Lauer’s alleged fraud was huge.

204 DE 179.

205 DE 183. Lauer’s “Sur-Reply” to the receiver’s response was filed on Feb. 26, 2004, after Zloch found in favor of the receiver. Lauer sometimes filed a surreply after he received a motion, filed an opposition, and received a reply.

Pro se, Lauer tried to supplement his opposition. Often, the movant (SEC or receiver) moved to strike Lauer’s sur-reply, which usually was granted.

206 The stock’s price never reached the $13 per share cited by Lauer. It is impossible to state with assurance what would have happened absent the 303

SEC’s suit against Lauer.

207 DE 733 at 3-5. Lauer had presented his objections again in the meantime. See DE 319 at 17-21.

208 Id. 209 Id. at 12.

210 Id. at 13.

211 Id. at 15. Zi also fought the receiver. E.g., DE 1118, DE 1119, DE 1205, DE 1227. Because of the actions of the SEC and Steinberg, it is impossible to know why Zi stock did not reach $20/share, a price that Lauer predicted.

212 DE 781, DE 894.

213 DE 1843.

214 Lauer’s brokerage account was at the Bank of America. DE 31 at 49.

215 Id. 216 There was extensive and expensive litigation between Steinberg and Zi. E.g., DE 1119 (Steinberg motion to hold Zi Corp. in contempt).

217 The SEC made and Marra accepted such an argument later.

218 DE 409 at 4.

219 Lauer made this argument to the court. DE 214 at 39.

220 DE 431. A magistrate judge is not a judge appointed under Article III of the Constitution and does not have life tenure. In civil cases, magistrate judges assist district judges to whom they refer matters such as discovery disputes.

A losing litigant appeals the decision of the magistrate judge to the district judge. It is safe to say that district judges far more often than not affirm the magistrate judge.

221 DE 434, DE 478, DE 494, DE 508, DE 529, DE 638, DE 676, DE 704, DE 715, DE 777, DE 819, DE 1517.

222 See Antonin Scalia & Brian A. Garner, Reading Law: The Interpretation of Legal Texts 100 (2012); Richard A. Posner, Reflections on Judging 213 (2013), on interpreting documents. Some state statutes authorize the police to seize a vehicle if it was used in the commission of a crime, for example, to transport narcotics. On February 21, 2019, the Supreme Court unanimously held those statutes unconstitutional as violating the provision against excessive fines.

Timbs v. Indiana, 586 U.S. ___ (2019).

223 Lauer sold life-insurance policies which listed his children as beneficiaries – which left his family without medical, health, or life insurance – because he could not pay the premiums. The sale generated $139,258. After selling the policies, Lauer put the proceeds in an escrow account with his lawyer, Carl Schoeppl, to buy a cheaper policy and to pay premiums. The sale of the insurance policies represented perhaps the clearest case of violating the letter of the asset-freeze order, but also the clearest case for excusing the violation.

The SEC and receiver objected. Marra found Lauer’s action violated the assetfreeze order and gave the proceeds of the sale of the life-insurance policies to the receiver.

The SEC and receiver pursued a used Mini-Cooper and a used BMW motorcycle that Lauer had purchased for his partner H.C. before the SEC began its investigation, but which he continued to register in his name. Both considered the vehicles hers. She sold both to obtain a safer vehicle when she 304

found she was pregnant. The combined sales price was $32,500. Steinberg and the SEC unquestionably spent much more than $32,500 of the investors’ and government’s money in litigating who owned the vehicles.

The receiver also seized a heavily mortgaged Cessna 172 airplane, which Lauer had purchased in 1992 and leased for pilot training and used occasionally. He had made a gift of it to H.C. in early 2003. The paperwork on the gift and registration was complete and proper, except for a minor mistake that did not affect H.C.’s title to the plane. Nevertheless, Marra focused on that mistake to order that the plane be forfeited to Steinberg, just as he did with the Denali. DE 222, DE 487, DE 501, DE 507, DE 516, DE 519, DE 525, DE 549, DE 582.

224 DE 31.

225 Tibble v. Edison Int’l, 135 S.Ct. 1823, 1827 (2015); Stargel v. Suntrust Banks, Inc., 791 F.3d 1309 (11th Cir. 2015) (per curiam).

226 DE 1718, DE 1868.

227 DE 760.

228 DE 1215.

229 DE 2018.

230 The district court denied Lauer the proceeds of other investments he had made, such as one in Millennium 3 Opportunity Fund, LLP. E.g., DE 1264, 1290, 1621. Magistrate Judge Barry Seltzer had found in favor of Lauer.

DE 1589. Marra reversed his recommendation. Marra never reversed a Magistrate Judge’s recommendation in favor of the SEC or receiver.

231 The facts were quite complex.

232 DE 1061.

233 Steinberg stated in a filing that he and his professionals “have become ‘command central’ not only for the Receiver’s investigation, but for the SEC, the Department of Justice, the Internal Revenue Service, and other federal agencies.” DE 383 at 11; see also DE 762 at 22, Steinberg v. Lauer et al., 05-cv60584, S.D. Fla. There does not seem to be other involvement in the litigation

by IRS, with the exception of its investigating whether Lauer had foreign bank accounts, since undisclosed bank accounts usually signal tax evasion and that is IRS’s bailiwick.

234 My discussions with Lauer.

235 DE 1794.

236 DE 319 at 11, 18, 28-33.

237 Recuse is the more technical term. It is usually used reflexively, e.g., “the judge recused himself.”

238 DE 319.

239 Id. at 18-33.

240 510 U.S. 540, 555 (1994).

241 DE 326.

242 Id. at 5-6. The internal quotation was from Bivens Gardens Office Bldg., Inc. v. Barnett Banks of Florida, Inc., 140 F.3d 898, 912 (11th Cir. 1998).

The authorities do not require “out of court statements or occurrences” that would constitute a bias. This misstatement of the law seems to have had no significance.

305

243 DE 332.

244 DE 376.

245 DE 375.

246 DE 376.

247 DE 402.

248 DE 416.

249 See DE 430 and subsequent unnumbered docket entry. To secure both impartiality and the appearance of impartiality, the assignment of a replacement judge is controlled by specific court procedures that insure a blind or random selection. A deviation from that procedure where the replaced judge was accused of bias and the moving party was acting pro se would seem to be improper. How can a judge that is accused of bias select his replacement, particularly a much younger judge, one that had been serving for less than a year and who occupied the courtroom next door, so his junior would always be nearby? The new judge, almost certainly aware of how he was selected, might feel obligated to adhere to the agenda of the judge who chose him, especially when the latter was the chief judge, and the new judge was unfamiliar with the area of law. The mandated procedure was put in place not only to secure impartiality but also to insure the appearance of impartiality. Lauer telephoned Zloch’s chambers to find out what happened with respect to the assignment. He spoke to Zloch’s law clerk, who suggested incorrectly that a chief judge could reassign a case at will. Lauer did not pursue the matter. My discussions with Lauer.

250 Id. at 2-3.

251 253 DE 360 at 7, 10-12.

252 DE 491 at 2-3.

253 My discussions with Lauer.

254 DE 491.

255 DE 359.

256 DE 1696.

257 Id. at 6. Lauer cited good authority for his position. He added: “It was also the longstanding and uncontested practice by the LMG to advance the Investment Manager for all legal expenses related to the Lancer Funds’ activities.” Id. 258 DE 530 at 8.

259 Marra also said, “More importantly, if there is an obligation to pay [for] a legal defense, such a claim arose as a pre-bankruptcy petition claim and is therefore a general unsecured claim that must ‘wait in line’ with the other creditors and claimants, even though the duty to pay did not accrue until after the bankruptcy petition was filed.” Contrary to Marra’s assumption, however, bankruptcy had nothing to do with Lauer’s motion. SEC v. Lauer was not in bankruptcy court and bankruptcy law did not apply. It was an SEC enforcement action in a district court with a court-appointed receiver.

260 Senior Tour Players 207 Mgmt. Co. v. Golftown 207 Holding Co., 853 A.2d 124, 130 (Del. Ch. 2004); SEC v. FTC Capital Markets, 09-cv-4755, 2010 U.S. Dist. LEXIS 65417, *14 (S.D.N.Y. June 29, 2010) (citing Homestore v. Tafeen, 888 A.2d 204, 213 (Del. 2005)).

306

261 DE 500. Zloch had provided the receiver with immunity from suit for negligence in his order appointing the receiver, which the SEC drafted. DE 18 at 11.

262 DE 539 at 7; see DE 214 at 64.

263 376 U.S. 254 (1964).

264 DE 522. The receiver also argued irrelevantly that Byron could have obtained the information from court filings.

265 DE 620, citing, inter alia, New York Times Co. v. U.S., 403 U.S. 713 (1971) (prior restraint against New York Times in Pentagon Papers case).

266 Sheppard v. Maxwell, 384 U.S. 222, 360-61 (1996); Gentile v. State Bar of Nevada, 501 U.S. 1030, 1071-75 (1991); see Nebraska Press Assoc. v. Stuart, 427 U.S. 539, 553-55 (1976).

267 Gentile, 501 U.S. at 1075.

268 When Lauer appealed and wrote his brief pro se in 2009, he did not include this as a ground for an argument. He was afraid it would come out that he had spoken to several investors, which would harm him. The order nevertheless inhibited Lauer from reaching out to other potential witnesses, inhibited potential witnesses from speaking with Lauer, and violated his fundamental due-process rights, which he pointed out to Zloch. How did Zloch expect Lauer to defend himself when he did not have a lawyer and was prohibited from talking to witnesses? Moreover, Lauer did not argue that Marra committed an error when he denied his motion to have his legal fees advanced. DE 491 at 5-6.

269 DE 428.

270 DE 491 271 The official title of the principal case brought by Steinberg is Court-Appointed Receiver of Lancer Management Group, LLC, et al. v. Lauer et al., 05-cv60584, S.D. Fla. Steinberg sued dozens of defendants.

272 E.g., DE 1028, granted DE 1048.

273 DE 358, filed Apr. 16, 2008, Steinberg v. Lauer, supra.

274 E.g., DE 1648 at 21, filed Sept. 4, 2015 (payment to Craig V. Rasile). Zinn said that Steinberg generously agreed not to charge for “secretarial work,” something that law firms generally do not do in any event. The receiver charged the investors $275 an hour for the time of paralegals, who were not lawyers. If a paralegal billed 1,800 hours a year (36 hours a week), that would come to $475,000 a year. If a paralegal earned $50,000 a year, that would be a gross profit of 950% for the law firm.

275 DE 1970; my discussions with Lombardi. Despite Lauer’s urgings, the court record shows no indication that Marra ever sought information from Steinberg on the economics of his suits against third parties, including analyses made prior to suit that would show that the suit was economically viable. The receiver gave no figures, but said that the settlement was “fair, adequate, and reasonable.” Id. at 8. Failing to provide the judge with information violates SEC guidelines. DE 3004. Given that the receiver was represented by a large law firm and there was no one who challenged the billings, it is likely that his attorneys’ fees were far larger than Lombardi’s. Even if the receiver’s legal bills were the same as Lombardi’s, he received in fees and expenses $200,000 307

(paid by the investors) to recover $18,000 from Lombardi, or more than a 90% loss on his investment. Steinberg also sued investors on the ground they had received preferential redemptions. E.g., DE 1027.

276 DE 428, DE 440. Marra denied these motions along with several other motions made by Lauer in DE 491. Lauer moved for reconsideration. DE 509.

277 DE 107 at 102-03 (transcript of conference); see id. at 172-79.

278 DE 130 at 6.

279 DE 130.

280 DE 166, DE 184, DE 185, DE 221.

281 DE 259 at 2-3; DE 251.

282 Rule 32(d), Federal Rules of Civil Procedure (entitled “Option to Produce Business Records”).

283 DE 332 at 4.

284 To help him answer interrogatories, Lauer filed a motion to obtain a copy of the receiver’s database. When he finally got it, the information was in random order and there was no index. Lauer then filed a motion to obtain a copy of the index. He never received a copy. E.g., DE 526, DE 1724.

285 DE 428, DE 478, DE 652.

286 DE 667, DE 675, DE 690.

287 DE 693.

288 DE 956.

289 I wrote a letter to Vitunac after she retired from the bench, asking for the basis for the dual incarceration/dismissal order. She did not respond.

290 DE 979 at 4, in part referring to a letter dated March 17, 2005, from Lauer’s attorney to the SEC. The receiver had sued Zoref. DE 61, Steinberg v. Alpha Fifth Group, 04-cv-60899, S.D. Fla. 291 DE 1246 at 5.

292 Id. 293 DE 1218 at 17-19; see DE 352 at 3 (Lauer states, “the plaintiff [SEC] now openly concedes that given that it did not speak to anyone in a position to know how valuations were conducted at this private entity, it did not know what the procedures were prior to undertaking its ex parte action that resulted in the de facto expropriation of this private property . . . .”).

294 DE 30.

295 DE 1218 at 17-19.

296 DE 1246.

297 DE 1299.

298 Virtually the entire deposition questioning dealt with the physical location of the stock certificates in Lauer’s personal brokerage account at the Bank of America (pp. 8-77) and the automobiles that Lauer owned and whether they were properly listed on his schedule of assets (pp. 78-241).

299 DE 1218, DE 1299; see generally Ronald K.L. Collins & David M. Skover, The Judge: 28 Machiavellian Lessons (Oxford University Press 2017).

300 DE 1338 at 14, n. 9.

301 Id. at 293.

302 Id. at 91; accord, Lauer Dep., Aug. 4, 2004, at 247-49.

303 Id. at 222. Lauer also denied suggesting valuations. Id. at 223-24.

308

304 Lauer Dep., Aug. 3, 2004, at 96.

305 Id. at 136-38.

306 Id. at 17.

307 Id. at 115.

308 Lauer Dep., Aug. 3, 2004, at 136.

309 Id. at 13.

310 Lauer Dep., Aug. 5, 2004, at 429-30.

311 Id. at 480.

312 E.g., id. at 369, 383, 416-18, 452-55, 518-21; Lauer Dep., Aug. 5, 2004, at 20304; Lauer Dep., Aug. 4, 2004, at 280-83, 358. I found no record that the SEC followed up on this charge.

313 SEC Brief at 46.

314 This was the only appearance of these judges in the case.

315 SEC v. Lauer, 240 F.Appx. 355 (11th Cir. 2007) (per curiam).

316 DE 1306.

317 DE 1368 at 8. Martín asserted that Lauer had access to other funds, including those from H.C. The two, however, had separated and were fighting over child support. DE 1794. Steinberg joined the SEC’s opposition, DE 1381, even though the receiver, who was court-appointed and court-supervised and regularly described as “an arm of the court,” was required to be neutral.

318 DE 108 at 2-3; see DE 2240.

319 A previous finding made in the same case between the same parties is binding under law of the case, which provides that a decision by a judge is valid throughout a case unless explicitly changed. Ironically, when Lauer sought to change a previous court ruling, the SEC cited case after case that said how difficult that was.

320 DE 1250, DE 1251.

321 DE 746. DE 742 was listed as a copy of Lauer’s motion.

322 DE 778.

323 Id. at 6. The SEC joined in the receiver’s motion to dismiss. DE 806. It was never stated what right the receiver, an arm of the district court, had to file a motion in opposition to Lauer that there was no legal basis for the SEC’s suit.

The Official Committee of Unsecured Creditors also asked for the dismissal of Lauer’s motion. DE 815.

324 DE 805 at 5.

325 DE 207 at 6.

326 DE 346, DE 381, DE 396.

327 DE 1075.

328 Id. at 4.

329 SEC v. Quest Energy Mgmnt. Group, 768 F.3d 1106, 1108-09 (11th Cir. 2014).

330 OFS Fitel, LLC v. Epstein, Becker, and Green, P.C., 549 F.3d 1344, 1356 (11th Cir. 2008) (later cited by 11th Circuit against Lauer); Parklane Hosiery v.

Parklane/Atlanta Venture, 927 F.2d 532, 534 (11th Cir. 1991).

331 Marbury v. Madison, 5 U.S. 137 (1803), could be cited for this fundamental point.

332 DE 1198 at 88-89.

333 DE 317 (filed May 3, 2004).

309

334 DE 1737, DE 1744.

335 The failure may have involved the sticky question of who would represent Lancer Management on the motion. That failure, however, presented a major problem for the receiver, because the hedge funds owed tens of millions of dollars to Lancer Management, including the $48 million that SEC attorney Zinn had conceded at the July 10, 2003, TRO hearing. This was income earned by Lancer and Lauer that he lent to the funds. Without a judgment Lancer Management could theoretically argue that it was under no obligation to pay out any money to anyone.

336 Ordinarily, a case cannot proceed simultaneously in the district court and court of appeals if the appeal could affect the case in the district court, and the district court would discontinue proceedings until the appeal was resolved. That seemed important here, because the contempt order denied Lauer use of much evidence, including his deposition, which was key in future proceedings.

337 E.g., Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986).

338 When the receiver later deposed witnesses in cases he brought against Lauer or Garvey, both engaged in cross-examination.

339 DE 1737-1 at 26. For unknown reasons, the SEC made Lauer’s denials part of the record in this case even though Lauer could not have introduced his own exculpatory testimony. The SEC included other evidence that exculpated Lauer. “Bendall . . . testified that if Lauer lied to him he would have resigned from the board.” DE 1744 at 11.

340 DE 1737-1 at 1.

341 For example, if a supplier charges a customer $11 for an item rather than $10, the customer has lost $1, the exact same amount that the supplier has gained.

342 The SEC said that 1999 was a terrible year for Lancer Management and the hedge funds, which it suggested was Lauer’s motive for the alleged fraud. In fact, the fourth quarter of 1999 was one of the best quarters Lancer ever had.

Its success continued into early 2000. The SEC may have had it backwards: when there is a bad year, there may be no incentive payment to Lancer Management, which was by far the largest component in its fees. The SEC relied heavily on the contention that Lauer manipulated stocks because he was showing a profit while the market was down, another impermissible inference in favor of the SEC. DE 1744 at 22-23. Lauer had dealt with that argument as early as September 2003. DE 49 at 9.

343 Mayrand Dep., SEC v. Lauer, Sept. 23, 2004, at 136-38.

344 Many complex, crucial, and disputed facts were brief statements followed by citations to a deposition by a single witness, for example, “Specifically, purchases by Lauer and Lancer Management artificially set the price for SMX from November 1999 to at least April 2003,” has as its sole support one deposition. DE 1744 at 24. The statement was repeated for six other stocks, generally with the same single cite. Id. Some statements were incredible on their face, and, besides, were irrelevant on a motion for summary judgment, such as Lauer “hid his compensation from the IRS by failing to declare more than $21 million he received during 2000.” Id. at 9-10. Also, only the price at the close of each quarter affected the fees paid by investors. Even though the 310

SEC quoted some, no closing price in November or April made any difference in setting Lancer Management’s fees; also, the investors did not know which stocks the hedge funds owned.

345 DE 1737-1 at 1.

346 DE 1744 at 25.

347 DE 115 at 5.

348 DE 107 at 21. There was no discussion of the evidence on which the SEC and Marra relied to find that all the startups were “worthless.” It consisted of conclusory statements by persons, such as felon Cowen, who was not a licensed appraiser, which was disputed by Milton Barbarosh’s report submitted to BVI. Assertions in the alleged statement of undisputed facts provided no citation or source, such as “SMX [was] a pink sheet shell with no operations and de minimis assets.” DE 1744-1 at 26. The issue was one for a jury (maybe). In addition, in a single paragraph, Marra also found numerous alleged instances in which Lauer allegedly used investor money to purchase items for himself. All such findings required making the assumption that the shares of the startups were worthless or else were otherwise vigorously disputed by Lauer. The allegations certainly were not undisputed. E.g., DE 760, DE 773 (the Mercedes-Benz race car); DE 501, 507, 525 (heavily mortgaged Cessna airplane). There was no attempt to explain how Lauer’s highly regarded accountants could have missed all these alleged frauds. Harold Zoref, Lauer’s principal accountant, was sued and extensively deposed. The suit principally cited alleged improper “transfers” to Zoref consistently and sought $644,729.39. It was settled for payment by Zoref of $65,000 in 24 monthly installments. DE 2615. There was no allegation that Zoref knowingly participated in Lauer’s alleged fraud.

349 DE 1744 at 29-30 (emphasis added).

350 Id. at 5-6.

351 Lauer has no idea of what the SEC was talking about. My discussions with Lauer.

352 DE 1744 at 23 (citations omitted).

353 DE 1737-1 at 13; the SEC added “[and effect]” to the first paragraph of the declaration (emphasis deleted). As noted, Cowen testified that he heard Lauer place one order, but gave few details. Id. at 12; Lauer Brief on Appeal at 36. No one else testified to seeing or hearing Lauer place any orders.

354 DE 1822 at 27. Doyle, Huard’s superior, also contradicted Huard’s suggestion that Lauer made these calls. Id at 26.

355 Lauer Pro Se Brief on direct appeal at 36. SEC v. Lauer, No. 09-15138 , 11th Cir. 356 We don’t know how many, if any, potential expert witnesses refused to testify on behalf of the SEC. 357 As noted, Stenton Leigh and Barbarosh were unchallenged as established and reputable valuators. Marra copied the SEC’s language that supposedly made their valuations worthless. “80. These valuation reports, however, were flawed and did not reflect the true values of the Funds’ under accepted Uniform Standards of Professional Appraisal Practice. The valuations were based upon (i) unreliable market prices of thinly traded securities; (ii) 311

baseless and unreliable projections; (iii) improper hypothetical appraisals; or (iv) incorrectly averaged various factors.” Id. at 42-43.

358 DE 1744 at 15 & n. 74.

359 Id. 360 Id. at 14-20.

361 At her SEC deposition she said, “I have to apologize, I’m not fluent bilingually, so I’m going to make mistakes in English.” Mayrand Dep., SEC v. Lauer, Sept. 23, 2004, at 18. Lack of funds prevented Lauer from reaching the representative of the University of Montreal pension fund with whom he hd originally spoken.

362 Dep. 95, 117-25, 191-92; Erickson Dep. 40-91; Wolak Dep. 14-38l; Borneman Dep. 7-12, 25-43, 45-46, 52-54.

363 Mayrand Dep., SEC v. Lauer, Sept. 23, 2004, at 125, 132; see Jack D. Schwager, Stock Market Wizards; Interviews with America’s Top Stock Traders 49-50 (2001).

364 Id. at 16 & n. 81.

365 Mayrand Dep., supra at 60-68.

366 Id. at 40.

367 Id. at 68.

368 Id. at 90.

369 The SEC’s memorandum accompanying its PSMF said the amount was “over $50 million.” DE 1737-1 at 2.

370 DE 1823. Lauer had no reason to present undisputed facts since he was the nonmoving party. It was yet another instance in which Lauer’s pro se status created problems or extra work for him.

371 DE 1822.

372 SEC TRO Ex. 6E at 13.

373 Ralph C. Winter, “State Law, Shareholder Protection, and the Theory of the Corporation,” 2003 Economic Analysis of the Law 177, 178.

374 Lauer quoted Doyle’s testimony that Lauer never directed a trade at Shamrock in Lighthouse Fast Ferry, Total Film Group, Service Max, or Fidelity First Financial Corp. Id. at 26, 48. Lauer could ask leading question because the SEC called the witnesses.

375 DE 1822, at 20-22.

376 SEC v. Lauer, Pennecke Dep. at 70, 71.

377 DE 1744 at 19.

378 Id. at 19; Lauer Pro Se Brief in 11th Circuit 42.

379 Id. at 27. Bendall also testified that Lauer was not involved in trading stock.

380 Oct. 8, 2003, Tr. at 77-79.

381 DE 805 at 17-35.

382 938 F.2d 364 (2d Cir. 1991).

383 Id. at 368. The Mulheren opinion also pointed out that the defendants in that case maintained the price for the manipulated stock by engaging in over 90% of the transactions in the stock and by selling stock off the books.

Distinguishing an earlier case, the court noted that there the sales “were effected in the name of two foreign banks to conceal the identity of the true seller,” noting, “No such chicanery exists here.” 938 F.2d at 372. In contrast, 312

the SEC relied only on a district court case, SEC v. Sayegh, 906 F.S. 939, 946 (S.D.N.Y. 1995), which did not support the broad rule it advocated, and internal decisions by the SEC. DE 1737-1 at 11.

384 DE 1836. Thel was not a “purported” expert witness. He had been qualified and accepted as an expert by a federal judge sitting in the same district as Marra in a case in which the United States was a party. The SEC’s motion also challenged Lauer’s affidavit (which the motion said constituted his testimony, which was barred); Lauer’s statements about alleged misconduct by the receiver (both because they constituted Lauer’s testimony and because they were “scandalous”); and Lauer’s financial statement from American Express (a document not previously disclosed by him).

385 While the SEC’s motion for summary judgment was pending, on June 25, 2007, Lauer filed a motion that asked the district court to take judicial notice of SEC v. Kelly, both for its value as a precedent and to rely on testimony given in the trial by Thel and Cowen. DE 1910. The former was not permitted, but the latter was highly probative. The SEC moved to strike the motion on the ground that Lauer had not conferred with the SEC as required by the local rules, DE 1913, and Marra granted the SEC’s motion. DE 2036. Lauer also asked the court to take judicial notice of the Supreme Court case of Tallabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007), along with a Second Circuit case, which supported Lauer on the issue of his scienter (his intent), and a portion of Cowen’s deposition. DE 1911. It met the same fate as his other motion. DE 1913; DE 2036. There seems to be no obligation to confer regarding judicial notice, which Rule 201, Federal Rules of Evidence, states should be done on the judge himself or after a “request” by a party.

386 See DE 2447. Rule 804(b)(1) allows in evidence former testimony that “(A) was given as a witness at a trial . . . whether given during the current proceeding or a different one; and (B) is now offered against a party who had – or, in a civil case, whose predecessor in interest had – an opportunity and similar motive to develop it by direct, cross-, or redirect examination.”

387 Marra had spent 16 years in private practice and six years as a state-court trial judge. By the time he was faced with the SEC’s motion for summary judgment, he had been a federal judge for five years.

388 DE 1852.

389 DE 1737-1 at 18, 22.

390 DE 1852 at 15-16.

391 This incident is another example of how Lauer was prejudiced by not having a good lawyer. Lauer did not include this major error in his brief in the court of appeals on direct appeal.

392 According to a report by the federal court system issued in May 2017, Marra was one of the slowest judges in the United States and by far the slowest of the 23 judges in the Southern District of Florida. The report states that 26 of 39 cases pending for more than three years in the district were assigned to Marra. In one instance litigants had to wait five years for a ruling. As noted below, Marra incorrectly marked the active SEC v. Lauer “closed,” presumably to enhance his statistics.

393 DE 1836, DE 1860, DE 1886, DE 1910.

313

394 DE 2033.

395 DE 2133.

396 Id. at 14 nn. 40, 41, 42; 32 nn. 119, 120; 33 nn. 123, 124 (two times), 125 (two times); 34 n. 134 (four times); 35 nn. 136 (four times), 137 (two times).

Unlike the U.S. Government, Lauer was a stranger to U.S. v. Kelly, so the SEC was in a weaker position than Lauer.

397 Id. at 3-4 (emphasis added).

398 Surprisingly, Marra copied the quotation accurately from Henderson, but that meant only that two confused district judges sat in the Southern District of Florida. The judge in Henderson provided the source of the quotation, namely, Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). But there was no period after “summary judgment” in Celotex, as there was in Henderson and SEC v. Lauer. Instead, the sentence continued with the words, “on issues on which the non-moving party has the burden of proof.” In terms of Lauer’s case, the statement applied not to Lauer but to the SEC! The failure of the SEC to prove an essential element of its case required the court to rule in favor of Lauer. There are hundreds, if not thousands, of cases that state the rule properly. But Marra chose Henderson, a case in the district court.

399 Id. at 4.

400 DE 2133 at 9 nn.23, 32, 38. There were other and more subtle instances. Marra found that Lauer valued two of Lancer’s hedge funds at over $1 billion, but that the receiver recovered less than $100 million. “Hence, either more than $900M evaporated in a little more than six months or Lauer’s valuations were materially misleading. Plainly, the facts demonstrated the latter.” Id. at 49. But there were other possible inferences, including that the receiver had recovered only a small fraction of the value of the assets held by the funds, a point that Lauer had made multiple times during the proceeding and for which there was considerable evidence. See Chapter 7. Actually, the receiver recovered more that $130 million. DE 2970 at 3.

401 DE 1744 at 11, DE 1822 at 19, 26; DE 2133 at 18.

402 Id. Bendall’s testimony was particularly probative because the SEC and the receiver claimed that Lauer deceived the directors (or, more accurately, everyone), and Bendall was a director of the offshore funds.

403 Id. at 40.

404 Lauer’s opposition to the SEC’s motion for summary judgment, DE 1822 at 25, quoted from Martin’s direct examination of Bendall at his deposition on Oct. 12, 2006 (pp. 190-91): Q. And what was your understanding of who was directing the trading strategy for the Lancer Fund? A. Eric Hauser, nothing got by him.

Q. But what to buy and how much, what was your understanding of who was directing that? A. Again, I think Eric had complete control over it. I would call him time to time and tell him where blocks were located or something was going to happen and he would say thank you and he would do whatever he would do. So he had complete or he understood the trading game perfectly and no one went around Eric. . . .

Q. What was your understanding of Michael Lauer’s role on behalf of Lancer Funds? A. The things that made him the number one analyst in the country – 314

and he was an absolutely great analyst – and the companies that I brought to him the big companies like Titan and defense companies that he had millions of shares of bigger – they were some of the biggest 20 companies out. There he knew that business better than anyone else, so he had to be the portfolio manager.

Q. So as portfolio manager, what was your understanding of his duties? A. Research stock, talk to his clients.

405 DE 1744 at 12.

406 Id. at 59; see DE 3013 at 8-9 (Marra’s omnibus final order).

407 Compare DE 1744 at 10 with DE 2133 at 16.

408 Judge Marra copied “exited” for “excited,” compare DE 1744 at 22, n. 115, with DE 2133 at 32, n.120; copied “tens of million of dollars,” compare DE 1737-1 at 9, with DE 2133 at 48. Other errors the court copied included omissions of a parenthesis, compare DE 1744 at 13, n. 67 and 24, n. 116 with DE 2133 at 21, n. 72 and DE 2133 at 32, n. 121; the omission of a “¶,” compare DE 1744 at 26, n. 136, and 28, n. 145, with DE 2133 at 3, n. 142 and DE 2133 at 41, n.

153; the omission of a number, compare DE 1744 at 25, n. 130 with DE 2133 at 35, n. 135; ending a footnote with a semi-colon, compare DE 1744 at 11, n. 55 with DE 2133 at 18, n. 59; and ending a footnote without punctuation, compare DE uer1744 at 15, n. 74, and 16, n. 81, with DE 2133 at 23, 81, and 24, n. 88. These instances were presented later to the 11th Circuit. There are others, e.g., while normally the SEC wrote a dash as “--,” both the SEC and Marra wrote “- -“ in the same place. Compare DE 1737-1 at 7 with DE 2133 at 45. Marra’s original contributions were negligible.

409 DE 2133 at 10-11. Marra relied for this claim on the same single non-IRS source on which the SEC relied.

410 Marra began the lengthy section of his opinion entitled, “Undisputed Facts,” with the language, “The following facts, taking mainly from Plaintiff SEC’s Statement of Material Facts as to Which There is no Genuine Issue to be Tried (DE 1744) (PSF) . . . .” Marra said he took his facts “mainly” from the SEC’s statement, which suggests judgment on his part. Since Marra scanned the SEC’s PSMF large portions of his discussion, that was a deceptive statement.

There were no other sources. He did not even modify any of the SEC’s statements on the basis of the citations to the record that Lauer included in his opposition.

411 DE 1737-1 at 6, DE 2133 at 44.

412 DE 2133 at 65.

413 The Supreme Court has stated, “This is an issue of fact to be determined by the special circumstances of each case.” Rochester Tel. Corp. v. U.S., 307 U.S. 125, 145-46 (1939); see In re Mutual Funds Inv. Lit., 566 F.3d 111, 130 (4th Cir. 2009) (control-person status is a “complex factual question”). Simple answers, such as the title of the individual, do not resolve the issue. Lauer disputed the contention that he was a control person, pointing out that the auditors ultimately determined the value of the NAVs, probably the most important element in the case. The funds’ directors initially set the price of stocks with Lauer’s input. Two of Marra’s prominent grounds for finding Lauer indisputably a control person were wrong. Marra’s first ground was 315

that witnesses other than Lauer pleaded the Fifth Amendment.

414 DE 2133 at 13-15, 58-59.

415 F.D.I.C. v. Federal & Deposit Co. of Maryland, 45 F.3d 969, 977-78 (5th Cir. 1995).

416 The witnesses who pleaded the Fifth Amendment were Martin Garvey, Eric Hauser, David Newman, Milton Barbarosh, George Levie, and Laurence Isaacson. DE 2133 at 13-15, 59. The first three were employees or officers of Lancer Management. Newman was engaged in administrative matters for the funds. The next two were independent contractors who did not work for Lancer. Levie, was associated with Stenton Leigh, as was Barbarosh. Bruce Cowen had made Isaacson interim president of some of the startups in which Lancer Management invested for the hedge funds; Isaacson was not an employee of Lancer. Moreover, even when the inference is made against the same person who pleaded the Fifth Amendment in a civil case, the court must review the facts to determine that the inference was not unfair. E.g., Eagle Hosp. Physicians, LLC v. SRG Consulting, 561 F.3d 1298, 1305 (11th Cir. 2009) (balancing of considerations required); In re Fructose Corn Syrup Antitrust Litigation, 295 F.3d 651 (7th Cir. 2002) (Posner, J.). Marra merely asserted that making a negative inference was not unfair. He did not explain.

417 Id. at 60-61; DE 1737-1 at 24-25.

418 DE 123 at 23; SEC v. Lauer, Aug. 4, 2004, at 320. Default judgment in the state case was not entered against Lauer until May 3, 2005, sixteen months after Zloch’s injunction, as Marra himself stated. DE 2133 at 36.

419 DE 1944; Lauer Pro Se Brief in Court of Appeals at 35.

420 There were other grounds for rejecting collateral estoppel that we raised on appeal, discussed in Chapter 16.

421 The words “collateral estoppel” or “collateral estopped” did not even appear in the opinions on which the SEC and Marra relied; the cases did not even purport to deal with collateral estoppel: “TeleVideo Sys., Inc. v. Heidenthal, 826 F.2d 915, 917-18 (9th Cir. 1987) (‘[t]he general rule of law is that upon default the factual allegations in the complaint, except those relating to the amount of damages will be taken as true.’ (internal quotation marks omitted)); Johnson v. Stanhiser, 85 Cal. Reptr. 2d 82, 84 (Cal. Dist. Ct. 1999) (same).” DE 2133 at 36. A previous finding made in the same case between the same parties is binding based on a different principle, namely, law of the case, which states that a decision by a judge is valid throughout a case unless changed or there has been an appeal.

422 DE 2164.

423 Id. at 2. As demonstrated above, the error was not inadvertent.

424 Id. at 3. The doctrine concerns the obligation of a litigant to introduce a complete document a when presenting only a portion might mislead a jury, but it was clear what Lauer meant.

425 Id. at 20.

426 Id. at 12.

427 DE 2133 at 35 & n. 137.

428 DE 2164 at 14.

429 DE 1822 at 19, 26.

316

430 Rule 106 reads: “If a party introduces all or part of a writing or recorded statement, an adverse party may require the introduction at that time, of any other part – or any other writing or recorded statement – that in fairness ought to be considered at the same time.” Lauer was presenting other portions of a witness’s testimony 431 Alice in Wonderland reads: “Let the jury consider the verdict,” the King said, for about the twentieth time that day.

“No, no!” said the Queen. “Sentence first, verdict afterwards.”

“Stuff and nonsense!” said Alice loudly. “The idea of having the sentence first!”

“Hold your tongue!” said the Queen, turning purple.

“I won’t!” said Alice.

“Off with her head!” the Queen shouted at the top of her voice.

432 Marra did not respond to a request for an interview.

433 08-cr-20071, D. Fla. 434 As early as September 2003 Lauer had written: “if the SEC claims that the management companies received incentive fees based upon asset valuation, the SEC should be able to identify all such payments or at least approximate a number. . . . In point of fact, most of the incentive fees earned by the management companies were deferred and not paid.” DE 49 at 10.

435 This example is based on a similar one used by Marra. DE 2133 at 10.

436 DE 741 at 1.

437 DE 49.

438 Although the complaint asserted that March 2000 was the beginning of the manipulation, the SEC had proffered no documents relating to transactions before April 2001, although it sometimes treated the start of the alleged scheme to have been in 1999.

439 DE 791.

440 My discussions with Lauer.

441 DE 791.

442 Id. at 5. The SEC wrote this on February 14, 2005, or more than a year and a half after it filed the complaint. The certified audits of the hedge funds showed assets of over $1 billion before the lawsuit. In addition, over $500 million had been returned to investors as profits or return of capital. There was no evidence that Lauer received “over $600 million from these entities” or from investors and no indication where that number came from. Since Lauer ran the Lancer Management companies, he could properly testify to its value or other salient characteristics about the property.

443 DE 800.

444 Previously, Lauer wrote: “The plaintiff ’s argument that the respondent’s ‘illgotten gains’ in this case are somehow equal to assets invested by Partners and Shareholders in the Funds is about as absurd as stating that gross revenue of any company is equal to net profit.” DE 409 at 3.

445 DE 1737-1 at 10.

446 DE 834.

447 DE 874.

317

448 DE 929 at 3; DE 991 (Marra). Simultaneously, Vitunac denied Lauer’s motion to file a sur-reply to the SEC’s response. DE 928, DE 935. The judges readily denied Lauer’s motions for leave to file supplemental memoranda.

449 DE 966, DE 979.

450 DE 991.

451 DE 2130, DE 2188, DE 2191.

452 DE 2190.

453 Marra simply ignored the notice of appeal and continued with the case, even though a notice of appeal, whether proper or not, denies jurisdiction to the district court, which meant that the district court could not act.

Inconsistently, in September 2014 Marra refused to consider two motions Lauer had filed on the ground he had an appeal pending in the Eleventh Circuit. DE 2920, DE 2921.

454 Supreme Fuels Trading FZE v. Sargeant, 689 F.3d 1244, 1245-46 (11th Cir. 2012) (Pryor, J., concurring ). Indeed, that was a much stronger ground for appeal than when he appealed after he was held in contempt and barred from introducing sundry evidence at the trial or summary judgment, where the Eleventh Circuit improperly entertained his appeal. While called contempt, the order was in fact the imposition of sanctions under Rule 37 of the Federal Rules of Civil Procedure, an interlocutory order that a party cannot appeal immediately An injunction against a party’s introducing evidence at trial is conceptually different from an injunction prohibiting a party from engaging in a profession.

455 See, e.g., Henry J. Friendly, Federal Jurisdiction: A General View (1973).

456 The court of appeals remanded the case to the district court on February 24, 2009. DE 2229.

457 DE 2193.

458 DE 2205.

459 “A special master should have no interest in or relationship to the parties.’ . . . Having served as a witness for one side of the case, the appointee was accordingly disqualified.” Lister v. Commissioner’s Court, 566 F.2d 490, 493 (5th Cir. 1978), a case binding in the Eleventh Circuit.

460 Id. at 10, 82.

461 DE 2989.

462 DE 107 at 190; DE 2205 at 10-11.

463 Since Kapila was adding up the sums that Lauer received from the hedge funds (and presumably nothing else), it is not clear what Kapila meant by money Lauer received “indirectly.”

464 Id. at 79-80.

465 DE 2205 at 76-77.

466 See Liu v. SEC, 140 S.Ct. 1936 (2020).

467 DE 2207.

468 DE 2133 at 15-16, see DE 2207.

469 PWC’s independent audit for the year ending December 31, 2001, stated: “We conducted our audit in accordance with international standards. . . .

In our opinion the financial statements referred to above present fairly, in all material respects, the financial positions of Lancer Offshore, Inc. as of 318

December 31, 2001, and the results of its operations, changes in shareholders’ equity and cash flows for the year ended December 31, 2001, in conformity with international accounting standards.” DE 1832 at 75. PWC stuck by its certification.

470 Id. at 51.

471 Id. at 80.

472 DE 2205 at 58, 64-65, 87, 102.

473 DE 2207 at 1.

474 DE 2212 at 1.

475 Both the SEC and Lauer had just filed proposed findings of fact on the question of relaxing the total freeze on Lauer’s assets for use to hire a private defense attorney in the criminal case. DE 2182, DE 2184.

476 Southern District of Florida Rule 7.1(a)(3), which applies only to “motions,” reads in pertinent part: Prior to filing any motion in a civil case, except a motion for injunctive relief, for judgment on the pleadings, for summary judgment, to prohibit or permit maintenance of a class action, to dismiss for failure to state a claim upon which relief can be granted . . . or to involuntarily dismiss and action . . . counsel for the movant shall confer (orally or in writing), or make reasonable effort to confer (orally or in writing), with all parties and nonparties who may be affected by the relief sought in the motion in a good faith effort to resolve by agreement the issues to be raised in the motion.

Arguments supporting the lack of Lauer’s need to confer include that his filing was not a motion, that it was part of a summary judgment motion, that the rule does not apply to dispositive motions (assuming it was a motion), and that the rule does not apply to pro se parties (it applies to “counsel”).

If you read the rule broadly, it arguably does not apply to disgorgement.

However, if you read the rule literally, it does not apply to pro se parties who file documents other than motions. While the current language of the rule is cited, have no reason to believe that the applicable version at the time was substantially different.

477 DE 2193.

478 Zloch and Marra had both acknowledged that the court of appeals to which it was beholden “requires that pro se pleadings be construed liberally.”

479 DE 2260. The order included a certification under Rule 54(b) of the Federal Rules of Civil Procedure, which is discussed below.

480 Marra made the statement that all of the fees were fraudulent despite his findings of fact that Lauer overstated the value of the holdings of the hedge funds as substantially lower than that. DE 2133 at 38-42. Moreover, a substantial portion of the hedge funds’ holdings was in actively traded publicly held companies. DE 115 (receiver’s motion “to sell publicly traded securities on public exchanges”). Marra granted the motion. DE 121. I have found no record giving the amount of the proceeds of the sales. The SEC never claimed that Lauer manipulated sales prices on the New York Stock Exchange.

481 DE 2970 at 3. For a variety of reasons, including those in the chapter that discussed the receiver’s sale of ZICA and END stocks (Chapter 6), the funds’ 319

holdings were worth far more than the amount the receiver received for them.

482 DE 115 at 5.

483 It would also have had to be true that the gross amount received was equal to the net amount.

484 DE 3013 at 8-9 (Marra’s omnibus final order).

485 DE 1648 at 9.

486 DE 2266.

487 Id. at 11-16.

488 Lauer also forcefully argued that he was not responsible for the unusual duration of the case prior to final judgment and should not be charged prejudgment interest for the delay of others.

489 Martin repeated this claim time and again without reference to where the argument was previously made. He seemed to be counting on Marra’s always accepting his word and Marra’s unwillingness to ask the SEC to support its statements.

490 DE 2269.

491 DE 2319.

492 DE 2321.

493 The amount of a statutory penalty was heard by a jury because under the Seventh Amendment it would have been heard by an English jury in 1789.

494 DE 2205, at 4-5.

495 DE 2319, DE 2321 496 DE 2321 at 1, 7.

497 Rule 54(b) of the Federal Rules of Civil Procedure reads: Judgment on Multiple Claims or Involving Multiple Parties. When an action presents more than one claim for relief . . . or when multiple parties are involved the court may direct entry of a final judgment as to one or more, but fewer than all, claims or parties only if the court expressly determines there is no reason for delay. Otherwise, any order or other decision, however designated, that adjudicates fewer than all the claims or the rights and liabilities of fewer than all the parties does not end the action to any of the claims or parties and may be revised at any time before the entry of a judgment adjudicating all the claims and all the parties’ rights and liabilities.

498 Rule 54(b), supra (emphasis added). The Rule says the district court may direct entry of final judgment under the rule only if the court expressly determines there is no reason for delay.

499 Hundreds of docket entries dealt with applications by Steinberg and others for fees and expenses.

500 Marra ordered the case to be “closed” even though his Rule 54(b) certification recognized that further proceedings would take place in the case. Id. Why he did that and what it means was not clear. He may have done that to remove SEC v. Lauer from the list of his pending cases so as to enhance his unsatisfactory statistics. There was no mention of the receiver, who continued to file fee requests and documents relating to other matters in the district court, including matters relating to the distribution of the assets of the receivership and settlement of the receiver’s claims, e.g., DE 2448 (claim 320

of estate of James Kelly); DE 2463 (Barbarosh and Stenton Leigh), DE 2473 (169838 Canada, Inc.).and litigation filings respecting third parties, e,g., DE 2493, DE 2495, DE 2577).

501 Supreme Fuels Trading FZE v. Sargeant, 689 F.3d 1244 (11th Cir. 2012); Hancy v. City of Cumming, 69 F.3d 1098 (11th Cir. 1995).

502 The SEC had not sued receivership entities other than Lancer Management Group and Lancer Management Group II, so it was unclear why it would dismiss claims against them. The receiver had placed them under receivership, but nothing more.

503 DE 2352, DE 2354.

504 DE 2324.

505 The most common standards of review used are whether the district court’s action was “clearly erroneous” and whether the district court “abused its discretion.” Both give substantial deference to the district judge.

506 When a defendant seeks reversal based on an error in the district court to which he did not object, he must prove “plain error” to the court of appeals.

The party must show manifest injustice, and the doctrine is generally confined to constitutional errors made in criminal cases.

507 Lauer’s inexperience showed on the first page of the brief. He called it “Notice of Supplemental Authority” rather than “Brief of Appellant.” He also cited some cases from the New York State courts, which are irrelevant.

508 Id. at 24-29.

509 Lauer initial brief on appeal at 25-26. Bracketed references are in the original.

The Post-Argument Brief made Lauer’s position even clearer.

510 Id. at 44.

511 Lauer pro se Brief at 37-40.

512 Id. at 40. The bracketed references to the district court record were part of Lauer’s pro se brief.

513 Id. at 41.

514 DE 2133 at 3-4.

515 Lauer Brief at 36-44. “[T]he Plaintiff selectively redacts the inconvenient sentences of the declaration, with a clear intent to manipulate the declaration and deposition. Huard declaration said, “Cowen and Garvey instructed me to place these trades at a specific price . . . .” When asked about Lancer trades at the trial of James Kelly, Huard cited only Martin Garvey. The SEC’s statement of undisputed material facts asserted, “Lauer and Lancer Management engaged in this manipulative scheme through several brokerdealers, including Shamrock . . . .” and “Huard, Doyle and Cowen have all testified on numerous occasions that this manipulative activity occurred at Shamrock.” DE 1744 at 25. Huard never said that.

516 DE 2164 at 14.

517 Id. at 44-48.

518 Id. at 34-35. Note that the references to docket entries were in Lauer’s filing, although contained in brackets. The underlinings, etc., are otherwise correct.

519 SEC Brief at 38, 43.

520 Id. at 41.

521 That the DOJ failed to prove its case beyond a reasonable doubt did not show 321

that the SEC, employing the same or similar evidence, could not prove its case by a preponderance of the evidence.

522 The SEC brief did not mention the argument it made in the district court that Marra had accepted, namely, that Lauer could not use testimony from U.S. v Kelly.

523 561 U.S. 247 (2010).

524 The decision meant that Congress had the power to regulate more broadly, but that it failed to do so in the securities laws it passed. The citation was to a different edition of Supreme Court cases.

525 As noted above, DOJ did not call Huard as a witness in U.S. v. Lauer.

526 H.C. Dep., Dec. 11, 2011, at 95, 121, 123-27, taken in Steinberg v. Lauer, 05cv-60584, S.D. Fla.; see id., DE 746 (exhibit 1 – affidavit of Michael Lauer – to Lauer’s motion for summary judgment against Receiver Steinberg.

527 H.C. Dep. at 94-96. H.C.’s mother was a witness to the conversation. Id. 528 Id. at 127-28.

529 Id. at 126.

530 To eliminate the possibility that the payments were approved by Judge John K. Olson, the judge in the Bankruptcy Court in south Florida who was presiding over the liquidation of Lancer Partners, L.P., Lauer and Garvey filed a pro se motion before Olson that sought information from him about any hearing. Olson responded that no such hearing had taken place. That left two possibilities. Either the judge was Marra (who denied any role) or Steinberg’s investigators invented the part about court approval.

531 The receiver was an arm of the court, but nevertheless worked hand in glove with the SEC. 532 DE 2901 at 6.

533 U.S. v. Lauer et al., 08-cr-20071, S.D. Fla. Several defendants made unsuccessful motions to dismiss the indictment on statute-of-limitations grounds.

534 DE 497 (recommendation of Magistrate Judge, filed Feb. 18, 2010). While the FBI issued denials that they took Lauer’s laptop, Blackberry, and Olympus voice recorder from Lauer’s sealed luggage, the Delta baggage staff at JFK had a different story. They said that the FBI took control of Lauer’s sealed luggage without a search warrant, took it to a separate room, and removed certain items. Significantly, only items that contained information were taken, not cash, not credit cards, not two expensive watches. My discussions with Lauer.

Some transcripts filed in U.S. v. Lauer are no longer available on Pacer. I have copies of some of the transcripts.

535 DE 544 (affirmance by District Judge filed March 25, 2010. Years later the Supreme Court held that lawful searches for an iPhone required a separate search warrant for its contents. Riley v. California, 134 S.Ct. 2473 (2014).

536 On February 20, 2008, the receiver wrote to two Polish banks, stating that he had identified accounts “held in the name of Michael Lauer,” citing account numbers and stating that the accounts were the subject to a court freeze order of July 17, 2003. On March 14, 2008, the prosecutors relied on these letters to oppose Lauer’s application for bail. They did not present answers from the banks or information about the accounts, such as when they were opened or what they contained. The government never produced evidence 322

that defendant Lauer had any offshore account and the claim that Lauer had an account in a Polish bank was eventually abandoned. There may have been an account in Poland under the name of Michael Lauer, but Lauer explained that if he owned a Polish account, he would have used the original Polish spelling of his first name, Michal. Lauer attorney Norman Horowitz wrote a letter dated May 29, 2008, to the receiver that “Mr. Lauer will provide you with an authorization or consent directive (known in this Circuit as a Ghidoni waiver) which you can present to the banks in order to obtain complete account records.” The receiver never answered. The prosecutors, like the SEC, were not sanctioned for their false statements.

537 This account is based on my discussions with Lauer.

538 Lauer complained to the monitoring authorities. On December 4, 2009, he wrote them: Although I’m grateful you’ve corrected the problem of the voice monitoring center calling me during the days that I was not subject to curfew, you should be informed of, and correct, the voice monitoring service’s nearly incessant calls during the curfew hours (Tuesdays and Thursdays, between 7pm and 7am). For example, this past Thursday/Friday, between the hours of 7pm and 7am, I received what could have been as many as 10 phone calls (I lost count, in part because I was half-asleep throughout). Nearly all these automated calls woke me up, and then I was expected to speak in my “daytime” voice into the device, until it confirmed my identity (during a number of calls, it took some doing). Suffice it to say, it is inconceivable that the court intended that the pretrial services literally torture me by inflicting sleep deprivation, particularly since these calls also harm my children, who have been staying with me recently. All of us will have a significantly suboptimal day today because of sleep deprivation.

I think you’d agree that the frequency of the monitoring calls is irrational and unconscionable, particularly in light of the fact that I’m entirely unmonitored for 12 of the 14 twelve-hour periods of the week. Presumably, if I were inclined to flee, I would choose the ample unmonitored timeframes.

539 DE 2063, quoting U.S. v. Noriega, 746 F.S. 1541, 1543 (S.D. Fla. 1990), and citing other cases.

540 DE 2081, DE 2085.

541 DE 2176 (hearing before Marra on Lauer’s motion to access his funds for use in the criminal proceedings). The issues involved commingling funds that Lauer held from before the alleged fraud started on or about November 1, 1999, with those were tainted. The parties and Marra examined the significance that Lauer held an interest-only mortgage on his condominium (which he bought before the alleged fraud period); tracing the money used to buy stock in his Bank of America brokerage account; and the significance of the IRS lien on his Greenwich home.

542 DE 2181, 2184.

543 Id. 544 DE 2240, DE 2176 at 66, 82.

545 SEC v. Blatt, 583 F.2d 1325, 1335 (5th Cir. 1978); see DE 2240 at 10-11. The respected and experienced Second Circuit agreed. “Having held that ordering 323

the refund of the proceeds [of the fraud] was a proper exercise of the district court’s equity powers, we hold that the court erred in ordering appellants to transfer to the trustee all the profits and income earned on such proceeds. . . . [W]e require appellants to transfer to the trustee only the proceeds received in connection with the Manor offering, together with interest at the New York legal rate . . . .” SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 110405 (2d Cir. 1972).

546 U.S. v. Puche, 350 F.3d 1137, 1153 (11th Cir. 2002); see DE 2109.

547 An earlier draft of this chapter, which was similar in content to the version in this book, was sent to Caruso for his review.

548 My telephone interview with Caruso. Garvey, who had run out of money, also was represented by an assigned attorney. Caruso was lead attorney.

549 See Chapter 2.

550 As of June 10, 2003, less than a month before it filed its complaint, the SEC’s knowledge of Lancer’s activities was so limited it could not decipher the Deloitte report without the help of Barbarosh. Because the SEC did not know the names of the companies whose stock it alleged Lancer and Lauer had manipulated, it was delighted that Barbarosh also furnished it with the code so it could use the report. See SEC v. Lauer, No. 13-13110, 11th Cir., Brief of Appellant at 40-47.

551 DE 2676 at 58-62.

552 Barbarosh actually violated the privilege of the hedge funds, not of Lauer, who had no standing to object to the violation of a third party’s privilege.

553 DE 18 at 7.

554 My discussions with Lauer.

555 DE 193.

556 DE 243.

557 Apparently, Barbarosh’s turning over the first Deloitte report to the SEC did not qualify as illegal, even though it violated BVI rules and involved an invasion of the attorney-client privileg of at least the offshore funds. Since Pascoe represented the offshore funds and not Lauer, there was no violation of Lauer’s attorney-client privilege, so he could not complain. The SEC’s conduct might have prejudiced the BVI proceeding.

558 See note 550.

559 DE 647, U.S. v. Lauer, 08-cr-20071, S.D. Fla., June 9, 2010, discussed in Chapter 15.

560 DE 486, id.

561 DE 574, id. Caruso filed many other motions on behalf of Lauer, including motions to dismiss the indictment based on government misconduct and for violation of the Speedy Trial Act, to transfer the case to the Southern District of New York, and to quash government evidence and bar a government witness.

562 The prosecution gave the defense a transcript of one witness, who testified before the third grand jury but not at the trial. Lauer did not know the witness.

563 Costello v. U.S., 350 U.S. 359 (1956); U.S. v. Estepa, 471 F.2d 1132 (2d Cir. 1972) (Friendly, J.) (dismissing indictment in complicated cases because no 324

grand-jury witness had firsthand knowledge of the facts).

564 Rule 6(c) of the Federal Rules of Criminal Procedure states that the foreman “will sign” all indictments, but the absence of his signature, while highly unusual, is not fatal. U.S. v. Willaman, 437 F.3d 354 (3d Cir. 2006); U.S. v.

Marshall, 910 F.2d 1241 (5th Cir. 1990). Curiously, the absence of a signature by a representative of the United States makes the indictment void. U.S. v.

Cox, 342 F.2d 167 (5th Cir. 1965).

565 DE 638, U.S. v. Lauer, 08-cr-20071, S.D. Fla. (May 11, 2010).

566 “Q. Did Lauer direct you to mark the close for trades for Lancer entities? A. I don’t recall specific conversations with him...Q. Would you have any reason to believe you were doing anything illegal in that time frame, 2000, 2001? A. No...Q. So you don’t really know how Lancer valued its positions, do you? A. That’s correct, I do not know...” [Huard Dep., Steinberg v. Lauer, 05-cv-60584, S.D. Fla., at 50, 60, 65.]

567 Id., March 23, 2011, Trial Tr. 57. Hauser’s testimony showed that he, not Lauer, made the trades.

568 Id., March 24, 2011, at 35.

569 That the district court in U.S. v. Kelly also gave the charge helped Lauer.

570 Id. at 42-53. Hauser was 68 and recognized that a conviction on a substantive count could result in what was equivalent to a life sentence. Id. at 60.

571 Id. at 65.

572 To assist him Cowen enlisted Milton Barbarosh of Stenton Leigh, near Boca Raton, Florida, a reputable company engaged in making valuations and providing similar business services since 1989.

573 U.S. v. Lauer, March 10, 2011, Tr. 140. Cowen described Lauer’s lack of involvement in preparing the memorandum on March 15, 2011, at 172-75.

574 Id. at 42-45, 78-85. The three received the money through an entity called Capital Research, which Cowen helped form. Cowen’s initial partner was James Kelly, who executed trades for Lancer and was acquitted. Joseph Huard also received hundreds of thousands of dollars. Lauer believed, correctly it seems, that to the extent that Lancer was involved in criminal activity, it and he were the victims.

575 Id. at 132-38; March 16, 2011, at 108.

576 Nevertheless, the SEC had accused Lauer of concealing Cowen’s lie as an undisputed fact, even though there was no evidence Lauer knew the facts.

DE 1744 at 20. Marra did the same. DE 2133 at 29.

577 My telephone interview with Milton Barbarosh, Jan. 22, 2018.

578 As in the civil case, we do not know if any expert refused to testify as a government witness.

579 U.S. v. Mulheren, 938 F.2d 364, 368 (2d Cir. 1991); DE 1822 at 22.

580 U.S. v. Lauer, April 20, 2011, which was the 28th day of the trial.

581 My discussions with Lauer.

582 What Jordan did was hardly unique. A more famous example was Judge John Sirica, who gave the Watergate burglars long sentences to coerce them into cooperating against their higher-ups. He later reduced the sentences. The practice is complex and controversial. What if the judge is wrong and there are no higher-ups?

325

583 Thane Rosenbaum, The Myth of Moral Justice: Why Our Legal System Fails to Do What’s Right 87 (2004).

584 Jed S. Rakoff, Why the Innocent Plead Guilty and the Guilty Go Free: and Other Paradoxes of Our Broken Legal System (Farrar, Straus & Giroux 2021).

585 Harvey A. Silverglade, Three Felonies a Day; How the Feds Target the Innocent 267-68 (2009); see Rosenbaum, supra at 87-88, 100; Roger Roots, The Conviction Factory: Trials Are Vanishing as the Rules of Court Procedure Tilt the Scales in Favor of the Government (2014); Angela Davis, Arbitrary Justice: The Power of the American Prosecutor (2007); Richard Levitt, “Federal Guilty Pleas Soar as Bargains Trump Trials,” Wall St. Journal, Sept. 24, 2012, at 1.

586 Harvard Law Professor Alan M. Dershowitz described the Soviet legal system: “The Soviet legal system was evaluated by the Communist Party not by its ability to dispense justice but rather by its efficiency. As Alexander Solzhenitsyn put it in his masterful work on the Gulag Archipelago, a garbage disposal system is not judged by its fairness but rather by its ability to dispose of garbage quickly and inexpensively.” Dershowitz, Foreword in Silverglade, supra.

587 My discussions with Michael Lauer.

588 Rakoff, Why the Innocent Place Guilty, supra at 23.

589 Laurence Isaacson was convicted of conspiracy remote from Lauer. That charge had a maximum sentence of five years, while he was acquitted of multiple counts of substantive offenses, each of which had a twenty-year maximum sentence. It was obviously a compromise verdict, rendered after the jurors announced they were deadlocked, and Judge Jordan gave the jury the Allen Charge, which all but instructed the jury to reach a verdict. After a lengthy post-trial battle over his conviction and sentence, which included two appeals to the Eleventh Circuit, Isaacson served six months in prison.

His issues on appeal included denial of a speedy trial and concealment of relevant evidence by the prosecution.

590 In addition, the judgment was accumulating millions of dollars of postjudgment interest. The amount could easily surpass the amount of prejudgment interest. The SEC had credited Lauer with about $6 million in payment.

591 When they reverse, courts of appeals have discretion over what other issues they decide.

592 See Allan Gerson & Jerry Adler, The Price of Terror (HarperCollins 2001).

I knew Gerson’s wife, Joan Nathan, independently. She was a prominent food writer, while I had been a restaurant critic for many years for the Washingtonian Magazine, the magazine of Washington, D.C., while I also practiced law. For my background see the last page of this book. Gerson died in December 2019.

593 At the time I was Of Counsel with the Washington, D.C., office of Sedgwick, LLP, which meant that my income depended solely on the business I brought in and the work I did. My agreement with Sedgwick allowed me to take an occasional case totally independently of Sedgwick, presumably of the type that Sedgwick would not take on its own. SEC v. Lauer fit that description. I 326

personally would do the work and pay the expenses and I personally would receive any fee if we won. It would have taken me months to prepare for trial and try the case, and cost tens of thousands of dollars, including living expenses in Florida. It was doubtful that I could have taken on the trial if we won the appeal and if Lauer asked me to represent him at a Florida trial on a contingency basis in 2013.

594 Hill sat on the Fifth Circuit before it was divided into the Fifth and the Eleventh Circuits.

595 I wanted an intelligent and experienced panel, but otherwise it was hard to tell. While criminal defendants ordinarily prefer liberal judges, that is not necessarily the case when the defendant is white collar.

596 Lauer’s brief did not mention his contract with the hedge funds for advancement of his legal fees. My limited review of the record in 2012 did not reveal its existence.

597 The 11th Circuit later provided us with a recording of the argument from which the account of the argument is taken.

598 Ebel’s direction meant that we could not show how Lauer’s failure to raise other arguments harmed him. That wrongfully deprived Lauer, who was claiming that he was improperly denied assistance of counsel, of being allowed to show how he was prejudiced.

599 A moving party must “show” that its facts are “undispute[d],” “that the movant is entitled to judgment as a matter of law,” and “that an adverse party cannot produce admissible evidence to support the fact,” as Rule 56(a) says.

Ebel nevertheless retorted aggressively that it was up to the nonmoving party (Lauer) to show conflicting facts. I argued with him, perhaps longer and more energetically than I should have. His hostility did not bode well for Lauer.

Later, research confirmed that Ebel was wrong. Two district-court cases ruled that the moving party had to demonstrate the absence of a material factual issue. Both cases not only denied the motion for summary judgment, but also awarded sanctions against the moving party on the ground that the motion as filed was incomplete and frivolous.

600 As noted above, that money would have come solely from the sale of Lauer’s homes and not his frozen assets. Such a sale would have taken months and, in fact, would not have left Lauer even a dollar after the satisfaction of the mortgage and liens, including the one filed by the IRS, to whom Lauer now owed $3 million. More important, the $10,000 a month was wildly insufficient to support the Lauer family and pay attorneys even without the IRS. 601 The rule of completeness allows the court to order the introduction of an entire document when a party seeks to introduce a portion, in order to avoid confusion of the jury.

602 The brief contained numerous new arguments, which is permitted, as opposed to new issues, which in general is not, although the judges could conclude new issues had been introduced. What seemed to be appropriate was another argument why collateral estoppel did not apply in SEC v. Lauer, namely, there had to be actual litigation of the issue of Lauer’s conduct. Pacific Lumber Co. v. State Water Resources Control Bd., 126 P.2d 1040, 1054 (Cal. 2006) highest court in California) (“the issue must have been actually litigated in 327

the former proceeding”); see IRS v. Palmer, 207 F.3d 566 (9th Cir. 2000). The SEC and Marra relied on an outdated lower-court case, Gottlieb v. Kest, 46 Cal. Rptr. 3d 7 (Cal. App. 2006).

603 The affidavit for the FBI’s search warrant was largely based on information that Lancer had voluntarily provided to the SEC under an assurance it would be used only by the SEC. Also, Harold Schimkat, an SEC lawyer who worked on SEC v. Lauer and who had access to the information, was moved to the Department of Justice to try the criminal case.

604 A judge in a civil case generally excludes evidence of an acquittal in a criminal case when it is offered in evidence by the defendant, because the proof required in the criminal case is beyond a reasonable doubt, while the proof in a civil case need be only by a preponderance of the evidence. The fact that the prosecutor could not prove someone was guilty beyond a reasonable doubt does not prove that someone else could not prove his misconduct by a preponderance of the evidence. Lauer brilliantly argued that the elevated standard in a criminal case resembled the standard of “no material fact in dispute” on summary judgment, so the acquittal should be allowed to prove the existence of a material fact in dispute. I responded that the acquittal could not be considered because only evidence admissible at trial could be considered, and the acquittal remained inadmissible. Moreover, the evidence in the two proceedings was not identical. Regardless of the technicalities of the rules of evidence, however, the acquittal was a powerful indication that Lauer had done nothing wrong and he understood that.

605 I was almost certain that the court would grant the extension, but I wanted the brief filed.

606 Failure to file a brief could have been disastrous.

607 Lauer also wrote a letter to the Eleventh Circuit that said that the brief that had been filed contained mistakes that he attributed to me, although he did not mention anything specific. I believed it was unseemly or worse for a lawyer to blame his client for difficulties (although there have been some notable instances of just that). I still am not sure that what I did was right. I still think about it.

608 I also added arguments to Lauer’s challenge to the grant of summary judgment, such as that Marra had wrongly decided the issue of fact whether Lauer was a “control person” under the securities laws. Throughout, the brief tried to relate the new arguments to the ones that Lauer had made in his pro se brief. I believed that getting the facts before the court would help. After all, they had been impressed by Lauer’s acquittal.

609 Lauer’s addition to the brief included the following: “[T]he members of the press that interviewed the jury after the trial confirmed that the jury’s verdict was fundamentally based on the government’s lack of evidence. For example, according to the Associated Press report dated April 27, 2011 (Exhibit 1), one of the jurors, Charles E. Floyd, stated that: ‘There just wasn’t enough proof. . . .’ The sentiment appeared to be the unanimous view of the jurors.” The reports were classic and inadmissible hearsay that no court would accept.

610 SEC Motion for 60-Day Extension of Time to File Its Brief at 3, SEC v. Lauer, No. 09-15138. 11tth Cir. Augustini did not list the six new arguments, 328

although she said that three of the new arguments related to various federal securities statutes. Lauer had argued that Morrison had established that the proper argument to challenge the overseas application of one of the federal securities laws was statutory. Post-Argument Brief expanded that argument to cover other statutory violations with which the SEC had charged Lauer, where the situation was similar though not identical. Otherwise, I feared the court of appeals might affirm on the basis of the other statutes on which the SEC’s action had been based.

611 Nevertheless, I probably should have accepted Lauer’s decision, although it is highly doubtful that any of this would have made a difference. I should have deferred to Lauer when nothing crucial was involved. The court of appeals would not deny the SEC an extension of time in any event.

612 SEC v. Lauer, 478 F.Appx. 550 (11th Cir. 2012) (per curiam).

613 Op. Ed., “Conservatives Should Oppose Expanding the Federal Courts,” New York Times, Nov. 29, 2017.

614 Living Designs Inc. v. DuPont de Nemours & Co., 431 F.3d 353, 372-73 (9th Cir. 2005).

615 In Dileo v. Ernst & Young, 901 F.2d 624, 626 (7th Cir. 1990), Judge Easterbrook wrote: “A district judge should not photocopy a lawyer’s brief and issue it as an opinion. Briefs are argumentative, partisan submissions. Judges should evaluate briefs and produce a neutral conclusion, not repeat an advocate’s oratory. From time to time, district judges extract portions of briefs and use them as the basis of opinions. We have disapproved this practice because it disguises the judge’s reasons and portrays the court as an advocate’s tool, even when the judge adds a few words of his own. . . . Judicial adoption of an entire brief is worse. It withholds information about what arguments the court found persuasive, and why it rejected contrary views. Unvarnished incorporation of a brief is a practice we hope to see no more.”

616 478 F.Appx. at 553. The court followed by saying that it reviews disgorgement and prejudgment interest only for an “abuse of discretion,” because there had been an evidentiary hearing. That was partially correct, but it was supposed to examine errors in the law de novo and we were arguing forcefully that there were errors of law.

617 Id. at 554.

618 Lauer’s brief to the 11th Circuit had not referred to the order that banned him from speaking with other investors, a separate violation of due process.

Because I did not learn of the order until much later, it was not part of the Post-Argument Brief, either.

619 What Zloch would have done if confronted in August 2003 with a motion to transfer is unknown, although the evidence suggests he would have denied it.

620 478 F.Appx. at 555-56.

621 DE 746 at 3-4.

622 The SEC had an argument that the activities of Lancer Partners, a Connecticut entity, were domestic and were covered by federal securities laws, which it may have intentionally not made. The activities of Lancer Partners were a fraction of the activities of the Lancer Management companies and the hedge funds. Acceptance of that narrowed argument might have required the court 329

of appeals to reverse the judgment in favor of the SEC and order Marra to reconsider the case without the two offshore funds. That was not something that the SEC (or receiver) wanted.

623 478 F.Appx. at 556.

624 Id. at 556.

625 Pacific Lumber Co. v. State Water Resources Control Bd., 126 P.2d 1040, 1054 (Cal. 2006) (“the issue must have been actually litigated in the former proceeding”); see IRS v. Palmer, 207 F.3d 566 (9th Cir. 2000) (same). This argument was made in the Post-Argument Brief even though Lauer had not argued it in his pro se brief. It was a new argument, but not a new issue. The case on which Marra’s ruling relied, TeleVideo Systems, Inc. v. Heidenthal, 826 F.2d 915, 917-18 (9th Cir. 1987), had nothing whatsoever to do with the issue of collateral estoppel. Everything occurred in the same case and the words “collateral estoppel” or “collateral estopped” did not even appear in the opinion. A previous finding made in the same case between the same parties is binding based on an entirely different and broader principle, namely, law of the case.

626 Gottlieb v. Kest, 46 Cal.App.4th 110, 46 Cal.Rptr.3d 7, 34-37 (2006), stated that California “accords collateral estoppel effect to default judgments, at least where the judgment contains an express finding on the allegations.”

The SEC’s statement of material facts was unclear whether the court in Hempstead found facts or whether the complaint in that case simply alleged them. See DE 1744 at 25-26. The California court suggested that it would not apply collateral estoppel when the defendant had no incentive to vigorously litigate the issues in the prior action. Lauer had no money and no incentive to defend the California action. Of course, the order by Zloch was a complete answer.

627 As noted, Marra said Lauer was a director, that he should be punished because others pleaded the Fifth Amendment, and that Lauer had violated the Adviser’s Act of 1940 because he had violated other statutes.

628 478 F.Appx. at 555.

629 Id. at 556.

630 A slashing opinion by legendary Judge Henry J. Friendly, where he reversed a district judge’s grant of a motion for summary judgment on the issue of breach of contract, is instructive. Friendly wrote: “If anyone other than the parties has had the patience to read so far in this portion of the opinion, he will long since have asked himself how this controversy over the interpretation of the contract could have been thought appropriate for summary judgment. We cannot give a satisfactory answer.” Painton & Co. v. Bourns, Inc., 442 F.2d 216, 232 (2d Cir. 1971); see David M. Dorsen, Henry Friendly, Greatest Judge of His Era 96 (Harvard University Press 2012).

631 Marra had erroneously written: “As demonstrated above, Lauer and Lancer Management violated Sections 206(1) and (2) of the Advisers Act, because the SEC has shown all the elements for liability under Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act, which are more stringent than the requirements to violate Sections 206(1) and (2) of the Advisers Act.” 330

632 U.S. v. Lay, 612 F.3d 440, 445-47 (6th Cir. 2010). Moreover, the relationship in U.S. v. Lay was “unlike a typical” relationship between a hedge-fund manager and investors because the manager had only one client, as that court emphasized. The hedge-fund manager was not trying to convince new investors to buy his hedge funds, which Lauer was doing.

633 Id. at 557. Because there had been an evidentiary hearing and Marra had heard live witnesses on the amount of disgorgement, to prevail Lauer had to establish that Marra’s decision on disgorgement was clearly erroneous, 634 DE 2205; Lauer’s Pro Se Brief at 23.

635 Appellant’s Post-Argument Brief at 54-55. Lauer did not object to the testimony on this ground. But it was admissible subject to connection. It was never connected. It just hung there. Lauer rightfully argued that there was a failure of proof.

636 See 478 F.Appx. at 557-58.

637 As noted above, the Eleventh Circuit confused U.S. v. Kelly with U.S. v. Lauer.

638 One could seek review of the decision by the panel or by all active judges in the Eleventh Circuit. I concluded the panel was irrevocably against us, so I wrote the petition for rehearing in order to interest the judges who did sit on the panel. Both were long shots. In retrospect, it did not matter.

639 See, e.g., Carolyn Shapiro, “The Limits of the Olympian Court: Common Law Judging Versus Error Correction in the Supreme Court,” 63 Washington & Lee Law Review 271 (2006).

640 I negotiated a new retainer agreement with Lauer that essentially gave me 20% of any recovery from the case. Later agreements with Garvey and the ousted directors had a similar provision once I started in earnest to represent them.

641 Federal Rules of Civil Procedure 60(b)(1), (2), and (3).

642 Rule 60(b)(4).

643 Rule 60(b)(3).

644 Rule 60(b)(6).

645 DE 2724.

646 Young v. U.S., 481 U.S. 787, 815-16 (1987) (Scalia, J., concurring). The receiver violated another important provision of the Constitution when he did work that the SEC should have done. Art. I, § 8, gives Congress the exclusive power of the purse. Funding the government is for Congress to decide. Citizens cannot influence decision-making in the federal government by providing it with funds.

647 Justice Scalia quoted a portion of this language in his opinion for the Court in Plaut v. Spendthrift Farm, Inc., 514 U.S. 211, 222-23 (1995); see, e.g., In re Murchison, 349 U.S. 133, 136 (1955) (“A fair trial in a fair tribunal is a basic requirement of due process.”); Young v. U.S., supra (district judge cannot appoint a party’s lawyer to prosecute contempt proceeding against the other party). A decision binding on district judges in the Eleventh Circuit involved a special master, also an officer of the court. The court stated that, “A special master should have no interest in or relationship to the parties.’ . . . Having served as a witness for one side of the case, the appointee was accordingly disqualified.” Lister v. Commissioner’s Court, 566 F.2d 490, 493 (5th Cir. 331

1978).

648 DE 383 at 10. One involvement of the IRS in SEC v. Lauer was its decision to execute a lien on Lauer’s Greenwich, Connecticut, home after he defaulted on his obligation to pay IRS $50,000 a month. As noted above, Lauer believes that the SEC or receiver convinced IRS to seek his money from the sale of the home rather than from his stock holdings at Bank of America. IRS was also involved in the search for Lauer’s alleged secret offshore bank account, into which the receiver and the SEC claimed Lauer had funneled millions of dollars. IRS often gets involved in offshore accounts, for the reason that an offshore bank account usually signifies tax evasion, and it investigated the allegations against Lauer. The receiver acknowledged he was “command central” for dealing with the IRS. 649 U.S. Constitution, Art. 1, § 8.

650 DE 709, Steinberg v. Lauer, 05-cv-60584, S.D. Fla. 651 DE 746, id.

652 The “Group investors and the Class investors” were subclasses of the investors in the hedge funds, who were involved in separate suits against third parties brought by the receiver. The subclasses were composed of different entities, as a result of which some investors were favored over others both in settlements and in allocation of the receiver’s fees and expenses. This led to objections by some of the investors that money that was rightfully theirs was diverted to help other investors. E.g., DE 2485. These allegations against the receiver have not been pursued in this book.

653 DE 746, Steinberg v. Lauer. We also minimized violations before final judgment. Happily, the receiver had little incentive to stress them. The more he pointed to evidence of violation of separation of powers before final judgment the stronger our case was on the merits.

654 Id. at 28-29.

655 DE 2750. The motion was based largely on earlier research I had earlier provided Lauer and Garvey. We went ahead even though they were arguably guilty of laches (unreasonable delay plus prejudice to others). Later, I entered an appearance for them. One of the first things I did was withdraw their motion to intervene in SEC v. Lauer, which they had no right to do in any event and which they did not need to prevail. Moreover, we did not want Marra to write an opinion that rejected the weaker argument of the directors’ right to intervene, but which would ignore their motion for reinstatement, in essence what the SEC and the Eleventh Circuit had done earlier.

656 DE 841, Steinberg v. Lauer, 05-cv-60584, S.D. Fla. 657 The motion of hundreds of pages to dismiss Steinberg v. Lauer was based on the receiver’s pattern of misconduct. DE 841 in Steinberg v. Lauer, 05cv-60584, S.D. Fla. Most of the grounds have been discussed, including accepting receivership of the hedge funds, destroying Lancer Management and the hedge funds by his unilateral removal of files and computers for Lancer’s offices and summarily liquidating the hedge funds, spending investor money to assist the SEC, misrepresenting himself as an arm of the court while working with the SEC, failing to inform investors of developments, making unlawful payments to H.C., and refusing to settle Steinberg v. Lauer, 332

without personal releases, while continuing to spend investor money for the sole purpose of protecting the receiver and his professionals, even though he owed the investors a fiduciary duty. In addition the receiver wasted receivership assets and overbilled the investors. Later, I asked Marra to take judicial notice of the filing in SEC v. Lauer under Rule 201, Federal Rules of Evidence.

658 DE 844 at 4. The Miami SEC was ecstatic over Marra’s ruling and immediately sent a letter to the court of appeals extolling it as valuable supplemental authority. Our response to the letter pointed out the serious legal problems that Marra had created for himself.

659 Id. at 18.

660 DE 2809 at 14. There is no direct evidence that Zloch was involved in securing Sieber’s affidavit.

661 On Nov. 27, 2020, the conservative Wall Street Journal (at page A14) observed in an editorial: “[The judge] even tried to investigate the case himself -- an extraordinary intrusion by a court into the Executive Branch’s prosecutorial power.” The Journal was referring to Judge Emmet Sullivan and the prosecution of Michael Flynn, national security adviser to President Donald Trump.

662 That the violation occurred on a matter other than the merits seems irrelevant to the question of whether the judge was biased. It was part of an adversary proceeding and it demonstrated his bias 663 Richard A. Flann, Judicial Disqualification 423-24 (2007) (citations omitted).

664 Johnson v. U.S., 780 F.2d 902, 910 (11th Cir. 1986) (citations omitted). The cases did not distinguish between facts relating to the merits of a case and what may be called “housekeeping” facts that pertained to the workings of the case, which would include facts contained in a decision on a motion to disqualify a judge.

665 Costello v. Flatman, LLC, 558 F.Appx. 59 (2d Cir. 2014).

666 Hurles v. Ryan, 752 F.3d 768, 791 (9th Cir. 2014).

667 Alexander v. Primerica Holdings Corp., 10 F.3d 155, 164-65 (3d Cir. 1993).

The Supreme Court later supported our position in Williams v. Pennsylvania, 136 S.Ct. 1899 (2016), where it relied on the Due Process Clause to hold that “an unconstitutional potential for bias exists when the same person serves as both accuser and adjudicator in a case.” The statement applied to the receiver.

668 DE 2809. We filed a motion for reconsideration in SEC v. Lauer. Marra concluded there was nothing new in this motion and that his independent investigation related to a motion to disqualify him and was not connected to the merits of the case, although he cited no authority or logic in support of the distinction. DE 2901.

669 DE 123.

670 Arguably, Lauer and Garvey would have a potential claim against Steinberg because he failed to protect the rights of those to which he owed a fiduciary duty, but that would be extremely difficult to prove.

671 The receiver never distinguished between the investments and the loans. The fact that everyone knew it was a loan is evidenced by the fact that the amount never changed, even though the value of investments did.

333

672 DE 2831, DE 2838. There was also correspondence with the trustee in bankruptcy of Lancer Partners. That effort was soon abandoned because of additional barriers to winning posed by the Bankruptcy Code.

673 DE 2873.

674 DE 2405.

675 The receiver had filed a motion on February 28, 2005, entitled Motion by Receiver Steinberg to Approve Protocol for Interim Distribution of Estate in the midst of litigation over Lauer’s motion to dismiss or for summary judgment and the sale of Zi stock by hedge funds, Lauer’s notion for specificity in disgorgement, and other matters. DE 823, amended DE 836.

Lauer opposed the motion, arguing that there should not be a distribution until after appeal. DE 865. The receiver withdrew the heart of the motion, DE 948, and Marra entered an order to that effect, DE 1079.

676 DE 2404.

677 DE 2413.

678 Id. at 14.

679 DE 2408.

680 Steinberg did not give citations to Marra to specific problems.

681 I did not see this argument until I was working on this book, years later.

682 We pointed to the language, “the investors and creditors of all of the Receivership Entities will share pro rata on the assets of all of the Receivership Entities.” It was clear to us, however, that Marra would not accept that argument. Of course, it was unlikely that he would find for us on any other argument.

683 DE 2970 at 7; see DE 107 at 107-08.

684 Id. at 134-36; see DE 2405, which suggests he did not have all the relevant records. Note, the SEC frequently complained that offshore entities would not provide records.

685 DE 2884.

686 DE 2205 at 9.

687 DE 2913.

688 DE 2929. A winning party cannot sue a second time or otherwise seek more than his original judgment on the same claim. You cannot split causes of action. This was black-letter law, often taught in the first year of law school.

See https://www.dblar.com/the-rule-against-splitting-a-cause-of-action/, March 19, 2013.

689 SEC Brief at 48. The 11th Circuit had accepted that argument when it affirmed the judgment against Lauer in April 2012.

690 The receiver was also placed in charge of distributing the bankruptcy estate of Lancer Partners. DE 490. We filed a motion in the bankruptcy case seeking the amount that Lancer Partners owed LMG II. Because of provisions in bankruptcy law and the relative size of the amounts involved, we abandoned that effort.

691 SEC v. Lauer, No. 13-13110, 11th Cir. 692 In re Lauer, No. 13-15710, 11th Cir. 693 In re Bendall & Geist, No. 14-20499, 11th Cir. The former directors agreed to retain me free of charge to file the quo warranto petition, which we sent to 334

the Eleventh Circuit on February 4, 2014.

694 SEC v. Lauer, No. 13-13110, 11th Cir. 695 The single case the court cited bore no relationship to the relevant issue. SEC v. Spence & Green Chemical Co., 612 F.2d 896, 904 (5th Cir. 1980) (when a corporation is a party, that does not give its president the right to appeal as an independent party).

696 768 F.3d 1106, 1108-19 (11th Cir. 2014) (citations omitted). Another member of the panel said the same thing. Baboco Tapia v. Drummond Co., 631 F.3d 1350 (11th Cir. 2011) (Martin, J.) (“standing [is] the threshold question in every federal case”).

697 SEC v. Lauer, 11th Cir., No. 13-13110. We felt our case was stronger in SEC v.

Lauer than in Steinberg v. Lauer.

698 The first argument in the brief on appeal was that Marra’s action in personally securing an affidavit from a court clerk and then incorporating it into his opinion without giving Lauer a chance to react was unlawful, indeed, unconstitutional. Marra’s extraordinary statement that he was going to stomp out forever Lauer’s “outlandish” claim and that he was getting the affidavit to “confirm” what he already knew made a strong case for bias, prejudgment of the outcome, and personal knowledge of disputed facts. Chief Justice Rehnquist’s opinion for the Court in Neder v. U.S., 527 U.S. 1, 9 (1999), recognized that some errors, but not others, automatically required reversal.

“Unlike such defects as the complete deprivation of counsel or trial before a biased judge, an instruction that omits an element of the offense does not necessarily render a criminal trial fundamentally unfair or an unreliable vehicle for determining guilt or innocence.”

699 I had counted a motion that a magistrate judge found in favor of Lauer without observing that Marra reversed the magistrate judge and entered the order against him.

700 Unlike the assignment of judges (or flipping a coin), the outcomes of motions are not random. Nevertheless, a record of zero out of more than 100 was spectacular and, we argued, probative.

701 One argument was that there was an appeal pending with which the disqualification appeal could be efficiently merged. The claim of bias could affect the outcome of that appeal, so the two appeals should be decided together.

702 This was Judge Carnes’s only appearance in the case.

703 Baze v. Rees, 553 U.S. 35, 93 (2008) (Scalia, J., concurring); Torres v. Oakland Scavenger Co., 487 U.S. 312, 325 (1988) (Brennan, J., dissenting).

704 An article in the August 27, 2014, Daily Report, a Georgia legal publication,

by Alyson M. Palmer entitled, “Gripes About Federal Bench: Banal to Bizarre,” and subheaded, “Peek into 11th Circuit misconduct file shows many complaints, no discipline,” stated: “None of the orders found in the court’s public files going back to 2006 refer to any discipline meted out to the judges.”

Some complaints were investigated and rejected. “Most were dismissed by the circuit’s chief judge or someone acting in the chief ’s stead on the basis that the complaint amounted to an attack on the merits of a judge’s decision or was not supported by enough evidence.” The article noted that unlike many 335

705 706 707 708

709

710

711

336

circuits, the 11th Circuit posted none of its judicial-discipline orders on its website. It also protected its own judges from en banc review more than most other circuits. 11th Cir. R. 35-4(a) denies en banc rehearing to interlocutory orders such as Bendall’s and Geist’s effort to represent the investors. 11th Cir. R. 35-4(b) denies en banc rehearing on “[a]ny order dismissing an appeal that is not published . . . .” These rules have further insulated judicial conduct from scrutiny and prevented accountability.

Patricia M. Wald, “The Rhetoric of Results and the Results of Rhetoric: Judicial Writing,” 63 University of Chicago Law Review 1371, 1372 (1995).

Richard A. Posner, Divergent Paths: The Academy and the Judiciary 162 (2016).

Jeffrey Sutton, “The Role of History in Judging Disputes About the Meaning of the Constitution,” 41 Texas Tech Law Review 1173, 1181 (2009).

Antonin Scalia, Scalia Speaks 173 (Christopher Scalia & Edward Whalen eds.

2017). Countless judges and scholars have remarked that a principal purpose of appellate courts is to explain the law and provide implicit assurances to the parties and the public that they are applying rules of law evenhandedly.

In Corcoran v. Levenhagen, 558 U.S. 1, 2 (2009) (per curiam), the Court said that arguments made in briefs did not suffice. See also Jefferson v. Upton, 560 U.S. 284, 285 (2010). Act I, Scene 1, of Shakespeare’s The Merchant of Venice served as a guide for the Eleventh Circuit: [A] willful stillness entertain, With purpose to be dress’d in an opinion Of wisdom, gravity and profound conceit, As who should say, “I am Sir Oracle, And when I ope my lips let no dog bark!”

O my Antonio, I do know of these That therefore only are reputed wise For saying nothing.

The petition for a writ of certiorari presented three issues: first, the failure of the 11th Circuit to explain its rulings; second, the propriety of Marra’s ex parte investigation of the reassignment from Judge Zloch to him when he denied the motion to disqualify him; and third, the constitutionality of the provision in 28 U.S.C. § 144, which bars a party from filing a motion under that section when he has previously filed a motion under the section against another judge in a case. That section requires a district judge to reassign a facially valid disqualification motion to a different judge for decision. It seemed improper to limit a party to one motion to disqualify a judge per case when the case was assigned to a second judge, at least when a reassignment was beyond the party’s control.

I tried to employ Lauer’s ex parte status to explain why certain arguments had not been made in the direct appeal and should be heard now. I was unsuccessful.

Pryor’s article recognized the obligation of a federal appellate court to issue writs in aid of its appellate jurisdiction and also celebrated separation of powers. William H. Pryor, Jr., “The Unbearable Rightness of Marbury v. Madison: Its Real Lessons and Irrepressible Myths,” 12 Engage: Journal

712

713 714 715 716 717

718 719 720 721 722 723

724 725 726 727 728

729 730

Federalist Society Practice Groups 94, 96 (2011). The issues are favorites with originalists. See Antonin Scalia, “The Doctrine of Standing as an Essential Element of the Separation of Powers,” 17 Suffolk Law Review 881 (1983); David M. Dorsen, The Unexpected Scalia: A Conservative Justice’s Liberal Opinions 175-77 (Cambridge University Press 2017).

We sought reconsideration. Six days later the court of appeals filed its order, which ignored the arguments we had made: Before the Court is Petitioner’s “Motion for Reconsideration and for Reconsideration En Banc.” To the extent that he seeks reconsideration of this Court’s order denying his petition for a writ of mandamus, the motion is DENIED. To the extent that he seeks reconsideration en banc, the request is DENIED. See 11th Cir. R. 35-4(b).

Shaughnessy v. U.S., 345 U.S. 206, 224 (1953) (Jackson, J., dissenting).

DE 2968.

DE 2975.

The fiduciary duty of the receiver was indisputable, as noted above.

Compare DE 2944 at 16 ($142,445,220) with DE 2975 at 3 (“over” $130 million). Marra found that, “When the Receiver was appointed in July 2003, the Funds were collectively worth less than $60M, and less than $4M in any case remained,” or substantially less than half he collected. DE 2133 at 10.

The $6.8 million seems to represent the proceeds from Lauer’s Bank of America brokerage account.

Rosenfeld v. Black, 445 F.2d 1337 (2d Cir. 1982).

11 U.S.C. § 330(a)(1).

The receiver never responded to these arguments.

DE 2979.

Many of the interim fee applications by the professionals were labeled along the lines of “Sixth Final Application for Fees” presumably to avoid audit of earlier fees.

DE 3003.

DE 3010.

Id. at 13.

Id. at 15.

The sole authority Marra gave for this incorrect statement of the law was U.S. v. Cowan, 524 F.2d 504, 513 (5th Cir. 1975), where the issue was whether a federal rule of criminal procedure that required the prosecutor to obtain “leave of court” to dismiss an indictment violated separation of powers. The court said it did not. In the course of a lengthy discussion the court used the word “usurp” once: “But that is not to say that the Rule was intended to confer on the judiciary the power and authority to usurp or interfere with the good faith exercise of the Executive power to take care the laws are faithfully executed.” This was yet another distortion of the law by Marra. It would mean that constitutional separation of powers was nonexistent if those in violation agreed, which was nonsense.

DE 2901 at 6.

Marra denied Lauer’s motion to declare the judgment satisfied basically on the ground that Lauer had inflated the value of the holdings of the hedge 337

731

732 733

734

735 736 737 738

739 740

338

funds. But Lancer owed money to Lauer, not stocks, a debt that preceded the alleged fraud. Also, Marra had fixed the overcharging as less than $48 million.

DE 311, DE 313, DE 314. The remaining shares in Lancer Management and GHA were held by Eric Hauser, who pleaded guilty to his indictment and worked with the SEC and DOJ. There is a subjective element in the categorization.

The statistics excluded procedural motions, such as motions for extension of time. Similarly excluded were motions where Zloch or Marra gave something to both sides. Included were motions made by Martin Garvey and the ousted directors that mirrored Lauer’s interests.

See Appellant’s Brief on Appeal, 11th Cir., No. 14-13931, at 36-42. This brief listed all the rulings that had been made up to that time in favor of the SEC and Receiver. The list occupied eight pages.

DE 3012 at 2. The court never explained how nonparty Garvey was free to file motions.

DE 2759.

DE 2843. The case had disintegrated into a cat and mouse game in which we were the mice.

DE 123. Marra stated on March 10, 2014 (quoting a Zloch order from February 5, 2004) why he was continuing to refuse to give the investors access to the unredacted billing records, which we sought and to which all investors were entitled. As redacted by the SEC, the words blacked out in its bills exceeded the words turned over to Lauer. The bills were incomprehensible in the version that Lauer and other investors saw, and offered them no assistance.

Zloch and Marra simply said: “these records may reveal confidential matters harmful to the entities and assets contained in the receivership.” DE 3069.

Ten years after the case began Marra refused to provide the investors with information about their destroyed hedge funds and their disposed-of assets because disclosure of the billing records might somehow harm those largely defunct entities, despite the fact that the investors owned the hedge funds and were paying for the receiver’s investigation. It should be noted that other professionals did not redact their bills, such as Foley & Lardner, the law firm retained by a committee of investors. E.g., DE 559 (filed Oct. 18, 2004).

DE 2722.

While I had financial and scheduling problems in representing Lauer in a trial if they won the appeal in 2012, that was not true in 2016. By then, I was sufficiently invested emotionally and financially to drop everything and try the case in Florida, or so I hoped. I would have had to spend months of time and tens of thousands of dollars of my money to prepare and try the case followed almost certainly by an appeal, if not additional proceedings.

Winning a civil trial would not have been easy, especially before Marra or someone who agreed with him, even though we had the benefit of the transcript of the criminal trial, where Michael Caruso had shown the way, and I knew the case much better in 2016 as a result of years litigating it. It was not clear how much we could recover if we won. The receiver’s drain on the receivership would presumably have ended. We would seek to have the

receiver disgorge a substantial amount of his fees.

741 Three separate appeals were given distinct numbers. The combined caption was SEC and Marty Steinberg v. Michael Lauer and Martin Garvey, John W. Bendall, Jr., Richard Geist, and Richard Lombardi, Nos. 15-15635, 15-15636, and 16-12033, 11th Cir. 742 By mid-January 2017, the short list also included Neil Gorsuch of the Tenth Circuit and Thomas Hardiman from the Third Circuit, also conservatives.

Pryor was the most controversial of the three, largely because he called Roe v. Wade the “worst abomination” in the history of the constitution law and argued that a right to same-sex intimacy would “logically extend” to “necrophilia, bestiality, and pedophilia.” Within two weeks Pryor’s stock had faded. January 31 Trump announced that he was sending the name of Gorsuch to the Senate to be confirmed. When Justice Kennedy retired in 2018, Pryor was not seriously considered. Pryor became chief judge of the 11th Circuit in 2020.

743 SEC v. Lauer, Nos. 15-15635, 15-15636, 16-12055, 11th Cir., available on Pacer.com.

744 Id., July 16, 2016. The court’s ruling contradicted U.S. v. Antiques Ltd. Partnership, 760 F.3d 668, 771-74 (7th Cir. 2014) (Posner, J.), which held collateral receivership orders nonappealable until the end of the case, depending on whether the Rule 54(b) order applied to placing the hedge funds into receivership and to ancillary receivership orders, which the Eleventh Circuit did not discuss. (The answer may not be the same in the two situations.) The Eleventh Circuit had a separate paragraph denying us the right to appeal a consent order, which we were not appealing.

745 Rule 54(b) of the Federal Rules of Civil Procedure reads: Judgment on Multiple Claims or Involving Multiple Parties. When an action presents more than one claim for relief . . . or when multiple parties are involved the court may direct entry of a final judgment as to one or more, but fewer than all, claims or parties only if the court expressly determines there is no reason for delay. Otherwise, any order or other decision, however designated, that adjudicates fewer than all the claims or the rights and liabilities of fewer than all the parties does not end the action to any of the claims or parties and may be revised at any time before the entry of a judgment adjudicating all the claims and all the parties’ rights and liabilities.

746 DE 2405, DE 2408.

747 DE 2750.

748 “Orders entered in the receivership do not merge into the final judgment in the [SEC] enforcement action. See United States v. Rivera Constr. Co., 863 F.2d 293, 299 (3d Cir. 1988) (order appointing receiver did not merge because it ‘was not a step in the procedural progression that culminated in the conviction and sentence.’) This is so because the receivership is an ancillary proceeding that ‘does not affect the ultimate outcome of the [enforcement] action.’ National Partnership Investment Corp. v. National Housing Dev. Corp., 153 F.3d 1289, 1291 (11th Cir. 1998).” Receiver filing, Feb. 19, 2016, in SEC v. Lauer, No. 15-15635, at 14, n. 4, 11th Cir. Our brief added other authorities.

339

749 The dismissal, moreover, did not dispose of the case, which is another reason why the sua sponte decision was a bad idea. If a court of appeals decided, for example, that the court of appeals had no jurisdiction at all, the court would have ended the case without further time spent by the parties or the court. Everyone could move on. But in this case briefs would be filed and there would be oral argument even after the court denied parties their right to litigate. There simply was no point in dismissing the major portion of the complex case sua sponte. Far more reasonable would have been for the court of appeals to request briefing on the issues it raised., World Fuel Corp. v.

Geitner, 568 F.3d 1345 (11th Cir. 2009) (court asked the parties to include in their briefs on appeal discussion of the new issues).

750 Supreme Fuels Trading FZE v. Sargeant, 689 F.3d 1244, 1245-46 (11th Cir. 2012), quoting Catlin v. U .S., 324 U.S. 229, 223 (1945).

751 “Except as provided in subsections (c) and (d) of this section, the courts of appeals shall have jurisdiction of appeals from: . . . . (2) Interlocutory orders appointing receivers, or refusing orders to wind up receiverships or to take steps to accomplish the purposes thereof, such as directing sales or other disposals of property . . . .”

752 There is a long-standing presumption that statutes are not repealed or modified by implication.

753 It is irrelevant that it would make more sense to require an immediate appeal from the creation of a receiver, since that was not the law.

754 DE 2975.

755 DE 2321.

756 SEC v. Lauer, No. 15-15635, 11th Cir. Sept. 22, 2016.

757 Caradelis v. Refineria Panama, S.A., 384 F.2d 589, 591 n. 1 (5th Cir. 1967); see Gloria S.S. Co. v. Smith, 376 F.2d 46, 47 (5th Cir. 1967). The Fifth Circuit was split into the Fifth and Eleventh Circuits on Oct. 1, 1981. Fifth Circuit decisions before that date are binding on both the Fifth and the Eleventh Circuits.

758 See, e.g., Supreme Fuels Trading FZE v. Sergeant, 689 F.3d at 245-46, discussed above.

759 Bingham Pump Co. v. Edwards, 118 F.2d 338, 339 (9th Cir. 1941); see Solis v.

Consulting Fiduciaries, Inc., 557 F.3d 772, 776 (7th Cir. 2009).

760 There was an inconsistency in the court’s opinion. The court treated the district court’s 2009 Final Judgment as disposing of the entire case as it existed to that point. But if that was accurate, there was no need to rely on 28 U.S.C. § 1292(a)(2), which the court implied was crucial to deciding whether an order to create a receivership had to be immediately appealed. Also, Rule 54(b) was irrelevant.

761 The law in the 11th Circuit regarding post-judgment appeals is stated in Mayer v. Wall St. Equity Group, 672 F.3d 1222 (11th Cir 2012): “Only if a postjudgment order is ‘apparently the last order to be entered in the action’ is it final and appealable. . . . [A]n order is deemed final, if it disposes of all the issues raised in the motion that initially sparked the postjudgment proceedings. . . . [We] combine in one review all stages of the proceeding that effectively reviewed and corrected if and when final judgment results.”

340

762 763 764

765 766

767 768

769

770 771

The provision is inapplicable because there was no judgment respecting the receiver until years later. Also, the orders did not appear to dispose of the entire case. The court did not discuss how the doctrine applied in this complex case.

DE 3404, 2405, In retrospect I should have entitled the motion as simply one for clarification.

A local rule prohibited successive motions to reconsider in the court of appeals. We were not seeking special treatment. Ordinary litigants get two chances, too.

Because of my unavailability, I missed my brother’s funeral.

“If anything about the individual charges and the reasons for them comes out clearly or can be guessed at while the accused is being questioned, then it is possible to work out and submit documents that really direct the issue and present proof, but not before. Conditions like this, of course, place the defense in a very unfavourable and difficult position. But that is what they intend. . . . The documents would mean an almost endless about of work. It was easy to come to that belief, not only for those of anxious disposition, that it was impossible ever to finish it. This was not because of laziness or deceit, which might have hindered the lawyers in preparing it, but because he did not know what the charge was . . . . ‘[V]ery many different people . . . were all agreed on one thing, and that was that when ill-thought-out accusations are made they are not ignored, and that once the court has made an accusation it is convinced of the guilt of the defendant and it’s very hard to make them think otherwise,’” Franz Kafka, The Trial 71, 78, 91 (Echo Library 2006) (originally published in German in 1925).

Phillips v. Employers Mut. Liability Co., 239 F.2d 79, 80 n.2 (5th Cir. 1956).

Tucker v. JP Morgan Chase Bank N.A., 2016 App. Lexis 22015 (11th Cir. Dec. 12, 2016); see In re Beverly Mfg. Corp., 778 F.2d 666 (11th Cir. 1985); Marcaida v. Rascoe, 569 F.2d 828 (5th Cir. 1978).

At this point Lauer and I stopped hearing from Martin Garvey. Garvey (and others) could not understand how someone whom the SEC had not sued, whom the government indicted but the jury acquitted, and whom the receiver and trustee in bankruptcy had sued but had dismissed their cases without getting a dime could have his funds withheld and be ruined financially and personally. Garvey could not get any job in finance despite his qualifications.

He despaired. He deserved better.

As noted, included in the brief were the sections on the issues the court of appeals wrongly dismissed sua sponte.

The rules required submitting nine paper copies of the brief, seven for the court of appeals and one each to the other parties; four copies of the appendix, which contained copies of the docket entries in the district court and of key documents in the case; conversion of all references in the brief to the district court’s docket entries, add the pages references and prepare a table of cases of authorities cited. The pages of the appendix had to be numbered, a table of contents prepared. Then the documents had to be printed and assembled and dividers inserted between all of the sixty-one exhibits in the four copies.

I finished off the project on Monday with the help of one of the firm’s staff, 341

772

773

774

775

776 777 778

779

342

Charles Davis, who put each of the twelve volumes of the appendix into ring binders and then sent out the paper copies while I filed the documents electronically, along with a motion to reinstate the appeal and his declaration.

I went home with an hour or two to spare.

The court’s failure to give reasons led to some craziness. The receiver’s response chastised us for not apologizing in our motion. We included an apology in the reply, although we were not sure what it was we were apologizing for.

Filings continually employed respectful and standard language.

However erroneous, even bizarre, was, the action of the court of appeals did not constitute a mistake in its jurisdiction. It possessed the power to do what it did.

It focused on procedural issues, such as the requirement that an appellant whose appeal had been dismissed must prove “extraordinary circumstances” to have his appeal reinstated and the proper interpretation of 28 U.S.C. § 1291(a)(2) relating to when the creation of a receivership must be appealed.

Actually, we filed two printed petitions for certiorari, one from the court of appeals’s order denying our motion for an extension of time to file our brief on appeal, the other from the court’s denial of our motion to reinstate the appeal.

The reason we did that was because the rules of the Supreme Court tolled the time period for motions for reconsideration, which was the practice in most courts of appeals, but did not mention motions to reinstate the appeal, which is the practice in the 11th Circuit. Supreme Court Rule 13.3. It was unclear whether the filing of a motion to reinstate the appeal allowed litigants to wait until the court of appeals decided that motion, so we filed a protective petition for certiorari from the denial of the earlier motion. The petitions concentrated on the conduct of the 11th Circuit when it denied our motions for reconsideration and our motion to reinstate the appeal. For example, the 11th Circuit dismissed our appeal without a hearing. Then, in order to prevail on a motion to reinstate an appeal we had to prove “extraordinary circumstances.” We had a constitutional right to appeal and we claimed that the court of appeals infringed on that right. We had to get back to the court of appeals and make our substantive arguments, such as whether we had to appeal the creation of the receiverships in 2003, so the substantive arguments were not properly before the Supreme Court. If the Court granted certiorari and we won, the Supreme Court presumably would have remanded the case to the 11th Circuit to hear our appeal. Meanwhile, however, the receiver was distributing all the remaining money to the investors or using it up as fees and expenses.

As noted above, the italicized paragraph is a lightly edited email from Lauer to the author.

Brown v. Allen, 344 U.S. 443, 540 (1953) (Jackson, J., concurring).

See, e.g., Carolyn Shapiro, “The Limits of the Olympian Court: Common Law Judging Versus Error Correction in the Supreme Court,” 63 Washington & Lee Law Review 271 (2006).

A Supreme Court Justice once told me that the cases that were most outrageous from the point of view of the loser had the smallest chance of being heard by the Supreme Court.

780 I dedicated my first book, Henry Friendly, Greatest Judge of His Era (Harvard University Press 2012), to the judges of the United States Courts of Appeals.

781 The American Bar Association published a book devoted to judges discussing cases over which they had presided. Cohn, Joel, Blindfolds Off: Judges on How They Decide Cases (American Bar Association 2014).

782 During the case, the principal law firm for the court-appointed receiver, Hunton & Williams, maintained a website www.Hunton.com/Lancer that posted documents filed in the case, but which was taken down after the case ended. The documents the firm posted on the website were not a complete record of the proceedings in the district court, but omitted many that Lauer had filed and in which he explained his positions and criticized the proceedings. The receiver separately emailed or mailed copies of his filings and the courts’ rulings to the investors, but did not similarly send them copies of many of the documents filed by Lauer.

343

Index A ABA Rules of Professional Conduct 76 accrual basis 158, 219 Alice in Wonderland (Carroll) 150, 314 Alpha Omega 302 American Express 26, 40, 280, 293, 311 American Society of Appraisers Business Valuation Standards 39 Animal Farm (Orwell) 77 AOL 28 appeal 27, 61, 93, 102, 112, 113, 114, 116, 123, 147, 151, 159, 162, 167, 168, 169, 170, 171, 172, 175, 178, 187, 203, 204, 205, 206, 208, 209, 210, 215, 217, 218, 219, 225, 226, 227, 228, 232, 235, 239, 241, 242, 244, 245, 246, 254, 256, 257, 258, 259, 260, 261, 262, 263, 264, 265, 266, 267, 268, 277, 282, 289, 290, 291, 292, 295, 296, 308, 309, 311, 314, 315, 318, 323, 329, 330, 331, 332, 333, 334, 335, 336, 337 “appealable” 114, 187, 244, 263, 264, 265, 335 Asche 281 asset freeze 55, 60, 63, 64, 90, 114, 115, 116, 160, 207, 286 Atlanta, Georgia 203, 206, 267, 277, 308 attorney-client privilege 189, 241, 321 Augustini, Hope Hall 206, 207, 283, 325 Auschwitz 15 B Bank of America 26, 40, 43, 63, 69, 81, 86, 87, 88, 135, 186, 235, 237, 238, 253, 280, 294, 303, 307, 320, 328, 332 Barbarosh , Milton 35, 130, 181, 188, 189, 190, 191, 192, 195, 199, 344

201, 276, 279, 280, 286, 296, 309, 313, 318, 321, 322 Bast, Jeffrey B. 68, 284 “because it’s terrible” 208 Bendall, John W., Jr. 26, 37, 99, 126, 134, 143, 144, 149, 150, 173, 193, 229, 230, 243, 257, 260, 268, 276, 279, 280, 308, 310, 312, 330, 331, 334 Beria, Lavertiy 5 Berkowitz, Dick, Pollard & Brant 284, 299 Bermuda Short sting 125, 180, 181, 201 Beverly Martin 242, 257 Bloodlands: Europe Between Hitler and Stalin (Snyder) 13, 285 Bloomberg 56 Blue Chips 23 BMW motorcycle 303 British Virgin Islands 23, 34, 70, 72, 130, 181, 188, 286 Buffet, Warren 24, 28 Bush, George W. 95, 205, 246 BVI (see British Virgin Islands) 23, 34, 35, 51, 52, 56, 117, 181, 188, 189, 195, 281, 286, 309, 321 Byron, Christopher 33, 53, 205, 285, 305 C California state-court action 148 “capably set forth” 213 Capital Research 322 Carnes, Julie 245, 282, 331 Carroll, Lewis 150 Caruso, Michael 187, 191, 192, 193, 194, 197, 276, 281, 321, 334 cash basis 158, 219 FHUWL¿HG DXGLWV certiorari 222, 223, 224, 225, 226, 243, 246, 268, 274, 275, 290, 292, 332, 337 Cessna airplane 309 Chen, Vanessa 187, 281

CIA 20 civil penalty 153, 166 CLR 81, 87, 235, 236, 288, 302 collateral estoppel 147, 148, 174, 207, 216, 217, 314, 324, 326 “command central” 228, 252, 304, 328 Communist Party 16, 322 confer, duty to 108, 155, 311, 316, 333 consent judgment 80, 286 Constitution (see U.S. Constitution) 5, 11, 58, 87, 117, 222, 227, 253, 273, 303, 327, 328, 331 contempt 72, 93, 103, 104, 105, 106, 107, 109, 110, 112, 113, 114, 116, 121, 123, 169, 281, 282, 288, 289, 303, 308, 315, 327 “control person” 60, 146, 313, 325 Cooke, Marcia 93, 94, 226, 231, 282, 287 Cowen, Bruce 32, 33, 35, 113, 125, 126, 128, 129, 130, 131, 135, 138, 139, 149, 150, 173, 174, 181, 190, 191, 192, 194, 195, 199, 210, 279, 309, 311, 313, 318, 322 credibility 111, 117, 123, 124, 139, 141, 142, 143, 202 criminal case (see U.S. v. Lauer) 58, 149, 151, 159, 169, 171, 172, 178, 182, 186, 199, 203, 205, 207, 208, 210, 216, 221, 235, 256, 258, 278, 281, 282, 289, 297, 316, 324 D DDJ Capital 74, 284, 286, 299 default judgment 111, 112, 148, 216, 217 Dell 28, 295 Deloitte, Touche 35, 188, 189, 190, 286, 321 Demers, Susanne 284, 299 de novo review 217 Department of Justice 31, 32, 36, 52, 58, 95, 158, 172, 181, 228, 247, 272, 277, 278, 298, 304, 324 depositions 44, 99, 102, 104, 108,

118, 124, 131, 133, 141, 149, 150, 173, 178, 196, 218 Der Spiegel 15 disgorgement 88, 140, 150, 153, 154, 155, 156, 157, 158, 159, 160, 161, 162, 163, 164, 165, 166, 168, 171, 175, 176, 187, 207, 213, 214, 216, 219, 228, 237, 238, 239, 265, 267, 288, 289, 290, 316, 325, 327, 329 'LVTXDOL¿FDWLRQ RI -XGJHV (Flamm) 90 Dobrowolski, Stefan 14, 15, 279 Dorsen, David M. 1, 6, 276, 281, 290, 295, 326, 332 Doyle, John 126, 134, 173, 279, 309, 310, 318 Dubina, Joel F. 113, 282 E Easterbrook, Frank H. 213, 282, 325 Ebel, David W. 205, 206, 207, 220, 277, 282, 323 Eleventh Circuit 113, 114, 116, 120, 121, 123, 159, 162, 168, 169, 203, 204, 205, 206, 209, 212, 213, 217, 218, 219, 221, 222, 223, 232, 241, 242, 243, 244, 245, 246, 256, 259, 261, 264, 265, 266, 268, 270, 271, 272, 274, 277, 278, 315, 316, 323, 324, 327, 328, 330, 331, 334 Emory Law School 205 Endeavor Corp. (END) 81, 82, 83, 84, 86, 239, 287, 317 Enjamio, Juan C. 58, 284 estoppel (see collateral estoppel) 147, 148, 174, 207, 216, 217, 314, 324, 326 ex parte hearing (see TRO hearing) 49, 50, 51, 104, 179 expert witness 130, 136, 137, 160, 162, 197, 210, 219, 281, 311 F “fake portfolios” 131, 132, 142, 345

218 FBI 11, 31, 32, 33, 35, 36, 37, 53, 56, 73, 74, 118, 172, 180, 182, 183, 185, 201, 207, 208, 238, 279, 280, 283, 286, 295, 299, 301, 319, 324 Federalist, The 227, 232, 332 Federal Rules of Civil Procedure 114, 116, 137, 149, 167, 218, 261, 262, 306, 315, 317, 327, 334 Federal Rules of Criminal Procedure 321 Federal Rules of Evidence 138, 150, 311, 328 Federal Sentencing Guidelines 151, 193 federal statutes 91, 245 ¿GXFLDU\ GXW\ 261, 297, 328, 329, 332 Fifth Amendment 71, 72, 99, 112, 146, 147, 313, 326 ¿OLQJ LQMXQFWLRQ ¿QDO MXGJPHQW 166, 167, 168, 169, 205, 220, 228, 239, 244, 254, 255, 262, 264, 290, 317, 328, 334, 335 ¿QDO MXGJPHQW UXOH Financial Service Commission 34 Financial Times 15 Ford, Gerald 205, 246 forensic analysis 160 forty-eight million dollars ($48 million) 10, 52, 54, 133, 155, 163, 177, 214, 219, 234, 238, 267, 308, 333 fraud period 125, 157, 158, 160, 162, 163, 165, 219, 320 Freudian slips 243 Friendly, Henry J. 1, 6, 191, 276, 315, 321, 326, 337 Ft. Lauderdale 45 G gag orders 98 Garvey, Martin 26, 43, 80, 99, 102, 128, 129, 130, 131, 135, 136, 158, 168, 178, 179, 180, 181, 184, 189, 346

190, 191, 193, 197, 198, 199, 202, 224, 228, 229, 230, 233, 235, 236, 237, 239, 244, 247, 248, 249, 253, 255, 257, 260, 263, 267, 268, 270, 271, 273, 276, 279, 280, 283, 290, 291, 294, 302, 308, 313, 318, 319, 321, 327, 328, 329, 333, 334, 336 Geist, Richard 26, 99, 229, 230, 243, 257, 260, 268, 279, 330, 331, 334 Georgia Law School 205 GGK 26, 40, 280, 293 GH Associates 26, 80, 235, 247, 253, 279, 280, 299, 302 grand jury 36, 37, 151, 180, 191, 321 Greenwich, Connecticut 30, 64, 65, 88, 286, 320, 327 H Harvard University 276, 326, 337 Hauser, Eric 26, 43, 56, 80, 99, 134, 135, 144, 149, 173, 180, 190, 192, 193, 197, 199, 201, 256, 279, 280, 294, 299, 302, 312, 313, 322, 333 H.C. 62, 89, 178, 179, 182, 253, 279, 289, 303, 307, 319, 328 hedge funds (generic) (see also Lancer Management Group) 10, 22, 23, 24, 25, 26, 27, 28, 33, 34, 35, 36, 38, 39, 40, 42, 43, 45, 46, 47, 48, 49, 51, 52, 53, 54, 55, 56, 57, 58, 60, 62, 67, 74, 75, 76, 77, 78, 81, 83, 84, 85, 86, 87, 90, 95, 99, 100, 101, 105, 122, 123, 127, 128, 130, 131, 132, 146, 147, 154, 155, 156, 158, 160, 162, 163, 164, 165, 167, 168, 172, 175, 177, 181, 187, 188, 189, 194, 195, 196, 207, 214, 219, 220, 227, 229, 233, 234, 236, 237, 238, 242, 243, 251, 259, 260, 263, 267, 269, 270, 277, 280, 281, 284, 286, 287, 288, 294, 296, 297, 299, 301, 302, 308, 309, 312, 313, 315, 316, 317, 321, 323, 326, 327, 328, 329, 333, 334 Henderson v. Carnival Corp. 141

Hermitage Capital Corp. 144 Hill, James 205, 207, 282, 323 Houlihan, R. D’Arsey 187, 281 Huard, Joseph 32, 33, 42, 126, 128, 129, 130, 134, 138, 139, 149, 173, 178, 192, 193, 199, 279, 280, 281, 309, 318, 319, 322 Hunton & Williams 49, 58, 74, 76, 77, 82, 106, 187, 250, 284, 294, 298, 302, 337 “hyperbole” 125, 141, 142, 143 I “ill-gotten gains” (see disgorgement) 40, 64, 115, 153, 155, 156, 157, 162, 163, 164, 176, 219, 238, 239, 249, 315 incentive fees 34, 63, 314 Institutional Investor Magazine 21 Internal Revenue Service 125, 228, 304 international accounting standards 161, 316 International Rescue Committee 18 interrogatories 104, 105, 107, 110, 113, 286, 287, 306 intervention 254, 255 Investment Advisers Act of 1940 23, 40 investors 10, 11, 21, 22, 23, 24, 25, 27, 28, 29, 31, 33, 34, 38, 39, 40, 42, 44, 45, 46, 47, 48, 49, 53, 54, 55, 57, 58, 63, 64, 67, 69, 71, 73, 74, 75, 77, 78, 79, 82, 83, 84, 85, 90, 96, 98, 99, 100, 101, 102, 106, 107, 115, 118, 122, 125, 126, 128, 129, 131, 132, 134, 135, 144, 154, 156, 160, 161, 165, 166, 167, 168, 175, 178, 181, 183, 195, 196, 197, 218, 220, 227, 228, 229, 234, 236, 237, 238, 239, 241, 243, 248, 249, 250, 251, 255, 256, 263, 268, 270, 271, 294, 295, 297, 299, 301, 303, 305, 306, 309, 315, 325, 327, 328, 330, 331, 333, 337 IPOs 127 Isaacson, Laurence 180, 181, 188,

189, 190, 191, 280, 290, 313, 323 Israel 17 J Jackson, Robert H. 247, 273, 332, 337 Jews 13, 14, 16 JFK Airport 199 Jones, David William 283, 295 Jordan, Adalberto (see U.S. v.

Lauer) 182, 183, 185, 186, 188, 189, 190, 191, 198, 199, 282, 290, 322, 323 judicial notice 311, 328 jury trial 62, 166, 256 K Kafka, Franz 201, 202, 266, 336 Kapila, Soneet 160, 161, 162, 165, 197, 219, 228, 238, 284, 299, 316 Kelly, James T. 32, 33, 42, 118, 129, 133, 134, 135, 136, 137, 138, 140, 146, 172, 173, 174, 176, 182, 193, 197, 216, 218, 279, 280, 281, 283, 295, 311, 318, 319, 322, 327 Kidder Peabody 20 Krakow, Poland 15 L Labush, Gerald 109, 180, 234, 281 laches 233, 238, 328 Lake George 185 Lander, Harry 135, 280 Lancer hedge funds 35, 84, 132, 147, 162, 172, 181, 195, 270, 284 Lancer Management Group 23, 33, 38, 46, 56, 78, 123, 167, 168, 201, 229, 236, 238, 251, 253, 265, 280, 281, 284, 306, 318 Lancer Partners 23, 27, 34, 43, 51, 56, 75, 101, 168, 278, 280, 282, 284, 286, 319, 326, 329, 330 Lardner, Ring 242, 333 Larimore, Steven M. 226, 231, 282 Lauer, Michael 5, 7, 9, 14, 31, 82, 99, 113, 123, 129, 143, 144, 160, 163, 164, 167, 173, 175, 178, 180, 347

203, 242, 244, 260, 270, 271, 276, 279, 281, 283, 286, 293, 295, 312, 319, 320, 322, 334 Lauer, Valentina 68, 70, 85, 95, 287 law of the case 115, 307, 314, 326 legal fees 59, 60, 65, 96, 101, 175, 269, 287, 305, 323 Lighthouse Fast Ferry 32, 33, 150, 281, 296, 310 Liteky v. U.S. 91 Lombardi, Richard 101, 251, 276, 284, 306, 334 Lviv, Poland (see Lvov) 13, 14, 15, 17, 293 Lvov, Poland 13, 19 M Magistrate Judges 282 Mallaby, Sebastian 285, 294 manipulation 10, 33, 40, 75, 137, 141, 146, 148, 149, 154, 157, 196, 198, 216, 217, 298, 315 Marcus, Stanley 113, 282 Marine Corps 18, 19 market maker 58, 143, 144, 193 market price 27, 35, 40, 82, 83, 129, 130, 133, 134, 143, 196, 294 marking the close 39, 40, 41, 45, 54, 67, 90, 112, 130, 136, 174, 193, 196, 197, 287, 296, 297 Marra, Kenneth A. 80, 94, 282 Martin, Christopher 63, 88, 157, 175, 207, 283 Mattimore, John T. 36, 189, 283, 296 Mayrand, Renee 131, 132, 133, 284, 300, 308, 310 McHale, Gerald A. Jr. 282 Mengele, Joseph 20 Mercedes-Benz race car 302, 309 0HUFKDQW RI 9HQLFH 331 Miami Herald 45, 285 Miami SEC 7, 36, 38, 43, 44, 45, 51, 53, 108, 123, 176, 182, 189, 196, 226, 283, 298, 328 Michigan Law Review 205 Microsoft 28, 295 348

Mini-Cooper 303 Model Code of Professional Responsibility 76 “model portfolios” 131, 132 More Money Than God (Sebastian Mallory) 285 Morgan, Stanley 53, 284, 294, 336 Moskowitz, Norman 186, 187, 203, 204 motion to disqualify Marra 226, 230, 233, 257, 259, 291 motion to disqualify Zloch 287 mutual funds 28, 52, 53, 172 N Nash, Jack 20 NAV (net asset value) 24, 27, 144, 165, 174 Nazis 14, 19 Newman, David 99, 135, 280, 294, 313 New York Post 33, 34, 53, 67, 75, 97, 98, 126, 195, 285, 286, 287 New York Stock Exchange 24, 27, 127, 165, 317 New York Times 15, 98, 212, 285, 305, 325 Nixon, Richard M. 205, 246, 295 O Obama, Barack 205 offshore bank accounts 183, 185 Olson, John K. 282, 319 Orwell, George 77 P Pacer 278, 319, 334 Palusek, Michael 33, 283 Patrick, Jack 182, 192, 283 Paul Newman 30, 87, 295 penalty 72, 140, 153, 166, 187, 256, 290, 317 Pennecke, Andrew 135, 310 per curiam opinions 212 petitions for certiorari 222, 274, 337 plea bargains 200, 202

pogroms 13, 14 Posner, Richard A. 245, 282, 303, 314, 331, 334 post-argument brief 258 post-judgment interest 203, 220, 323 Powell 5 PPMs 23, 24, 25, 27, 39, 48, 96, 118, 132, 133, 196, 218, 295 prejudgment interest 155, 163, 164, 168, 175, 177, 220, 238, 239, 317, 323, 325 preliminary injunction 59, 60, 61, 62, 72, 93, 286, 297 press releases 104 PricewaterhouseCoopers (PWC) 10, 26, 40, 42, 44, 54, 69, 100, 118, 130, 133, 161, 162, 174, 181, 189, 194, 195, 200, 219, 237, 280, 293, 295, 298, 316 pro se parties 119, 164, 316 Pryor, William H., Jr. 159, 212, 242, 243, 245, 246, 257, 259, 266, 268, 277, 282, 315, 332, 334 Public Defender (see Caruso, Michael) 187, 281 R Rakoff, Jed S. 200, 283, 300, 322 RAM Trading, Ltd. 81 Reagan, Ronald 205 reasonable doubt 176, 202, 221, 319, 324 receiver (generic) 10, 11, 34, 38, 45, 46, 47, 48, 49, 53, 55, 56, 57, 58, 59, 63, 64, 65, 66, 67, 68, 69, 70, 71, 72, 73, 74, 75, 76, 77, 78, 79, 80, 81, 82, 83, 84, 85, 86, 87, 90, 94, 96, 97, 98, 99, 100, 101, 102, 104, 105, 106, 107, 109, 110, 121, 122, 126, 127, 128, 130, 160, 165, 167, 168, 175, 178, 179, 180, 182, 183, 186, 187, 189, 194, 196, 204, 214, 215, 224, 227, 228, 229, 230, 232, 233, 234, 235, 236, 237, 238, 239, 241, 242, 243, 244, 246, 248, 249, 250, 251, 252, 253, 254,

255, 256, 257, 258, 259, 260, 261, 263, 265, 266, 267, 268, 272, 277, 278, 284, 286, 287, 288, 290, 291, 292, 294, 297, 298, 299, 301, 302, 303, 304, 305, 306, 307, 308, 311, 312, 317, 318, 319, 320, 326, 327, 328, 329, 330, 332, 333, 334, 335, 336, 337 receivership 46, 47, 48, 55, 57, 73, 75, 76, 77, 80, 81, 83, 87, 100, 121, 122, 160, 168, 175, 227, 234, 235, 236, 239, 243, 246, 248, 249, 250, 257, 259, 260, 262, 263, 264, 265, 267, 277, 288, 291, 292, 297, 299, 302, 318, 328, 333, 334, 335, 337 reinstatement (appeal) 253, 254, 257, 261, 267, 268, 328 relief defendants 48, 60, 164, 165 res judicata 228 Roe v. Wade 334 Royal Canadian Mounted Police 31 rule of completeness 207, 218, 324 S satisfaction of judgment, motion for 238, 291 Scalia, Antonin 1, 6, 227, 246, 259, 275, 277, 303, 327, 331, 332 Schimkat, Harold 182, 192, 199, 202, 283, 324 Schlein, William 283, 295 Schoeppl, Carl 110, 113, 114, 281, 303 SEC Commissioners 36, 226 SEC enforcement actions 250 Second Circuit 134, 137, 191, 193, 232, 311, 320 SEC v. Lauer 9, 11, 45, 49, 51, 58, 70, 73, 74, 76, 77, 78, 88, 92, 93, 95, 99, 103, 104, 132, 133, 136, 141, 147, 148, 153, 154, 163, 167, 168, 169, 172, 177, 178, 180, 182, 184, 186, 187, 188, 189, 190, 194, 196, 198, 203, 212, 221, 224, 225, 228, 230, 233, 235, 243, 244, 250, 253, 255, 257, 262, 266, 272, 273, 349

274, 277, 278, 281, 282, 283, 286, 287, 288, 289, 290, 291, 292, 294, 295, 296, 298, 300, 305, 307, 308, 309, 310, 311, 312, 314, 318, 321, 323, 324, 325, 327, 328, 329, 330, 334, 335 Seltzer, Barry S. 283, 304 sentences 15, 129, 144, 159, 236, 318, 322 Separation of Powers 332 Shakespeare, William 331 Shamrock Partners 26, 32, 127, 134, 279, 280 “shells” 194, 280 Sheppard, Sam 98, 305 Sieber, Edward 231, 233, 240, 283, 329 Silesians 16 Snyder, Timothy 13, 285 Solicitor General 223, 224, 243, 246, 275 Soros, George 24 Soviet Union 17, 19, 166 Stamford, Connecticut 23, 56 standing 18, 30, 121, 243, 254, 321, 330, 335 start-ups 194, 195 Steinberg, Marty 7, 49, 55, 56, 57, 58, 59, 65, 66, 68, 69, 70, 71, 73, 74, 77, 80, 81, 84, 87, 88, 99, 100, 101, 102, 105, 115, 127, 159, 161, 162, 167, 178, 179, 189, 192, 197, 199, 210, 214, 228, 229, 230, 233, 234, 237, 240, 241, 242, 246, 247, 248, 249, 250, 251, 252, 255, 258, 278, 284, 286, 288, 289, 290, 291, 299, 300, 301, 302, 303, 304, 306, 307, 318, 319, 322, 328, 329, 330, 334 Steinberg v. Lauer 100, 102, 167, 178, 192, 199, 228, 229, 230, 233, 242, 248, 249, 278, 290, 291, 299, 301, 304, 306, 319, 322, 328, 330 Stenton Leigh 35, 130, 181, 188, 279, 309, 313, 318, 322 Stock Market Wizards (Schwager) 27, 29, 285, 294, 298, 310 350

subject-matter jurisdiction 111, 116, 117, 120, 121, 177, 297 subpoena power 36 summary judgment (generic) (see also motions) 44, 80, 100, 112, 117, 118, 119, 120, 123, 124, 125, 129, 131, 133, 134, 137, 138, 139, 140, 141, 142, 145, 147, 148, 149, 150, 151, 152, 153, 154, 157, 158, 159, 164, 170, 171, 172, 176, 178, 180, 182, 190, 192, 197, 198, 202, 204, 205, 206, 207, 210, 213, 216, 217, 218, 221, 228, 239, 249, 288, 289, 290, 309, 311, 312, 315, 316, 319, 324, 326, 329 Supreme Court (see also names of cases and Justices) 9, 55, 61, 91, 98, 146, 177, 191, 204, 205, 215, 222, 223, 224, 225, 243, 246, 261, 268, 273, 274, 275, 277, 290, 292, 293, 297, 303, 311, 313, 319, 327, 329, 337 T tainted funds (see disgorgement) 86, 186 temporary restraining order (see TRO) 45, 49, 50 Thel, Stephen 136, 137, 138, 146, 197, 216, 281, 311 The Trial (Kafka) 201, 266, 336 7MRÀDW *HUDOG %DUG 268, 283 Touchstone Investigative Group 58, 284 TRO 45, 47, 50, 51, 59, 60, 101, 154, 161, 165, 172, 174, 219, 286, 294, 296, 297, 298, 308, 310 TRSOR 81, 302 Trump, Donald J. 6, 259, 322, 329, 334 Tsakni, James 134, 135, 144, 149, 193, 280 U Ukrainians 14 Uniform Standards of Professional

Appraisal Practice 39, 310 University of Montreal 131, 133, 284, 310 unpublished opinions 212, 213 U.S. Constitution 328 U.S. v. Kelly 118, 133, 135, 136, 138, 140, 146, 172, 174, 176, 193, 216, 218, 283, 295, 311, 322, 327 U.S. v. Lauer 151, 168, 171, 180, 182, 187, 188, 191, 192, 194, 196, 200, 201, 272, 276, 283, 289, 290, 296, 299, 319, 321, 322, 327 U.S. v. Mulheren 137, 174, 198, 322 V V-Day 199 venue 54, 61, 70, 111, 120, 175, 181, 287 Vetter, Benjamin 268, 283 Vienna, Austria 17, 19 Vitunac, Ann E. 86, 107, 108, 109, 110, 113, 121, 157, 158, 166, 283, 288, 306, 315 Voyager Fund 28

54, 56, 59, 61, 63, 66, 71, 101, 103, 155, 161, 283, 287, 298, 301, 306, 308 Zloch, William J. 44, 48, 49, 51, 52, 53, 54, 55, 56, 57, 59, 60, 63, 64, 65, 66, 67, 68, 70, 71, 72, 74, 75, 77, 78, 80, 81, 83, 87, 90, 91, 92, 93, 94, 95, 101, 103, 104, 107, 109, 114, 115, 127, 148, 164, 166, 168, 172, 175, 189, 206, 215, 217, 218, 226, 227, 230, 231, 237, 241, 242, 253, 254, 272, 282, 283, 286, 287, 298, 299, 300, 301, 302, 305, 314, 317, 326, 329, 332, 333 Zoref, Harold 110, 281, 306, 309

W waiver 216, 320 Wald, Patricia 245, 283, 331 Wells notice 296 West Palm Beach 94 White, Byron 205 Wiesenthal, Simon 17, 19, 20, 279, 293 Williams v. Pennsylvania 329 Winter, Ralph K. 134, 310 World War II 14, 15, 16, 279 writ of mandamus 233, 242, 244, 245, 282, 332 writ of quo warranto 242 Y Young Immigrants, The (Lardner) Z Zi Corp. (ZICA) 81, 83, 84, 86, 239, 288, 303 Zinn, Kerry Ann 45, 49, 51, 52, 53, 351

The Author David Dorsen is a graduate of Harvard College and Harvard Law School, where he was an editor on the law review. Dorsen served as an Assistant U.S. Attorney under Robert M. Morgenthau in the Southern District of New York and as Assistant Chief Counsel of the Senate Watergate Committee under Senator Sam Ervin in addition to his years in private practice. His clients in private practice have included General William C. Westmoreland in a libel suit against Mike Wallace and CBS, John and Maureen Dean in a libel suit against St. Martin’s Press, G. Gordon Liddy and others, and a corporation (IMIC) owned by the Hunt brothers and Arab sheiks during the collapse of the silver market. He has acted as an adjunct professor or visiting lecturer at Duke University (in public policy), Georgetown Law Center, and George Washington Law School. In 2012 Harvard University Press published his biography, Henry Friendly, Greatest Judge of His Era, with a foreword by Judge Richard Posner, which won the Green Bag Award for “exemplary legal writing.” In 2017 Cambridge University Press published his The Unexpected Scalia: A Conservative Justice’s Liberal Opinions. Dorsen also wrote and self-published a novel titled Moses v. Trump. He is the librettist of a forthcoming opera based on Ernest Hemingway’s For Whom the Bell Tolls and has written a play based on the 1973 Saturday Night Massacre.

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