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Meyer v. Ward

United States District Court, N.D. Illinois, Eastern Division

May 9, 2017

DAVID MEYER, Plaintiff,
v.
KRISTA WARD and CALHOUN ASSET MANAGEMENT LLC, Defendants.

          MEMORANDUM OPINION AND ORDER

          MARY M. ROWLAND, UNITED STATES MAGISTRATE JUDGE.

         This case arises from alleged violations of the federal and Illinois securities laws. On September 27, 2016, this Court granted in part and denied in part Defendants' motion for summary judgment. The remaining claims at the time of trial were Counts I (Violation of Section 12 of the Securities Act), III (Violation of the Illinois Securities Law of 1953), VII (Rescission), and VIII (Unjust Enrichment).[1] A bench trial between Meyer and Calhoun Asset Management was held before this Court on April 25, 2017.[2] During trial, Defendant moved orally to exclude the December 29, 2011 and July 9, 2012 Orders of the U.S. Securities and Exchange Commission (SEC). For the reasons set forth below, Defendant's oral motion to exclude the December 29, 2011 and July 9, 2012 SEC Orders and any evidence derived therefrom is granted in part and denied in part.

         I. BACKGROUND

         Before trial, the parties filed a Joint Proposed Pre-Trial Order which stated in relevant part: “The parties dispute the findings of a prior SEC action involving the Defendant, whether that action is relevant in the present action, whether it is admissible and whether it has any impact on the Plaintiff's investment decisions and alleged losses.” (Dkt. 125 at 3). The SEC action[3] refers to the SEC administrative proceedings against Calhoun Asset Management, LLC and Krista Ward, concerning “materially false and misleading statements made by Calhoun, the investment adviser to two fund of funds, and Ward, its principal.” (Pl. Exh. 11, at 2). On December 29, 2011, the SEC, “after an investigation, ” issued an Order Instituting Administrative and Cease-and-Desist Proceedings against Calhoun and Ms. Ward (hereafter, “SEC OIP” or “Pl. Exh. 11”). On July 9, 2012, the SEC issued, and Calhoun and Ms. Ward consented to, an “Order Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order” (hereafter, “SEC Consent Decree” or “Pl. Exh. 10”).

         During trial, Plaintiff, Mr. Meyer, raised the issue of the SEC action during his testimony. Plaintiff's counsel also asked Ms. Ward, on cross-examination, about the SEC action. Defendant's counsel maintained a standing objection throughout trial to any reference to the SEC action. On cross-examination of Mr. Meyer, Defendant's counsel asked Mr. Meyer whether Ms. Ward's ex-husband told him about her “SEC problems” and whether that led him to sue Ms. Ward. After trial, the Court stated that it would issue a ruling on the admissibility of the SEC OIP and SEC Consent Decree and any evidence derived therefrom, and the parties would then submit post-trial briefs following that ruling.[4]

         II. LEGAL STANDARD

         “[D]ecisions regarding the admission and exclusion of evidence are peculiarly within the competence of the district court.” Aldridge v. Forest River, Inc., 635 F.3d 870, 874 (7th Cir. 2011) (internal quotations and citations omitted). Under Federal Rule of Evidence 408, “Evidence of the following is not admissible…to prove or disprove the validity or amount of a disputed claim or to impeach by a prior inconsistent statement or a contradiction: (1) furnishing, promising, or offering-or accepting, promising to accept, or offering to accept-a valuable consideration in compromising or attempting to compromise the claim; and (2) conduct or a statement made during compromise negotiations about the claim-except when offered in a criminal case and when the negotiations related to a claim by a public office in the exercise of its regulatory, investigative, or enforcement authority.” FRE 408(a). However, “[t]he court may admit this evidence for another purpose….” FRE 408(b).

         Federal Rule of Evidence 803(8)(A)(iii) provides an exception to the rule against hearsay for “[a] record or statement of a public office if it sets out…in a civil case… factual findings from a legally authorized investigation.” The party opposing the admission of the evidence has the burden to show that “the source of information or other circumstances indicate a lack of trustworthiness.” FRE 803(8)(B). Administrative findings may be admissible evidence and a district court “retains significant discretion as to whether such material ought to be admitted.” Halloway v. Milwaukee Cty., 180 F.3d 820, 827 n.9 (7th Cir. 1999) (internal citations omitted).

         III. DISCUSSION

         A. The SEC Consent Decree

         The SEC Consent Decree (Pl. Exh. 10) is not admissible evidence in this case. Courts in this district have held that SEC consent decrees are inadmissible under Federal Rule of Evidence 408. Zivitz v. Greenburg, No. 98 C 5350, 1999 U.S. Dist. LEXIS 19160, at *10 (N.D. Ill. Nov. 30, 1999); Beck v. Cantor, Fitzgerald & Co., 621 F.Supp. 1547, 1566 (N.D. Ill. 1985) (“Xonics' acquiescence in the SEC's opinion is not admissible to prove that the original financial statements are admitted to be false or improper.”). Other courts have reached the same conclusion. See e.g. Paul Harris Stores, Inc. v. Pricewaterhouse Coopers, LLP, No. 1:02-cv-1014-LJM-VSS, 2006 U.S. Dist. LEXIS 65840, at *17-18 (S.D. Ind. Sep. 14, 2006) (“A consent decree, like any settlement, is inadmissible under Federal Rule of Evidence 408.”).

         The Court notes that evidence of a settlement or consent decree may be admissible for other purposes under Rule 408(b). At trial in this case, however, the testimony elicited based on the SEC Consent Decree was to prove the truth of the matters asserted in the consent decree or to impeach Ms. Ward's credibility. Neither of these purposes is proper under Rule 408. As the Advisory Committee Notes to Rule 408 state, allowing evidence of settlements for broad impeachment purposes “would tend to swallow the exclusionary rule and would impair the public policy of promoting settlements.” Fed.R.Evid. 408 Advisory Comm. Notes (2006 Amend.). Accordingly, the SEC Consent Decree is excluded from evidence, and any reference to the SEC Consent Decree at trial will be stricken and not considered by the Court, subject to an exception described, below.

         B. The SEC Order Instituting Proceedings

         The SEC OIP (Pl. Exh. 11) is admissible evidence under the exception to hearsay in Federal Rule of Evidence 803(8)(A)(iii). The SEC OIP is an order issued after an investigation conducted pursuant the SEC's authority under the Securities and Exchange Act of 1934. 15 U.S.C.S. § 78u. It also appears relevant to some of the issues presented at trial. For example, the findings in paragraphs 9-12 discuss the ...


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