Securities and Exchange Commission v. Graham, II et al
Filing
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ORDER Denying 51 Motion for Summary Judgment. Signed by Judge James C. Mahan on 5/13/11. (Copies have been distributed pursuant to the NEF - MMM)
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UNITED STATES DISTRICT COURT
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DISTRICT OF NEVADA
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SECURITIES AND EXCHANGE
COMMISSION,
2:09-CV-250 JCM (LRL)
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Plaintiff,
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v.
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LEWIS E. GRAHAM II and
FLOWORKS, INC.,
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Defendants.
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ORDER
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Presently before the court is defendant Lewis E. Graham II’s pro se motion for summary
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judgment (doc. #51). Plaintiff the Securities and Exchange Commission (hereinafter “the
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commission”) filed an opposition. (Doc. #52). Defendant filed a reply. (Doc. #57).
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The commission filed its complaint against defendants Graham and Floworks, Inc. and relief
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defendant Linworth LLC, on February 6, 2009, asserting claims for (1) violations of section 10(b)
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and Rule 10b-5 of the Securities Exchange Act of 1934 (“Exchange Act”) against Graham and
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Floworks, and (2) equitable disgorgement against Linworth. The commission alleges that Graham,
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through his entity Floworks, materially misrepresented facts to investors that impacted their
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decisions relating to the buying and selling of securities.
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Motion for Summary Judgment
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In the motion for summary judgment (doc. #51), Graham argues several points, including,
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but not limited to, (1) lack of jurisdiction, (2) that no securities transactions occurred, (3) that there
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James C. Mahan
U.S. District Judge
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was no California operating agreement, (4) his statements were made in reliance on reports from
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counsel, advisors, consultants, business associates, and others, (5) his actions were legitimate based
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on his due diligence, (6) the complaint misrepresents facts, (7) his motivations were “stewardship
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rather than self-interest,” (8) all necessary disclosures were made, and (9) that no tax advice was
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provided. Graham concludes based on the foregoing, that no genuine issues of material fact exist
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regarding the claim against him, and that the court should enter summary judgment in his favor.
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A.
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Pursuant to Rule 56 of the Federal Rules of Civil Procedure, summary judgment may
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Legal Standard
be granted if the pleadings demonstrate that there are no genuine issues of material fact
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and the moving party is entitled to judgment as a matter of law. Anderson v. Liberty Lobby, Inc., 477
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U.S. 242, 247 (1986); Diaz v. Eagle Produce Ltd. Partnership, 521 F.3d 1201, 1207 (9th Cir. 2008).
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The party seeking summary judgment bears the initial burden of informing the court of the basis of
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its motion, and identifying the portions of the pleadings or otherwise which demonstrate the absence
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of genuine issues of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).
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At the summary judgment stage, the facts and inferences must be viewed in the light most
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favorable to the nonmoving party. Anderson, 477 U.S. at 248, 256; Diaz, 521 F.3d at 1207. Once the
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movant has met its burden, the non-moving party must set forth facts to show a genuine issue for
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trial. Celotex, 477 U.S. at 324.
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B.
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During 2002, Graham, through Floworks, became the manager of a real estate investment
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partnership by the name of Stanford Square Investors, LLC (hereinafter “Stanford”), which had
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approximately 100 investors. (Doc. #52). The primary asset of Stanford was a building located in
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Palo Alto, California (hereinafter “the Palo Alto property”), that was initially purchased in 1985 for
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approximately $15 million. Id. Prior to Graham becoming manager, in July of 2002, a trustee for the
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Securities Investors Protection Corporation named Stephen Snyder announced to investors that he
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intended to become the manager of the Palo Alto property. Id.
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Relevant Facts
After he was informed of Snyder’s intention to manage, Graham began to campaign to be
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appointed manager instead. At that time, Graham owned approximately 2.5% interest in Stanford,
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and allegedly represented to investors in an August 9, 2002, newsletter that he had “multiple
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advanced degrees, founded and ran an international management consulting company for more than
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20 years,...served as a [d]irector of several corporations, and [was] a member of several California
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business advisory boards.” (Doc. #52-24 Exhibit 163). Ultimately, investors voted Graham as
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manager. (Doc. #52).
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Shortly after being elected manager, in 2004, Graham began actively trying to sell the Palo
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Alto property, and sent newsletters to the investors announcing this intention and introducing the
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option of “deferring the tax affect of any sale through a tax-free transaction known as a like-kind
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exchange under Section 1031 of the Internal Revenue Code.” (Doc. #52-26 Exhibit 165 and Doc
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#52-6 Exhibit 45). Basically, he was informing the investors in the newsletters that the Palo Alto
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property could be sold, the proceeds could be used to purchase another investment property, and
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there would be no tax consequences to them. (Doc. #52).
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In March of 2005, Graham sent another newsletter (doc. #52-26 Exhibit 165) to the investors
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explaining that he had secured a non-binding letter of intent to purchase the Palo Alto property which
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indicated a gross sale price of $33.2 million with a net sales price of $28.5 million. He estimated that
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each investor’s interest would receive nearly $20,000 for each 1% interest in Stanford, and that the
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investors would realize a “paper profit” from the sale. Id. Once again, he assured them that they
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could avoid paying taxes by entering into a tax-free, like-kind exchange under the Internal Revenue
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Code. Id. He attached a ballot to this newsletter, which asked the investors whether or not they
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supported the proposed sale. Id.
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In addition to the information regarding the intent to purchase letter, Graham stated in the
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newsletter that the purchase of the replacement property would “require a separate, additional ballot
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after the sale and the approval of a [m]ajority-[i]n-[i]nterest of [its] [m]embers.” Id. In April of that
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year, Graham sent another newsletter (doc. #52-6 Exhibit 45) informing the investors that he had
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located a possible replacement property, that he had to commit to millions of dollars in order to keep
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the deal available, and that he transferred his financial interests “for the benefit of [m]embers and
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in order to secure an investment opportunity for a [tax-free] exchange.” Id. The commission argues
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that these “millions” were actually part of an agreement where Graham agreed to assign essentially
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all of his financial interests as manager of the Palo Alto property to the seller Langenburg Research,
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Inc., owned by Albercht zu Hohenlohe Langenburg (hereinafter “Langenburg”), and that he was
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receiving substantial financial interests in what amounted to a joint venture with the Langenburg and
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Langenburg Research. (Doc. #52).
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After 68% of the Stanford investors approved the sale, the Palo Alto property sold for $33.2
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million ($28.5 million in net proceeds). (Doc. #52-8 Exhibit 48). Subsequently, and without the
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approval of the investors, Graham purchased the “like-kind, commercial property,” that he described
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in a newsletter as “several parcels and two (2) buildings in an industrial park in Eugene, Oregon”
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(hereinafter “the Eugene property”). Id. He assured the investors that the Eugene property was the
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“best exchange opportunity that met all [the] Internal Revenue Code requirements while offering
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significant, potential financial upside.” Id.
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Following this, Graham made several representations to the investors, including that the
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property was comprised of “superb high-technology manufacturing space,” had been appraised at
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“$75+ million,” that the Eugene market had been “moving upward,” and that the parties had
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“mutually agreed” upon a value of $75 million including “existing land, buildings, improvements
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and generic equipment plus all specialized production equipment installed by seller.” Id. (Emphasis
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supplied). Graham informed the investors that the Eugene property would have a “single, high-
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technology tenant” by the name of H20 Bottling LLC. Id. He assured the investors that he had carried
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out “extensive due diligence” and that H20's business prospects were “enormous.” Id. Investors were
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told that H20's lease on the Eugene property would translate to a distribution of $10,000 per year for
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every 1% interest over the first 3 years of the lease. Id.
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Finally, the newsletter stated that the purchase of the Eugene property met the requirements
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for tax-free treatment, and that those who elect to remain in the LLC “will have no current tax
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liabilities” from the decision to sell Palo Alto property. Id. For any investor who did not wish to
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participate in the purported tax-free transaction, Graham informed them that Langenburg Research
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would purchase their interest “for every pre-tax penny [they] would have received from the building
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sale if there had been no LLC 1031 transaction plus [their] pro rata share of the additional property
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purchase down payment that the LLC was required to make for a total cash investment of
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$3,000,000.00.” Id. (Emphasis supplied). Approximately 40 investors elected to sell their Stanford
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interests. (Doc. #52).
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C.
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In the complaint (doc. #1) and the opposition to the motion (doc. #52), the commission
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asserts that Graham made “numerous misleading statements and omissions regarding the transactions
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at issue, including, among other things, the nature of the Eugene property transaction, the identity
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of the seller of the Eugene property, the value of the Eugene property, [the] tax-free status of the Palo
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Alto and Eugene property transactions, Grahams financial interest in H20 Bottling, and existing and
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potential liabilities incurred by [Stanford].” The commission contends that these misrepresentations
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amount to violations of Section 10(b) of the Exchange Act, and Rule 5b-1 thereunder. (Doc. #1 and
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#52).
Conclusion
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To be successful in his motion for summary judgment (doc. #51), Graham must demonstrate
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that no genuine issues of material fact exist in the claim against him for violations of the Exchange
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Act. Celotex, 477 U.S. at 317, 323. The commission must prove four elements to establish violations
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of section 10(b) and 10b-5 of the Exchange Act, including (1) a fraudulent device, material
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misrepresentation or omission, or an act that operated as a fraud or deceit, (2) in connection with the
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purchase or sale of a security, (3) scienter, and (4) use of the jurisdictional means. SEC v. Rana
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Research, Inc., 8 F.3d 1358, 1363-64 (9th Cir. 1996) (discussing the elements of 10b-5); SEC v.
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Monarch Funding Corp., 192 F.3d 295, 308 (2d Cir. 1999).
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In Graham’s motion for summary judgment (doc. #51), he argues that summary judgment
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is appropriate, but fails to provide the court with conclusive evidence to negate the allegations
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against him and to support the contention that no genuine issues of material fact exist. Graham
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asserts that “there are no material facts in dispute and none that indicate [he] ever detected fraud
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by others or committed fraud of any kind himself.” (Doc. #57) (Emphasis supplied). However, the
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commission points to several facts that indicate fraud occurred, or at the least, that support a finding
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that a dispute as to the fraudulent and misleading nature of certain activities and representations
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exists. (Doc. #52).
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Specifically, the commission argues that Graham made certain misrepresentations, and
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provides the court with evidence supporting their assertion that (1) the Eugene sale was not a
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purchase of Stanford from Langenburg Research, but rather a purchase from Western Mechanical
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by Stanford and Langenburg together for $5.4 million, (2) the value of the property was grossly
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inflated, as it was actually purchased for $5.4 million, instead of the $17 million that Graham
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purported to purchase it for, (3) Graham failed to disclose to investors that he had no basis to support
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the promise that the transaction met the requirements of the tax-free status and had never consulted
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with an attorney regarding this (doc. #52-29 Exhibit 168, doc #52-30 Exhibit 169, doc. #52-31
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Exhibit 170, and doc. #52-32 Exhibit 171), (4) he failed to disclose his current and future financial
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interest in H20 to investors, and (5) he failed to disclose to investors that he caused Stanford to be
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liable for loans to Western Mechanical for $1.9 million and to Grand Pacific for $4 million and $1.5
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million. (Docs. #52-16, 52-12, 52-13, and 52-14).
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Despite the evidence presented, Graham denies that these misrepresentations occurred and
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provides his own evidence to dispute the allegations against him. Therefore, there are genuine issues
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as to whether the material misrepresentations and/or omissions occurred. As Graham has failed to
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meet his burden of proving that no genuine issues of material fact exist as to the violations of the
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Exchange Act, the court is not inclined to grant summary judgment.
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Accordingly,
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IT IS HEREBY ORDERED ADJUDGED AND DECREED that defendant Lewis E. Graham
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II’s pro se motion for summary judgment (doc. #51) be, and the same hereby is, DENIED.
DATED this 13th day of May, 2011.
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UNITED STATES DISTRICT JUDGE
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James C. Mahan
U.S. District Judge
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