Krys v. Aaron

Filing 727

MEMORANDUM OPINION. Signed by Chief Judge Jerome B. Simandle on 6/22/2015. (tf, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY

KENNETH M. KRYS, MARGOT
MACINNIS, and THE HARBOUR
TRUST CO. LTD.,

HONORABLE JEROME B. SIMANDLE

Plaintiffs,

Civil Action
No. 14-2098 (JBS/AMD)

v.
ROBERT AARON, DERIVATIVE
PORTFOLIO MANAGEMENT LLC, DPMMELLON, LLC, DERIVATIVE
PORTFOLIO MANAGEMENT, LTD.,
DPM-MELLON, LTD, and BANK OF
NEW YORK MELLON CORPORATION,

MEMORANDUM OPINION

Defendants.

SIMANDLE, Chief Judge:
In this lengthy multi-district securities litigation, the
parties filed 29 in limine motions.

By Orders dated May 26,

2015, June 16, 2015, and June 18, 2015 [Docket Items 697, 698,
721, & 725], the Court addressed 26 of the parties’ motions.

On

the oral argument records on June 15, 2015 and June 17, 2015,
however, the Court reserved decision with respect to three
motions.

This Memorandum Opinion addresses those reserved

motions, and specifically concerns:
1. Defendants’ motion in limine to exclude references to
whether Defendant Robert Aaron violated the Irish Stock
Exchange Rules [see Docket Item 598];
2. Defendants’ motion in limine to exclude introduction of
and references to auditing problems unrelated to SMFF
[see Docket Item 603]; and
3. Plaintiffs’ motion in limine to preclude Defendants from
introducing a May 17, 2006 letter from the Northeast

Regional Office of the Securities and Exchange Commission
to Christopher Sugrue, the Chairman of PlusFunds [see
Docket Item 616].
For the reasons that follow, Defendants’ motion to exclude
references to violations of the Irish Stock Exchange Rules will
be granted in part and denied without prejudice in part, and
their motion to exclude evidence concerning auditing problems
unrelated to SMFF will be granted in its entirety.

Plaintiffs’

motion to preclude Defendants from introducing the May 17, 2006
letter will be granted in part and denied without prejudice in
part.

The Court finds as follows:1
1.

The Court first address Defendants’ motion to exclude

references to Defendants’ alleged violations of the Irish Stock
Exchange listing requirements.

The various SPhinX offering

memoranda disclosed, on their face, SPhinX’s listing on the
Irish Stock Exchange, and instructed, in relevant part, that
SPhinX would adhere to the “Listing Requirements and Procedures”
of the Irish Stock Exchange for as long as the SPhinX shares
remained so listed.

[See Docket Item 675-4 at i, 22 (Offering

1

In connection with the pending motions, the Court presumes
familiarity with the factual and legal underpinnings of this
lengthy litigation. For a more detailed discussion of the
factual predicate and procedural history of this action, the
Court refers any interested readers to the Court’s prior
Opinions: Krys v. Aaron, ___ F. Supp. 3d ____, No. 14-2098, 2015
WL 3660332 (D.N.J. June 12, 2015); Krys, No. 14-2098, 2015 WL
3452324 (D.N.J. May 29, 2015); Krys, ___ F. Supp. 3d ____, No.
14-2098, 2015 WL 2453720 (D.N.J. May 22, 2015); Krys, ___ F.
Supp. 3d ____, No. 14-2098, 2015 WL 2412448 (D.N.J. May 20,
2015).
2 

Memorandum dated July 12, 2002); Docket Item 675-5 at i, 22
(Offering Memorandum dated May 2004).]
2.

As relevant here, those investments restrictions

required that “no more than 20% of the value of the gross
assets” of each SPhinX portfolio could “be lent to or invested
in the securities of any one issuer” or could “be exposed to the
creditworthiness or solvency of any one counterparty.”
Item 675-4 at 22; Docket Item 675-5 at 22.]

[Docket

In other words, the

Listing Requirements required segregation and imposed an
obligation upon SPhinX’s directors to confirm and assure that
its assets remained segregated.

As a result, Mr. Aaron

confirmed in a letter dated June 25, 2002 to the Irish Stock
Exchange (among other entities) that he had reviewed the
Offering Memorandum, the “Continuing Obligations of the Irish
Stock Exchange,” and that he had “ensure[d] compliance” with
these obligations.
3.

[Docket Item 675-2 at 1-2.]

In moving to exclude any reference to Defendants’

alleged violation of the Irish Stock Exchange requirements,
Defendants argue that any such reference would interject an
irrelevant body of law into this litigation, and would create a
danger that references to “‘breaches’” or “‘violations’” of the
Irish Stock Exchange rules might mislead the jury into
concluding that Defendants necessarily committed the breaches
alleged by Plaintiffs.

[Docket Item 598-1 at 2-4.]
3 

Plaintiffs,

however, take the position that any reference to these issues
would not serve to interject Irish law, but would instead be
used as an example of Mr. Aaron’s “false representations”
concerning “the accuracy of SPhinX financial statements, the
protections afforded SPhinX assets administered by DPM, and the
compliance with the requirements of the SPhinX Offering
Memorandum.”
4.

[Docket Item 675 at 1-2, 6-7.]

Evidence of Mr. Aaron’s representations concerning

SPhinX’s compliance with segregation requirements have a clear
tendency to make a fact of consequence in this action “more or
less probable,” particularly to the extent that a
misrepresentation of fact constitutes an element of Plaintiffs’
fraud claim against Mr. Aaron.

FED. R. EVID. 401(a)-(b).

Indeed,

Defendants do not challenge the introduction of these
representations on relevance grounds.2

Rather, Defendants

challenge the representations on the grounds that their
connection to violations of the Irish Stock Exchange rules may
prejudice, confuse, and/or mislead the jury.

2

[See generally

On the oral argument record on June 15, 2015, counsel for
Plaintiffs confirmed that Plaintiffs only intend to rely upon
the rules of the Irish Stock Exchange, to the extent sections
2.35 and 2.52 of the Listing Requirements required the directors
of SPhinX to segregate its assets, and to prevent those assets
from being exposed “to the creditworthiness or solvency of any
one counterparty (including that counterparty’s subsidiaries or
affiliates).” [Docket Item 675-3.] Plaintiffs, do not, however
seek to introduce the remaining 100+ pages of the Listing
Requirements.
4 

Docket Item 598.]

Despite the relevance, the Court will not

ignore that arguments or references to violations or breaches of
the rules applicable to SPhinX’s listing on the Irish Stock
Exchange may confuse the jury’s understanding of the violations
and/or breaches actually alleged in this litigation.

Labeling

these requirements as violating Irish law would tend to cause
the jury to believe that such a violation is actionable in this
case, when there is no cause of action for breach of Irish law.
Even more, these references may lead the jury to unfairly
presume that Defendants’ alleged violations of Irish law
necessarily implies that Defendants breached or violates their
obligations under the Offering Memorandum, Service Agreement,
and applicable law.

For these reasons, the Court will not

permit Plaintiffs to argue that Defendants’ breached and/or
violated the rules of the Irish Stock Exchange, because the
danger of confusion and unfair prejudice substantially outweigh
the probative value of those references.

See FED. R. EVID. 403.

The Court will also preclude Plaintiffs from introducing any
portion of the Listing Requirements and Procedures of the Irish
Stock Exchange other than sections 2.35 and 2.52.

The Court

will, however, permit Plaintiffs to rely upon these limited
sections of the Listing Requirements, in support of their claim
that Defendants, and specifically Mr. Aaron, made a
misrepresentation of fact concerning the segregation of SMFF’s
5 

excess cash.3

These provisions 2.35 and 2.52 are probative of

the materiality of the promise that such funds would be
segregated and not exposed to the creditworthiness of the
custodian of these funds.

The Court will consider a limiting

instruction to the jury, if requested by either party,
concerning the purposes for which this evidence may be
considered by the jury to avoid confusion or undue prejudice.
5.

The Court turns to Defendants’ motion to exclude the

introduction of evidence concerning auditing problems unrelated
to SMFF.

SPhinX operated a family of 70 investment funds to

provide investors with a platform for tracking the Standard &
Poor’s Hedge Fund Index.

(See Joint Final Pretrial Order at 4.)

This action, however, only concerns Defendants’ alleged breaches
of their various fiduciary and contractual auditing and
accounting obligations with respect to one of the SPhinX funds,
SMFF.

(See generally id.)

Plaintiffs allege, in particular,

that Defendants facilitated the unauthorized movement of SMFF’s
excess cash into unsegregated accounts with Refco and failed to
take certain corrective steps in the face of Refco’s potential
insolvency.

(See generally id.)

3

Defendants argue that Plaintiffs’ reliance upon these
representations would be cumulative. [See Docket Item 598-1 at
3-4.] The Court does not find this evidence to be cumulative
because it is not redundant; it is reinforcing of the parties’
understanding of segregation of funds arising from the
restrictions in the various SPhinX offering memoranda concerning
segregation.
6 

6.

As a result, in their motion to exclude evidence of

non-SMFF auditing problems, Defendants argue that “documentation
and testimony related to accounting and auditing-related
breaches with respect to the other SPhinX Funds” should be
excluded as irrelevant, prejudicial, and likely to confuse.
[Docket Item 603-1 at 1, 8-9.]

Plaintiffs, however, take the

position that the “intertwined and highly interdependent”
structure of SPhinX funds left SMFF necessarily “affected by the
accounting and auditing problems” at other SPhinX funds.
[Docket Item 688 at 7-8.]
7.

The Court notes that the MDL District Court squarely

decided this issue over 5 years ago.4

[See Docket Item 603.]

Indeed, in a February 3, 2010 Report and Recommendation on
Defendants’ motion to dismiss and the “omnibus” issue of
standing, the Special Master noted that the segregation of
SMFF’s excess cash and its protection from any losses at Refco
formed the “gravamen” of Plaintiffs’ complaint.
720-1 at 17.]

[Docket Item

The Special Master further noted that, in making

these allegations, Plaintiffs referred “to the SPhinX ‘family of
hedge funds.’”

[Id. (citation omitted).]

Nevertheless, he

concluded that “SMFF – and only SMFF – [] opened the account and
deposited the funds at issue with Refco LLC,” and therefore
4

Following oral argument on June 15, 2015, counsel for
Defendants submitted the MDL District Court’s decision by letter
dated June 16, 2015. [See Docket Item 720.]
7 

found that “only SMFF” had “the asserted right to segregation
from the ills at Refco,” not the SPhinX “‘family’ of hedge
funds.”5

[Id. (citation omitted).]

For these reasons, the

Special Master recommended that the claims brought by the SPhinX
funds other than SMFF be dismissed with prejudice for lack of
standing.

[Id. at 18.]

On March 31, 2010, the MDL District

Court then adopted the Special Master’s Report and
Recommendation, and specifically “dismissed with prejudice” all
counts that “purport to bring claims on behalf of SPhinX
investors and any SPhinX fund other than SPhinX Managed Futures
Fund.”
8.

[Docket Item 720-2 at 2.]
That determination remains the law of the case.

Plaintiffs do not appear to have challenged that ruling before
the MDL District Court, nor have they identified any basis for
this Court to depart from the MDL District Court’s Order.

See

In re Pharmacy Benefit Mgrs. Antitrust Litig., 582 F.3d 432, 441
(3d Cir. 2009) (generally noting that “a ‘Return to Go’ card
[should not] be dealt to parties involved in MDL transfers,”
absent extraordinary circumstances); Hayman Cash Register Co. v.
Sarokin, 669 F.2d 162, 169 (3d Cir. 1982) (“A disappointed
litigant should not be given a second opportunity to litigate a
5

In so finding, the Special Master considered, and specifically
rejected, Plaintiffs’ position concerning the structure of the
SPhinX family of funds, an argument Plaintiffs have reasserted
in connection with the pending in limine motion. [Compare
Docket Item 720-1 at 17, with Docket Item 688 at 6-7.]
8 

matter that has been fully considered by a court of coordinate
jurisdiction, absent unusual circumstances.”).
9.

Moreover, because the MDL District Court dismissed

claims related to SPhinX funds other than SMFF with prejudice,
this Court cannot conclude that accounting and auditing problems
unrelated to SMFF have any tendency to make a fact of
consequence in this action “more or less probable.”
401(a)-(b).

FED. R. EVID.

In addition, these unrelated accounting and

auditing problems may mislead and confuse the jury and unfairly
prejudice Defendants, while consuming undue time compared with
the probative value, because their introduction might lead the
jury to impugn the propriety of Defendants’ actions with respect
to SMFF as a result of their conduct with respect to other
SPhinX funds.

Relatedly, the jury might misunderstand the

impact of these unrelated problems (or lack thereof) on the SMFF
issues actually implicated in this litigation.

The Court

therefore finds any probative value associated with this
evidence outweighed by the danger of unfair prejudice and
confusion and undue consumption of time.

See FED. R. EVID. 403.

Defendants’ motion will, accordingly, be granted, and Plaintiffs
will be precluded from introducing accounting and auditing
problems regarding any SPhinX fund other than SMFF.

Plaintiffs,

however, remain free to introduce evidence concerning
Defendants’ alleged accounting and auditing errors in its
9 

administration of SMFF, as those issues remain relevant to the
claims in this action.
10.

The Court next addresses Plaintiffs’ motion to exclude

a May 17, 2006 letter from the Assistant Regional Director of
the Securities and Exchange Commission (hereinafter, the “SEC”),
Dawn M. Blankenship, to Christopher Sugrue, the former Chairman
of PlusFunds.

[See Docket Item 616.]

Following Refco’s

collapse, the SEC conducted an investigation into PlusFunds.

In

connection with that investigation, the Northeast Regional
Office of the SEC conducted an examination of PlusFunds’ “books
and records” pursuant to section 204 of the Investment Advisers
Act of 1940. [Docket Item 616-2 at 1.]

By letter dated May 17,

2006, Ms. Blankenship set forth the information “revealed”
during that examination, and specifically discussed issues
regarding “Conflicts of Interest,” the “Safety of Client Funds,”
“Personal Trading,” and “Internal Disclosures.”

[Id. at 1-18.]

As particularly relevant here, the letter also addressed the
sweeps of SMFF’s excess cash from segregated accounts at Refco,
LLC to unsegregated accounts at Refco Capital Markets, Ltd.
[See id. at 9-16.]

In doing so, the letter stated that the

Regional Office’s examination “revealed” that various operations
staff of PlusFunds knew that SMFF’s excess cash had been swept
to unregulated accounts at RCM, and that these individuals
failed to disclose that fact to investors.
10 

[See id. at 11-12.]

11.

In moving to exclude the letter, Plaintiffs argue that

the substantive contents of the letter amount to inadmissible
hearsay, because the informal report followed an “initial” and
“partial” investigation, and therefore lacks the finality and
trustworthiness required for purposes of Federal Rule of
Evidence 803(8).

[Docket Item 616-4 at 2-8.]

Defendants

counter, however, that “the nature of the investigation
conducted by the SEC” in connection with the letter, namely, the
thorough “review of PlusFunds’ books and records and independent
witness interviews,” meets the threshold requirements for
admissibility under Rule 803(8).6
12.

[Docket Item 672 at 8-10.]

Federal Rule of Evidence 803(8) permits the

introduction of an otherwise inadmissible “record or statement”
of a public agency, if it sets out “factual findings from a
legally authorized investigation” and “the opponent does not
show that the source of information or other circumstances
indicate a lack of trustworthiness.”

FED. R. EVID.

803(8)(A)(iii), (B).
13.

Critically, however, courts routinely exclude

preliminary or interim government documents, on the basis that

6

In opposition to Plaintiffs’ in limine motion, Defendants
assert that they “do not intend to rely on all twenty pages of
the SEC letter.” [Docket Item 672 at 2.] Rather, Defendants
only seek to introduce the portion of the letter that concerns
the “Safety of Client Assets” and specifically reference SMFF’s
excess cash.
11 

such reports fail to constitute “factual findings” and lack
adequate indicia of trustworthiness.

See, e.g., Smith v. Isuzu

Motors Ltd., 137 F.3d 859, 862 (5th Cir. 1998) (“[I]nterim
agency reports or preliminary memoranda do not satisfy Rule
803(8)(C)’s requirements.”); Plemer v. Parsons–Gilbane, 713 F.2d
1127, 1140 (5th Cir. 1983) (noting that if administrative report
is not final, it “may be considered untrustworthy” under
803(8)(C)); City of New York v. Pullman Inc., 662 F.2d 910, 914
(2d Cir. 1981) (concluding that an interim staff report does not
fall under the Rule 803(8) exception); Toole v. McClintock, 999
F.2d 1430, 1434-35 (11th Cir. 1993) excluding FDA report which
contained proposed findings and invited public comment and
forecasted issuance of final document after more study); Appleby
v. Glaxo Wellcome, Inc., No. Civ. 04-0062, 2005 WL 3440440, at
*3 (D.N.J. Dec. 13, 2005) (noting that the presumption in Rule
803(8) “typically does not apply to render hearsay admissible
where the findings are merely proposed, tentative, or ‘secondhand’”) (citation omitted).
14.

Here, the SEC letter states, on its face, that it is

based upon the staff’s continued “examination” of PlusFunds and
does not qualify as “findings” of the SEC.7

7

[Docket Item 616-2

To the contrary, the Northeast Regional Office carefully
couched the statements in its letter as “revelations” based upon
staff review, and not as “findings,” preliminary or otherwise.
[Docket Item 616-2.]
12 

at 19.]

Rather, the letter served, by its own terms, to bring

certain “deficiencies and/or violations of law” to PlusFunds’
attention.

[Id.]

Importantly, the letter solicited PlusFunds’

response, and specifically requested that PlusFunds “inform” the
Regional Office of any corrective measures that it intended to
implement as a result of notations contained within the letter.
[Id.]

Furthermore, the letter attached a laundry list of the

Regional Office’s 15 “Outstanding Requests” for documentation
from PlusFunds concerning a wide array of information relative
to PlusFunds’ and SMFF’s administration, and their transactions
with RCM and other entities.
15.

[Docket Item 616-2.]

As a result, the letter makes plain that it did not

embody the final findings of even the Northeast Regional Office
(much less the SEC), but instead presented the tentative
impressions of the Regional Office’s incomplete and ongoing
staff investigation, as to which comments were invited.

Indeed,

given the volume of the outstanding documentation, the Court
must assume that the Regional Office intended to issue an
additional letter in order to augment and/or finalize the
“revelations” disclosed in its May 17, 2006 letter.

It is also

significant that, although the letter certainly included broad
conclusory language that might prove advantageous to Defendants
at trial, the letter expressly declined to make any ultimate
findings on the segregation issues implicated in this
13 

litigation.

Rather, Ms. Blankenship couched her statements as

“revelations” based upon the reviewed documentation, and
concluded, in relevant part, that PlusFunds “may not have
properly safeguarded investor funds and in doing so, may have
violated its fiduciary duty to its client.”

[Id. at 16.]

For

these reasons, the Court finds that the letter does not
constitute the SEC’s “findings” and is not sufficiently
trustworthy under Rule 803(8).8

FED. R. EVID. 803(8); see also In

re Cessna 208 Series Aircraft Prods. Liab. Litig., MDL No. 1721
2009 WL 2780223, *3-*4 (D. Kan. Sept. 1, 2009) (finding a
preliminary agency report “subject to revision and further
review” insufficient to meet the requirements of Rule 803(8)).

8

Abrams v. Van Kampen Funds, Inc., No. 01-7538, 2005 WL 88973
(N.D. Ill. Jan. 13, 2005) compels no different conclusion. In
Abrams, the district court considered the admissibility of
various letters between the “Midwest Regional Office of the SEC”
and the defendant under Rule 803(8). Id. at *18-*19. As noted
by Defendants, the Abrams court indeed found such letters
admissible under Rule 803(8). In so finding, however, the Abrams
court reviewed a cascade of letters between the Midwest Regional
Office and the defendant, with the final letters appearing to
amount to the Midwest Regional Office’s final determinations
based upon its lengthy examinations. Id. at *18. Here, however,
the Northeast Regional Office appears to have issued only a
single letter, in which the Northeast Regional Office
acknowledges that the examination remains ongoing and delineates
a series of outstanding requests relative to its continued
examination into PlusFunds’ affairs. [See generally Docket Item
616-2.] This fact alone casts doubt upon the persuasiveness of
Abrams in relation to Plaintiffs’ pending in limine motion.
Beyond this distinguishing feature, however, an unpublished
decision from another district does not constitute binding
authority on this Court, and the Court does not find Abrams
persuasive under the specific circumstances of this action.
14 

Plaintiffs’ motion will, accordingly, be granted to the extent
it seeks to preclude Defendants from introducing the SEC letter
under Rule 803(8), but denied without prejudice to the extent it
seeks to bar Defendants from introducing the letter for nonhearsay purposes.9
16.

An accompanying Order will be entered.

June 22, 2015
Date

s/ Jerome B. Simandle
JEROME B. SIMANDLE
Chief U.S. District Judge

9

In its opposition, Defendants state that the letter may be used
in “numerous ways” that do not implicate hearsay and the
exceptions to the rule against hearsay. [Docket Item 672 at 34.] These alternative uses include using the letter as:
“evidence [of] the fact that the SEC investigated PlusFunds,
irrespective of the substantive contents thereof; or as []
extrinsic evidence of a prior inconsistent statements” under
Federal Rule of Evidence 613(b). Resolution of these issues,
however, would be premature, because “the context of trial” may
provide clarify. Ebenhoech v. Koppers Indus., Inc., 239 F. Supp.
2d 455, 461 (D.N.J. 2002) (noting that rulings on motions in
limine “should not be made prematurely if the context of trial
would provide clarity”); Sperling v. Hoffmann–La Roche, Inc.,
924 F. Supp. 1396, 1413 (D.N.J. 1996) (“[I]t is difficult to
rule on the admissibility of pieces of evidence prior to trial.
It is often useful to wait to see how the trial unfolds.”).
Plaintiffs’ motion in this respect will, accordingly, be denied
without prejudice to renewal in the event Defendants intend to
use the letter for non-hearsay purposes.
15