Securities and Exchange Commission v. Goldstone et al

Filing 653

MEMORANDUM OPINION AND ORDER by District Judge James O. Browning denying 392 the Plaintiff Securities and Exchange Commissions Motion in Limine to Exclude Argument or Evidence that the Defendants did not Violate Rule 13b2-2 as a Result of Providing the Tie-Out Document to KPMG (meq)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW MEXICO
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
vs.

No. CIV 12-0257 JB/GBW

LARRY A. GOLDSTONE; CLARENCE G.
SIMMONS, III and JANE E. STARRETT,
Defendants.
MEMORANDUM OPINION AND ORDER
THIS MATTER comes before the Court on the Plaintiff Securities and Exchange
Commission’s Motion in Limine to Exclude Argument or Evidence that the Defendants did not
Violate Rule 13b2-2 as a Result of Providing the “Tie-Out Document” to KPMG, filed March
17, 2016 (Doc. 392)(“Motion”). The Court held a hearing on May 11, 2016. The primary issue
is whether the Court should allow the Defendants, Larry A. Goldstone, Clarence G. Simmons,
III, and Jane E. Starrett,1 to introduce evidence that, on February, 27, 2008, Thornburg Mortgage
provided to its auditor, KPMG, LLC, a “Tie-Out Document,” which constituted a schedule of
margin calls that Thornburg Mortgage received in the two weeks before that date. The Court
will allow the Defendants to introduce evidence related to the Tie-Out Document, because such
evidence is not irrelevant to whether the Defendants violated rule 13b2-2 and because the danger

1

Starrett reached a settlement with the Securities and Exchange Commission (“SEC”) on
May 20, 2016. Consent of Defendant Jane E. Starrett at 1 (dated May 20, 2016), filed May 26,
2016 (Doc. 472-1)(“Starrett Consent”). The Starrett Consent neither admits nor denies the
Complaint’s allegations, and does not include a requirement that Starrett testify for any of the
remaining parties. Starrett Consent at 1. The term “Defendants,” when describing the case’s
factual and procedural history, includes Starrett until the Starrett Consent’s entry.

of unfair prejudice does not substantially outweigh the Tie-Out Document’s probative value.
Accordingly, the Court denies the Motion.
FACTUAL BACKGROUND
The Court takes its facts from the Complaint, filed March 13, 2012 (Doc. 1). The Court
presents the facts solely to provide context for the Motion. It continues to adhere to the decisions
on the facts that it reached in SEC v. Goldstone, No. CIV. 12-0257 JB/GBW, 2015 WL 5138242
(D.N.M. August 22, 2015)(Browning, J.)(“Summary Judgment Opinion”).
The Defendants are Thornburg Mortgage officers: Goldstone was the chief executive
officer, Simmons was the chief financial officer, and Starrett was the chief accounting officer.
See Complaint ¶ 1, at 1. The SEC alleges that the Defendants were involved in fraudulent
misrepresentations and omissions made in connection with the 2007 Form 10-K.2 See Complaint
¶¶ 1-3, at 1-2. The SEC asserts that the Defendants misled and withheld important financial
information from Thornburg Mortgage’s outside auditor, KPMG, LLP, such as the impending
collapse of a large European hedge fund that held mortgage-backed securities (“MBS”) similar
to the Thornburg Mortgage’s adjustable rate mortgage (“ARM”) securities.3 Complaint ¶¶ 7679, at 22.
Thornburg Mortgage was a publicly traded single-family mortgage lender and real estate
2

A Form 10-K is “[a] comprehensive summary report of a company’s performance that
must be submitted annually to the Securities and Exchange Commission. Typically, the 10-K
contains much more detail than the annual report.”
10-K, Investopedia,
http://www.investopedia.com/terms/1/10-k.asp (last visited August 9, 2014). An annual report is
“an annual publication that public corporations must provide to shareholders to describe their
operations and financial conditions. It includes information such as company history,
organizational structure, equity, holdings, earnings per share, subsidiaries, etc.” 10-K,
Investopedia, http://www.investopedia.com/terms/1/10-k.asp (last visited August 9, 2014).
3

An “adjustable rate mortgage” is a “mortgage in which the lender can periodically adjust
the mortgage’s interest rate in accordance with fluctuations in some external market index.”
Adjustable Rate Mortgage, Black’s Law Dictionary 1102 (9th ed. 2009).
-2-

investment trust, founded in 1993, headquartered in Santa Fe, New Mexico, and was once the
second-largest independent mortgage company in the United States of America after
Countrywide Financial Corporation. See Complaint ¶ 2, at 1; id. ¶ 20, at 7. During the time
relevant to the Complaint’s allegations, Thornburg Mortgage’s shares were traded on the New
York Stock Exchange. See Complaint ¶ 20, at 7. Thornburg Mortgage’s lending operations
focused on “jumbo” and “super-jumbo”4 ARM securities; Thornburg Mortgage also purchased
ARM securities that third parties originated. See Complaint ¶ 21, at 7. Thornburg Mortgage
4

“Jumbo” and “super-jumbo,” in reference to ARM securities, describe the amount of a
mortgage. Super jumbo mortgage, Wikipedia (Dec. 24, 2012), http://en.wikipedia.org/
wiki/Super_jumbo_mortgage. These mortgages exceed the conforming loan limit that the
Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage
Corporation (“Freddie Mac”) set. Super jumbo mortgage, Wikipedia. Fannie Mae purchases
and guarantees mortgages that meet its funding criteria.
Fannie Mae, Investopedia,
http://www.investopedia.com/terms/f/fanniemae.asp (last visited August 9, 2014). Both Fannie
Mae and Freddie Mac are government-sponsored enterprises, that is, financial services
corporations that the United States Congress created.
See Fannie Mae, Wikipedia,
http://en.wikipedia.org/wiki/Fannie_Mae (last updated July 26, 2014); Freddie Mac, Wikipedia,
http://en.wikipedia.org/wiki/Freddie_Mac (last updated July 18, 2014); Government-Sponsored
Enterprise, Wikipedia, http://en.wikipedia.org/wiki/Government-sponsored_enterprise (last
updated January 9, 2014). “Together, Fannie Mae and Freddie Mac purchase or guarantee
between 40 to 60% of all mortgages originated in the United States annually, depending upon
market conditions and consumer trends.” Fannie Mae, Investopedia. The conforming limits that
Fannie Mae and Freddie Mac set vary by county, but the conforming loan limit for 2013 and
2014 for most of the United States, including all of New Mexico, was $417,000.00. See FHA
Announces Conforming Loan Limits for 2014, released November 26, 2013,
http://www.fhfa.gov/webfiles/25847/CLL2014112613Final.pdf. Higher-value areas, such as the
District of Columbia, have conforming loan limits of up to $625,500.00. See FHA Announces
Conforming
Loan
Limits
for
2014,
released
November
26,
2013,
http://www.fhfa.gov/webfiles/25847/CLL2014112613Final.pdf. “Jumbo” mortgage loans are
loans that exceed the local conforming loan limit and have higher interest rates, because of the
increased risk of issuing a larger loan. Jumbo Mortgage, Wikipedia (Oct. 11, 2013),
http://en.wikipedia.org/wiki/Jumbo_mortgage. The term “super-jumbo” is not expressly defined
or regulated, but mortgage companies use it internally and independently to set loan parameters.
See Super jumbo mortgage, Wikipedia. The definition may vary according to a particular
lender’s criteria and the area where the mortgage is being sought. See Super jumbo mortgage,
Wikipedia. The United States government did not explicitly guarantee Fannie Mae or Freddie
Mac’s securities, but there was widespread belief of an implied federal guarantee. See Fannie
Mae, Wikipedia; Freddie Mac, Wikipedia.
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used most of its earnings to pay dividends, and obtained financing for its mortgage and
investment business through reverse repurchase agreements5 which ARM securities backed. See
Complaint ¶ 3, at 2. Thornburg Mortgage’s reverse repurchase agreements “typically consisted
of a simultaneous sale of pledged securities to a lender at an agreed price in return for Thornburg
Mortgage’s agreement to repurchase the same securities at a future date (the maturity date) at a
higher price.” Complaint ¶ 22, at 7-8. The reverse repurchase agreements required Thornburg
Mortgage to maintain a certain degree of liquidity and subjected Thornburg Mortgage to margin
calls if the value of the ARM securities serving as collateral on the agreements fell below a
specified level. See Complaint ¶ 22, at 8. A margin call would generally require Thornburg
Mortgage to pay cash to reduce its loan amount or to pledge additional collateral to the lender,
either on the same day that Thornburg Mortgage received the margin call or on the following
day, unless the parties agreed otherwise. See Citigroup Global Markets, Inc. as Intermediating
Agent for Citigroup Global Markets Limited and [Counterparty] Thornburg Mortgage, Inc.,
International Securities Lenders Association ISLA Global Master Securities Lending Agreement
§ 5.8, at 11, filed May 21, 2012 (Doc. 37-6)(brackets in original); Master Repurchase Agreement
Between Greenwich Capital Markets, Inc., and Thornburg Mortgage, Inc. § 4(c) at 5, filed July
20, 2012 (Doc. 60-2); id. at § 11(a), at 7-8; Master Repurchase Agreement Between Credit

5

A “repurchase agreement” is a “short-term loan agreement by which one party sells a
security to another party but promises to buy back the security on a specified date at a specified
price. Often shortened to repo.” Repurchase Agreement, Black’s Law Dictionary 1419 (9th ed.
2009)(emphasis in original). A “reverse repurchase agreement” is the same agreement from the
buyer’s point of view rather than the seller’s. Repurchase agreement, Wikipedia (Nov. 23,
2013), http://en.wikipedia.org/wiki/Repurchase_agreement. “For the party selling the security
(and agreeing to repurchase it in the future) it is a repo; for the party on the other end of the
transaction (buying the security and agreeing to sell in the future) it is a reverse repurchase
agreement.”
Reverse Repurchase Agreement, Investopedia (Dec. 8, 2013),
http://www.investopedia.com/terms/r/reverserepurchaseagreement.asp.
-4-

Suisse First Boston Corporation and Thornburg Mortgage Asset Corporation § 4(c), at 4, filed
July 20, 2012 (Doc. 60-3); id. at § 11(a), at 7; Complaint ¶ 23, at 8. Thornburg Mortgage’s
failure to timely meet a margin call was an event of default and allowed a lender to declare
Thornburg Mortgage in default, which would trigger cross-defaults on Thornburg Mortgage’s
other reverse repurchase agreements, and all lenders with whom Thornburg Mortgage had
defaulted were then allowed to seize and to sell the ARM securities collateralizing Thornburg
Mortgage’s loans. See Complaint ¶ 24, at 8. Receiving margin calls was part of Thornburg
Mortgage’s normal course of business, as the value of its ARM securities often fluctuated. See
Complaint ¶ 25, at 8.
Citigroup Global Markets, Inc.’s margin call on February 21, 2008, was the largest of the
three margin calls that Thornburg Mortgage could not immediately meet -- $196 million. See
Complaint ¶ 33, at 10. In response to Thornburg Mortgage’s inability to meet the Citigroup
Global margin call on February 21, 2008, Citigroup Global sent a letter to Goldstone and
Simmons, stating that Thornburg Mortgage had breached the parties’ reverse repurchase
agreement and reserving Citigroup Global’s right to declare Thornburg Mortgage in default. See
Complaint ¶ 3, at 2; id. ¶ 34, at 10-11 (citing Letter from Stephen G. Malekian to Thornburg
Mortgage, Inc., Re: The Global Master Securities Lending Agreement dated as of September 20,
2007 Between Citigroup Global Markets, Inc. as Intermediating Agent for Citigroup Global
Markets Limited and Together with Citigroup Global Markets, Inc. and Thornburg Mortgage
(dated Feb. 21, 2008), filed May 21, 2012 (Doc. 37-7)(“Citigroup Global Letter”)). Citigroup
Global made clear that, although Citigroup Global was not exercising its rights under the reverse
repurchase agreement, it was not waiving its right to declare Thornburg Mortgage in default or to
amend the underlying reverse repurchase agreement. See Complaint ¶ 34, at 11. In an email

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from Goldstone to Simmons, Starrett, and others, dated February 21, 2008, Goldstone stated that
he had negotiated a “payment plan with Citigroup Global in order to satisfy the call by the end of
[the following] week[.]” Complaint ¶ 61, at 18 (alterations in original)(quoting Email from Clay
Simmons to Nyira Gitana, Subject: FW: TMA Update at 2 (sent February 21, 2008, at 9:30 a.m.),
filed May 21, 2012 (Doc. 37-10)). Thornburg Mortgage paid the Citigroup Global margin call
over seven days and made the final payment of seventy-five million dollars on February 27,
2008. See Complaint ¶ 35, at 11.
In the last week of February, 2008, Thornburg Mortgage had to sell the interest-only
portions of its ARM loans (“I/O Strip Transactions”) to generate sufficient cash to meet the
margin calls it received in the second half of the month. Complaint ¶ 36, at 11. The I/O Strip
Transactions further depleted Thornburg Mortgage’s liquidity to meet margin calls.

See

Complaint ¶ 36, at 11. In an email from Goldstone to Simmons and Starrett on February 22,
2008, Goldstone informed them of some of Thornburg Mortgage’s plans to raise liquidity to
meet margin calls: “‘Citi sold two of [Thornburg Mortgage’s] IO securities[6] as well for a gain
of approximately $25 million and net proceeds to Citi of $10 million.’” Complaint ¶ 67, at 19-20
(alteration in original)(quoting Email from Larry Goldstone to Garret Thornburg, Anne
Anderson, David Ater, Eliot Cutler, Francis Mullin III, Ike Kalangis, Michael Jeffers, Owen
Lopez, and Stuart Sherman, Subject: TMA Update - Friday Morning, February 22 at 2 (sent
February 22, 2008 at 8:42 a.m.), filed May 21, 2012 (Doc. 37-8 at 2)(“Feb. 22, 2008, Email”)).
In an email sent February 25, 2008, Goldstone informed Simmons and Starrett that Thornburg

6

“Interest only (IO) strips are the interest portion of mortgage, Treasury, or bond
payments, which [are] separated and sold individually from the principal portion of those same
payments.”
Interest
Only
(IO)
Strips,
Investopedia
(April
22,
2016),
http://www.investopedia.com/terms/i/iostrips.asp.
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Mortgage was “‘moving towards resolving [its] margin issues’” through, among other strategies,
having “‘sold some additional IO securities[.]’” Complaint ¶ 68, at 20 (quoting Email from
Larry Goldstone to the Thornburg Mortgage Board of Directors (sent February 25, 2008, at 5:03
p.m.), filed May 21, 2012 (Doc. 37-9)(“Feb. 25, 2008, Email”)).
The Defendants planned to quickly raise cash to satisfy Thornburg Mortgage’s future
margin calls after filing the 2007 Form 10-K. Complaint ¶ 32, at 10. The Defendants did not
plan to disclose that Thornburg Mortgage was late in meeting margin calls. See Complaint ¶ 32,
at 10. In an email, from Goldstone to Simmons and Starrett, on February 22, 2008, Goldstone
stated that Thornburg Mortgage was “‘planning to sell two of [its] TMA securities’” to meet
margin calls and that this sale would “‘allow[] us to keep our current situation quiet while we
deal with it.’” Complaint ¶ 67, at 20 (alterations in original)(quoting Feb. 22, 2008, Email at 2).
The Defendants “scrambled” to meet Thornburg Mortgage’s margin calls before filing
the 2007 Form 10-K. Complaint ¶ 30, at 9-10. In an email from Goldstone dated February 22,
2008, which Simmons and Starrett received, Goldstone stated:
We don’t want to disclose our current circumstance until it is resolved. Our goal
for resolution i[s] the filing of our 10-K. How we disclose this issue and what we
say will depend on where we are next week when we need to file. But, our plan is
to say that we had margin calls and all have been met.
Complaint ¶ 30, at 10 (alteration in original)(quoting Feb. 22, 2008, Email at 2). Goldstone also
discussed in the same email strategies that would allow Thornburg Mortgage “‘to keep [its]
current situation quiet while we deal with it.’”

Complaint ¶ 31, at 10 (alteration in

original)(quoting Feb. 22, 2008, Email at 2). Goldstone also stated: “‘Hopefully our disclosure
will be a simple one, meaning all margin calls have been met.’” Complaint ¶ 31, at 10 (quoting
Feb. 22, 2008 Email at 3).
Goldstone and Simmons also learned, on February 27, 2008, that a large European hedge
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fund with substantial MBS holdings, similar to those Thornburg Mortgage held, was collapsing.
See Complaint ¶ 38, at 12. Goldstone anticipated that the European hedge fund’s collapse would
negatively affect Thornburg Mortgage’s ARM securities and sent an email to Simmons on
February 27, 2008, in which he said:
Also, you should know that a large Alt-A hedge fund in Europe is blowing up this
afternoon. UBS credit just mentioned it to me. They got hit with 20 point
haircuts on Alt-A and AAA’s overnight. I think we will get this a little more
gradually, but we should be ready for it.7
Complaint ¶ 38, at 12 (quoting Email from Larry Goldstone to Clay Simmons at 2, sent February
27, 2008, at 3:48 p.m.), filed May 21, 2012 (Doc. 37-21)(“Feb. 27, 2008, Goldstone/Simmons
Email”)). Simmons sent an email to Goldstone and others regarding the potential collapse of the
European hedge fund, stating: “‘This makes it even more critical to be done with Citi today so
we can get the K filed.’”

Complaint ¶ 39, at 12 (quoting Email from Clay Simmons to

Thornburg Mortgage Employee Patrick Feldman and Larry Goldstone at 2 (sent February 27,
2008, at 8:08 a.m.), filed May 21, 2012 (Doc. 37-20)(“Feb. 27, 2008, Simmons/Feldman
Email”)). Later on February 27, 2008, Simmons sent an email to Starrett, in which he stated: “‘I
gave [Thornburg’s SEC Reporting manager] a 6:00 AM Thursday deadline to file the K. I do not

7

A “haircut” is “[t]he difference between prices at which a market maker can buy and sell
a security,” or “[t]he percentage by which an asset’s market value is reduced for the purpose of
calculating capital requirement, margin and collateral levels.”
Haircut, Investopedia,
http://www.investopedia.com/terms/h/haircut.asp (last visited August 23, 2014). An “Alt-A
mortgage” is an abbreviation for “Alternative A-paper,” which generally is considered riskier
than A-paper, but less risky than subprime mortgages. Alt-A, Wikipedia (February 16, 2013,
11:03 a.m.), http://en.wikipedia.org/wiki/Alt-A. Credit rating agencies assign bond credit
ratings, which represent the credit worthiness of corporate or government bonds, and “the
likelihood the debt will be repaid.” Bond credit rating, Wikipedia (December 13, 2013, 9:14
a.m.), http://en.wikipedia.org/wiki/Bond_credit_rating. The letter designations, such as AAA,
AA, A, BBB, and BB, represent the bond’s quality. See Bond credit rating, Wikipedia. “AAA”
refers to the “highest possible rating assigned to the bonds of an issuer by credit rating agencies.”
AAA, Investopedia, http://www.investopedia.com/terms/a/aaa.asp (last visited July 5, 2013).
-8-

want there to be any issues based on Thursday activity.’” Complaint ¶ 40, at 12 (alteration in
original)(quoting Email from Clay Simmons to Jane Starrett at 2 (sent February 27, 2008, at
10:35 a.m.), filed May 21, 2012 (Doc. 37-38)(“Feb. 27, 2008, Simmons/Starrett Email”)).
Thornburg Mortgage filed its 2007 Form 10-K on February 28, 2008, approximately
twelve hours after sending its last payment to Citigroup Global and meeting its outstanding
margin calls. See Complaint ¶ 3, at 6; id. ¶ 41, at 12. Goldstone, Simmons, and Starrett drafted
and reviewed Thornburg Mortgage’s 2007 Form 10-K before filing it, and Goldstone and
Simmons signed the Form 10-K. See Complaint ¶ 7, at 3. In the 2007 Form 10-K, Goldstone
and Simmons represented that Thornburg Mortgage had successfully met its margin calls without
selling any assets. See Complaint ¶ 7, at 3; 2007 Form 10-K at 35 (“[D]espite these challenges,
we successfully continue to meet all margin calls, we maintain existing short-term financing
facilities with our existing finance counterparties and we have successfully added new financing
capacity since year end.”); id. at 39 (“In the event that we cannot meet future margin calls from
our available cash position, we might need to selectively sell assets in order to raise cash. To
date, no such sales have been required . . . .”).

Thornburg Mortgage’s 2007 Form 10-K

accounted for the I/O Strip Transactions as the issuance of secured debt.8 See Complaint ¶ 37, at

8

The Financial Accounting Standards Board (“FASB”) “is the independent, privatesector, not-for-profit organization . . . that establishes financial accounting and reporting
standards for public and private companies and not-for-profit organizations that follow” GAAP.
About the FASB, Financial Accounting Standards Board (May 2, 2016),
http://www.fasb.org/facts/. According to the FASB’s Statement of Financial Accounting
Standards No. 166 ¶ 26C(b), at 5, filed May 21, 2012 (Doc. 37-33)(“SFAS 166”), “[i]n a
transaction in which the transferor creates an interest-only strip from a loan and transfers the
interest-only strip, the interest-only strip does not meet the definition of an entire financial asset.”
FASB explains that, when an interest-only strip does not meet the definition of an “entire
financial asset,” it should not be counted as a sale. SFAS 166 at 3. FASB issued SFAS 166 in
June, 2009, as an amendment to the Statement of Financial Accounting Standards No. 140 ¶ 9, at
3, filed May 21, 2012 (Doc. 37-32)(“SFAS 140”), to clarify SFAS 140’s objective. SFAS 166 at
3. Paragraph 9 of SFAS 140 states: “A transfer of financial assets (or all or a portion of a
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11. The 2007 Form 10-K also stated that Thornburg Mortgage had the “‘intent and ability to
hold its ARM Securities until their value recovered in the market,’” notwithstanding that the
lenders which declared Thornburg Mortgage in default of reverse repurchase agreements could
have seized Thornburg Mortgage’s ARM securities pledged as collateral. Complaint ¶ 8, at 3
(quoting 2007 Form 10-K at 41). In accordance with the statement that Thornburg Mortgage had
the intent and ability to hold its ARM securities until their value recovered, Thornburg Mortgage
did not recognize $427.8 million in losses associated with its ARM securities that served as
collateral on its reverse repurchase agreements. See Complaint ¶ 8, at 4. Thornburg Mortgage
also reported a fourth-quarter 2007 profit. See Complaint ¶ 11, at 4. “Thornburg’s . . . Form
10K and accompanying financial statements were also incorporated into the company’s active
Form S-3 ASR9 registration statement, relating to Thornburg Mortgage’s dividend reinvestment
and stock purchase plan, which was signed by Goldstone and Simmons and had been filed with
the Commission on December 10, 2007.” Complaint ¶ 89, at 26.
Thornburg Mortgage began receiving margin calls at 6:00 a.m. on February 28, 2008.
See Complaint ¶ 41, at 12-13. Thornburg Mortgage’s stock prices fell after it filed the 2007
Form 10-K. See Complaint ¶ 10, at 4; Thornburg Hit with Margin Calls; Shares Slide, Dow
Jones Newswires, Feb. 28, 2008, filed May 21, 2012 (Doc. 37-29)(“Feb. 28 Dow Jones
Newswire”); Thornburg, MF Global Send Financial Stocks Lower, Dow Jones MarketWatch,

financial asset) in which the transferor surrenders control over those financial assets shall be
accounted for as a sale to the extent that consideration other than beneficial interests in the
transferred assets is received in exchange.” SFAS 140 ¶ 9, at 3.
9

“ASR” stands for “Accounting Series Release” and refers to the SEC’s official
accounting rule pronouncements. Accounting Series Release, Investopedia (December 8, 2013),
http://www.investopedia.com/terms/a/accounting-series-releases.asp. “ASRs provide guidelines
and rules on all aspects of corporate accounting, including requirements, auditing policies and
disclosure mandates.” Accounting Series Release, Investopedia.
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Feb. 28, 2008, filed May 21, 2012 (Doc. 37-30). Simmons commented to Goldstone, in an earlymorning email regarding Thornburg Mortgage’s falling stock prices: “I guess the recent
development section did not go over well. If they only knew.” Complaint ¶ 10, at 4 (quoting
Email from Clay Simmons to Larry Goldstone at 2 (sent February 28, 2008, at 6:33 a.m.), filed
May 21, 2012 (Doc. 37-24)(“Feb. 28, 2008, Simmons/Goldstone Email”)). In an email from
Goldstone to Thornburg Mortgage’s Investor Relations department on February 28, 2008, at 5:29
a.m., Goldstone instructed the group to “‘try to calm the panic,’” and to inform investors that
“‘[a]ll margin calls met,’ ‘[l]enders are fine,’ and ‘[w]e have sufficient operating cash[.]’”
Complaint ¶ 94, at 27 (alterations in original). See Email from Larry Goldstone to Thornburg
Mortgage IR Department Employees Amy Pell, Suzanne O’Leary Lopez, and Allison Yates at 2,
(sent February 28, 2008, at 5:29 a.m.), filed May 21, 2012 (Doc. 37-27).

At 6:56 a.m.,

Goldstone informed Thornburg Mortgage’s Board of Directors in an email that he estimated
Thornburg Mortgage had approximately forty million dollars available in cash at that time. See
Complaint ¶ 95, at 28; Email from Larry Goldstone to Thornburg Mortgage Board of Directors at
2, (sent February 28, 2008, at 6:56 a.m.), filed May 21, 2012 (Doc. 37-11)(“Feb. 28, 2008,
Email”). As of 7:30 a.m. on February 28, 2008, Thornburg Mortgage had received over $100
million in margin calls. See Complaint ¶ 9, at 4; id. ¶ 41, at 13.
In the afternoon of February 28, 2008, Goldstone appeared on CNBC’s Street Signs. See
Complaint ¶ 98, at 28. On Street Signs, Goldstone stated that: (i) he did not believe Thornburg
Mortgage would need to sell assets; (ii) Thornburg Mortgage had “‘met all of [its] lending
requirements’”; and (iii) Thornburg Mortgage had “‘liquidity and cash available to continue to
support the portfolio.’” Complaint ¶ 98, at 28 (alterations in original)(quoting Street Signs:
Interview with Larry Goldstone at 3:54-4:09, CNBC television broadcast February 28, 2008,

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filed May 21, 2012 (Doc. 37-1)).
On the evening of February 28, 2008, Thornburg Mortgage received a default notice from
J.P. Morgan Chase Bank, N.A. for an unpaid margin call that J.P. Morgan had issued to
Thornburg Mortgage earlier that day. See Complaint ¶ 41, at 13. At the end of the day on
February 28, 2008, Goldstone, Simmons, and Starrett confirmed, via email, that the “‘top
messages [they] reinforced in the market’” were: “‘We have met all margin calls to date, and we
expect to continue to do so. We have sufficient operating cash, and we don’t expect to sell assets
to meet margin calls. We returned to profitability during the fourth quarter despite a tough
market.’” Complaint ¶ 96, at 28 (alterations in original).
As part of Thornburg Mortgage’s auditing process in 2007, Thornburg Mortgage had to
assess whether it had the intent and ability to hold its ARM securities until maturity, or when
they recovered their value on the market -- referred to as an “other-than-temporary
impairment . . . analysis” (“OTTI analysis”).10

Complaint ¶¶ 49-50, at 50-51.

As part of

Thornburg Mortgage’s 2007 audit, KPMG assessed whether Thornburg Mortgage’s OTTI
analysis was accurate. See Complaint ¶ 49, at 14-15.11 The Defendants did not disclose to
10

An “impairment” is a “reduction in a company’s stated capital.” Impairment,
Investopedia, http://www.investopedia.com/terms/i/impairment.asp (last visited June 10, 2013).
11

The Complaint does not identify Thornburg Mortgage’s auditor as KPMG. The Court
has determined, however, that it may take judicial notice of documents that the Complaint
references and that are central to the SEC’s allegations, see In re. Thornburg Mortg., Inc. Sec.
Litig., No. CIV 07-0815 JB/WDS, 2009 WL 5851089, at *2 (D.N.M. Dec. 21,
2009)(Browning, J.)(“In addition to those documents that are judicially noticeable, a court may
consider documents to which the complaint refers, if the documents are central to the plaintiff’s
claim and the parties do not dispute their authenticity.”), and the Court has taken judicial notice
of an email from KPMG Senior Manager Jennifer Hall to Larry Goldstone, Jane Starrett, Clay
Simmons, and Thornburg Mortgage Employee Shawn Buniel (March 3, 2008, 11:44 p.m.), filed
May 21, 2013 (Doc. 37-28)(“March 3, 2008, Hall Email”), which indicates that Thornburg
Mortgage’s auditor was KPMG, see March 3, 2008, Hall Email at 2 (representing that the email
was sent from a KPMG employee).
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KPMG: (i) Thornburg Mortgage’s “precarious” financial condition, Complaint ¶ 51, at 15;
(ii) that Thornburg Mortgage was in violation of its repurchase agreements and relying on lender
forbearance to meet its margin calls, see Complaint ¶ 51, at 15; (iii) that Thornburg Mortgage
had used I/O Strip Transactions to meet margin calls in the last two weeks of February, 2008, see
Complaint ¶ 99, at 29; (iv) that Thornburg Mortgage had received the Citigroup Letter, see
Complaint ¶ 99, at 29; or (v) that the European hedge fund was on the verge of collapse, see
Complaint ¶ 76, at 22.
The Defendants each signed Thornburg Mortgage’s February 27, 2008, management
representation letter to KPMG, in which they represented that: (i) Thornburg Mortgage was in
compliance with all aspects of its contractual obligations that would have a material effect on its
consolidated financial statements in the event of a noncompliance; (ii) Thornburg Mortgage had
the intent and ability to hold its impaired securities for a sufficient period of time to allow for
them to recover their value in the market; (iii) Thornburg Mortgage had experienced no
subsequent events requiring it to adjust or disclose its financial statements; and (iv) Thornburg
Mortgage’s financial statements disclosed all matters of which the Defendants were aware that
were relevant regarding Thornburg Mortgage’s ability to continue as a going-concern. See
Complaint ¶ 57, at 17. Goldstone and Simmons did not inform the auditor of the possible
collapse of a large European hedge fund, which held ARM securities similar to Thornburg
Mortgage’s. See Complaint ¶ 76, at 22. “[A]t or about the time” that Simmons learned of the
possible collapse of the European hedge fund, he had “just advised . . . Thornburg’s outside
auditor that he believed the MBS market had reached its lowest point and MBS prices were not
likely to deteriorate further.” Complaint ¶ 77, at 22-23.
On March 3, 2008, KPMG requested from the Defendants evidence “that the events

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subsequent to filing were unforeseeable catastrophic events.”

Email from KPMG Senior

Manager Jennifer Hall to Larry Goldstone, Jane Starrett, Clay Simmons, and Shawn Buniel at 2,
(sent March 3, 2008, 11:44 p.m.), filed May 21, 2013 (Doc. 37-28)(“March 3, 2008, Hall
Email”). The requested evidence included “correspondence with lenders/attorneys/shareholders,
emails.” Request for Correspondence, attached to March 3, 2008 Hall Email at 3-4, filed May
21, 2012 (Doc. 37-28)(“Request for Correspondence”). See Complaint ¶ 100, at 29. KPMG also
requested a “position paper,” which “provides the Company’s assessment of the ability to hold
securities for the foreseeable future as of August 27, 2008, including but not limited
to . . . [c]orrespondence with counter parties for the two weeks prior to filing, along with
supporting evidence.” Request for Correspondence at 4. At the time, KPMG, as auditor, was
considering whether to restate Thornburg Mortgage’s financial statements and was reevaluating
its audit opinion’s validity. See Complaint ¶ 99, at 29. Goldstone and Simmons were aware of
the Citi Letter, but did not provide it to the auditor. See Complaint ¶ 101, at 29. KPMG did not
become aware of the Citi Letter while preparing its Restatement. See Complaint ¶ 101, at 29.
Simmons reviewed and approved an analysis for the auditor which explained that Thornburg
Mortgage’s margin calls on February 28, 2008, and the corresponding collapse in the mortgage
market were part of “‘an unforeseeable catastrophic decline in mortgage market valuations.’”
Complaint ¶ 102, at 29 (quoting ABX Index Moves Late February at 2-3, filed May 21, 2012
(Doc. 37-25)(“Position Paper”)). The analysis states: “‘Due to a number of factors including the
unexpected collapse of a major hedge fund in Europe the mortgage market gapped
significantly wider. . . [.] No one in the market could have foreseen the sudden decline in
mortgage valuations.’”

Complaint ¶ 103, at 30 (quoting Position Paper at 2)(emphasis in

Complaint).

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PROCEDURAL BACKGROUND
The SEC filed this enforcement action on March 13, 2012. See Complaint at 1. The SEC
alleges eleven claims for relief: (i) fraud in violation of § 10(b) of the Exchange Act of 1934,
15 U.S.C. §§ 78l(b)p and rule 10b-5, 17 C.F.R. § 240.10b-5; (ii) controlling person liability for
fraud under § 20(a) of the Exchange Act, 15 U.S.C. § 78t; (iii) aiding and abetting in fraud in
violation of § 10(b) of the Exchange Act and rule 10(b)-5; (iv) fraud in violation of § 17(a) of the
Securities Act, 15 U.S.C. § 78a(b); (v) falsifying books, records, or accounts in violation of
§ 13(b)(5) of the Exchange Act, 15 U.S.C. § 78m(b)(5), and rule 13b2-1; (vi) false certification
in violation of rule 13a-14 of the Exchange Act; (vii) deceit of auditors in violation of rule 13b22 of the Exchange Act, 17 C.F.R. § 240.13b2-2; (viii) aiding and abetting in false SEC filings in
violation of § 13(a) of the Exchange Act, 15 U.S.C. § 78m(a), and rules 12b-20, 17 C.F.R.
§ 240.12b-20, and 13a-1, 17 C.F.R. § 240.13a-1; (ix) control person liability for false SEC filings
under § 20(a) of the Exchange Act and rules 12b-20 and 13a-1; (x) aiding and abetting in
keeping false books and records in violation of § 13(b)(2) of the Exchange Act,
15 U.S.C. § 78m(b)(2); and (xi) control-person violation for keeping false books and records
under § 20(a) of the Exchange Act. See Complaint ¶¶ 106-43, at 31-39.
The Court granted in part and denied in part the SEC’s and the Defendants’ motions to
dismiss on July 8, 2013.

See SEC v. Goldstone, 952 F. Supp. 2d 1060, 1076 (D.N.M.

2013)(Browning, J.). The Court dismissed the SEC’s claims: (i) “based upon the statement in
the 2007 Form 10-K and to Thornburg Mortgage’s outside auditor that Thornburg Mortgage
successfully met its margin calls without violating its lending agreements, and did not sell assets
to meet margin calls”; and (ii) “that the Defendants schemed to defraud Thornburg Mortgage’s
outside auditor in connection with the 2007 Form 10-K.” SEC v. Goldstone, 952 F. Supp. 2d at

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1076. The Court declined to dismiss the SEC’s claim that “the representation that Thornburg
Mortgage had the intent and ability to hold its impaired assets to maturity or their value
recovered in the market at the time it filed the 2007 Form 10-K was materially false or
misleading.” SEC v. Goldstone, 952 F. Supp. 2d at 1076-77. The Court continued:
The Court will not dismiss the SEC’s allegation that Goldstone and Simmons are
primarily liable or liable as control persons for that misrepresentation in the 10-K,
and the Court will not dismiss the SEC’s allegations that the Defendants aided
and abetted the misrepresentation, as the Court has determined that the SEC
sufficiently alleged that Goldstone and Simmons made, and the Defendants
provided substantial assistance to, the misrepresentation with knowledge of or
recklessness to its falsity. Similarly, the Court will not dismiss the SEC’s
allegations that the Defendants misled Thornburg Mortgage’s auditor before the
2007 Form 10-K was filed through the statement that Thornburg Mortgage had
the intent and ability to hold its impaired assets to maturity or their value
recovered in the market.
SEC v. Goldstone, 952 F. Supp. 2d at 1077. The Court also allowed certain claims against
Goldstone and Simmons to proceed. See 952 F. Supp. 2d at 1077. These claims include the
SEC’s allegations that: (i) the Defendants failed to disclose to KPMG before they filed the 2007
Form 10-K that a European hedge fund’s collapse would negatively affect Thornburg
Mortgage’s financial condition; (ii) Goldstone materially misrepresented Thornburg Mortgage’s
financial condition after filing the 2007 Form 10-K; (iii) the Defendants materially misled
KPMG by not providing correspondence showing that Thornburg Mortgage experienced an
event of default in the two weeks before the 2007 Form 10-K filing; and (iv) Simmons
misrepresented that unexpected events had an unexpected financial impact on Thornburg
Mortgage after the 2007 Form 10-K filing. See SEC v. Goldstone, 952 F. Supp. 2d at 1077.
The Court later denied the Defendants’ and the SEC’s motions for summary judgment.
See SEC v. Goldstone, No. Civ. 12-0257 JB/GBW, 2015 WL 5138242, at *1 (D.N.M. Aug. 22,
2015)(Doc. 371)(Browning, J.).

The Court first explained that it would apply an “actual-

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disbelief” standard to determine “whether a person subjectively disbelieved the truth of an
opinion statement.” 2015 WL 5138242, at *1. The Court then concluded that genuine issues of
material fact for the jury existed on the SEC’s claims that: (i) the Defendants made objectively
false statements; (ii) the statements were material; (iii) the Defendants believed that their
statements were false when they made them; and (iv) the Defendants made statements that were
false or misleading because of omitted information. See 2015 WL 5138242, at *1. The Court
thus declined to grant summary judgment for any party on any issue. See 2015 WL 5138242, at
*1.
Ten claims were tried to a jury. These included the claims that the SEC alleged in its
Complaint, see Complaint ¶¶ 106-43, at 31-39, excepting the SEC’s claim for fraud in violation
of § 17(a) of the Securities Act, 15 U.S.C. § 78a(b). See Pretrial Order at 3-4, filed May 11,
2016 (Doc. 448).12 The trial commenced on June 6, 2016. See Transcript of Trial Proceeding at
1:13 (taken June 6, 2016). The jury returned a partial verdict on June 29, 2016. See Trial Tr. at
4470:5-10 (Court, Valdez); Final Verdict Form at 1-22. The jury reached a unanimous verdict in

12

The Motion to Dismiss Opinion and Summary Judgment Opinion did not dismiss the
SEC’s § 17(a) claim, but it did not appear in the Pretrial Order. The parties also did not submit
any jury instructions on this claim. See Plaintiff Securities and Exchange Commission’s
Proposed Jury Instructions and Verdict Form, filed May 19, 2016 (Doc. 459); Defendants’ First
Proposed Final Jury Instructions, filed May 19, 2016 (Doc. 463). The parties’ proposed verdict
forms did not include a § 17(a) claim. See Defendant Clay Simmons’ First Proposed Special
Verdict Form, filed May 19, 2016 (Doc. 465); Defendant Larry Goldstone’s First Proposed
Special Verdict Form, filed May 19, 2016 (Doc. 464); Plaintiff U.S. Securities and Exchange
Commission’s Trial Brief Regarding Proposed Verdict Forms, filed June 2, 2016 (Doc. 489).
The Tenth Circuit has held that “claims, issues, defenses, or theories of damages not included in
the pretrial order are waived even if they appeared in the complaint and, conversely, the
inclusion of a claim in the pretrial order is deemed to amend any previous pleadings which did
not include that claim.” Wilson v. Muckala, 303 F.3d 1207, 1215 (10th Cir. 2002). The Pretrial
Order that the parties filed in this case, therefore, supersedes all prior pleadings, including the
Complaint. See Wilson v. Muckala, 303 F.3d at 1215 (citing C. Wright, A. Miller & M. Kane,
6A Fed. Prac. & Proc. Civ. § 1522 (2d ed. 1990)).
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Goldstone’s and Simmons’ favor on five of the ten claims that were tried: (i) falsifying books,
records, or accounts in violation of § 13(b)(5) of the Exchange Act, 15 U.S.C. § 78m(b)(5), and
rule 13b2-1 (“Claim 4”); (ii) control-person violation for keeping false books and records under
§ 20(a) of the Exchange Act (“Claim 5”); (iii) false certification in violation of rule 13a-14 of the
Exchange Act (“Claim 7”); (iv) control person liability for false SEC filings under §§ 13(a) and
20(a) of the Exchange Act, and rules 12b-20 and 13a-1 (“Claim 9”); and (v) aiding and abetting
in false SEC filings in violation of § 13(a) of the Exchange Act, 15 U.S.C. § 78m(a), and rules
12b-20, 17 C.F.R. § 240.12b-20, and 13a-1, 17 C.F.R. § 240.13a-1 (“Claim 10”). See Final
Verdict Form at 8-11, 14-15 & 18-21. The jury failed to reach, however, a unanimous verdict on
the five remaining claims against Goldstone and Simmons: (i) fraud in violation of § 10(b) of the
Exchange Act of 1934, 15 U.S.C. §§ 78l(b)p and rule 10b-5, 17 C.F.R. § 240.10b-5 (“Claim 1”);
(ii) controlling person liability for fraud under § 20(a) of the Exchange Act, 15 U.S.C. § 78t
(“Claim 2”); (iii) aiding and abetting in fraud in violation of § 10(b) of the Exchange Act and
rule 10(b)-5 (“Claim 3”); (iv) aiding and abetting in keeping false books and records in violation
of § 13(b)(2) of the Exchange Act, 15 U.S.C. § 78m(b)(2)(“Claim 6”); and (v) deceit of auditors
in violation of rule 13b2-2 of the Exchange Act, 17 C.F.R. § 240.13b2-2 (“Claim 8”). Final
Verdict Form at 1-7, 12-13 & 16-17. On August 11, 2016, the Court entered judgment in
Goldstone’s and Simmons’s favor of against the SEC on Claims 4, 5, 7, 9, and 10. See Judgment
at 1 (dated July 17, 2016), filed August 11, 2016 (Doc. 597).
1.

The SEC’s Motion.

Before the trial, the SEC filed a motion to exclude argument or evidence that the
Defendants did not violate rule 13b2-2 as a result of providing KPMG with the Tie-Out
Document. Motion at 1-2. In its motion, the SEC recalls two of the Defendants’ summary-

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judgment arguments: (i) because Thornburg Mortgage provided KPMG with the Tie-Out
Document, which showed the margin calls that Thornburg Mortgage received in the two weeks
before February 27, 2008, the SEC consequently cannot establish that KPMG was unaware that
Thornburg Mortgage had difficulty in meeting its margin calls, see Motion at 1 (citing Motion
for Summary Judgment on Behalf of Larry Goldstone and Clarence G. Simmons and
Memorandum of Law in Support at 69, filed August 9, 2013 (Doc. 201)); and (ii) because the
Defendants supplied KPMG with truthful disclosures before KPMG decided whether Thornburg
Mortgage had the ability to hold its impaired securities, the SEC cannot prove that the
Defendants violated rule 13b2-2(a), see Motion at 1-2. Next, the SEC contrasts the Defendants’
arguments with the Court’s conclusion “that the Tie-Out Document ‘did not cure the
[Defendants’] omission.” Motion at 2 (quoting Summary Judgment Memorandum Opinion and
Order at 620 n. 326, filed August 13, 2015 (Doc. 364)(“Summary Judgment Opinion”)). The
SEC argues that, in light of the Court’s summary judgment ruling, evidence related to the TieOut Document is irrelevant to whether the Defendants violated rule 13b2-2 or, if relevant, the
danger of unfair prejudice substantially outweighs the Tie-Out Document’s probative value and,
hence, is inadmissible under Federal Rule of Evidence 403. See Motion at 2 (citing Fed. R.
Evid. 401, 403).
2.

The Defendants’ Opposition.

The Defendants oppose the Motion. See Defendants’ Memorandum in Opposition to
Plaintiff’s Motion in Limine to Exclude Argument or Evidence that the Defendants Did Not
Violate Rule 13b2-2 as a Result of Providing the “Tie Out Document” to KPMG, filed April 14,
2016 (Doc. 424)(“Opposition”).

In their Opposition, the Defendants restate the Court’s

conclusions in denying the Defendants’ summary judgment motion. Opposition at 2-3. The

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Defendants state that the Court “nowhere suggested that the Margin Call Schedule was irrelevant
to whether Defendants had committed any violation of Rule 13b2-2.” Opposition at 3.13 The
Defendants note the Court’s conclusions on summary judgment: (i) “that ‘[o]nce a material fact
is omitted from a statement, which the omission made misleading, rule 13b2-2 is violated,’”
Opposition at 2 (quoting Summary Judgment Opinion at 610)(alteration in original); (ii) “that the
later receipt of the Margin Call Schedule would not impact whether there was an earlier
actionable omission, if in fact there was an earlier omission,” Opposition at 2 (citing Summary
Judgment Opinion at 620); and (iii)
that . . . if at some point prior to when the Margin Call Schedule was provided to
KPMG, Defendants made a statement to KPMG from which they omitted a
material fact, and the omission made that statement misleading, such that a
violation of rule 13b2-2 had occurred, then . . . provision of the Margin Call
Schedule to KPMG would also not cure that violation of Rule 13b2-2,
Opposition at 2 (alteration and emphases in original)(citing Summary Judgment Opinion at 620
n.326). The Defendants emphasize that the Court’s conclusions do not constitute a holding that
the Tie-Out Document was irrelevant, stating that the Court’s Summary Judgment Opinion
concludes “that its ruling does not foreclose Defendants from using the Margin Call Schedule to
show that they did not omit any material information in the first place.” Opposition at 3.
The Defendants make four arguments to support the Tie-Out Document’s relevancy.
First, the Defendants argue that the Tie-Out Document is directly relevant to the omission
element of the SEC’s rule 13b2-2 claim, because if KPMG received the Tie-Out Document
before any alleged omission, the SEC cannot establish auditor deception. See Opposition at 3.

13

In their Opposition, the Defendants refer to what the SEC calls the “Tie-Out Document”
as the “Margin Call Schedule.” Compare Motion at 1, with Opposition at 1. The Court
recognizes that these alternative names refer to the same set of documents, transmitted to KPGM
on February 27, 2008, which documents margin calls that Thornburg Mortgage had received in
the two weeks before that date. See Motion at 1; Opposition at 2.
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Second, the Defendants argue that “KPMG’s response and reaction . . . to the information
contained in the Margin Call Schedule . . . are relevant to how important (or unimportant) such
information was to KPMG at the time, both before the original 10-K filing and during the
restatement period, when the Margin Call Schedule was again reviewed by KPMG.” Opposition
at 4. Third, the Defendants argue that the Tie-Out Document is relevant to the circumstances of
the Defendants’ communications with KPMG. “The ‘circumstances’ surrounding any purported
omission,” the Defendants stress, “bear directly on whether any purported omission by
Defendants was misleading.” Opposition at 4. Fourth, the Defendants argue that the Tie-Out
Document is relevant to whether they “acted unreasonably in their communications with KPMG
about margin call activity.” Opposition at 4-5 (citing SEC v. Leslie, No. C07-3444, 2010 WL
2991038, at *28 n.19 (N.D. Cal. July 29, 2010)(Fogel, J.)(noting that, for purpose of a rule 13b22 claim, the “plaintiff must . . . show that the defendant acted unreasonably”)).
The Defendants also oppose the SEC’s rule 403 challenge, contending that the SEC fails
to explain how the Tie-Out Document causes the SEC unfair prejudice. See Opposition at 5.
According to the Defendants, “the SEC provides no explanation of how it will suffer any
prejudice if it not granted relief, and certainly does not carry its burden of showing that such
prejudice substantially outweighs the probative value of the evidence.”

Opposition at 5.

Consequently, the Defendants urge the Court to deny the Motion. See Opposition at 5.
3.

The SEC’s Reply.

The SEC counters the Defendants’ Opposition.

See Plaintiff U.S. Securities and

Exchange Commission’s Reply in Support of its Motion in Limine to Exclude Argument or
Evidence that the Defendant did not Violate Rule 13b2-2 as a Result of Providing the “Tie-Out
Document” to KPMG at 1-8, filed May 3, 2016 (Doc. 432)(“Reply”). The SEC restates its

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request that the Court grant the Motion, and exclude any argument or evidence by the
Defendants that they did not violate rule 13b2-2 because they provided the Tie-Out Document to
KPMG on February 27, 2008. See Reply at 1, 8.
In its Reply, the SEC maintains its argument that the Tie-Out Document is irrelevant to
the rule 13b2-2 claim. See Reply at 2-6. While acknowledging that the Defendants provided
KPMG with the Tie-Out Document on February 27, 2008, the SEC outlines its theory of
Defendants’ liability under rule 13b2-2: “There are four categories of statements actionable
under Rule 13b2-2: (1) misstatements made before or (2) after the Tie-Out Document was
provided to KPMG; and (3) omissions made before or (4) after the Tie-Out Document was
provided to KPMG.” Reply at 5. The SEC argues that, in light of the Court’s Summary
Judgment Opinion, the Tie-Out Document is “indisputably irrelevant to the first three
categories.” Reply at 5. The SEC notes the Court’s ruling that, because rule 13b2-2 places an
affirmative obligation on the Defendants not to make a false or misleading statement to KPMG,
the rule is violated “[o]nce a material fact is omitted from a statement, which the omission made
misleading.” Reply at 2 (quoting Summary Judgment Opinion at 610)(alteration added). The
SEC then argues that the Tie-Out Document cannot be relevant to the Defendants’ liability for
any omission violating rule 13b2-2, if the Defendants provided the Tie-Out Document to KPMG
after the Defendants made an omission to KPMG that violated rule 13b2-2. See Reply at 3-5.
The SEC restates its concern that the Defendants seek to argue -- contrary to this Court’s ruling
on summary judgment -- that the Defendants cannot have deceived KPMG, in violation of rule
13b2-2, so long as the Defendants provided KPMG with the Tie-Out Document. See Reply at 5.
The SEC acknowledges that the Tie-Out Document could be relevant “if the Defendants
can show that the Tie-Out Document was provided prior to any charged omission.” Reply at 5.

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According to the SEC, “[t]he Tie-Out Document could only possibly be relevant to the Rule
13b2-2 claim if the evidence at trial is that the omission was made after the Tie-Out Document
was received by KPMG.” Reply at 5-6 (emphasis in original). The SEC contends, however, that
this condition for the Tie-Out Document’s relevancy remains unsatisfied. See Reply at 6.
According to the SEC, “the bulk of Defendants’ statements for which the Commission has
charged the Defendants under Rule 13b2-2 are affirmative misrepresentations, and, therefore,
cannot provide a basis for the Defendants’ intended use of the Tie-Out Document.” Reply at 6.
Furthermore, the SEC states that “[t]he omissions charged by the Commission [occurred] prior to
the Tie-Out document being given to KPMG” and alleges that there is no “evidence that such an
omission was made following KPMG’s receipt of the Tie-Out Document . . . .” Reply at 6. The
SEC concludes, therefore, that unless the Defendants can development evidence that the Tie-Out
Document was provided before any charged omission, that the Court should proscribe the
Defendants from introducing the Tie-Out Document. See Reply at 6.
The SEC also buttresses its rule 403 argument, contending that the Defendants want to
rely on the Tie-Out Document to “suggest to the jury that they did nothing wrong” and to train
the jury’s attention on something other than the applicable law. Reply at 7. The SEC, therefore,
argues that the Tie-Out Document is likely to confuse the jury regarding the conditions that
establish liability for a rule 13b2-2 violation. See Reply at 7. The SEC contends that the danger
of misleading or confusing the jury is prejudicial, and, assuming that the Tie-Out Document is
relevant, that danger substantially outweighs the Tie-Out Document’s relevance. See Reply at 7.
4.

The Hearing.

The Court held a hearing on the Motion. See Transcript of Hearing at 51:23-62:2 (taken
May 11, 2016)(Doc. 466)(Court)(“Tr.”). The Court indicated at the hearing’s outset that it was

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inclined to deny the Motion. See Tr. at 52:3 (Court). The Court explained that the Tie-Out
Document is “probably needed to tell the complete story.” Tr. at 52:7 (Court). The Court made
clear that the Defendants “cannot argue that this document cures any sort of deception or
fraudulent activity that they engaged in earlier or were in engaging in that day.” Tr. at 52:8-10
(Court). The Court noted, however, that without the Tie-Out Document, the Defendants would
be unable to present their complete story to the jury. See Tr. at 52:13-15 (Court). The Court
then invited the parties’ argument. See Tr. at 52:20-23 (Court).
The SEC argued that the Defendants’ use of the Tie-Out Document amounts to “a
strategy to deceive the jury by trying to say that KPMG wasn’t deceived, when the issue isn’t
whether KPMG was deceived.” Tr. at 54:3-5 (Kasper). The SEC indicated that the issue is,
rather, whether “the defendants [were] fulsome and complete in their dealings with their
auditors.” Tr. at 54:7-8 (Kasper). The SEC argued that allowing the Tie-Out Document to be
introduced into evidence “is going to have the impact of . . . confusing the jury.” Tr. at 54:19-20
(Kasper). The SEC argued that, because the Court ruled in its summary judgment opinion that
liability does not depend on whether KPMG was deceived, but rather whether the Defendants
made a false or misleading statement or omission to KPMG, the Tie-Out Document would allow
the Defendants “to effectively argue something that’s contrary to the law of this case.” Tr. at
54:21-22 (Kasper). The SEC also alleged that the Tie-Out Document cannot bear on whether the
Defendants’ conduct was unreasonable. See Tr. at 54:25-55:1 (Kasper). The SEC reiterated its
concern that the Defendants would use the Tie-Out Document to argue that it cures their rule
13b2-2 violations. See Tr. at 55:10-12 (Kasper).
The Defendants responded that the SEC has to establish the elements of a rule 13b2-2
violation and that the Tie-Out Document is relevant to multiple elements. See Tr. at 56:9-18

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(Lee). The Defendants argued that the Tie-Out Document is relevant, because “it goes to
whether there was an admission, it goes to materiality, it goes to the circumstances, [and] it goes
to the unreasonableness.” Tr. at 56:12-15 (Lee). The Defendants also stated that they did not
intend to “argue around” the Court’s ruling on what constitutes an actionable omission. Tr. at
56:24-57:5 (Lee). The Defendants additionally indicated that “the timing of when the alleged
omission occurred, vis-à-vis when the margin call schedule was provided, is critical,” Tr. at
57:10-12 (Lee), and contended “that the specific timing of when the margin call schedules were
provided has not been established,” Tr. at 57:19-21 (Lee).
The SEC replied that the Defendants are “really fundamentally just dressing up their
same point . . . that KPMG was not deceived.” Tr. at 58:10-12 (Kasper). The SEC argued that
the Tie-Out Document is not relevant to materiality, contending that the Defendants do not offer
“any theory of how a document they received on the 27th . . . could possibly address the
materiality concern [of statements made in the management representation letter].” Tr. at 58:1519 (Kasper). The SEC also argued that the Defendants failed to establish how the Tie-Out
Document makes it more likely that the Defendants’ statements or omissions to KPMG were not
misleading, see Tr. at 59:11-18 (Kasper), or how the Tie-Out Document makes it more probable
that their conduct was reasonable, given that “there is no evidence that the defendants were
aware of this document,” Tr. at 59:11-18 (Kasper).

The SEC also emphasized that the

Defendants’ “misstatements can’t be fixed regardless of when the tie-out document was
received, and some omissions . . . occurred . . . after the tie-out document was received.” Tr. at
60:16-19 (Kasper). The SEC pointed to the Court’s summary judgment ruling, arguing that the
ruling, “fairly read, suggests that the timing doesn’t matter . . . . [T]he tie-out document cannot
cure the defendants’ misstatements or omissions.” Tr. at 61:4-7 (Kasper).

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After hearing the parties’ arguments, the Court remained inclined to deny the Motion.
See Tr. at 62:1-2 (Court). The Court warned that “the defendants are going to have to be careful
what they do with this document,” Tr. at 61:11-12 (Court), stating that “[t]he defendants will not
use it to try to say that this cures the problem, if they had made some blatant or deceptive
comments,” Tr. at 61:17-19 (Court). The Court noted, however, that it is necessary to introduce
the Tie-Out Document into evidence “to tell the complete story.” Tr. at 61:21 (Court).
LAW REGARDING RULE 401 OF THE FEDERAL RULES OF EVIDENCE
“The rules of evidence contemplate the admission of relevant evidence, and the
exclusion of irrelevant and potentially prejudicial evidence.” Train v. City of Albuquerque, 629
F. Supp. 2d 1243, 1247 (D.N.M. 2009)(Browning, J.)(citing Fed. R. Evid. 401, 402 & 403).
“Relevant evidence is evidence that has a tendency to make the existence of any fact that is of
consequence to the determination of the action more probable or less probable than it would be
without the evidence.” United States v. Gutierrez–Castro, No. CR 10-2072 JB, 2011 WL
3503321, at *3 (D.N.M. Aug. 6, 2011)(Browning, J.)(citing Fed. R. Evid. 401 (“Evidence is
relevant if: (a) it has any tendency to make a fact more or less probable than it would be without
the evidence; and (b) the fact is of consequence in determining the action.”). “The standard for
relevancy is particularly loose under rule 401, because ‘[a]ny more stringent requirement is
unworkable and unrealistic.’” United States v. Ganadonegro, 854 F. Supp. 2d 1088, 1127
(D.N.M. 2012)(Browning, J.)(quoting Fed. R. Evid. 401 advisory committee’s note). Irrelevant
evidence, or that evidence which does not make a fact of consequence more or less probable,
however, is inadmissible. See Fed. R. Evid. 402 (“Irrelevant evidence is not admissible.”).

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LAW REGARDING RULE 403 OF THE FEDERAL RULES OF EVIDENCE
Rule 403 provides: “The court may exclude relevant evidence if its probative value is
substantially outweighed by a danger of one or more of the following: unfair prejudice,
confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting
cumulative evidence.” Fed. R. Evid. 403. Under rule 403, the trial court must weigh the
proffered evidence’s probative value against its potential for unfair prejudice. See United States
v. Record, 873 F.2d 1363, 1375 (10th Cir. 1989). “[I]t is only unfair prejudice, substantially
outweighing probative value, which permits exclusion of relevant matter [under rule 403].”
United States v. Pettigrew, 468 F.3d 626, 638 (10th Cir. 2006)(quoting United States v. Sides,
944 F.2d 1554, 1563 (10th Cir. 1991)). The United States Court of Appeals for the Tenth Circuit
has reminded district courts that they should be “mindful” that “exclusion of evidence under
Rule 403 that is otherwise admissible under the other rules is an extraordinary remedy and
should be used sparingly.” United States v. Smalls, 605 F.3d 765, 787 (10th Cir. 2010).
The decision to admit or exclude evidence pursuant to rule 403 is within the trial court’s
discretion, see United States v. Lugo, 170 F.3d 996, 1005 (10th Cir. 1999), and the trial court’s
discretion to balance possible unfair prejudice against probative value is broad, see United States
v. Bice-Bey, 701 F.2d 1086, 1089 (4th Cir. 1983)(Ervin, J.); United States v. Masters, 622 F.2d
83, 87-88 (4th Cir. 1980)(Russell, J.). As the Supreme Court of the United States has noted:
In deference to a district court’s familiarity with the details of the case and its
greater experience in evidentiary matters, courts of appeals afford broad
discretion to a district court’s evidentiary rulings. . . . This is particularly true with
respect to Rule 403 since it requires an “on-the-spot balancing of probative value
and prejudice, potentially to exclude as unduly prejudicial some evidence that
already has been found to be factually relevant.”
Sprint/United Mgmt. Co. v. Mendelsohn, 552 U.S. 379, 384 (2008)(Thomas, J.)(quoting 1
Steven A. Childress & Martha S. Davis, Fed. Standards of Review § 4.02, at 4-16 (3d ed. 1999)).
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See United States v. Abel, 469 U.S. 45, 54 (1984)(Rehnquist, J.)(“Assessing the probative value
of [proffered evidence], and weighing any factors counseling against admissibility is a matter
first for the district court’s sound judgment under Rules 401 and 403 . . . .”).
Evidence may be unfairly prejudicial if it would likely provoke the jury’s emotional
response or would otherwise tend to adversely affect the jury’s attitude toward a particular
matter. See United States v. Rodriguez, 192 F.2d 946, 951 (10th Cir. 1999). Evidence is not
unfairly prejudicial merely because it damages a party’s case. See United States v. Caraway, 534
F.3d at 1301; United States v. Curtis, 344 F.3d 1057, 1067 (10th Cir. 2003); United States v.
Martinez, 938 F.2d 1078, 1082 (10th Cir. 1991). Rather, “[t]o be unfairly prejudicial, the
evidence must have ‘an undue tendency to suggest decision on an improper basis, commonly,
though not necessarily, an emotional one.’” United States v. Caraway, 534 F.3d at 1301 (quoting
Fed. R. Evid. 403 advisory committee note).
ANALYSIS
The Court will allow the Defendants to introduce evidence related to the “Tie-Out
Document,” because such evidence is not irrelevant to whether the Defendants violated rule
13b2-2, and the danger of unfair prejudice does not substantially outweigh the Tie-Out
Document’s probative value.
I.

THE TIE-OUT DOCUMENT IS RELEVANT EVIDENCE UNDER RULE 401.
The Court concludes that the Tie-Out Document is relevant evidence under rule 401. See

Fed. R. Evid. 401. First, as the Court suggested at the hearing, the Tie-Out Document enables
the jury to hear “the complete story.” Tr. at 61:21 (Court). In other words, the Tie-Out
Document is relevant to the “circumstances” under which, according to the SEC, the Defendants
omitted information that was necessary to render other statements that the Defendants had made

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to KPMG not misleading. Rule 13b2-2(a)(2) provides: “No director or officer of an issuer shall,
directly or indirectly . . . [o]mit to state, or cause another person to omit to state, any material fact
necessary in order to make statements made, in light of the circumstances under which such
statements were made, not misleading, to an accountant . . . .”

17 C.F.R. § 240.13b2-

2(a)(2)(emphasis added). As the Court indicated at the hearing, the Tie-Out Document allows
the jury a more complete picture of the circumstances that make it more or less likely that any of
the Defendants’ omissions of material fact were misleading and, consequently, violated rule
13b2-2.

Because the Tie-Out Document enables the jury a more complete picture of the

circumstances under which the Defendants’ made statements and omissions to KPMG, the
evidence is relevant. Cf. United States v. Hardy, 228 F.3d 745, 748 (6th Cir. 2000)(“Proper
background evidence . . . forms an integral part of a witness’s testimony, or completes the story
of the charged offense.”); United States v. Ganadonegro, 2011 WL 3957549, at *1 (D.N.M.
2011)(Browning, J.)(concluding that evidence was properly introduced as res gestae and
background information).
Beyond helping to tell the story, the Tie-Out Document is relevant.

The Tie-Out

Document is evidence that Thornburg Mortgage knew about the margin calls. If Thornburg
Mortgage told KPMG about the margin calls, then the Tie-Out Document is relevant evidence to
that disclosure. The SEC does not dispute this assertion, but says that the Tie-Out Document
does not assist the jury in determining whether the Defendants made any misstatements or
omissions to KPMG before providing KPMG the Tie-Out Document. See Reply at 5. That
statement is true, but the Court is not the one to decide if there were or were not prior
misstatements or omissions.
The Court also notes that, if the Defendants omitted any information to KPMG after

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Thornburg Mortgage provided KPMG with the Tie-Out Document, then the Tie-Out Document
is relevant to whether -- because it makes it less probable that -- the omission is misleading and,
hence, violates rule 13b2-2. See Fed. R. Evid. 401 (“Relevant evidence is evidence that has a
tendency to make the existence of any fact that is of consequence to the determination of the
action more probable or less probable than it would be without the evidence.”). Consequently, if
the Defendants introduce sufficient proof at trial that the Defendants’ alleged omissions of
material fact occurred after Thornburg Mortgage provided KPMG with the Tie-Out Document,
then the Tie-Out Document is relevant to whether those omissions violate rule 13b2-2. See Fed.
R.

Evid.

104(b);

Huddleston

v.

United

States,

485

U.S.

681,

690-91

(1988)(Rehnquist, C.J.)(noting that “in assessing the sufficiency of the evidence under Rule
104(b), the trial court must consider all evidence presented to the jury”). The Tie-Out Document
is also relevant to whether the Defendants deceived KPMG regarding any statements that the
Defendants made to KPMG that were concurrent with the Defendant’s provision of the Tie-Out
Document to KPMG.

And the jury -- not the court -- should decide whether, under the

circumstances, Thornburg Mortgage or the Defendants made false or misleading statements or
omissions to KPMG. Thus, because the Tie-Out Document enables the jury to comprehend the
circumstances under which the Defendants made statements and omissions to KPMG, the TieOut Documents’ relevance does not entirely depend on the Defendant’s proof that any alleged
omission of material fact occurred after Thornburg Mortgage provided KPMG with the Tie-Out
Document. In any case, it is for the jury to decide whether the Defendants made false or
misleading statements or omissions to KPMG.
II.

THE DANGER OF UNFAIR PREJUDICE DOES NOT SUBSTANTIALLY
OUTWEIGH THE TIE-OUT DOCUMENT’S PROBATIVE VALUE.
The SEC’s rule 403 challenge to the introduction of the Tie-Out Document into evidence
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does not persuade the Court, because the danger of unfair prejudice does not substantially
outweigh the Tie-Out Document’s probative value. “The danger of ‘confusion of the issues’ and
‘misleading the jury’ arises when circumstantial evidence would tend to sidetrack the jury into
consideration of factual disputes only tangentially related to the facts at issue in the current
case.” United States v. McVeigh, 153 F.3d 1166, 1191 (10th Cir. 1998)(citing United States v.
Guardia, 135 F.3d 1326, 1331-32 (10th Cir. 1998)). The Court acknowledges the possibility that
the Tie-Out Document’s introduction into evidence might make it more difficult for the jury to
rule in the SEC’s favor; however, the Court concludes that the risk of potential jury confusion to
be minimal. The Court has warned that “the defendants are going to have to be careful what they
do with this document.” Tr. at 61:11-12 (Court). At the hearing, the Court made plain that
“[t]he defendants will not use it to try to say that this cures the problem, if they had made some
blatant or deceptive comments.” Tr. at 61:17-19 (Court). In addition to this warning to the
Defendants, the Court concludes that proper jury instructions can minimize any risk of potential
jury confusion as to import of the Tie-Out Document. See Noland v. City of Albuquerque, 779
F. Supp. 2d 1235, 1241 (D.N.M. 2011)(Browning, J.)(holding that “the Court will not exclude
this evidence under rule 403,” because “[t]he proper jury instructions will help ensure that this
evidence will not mislead or confuse the jury”); Conrad v. Bd. of Johnson Cty., Kansas
Comm’rs, No. CIV.A. 00-2277-DJW, 2002 WL 1461975, at *4 (D. Kan. July 2,
2002)(Waxse, M.J.)(“Although the Court foresees the possibility of some confusion . . . any risk
of confusion may be minimized by proper jury instructions.”). The Court is prepared, if the SEC
requests it, to instruct the jury that statements in a Tie-Out Document that the Defendants made
before the 10-K was filed do not mean that the Defendants did not make deceptive statements or
omissions to KPMG. Consequently, the danger that the jury will misunderstand the relevance of

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the Tie-Document to the rule 13b2-2 claim does not substantially outweigh the Tie-Out
Document’s probative value.

The Court, therefore, will decline to exclude the Tie-Out

Document on the basis of the danger of jury confusion and unfair prejudice to the SEC.
IT IS ORDERED that the Plaintiff Securities and Exchange Commission’s Motion in
Limine to Exclude Argument or Evidence that the Defendants did not Violate Rule 13b2-2 as a
Result of Providing the “Tie-Out Document” to KPMG, filed March 17, 2016 (Doc. 392), is
denied.

________________________________
UNITED STATES DISTRICT JUDGE
Counsel:
Michael H. Hoses
Assistant United States Attorney
United States Attorney’s Office
Albuquerque, New Mexico
-- and -Stephen C. McKenna
Gregory A. Kasper
Dugan Bliss
Danielle Voorhees
Ian S. Karpel
Securities and Exchange Commission
Denver, Colorado
Attorneys for Plaintiff Securities and Exchange Commission
Robert Badal
Santa Barbara, California
-- and --

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Skye Lynn Perryman
Michael A. Lamson
April N. Williams
Wilmer Cutler Pickering Hale & Dorr LLP
Washington, D.C.
-- and -Randall R. Lee
Aaron Thompson
Daniel Crump
Wilmer Cutler Pickering Hale & Dorr LLP
Los Angeles, California
-- and -Heather S. Tewksbury
Christopher W. Johnstone
Wilmer Cutler Pickering Hale & Dorr LLP
Palo Alto, California
-- and -Jerry L. Marks
Robert J. Liubicic
Elena Kilberg
Alisa Schlesinger
Paul M. Torres
Milbank, Tweed, Hadley & McCloy LLP
Los Angeles, California
-- and -Bruce D. Hall
Andrew G. Schultz
Melanie B. Stambaugh
Rodey, Dickason, Sloan, Akin, & Robb P.A.
Albuquerque, New Mexico
Attorneys for Defendants Larry Goldstone, Clarence G. Simmons, III, and Jane E. Starrett
Peter J. Dennin
George A. Salter
Hogan Lovells US LLP
New York, New York

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-- and -William Spencer Reid
Keleher & McLeod P.A.
Albuquerque, New Mexico
Attorneys for Intervenor KPMG, LLP

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