Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_09-cv-00665/USCOURTS-caed-2_09-cv-00665-40/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:77 Securities Fraud

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UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF CALIFORNIA

SECURITIES AND EXCHANGE

COMMISSION,

NO. CIV. S-09-0665 LKK/DAD

Plaintiff,

v.

O R D E R

ANTHONY VASSALLO, KENNETH

KENITZER, and EQUITY 

INVESTMENT MANAGEMENT AND

TRAINING, INC.,

Defendants.

 /

MICHAEL CALLAHAN and

MATTHEW TUCKER, parties in

interest.

 /

On July 31, 2009, this court appointed a permanent Receiver

to marshal and recover Equity Investment Management and Trading,

Inc. (“EIMT”) assets. On August 20, 2009, this court established

a standard for summary proceedings for the recovery of EIMT assets

by the Receiver. Pursuant to this procedure, the Receiver has moved

for the disgorgement of $2.0 million from interested parties

Michael Callahan (“Callahan”) and Matthew Tucker (“Tucker”).

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Callahan has filed both a motion to continue the hearing and an

opposition to the motion. Tucker has not opposed the motion.

I. BACKGROUND

This court appointed a Receiver to recover assets of 

EIMT. These assets are to be distributed to the defrauded

investors of EIMT. Throughout the Receiver’s efforts to recover

these assets, he discovered that EIMT consisted of several

subfunds. These include Veritas Investments, LLC (“Veritas”). In

December 2008, Veritas transferred $2.0 million to Michael

Callahan (“Callahan”) and Matthew Tucker (“Tucker”) to purchase

an investment called a Collateralized Mortgage Obligation

(“CMO”). Veritas wired Callahan $125,000 and wired Tucker $1.875

million for the purchase. The parties contest whether a CMO was

ever purchased by Callahan and Tucker. Additionally, the parties

contest the extent of Callahan’s involvement in this

transaction. After numerous negotiations with Callahan to

recover the CMO, the Receiver filed this motion to disgorge.

II. STANDARD OF REVIEW

On August 20, 2009, the court issued an order establishing

a standard summary procedure for Receiver’s recovery of EIMT’s

assets. Doc. No. 116. This order set forth the procedure for

disgorgement claims for EIMT assets. First, the Receiver shall

file a noticed motion for disgorgement and serve said motion

upon all interested parties. Interested parties may file an

opposition brief, in response to which the Receiver may file a

reply brief. The order also provides that, “Upon a showing of

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 The court notes that the court may consider whether an 1

interested party acted in good faith when determining whether there

is good cause for discovery.

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good cause, the Court may order limited discovery concerning the

particular asset.” 

Additionally, if “the Court determines there is a disputed

issue(s) of fact concerning the disgorgement of a particular

asset, the Court shall set an evidentiary hearing to resolve the

issue(s).” According to this standard, the court may only grant

a motion for disgorgement where material facts are in dispute if

the record as a whole could not lead a rational trier of fact to

find that the assets at issue are not held in constructive trust

for EIMT, or more specifically, for the receivership of EIMT

assets. This cannot be decided based upon whether an interested

party acted in good faith in its communications with the

Receiver. When the Receiver cannot meet this burden, the court 1

shall order an evidentiary hearing to resolve any disputed

facts. 

III. ANALYSIS

A. Motion to Continue

Callahan filed a motion to continue the Receiver’s Motion

for Disgorgement several days after he filed an opposition to

Receiver’s motion. Despite the unusual chronology of Callahan’s

filings, the court will first decide his motion to continue. For

the reasons discussed below, the court denies the motion to

continue.

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 At the same time, Callahan reports that Tucker is no longer 2

communicating with him.

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Callahan moves for a 60 day continuance of the Receiver’s

motion for disgorgement so that he can hire an attorney and

conduct discovery. The court is not persuaded by Callahan’s

request for a continuance to hire an attorney. First, Callahan

is an attorney; second, Callahan has been aware of the

Receiver’s demands to remit the money he obtained for the CMO

since at latest July 23, 2009, Receiver’s Exhibit 11; third,

Callahan has been aware of the investors’ demands to remit the

money or the CMO since at latest January 2009, Declaration of

Bruce Davis in Support of Receiver’s Reply at ¶ 2; fourth,

despite being a sophisticated party, with knowledge of the legal

claims of EIMT to the funds or the CMO for nearly a year,

Callahan did not retain counsel; and finally, Callahan submitted

an opposition to the Receiver’s motion. As such, it appears to

the court that Callahan is merely attempting to delay

proceedings, and the court denies his request for a continuance

so that he can retain counsel.

Callahan also requests a continuance so that he may conduct

limited discovery as to the connection between EIMT and Veritas.

Callahan contends that he is entitled to such discovery so that

he and Tucker can deliver the CMO to EIMT. Interested parties, 2

however, are only entitled to discovery when they can show good

cause for such discovery. This issue will be resolved in the

evidentiary hearing ordered below. As such, Callahan is not

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The Court will consider Callahan’s opposition as if timely 3

filed.

 Callahan also alludes to due process concerns in his motion. 4

The Receiver interprets this as a claim challenging the summary

proceeding. If it is such a challenge, Callahan’s concerns will be

resolved through the order for an evidentiary hearing. 

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entitled to a continuance on this ground.

Callahan also mentions in his motion that there are

disputed facts. This issue will also be resolved in the

evidentiary hearing, and thereby does not merit a continuance.

Accordingly, Callahan’s motion for a continuance is denied. The

court will rule on the motion for disgorgement at this time.3,4

B. Motion to Order Disgorgement of $2.0 Million

i. Collateralized Mortgage Obligation

The Receiver and Callahan agree that Veritas transferred

$2.0 million in December 2008. Callahan was wired $125,000,and

Tucker was wired $1.875 million. The money was transferred to

purchase a Collateralized Mortgage Obligation (“CMO”). The

Receiver has attempted to recover the CMO from Callahan and

Tucker for several months. These efforts have not been fruitful.

For this reason, the Receiver does not believe that the CMO was

ever purchased, and now seeks disgorgement of the money

transferred for the purported purchase of the CMO. Callahan,

however, contends that the CMO was purchased, and may be

delivered to the Receiver. This constitutes a material dispute

of fact, which is dispositive as to whether the $2.0 million

should be disgorged from Callahan and accordingly, the court

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orders an evidentiary hearing as to that issue.

ii. Joint and Several Liability

If the trier of fact concludes either that the CMO does not

exist or that a CMO exists, yet is not legitimate, the

transaction would appear to be fraudulent. The elements of a

claim for intentional misrepresentation under California law are

(1) misrepresentation (a false representation, concealment or

nondisclosure), (2) knowledge of falsity, (3) intent to defraud

(to induce reliance), (4) justifiable reliance, and (5)

resulting damage. Agosta v. Astor, 120 Cal. App. 4th 596, 603

(2004). If the CMO was never purchased, there appears to be no

question as to whether EIMT, through its subfund Veritas,

experienced damage as a result of the statements that the CMO

was purchased with its assets and Callahan has not argued that

EIMT did not justifiably rely upon such statements. Moreover, it

seems apparent that knowingly false statements were made to EIMT

with the intent to defraud it of $2.0 million if the CMO does

not exist or is not legitimate. 

A question that remains is what Callahan’s involvement was

in this transaction. It is undisputed that Callahan sent an

email to EIMT which demonstrated his involvement in the asserted

multi-stage process of purchasing the CMO. However, it appears

to the court that Callahan argues that he was not aware of the

falsity of the statements he made concerning the purchase of the

CMO and that he lacked the intent to defraud EIMT. The Receiver,

as should be obvious, contends that Callahan was aware of the

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falsity of his statements and that he intended to defraud EIMT.

This constitutes a disputed fact, which is determinative as to

whether Callahan is a joint tortfeasor and, thereby, should be

held jointly and severally liable for the entire $2.0 million.

See Expressions at Rancho Niquel Assoc. V. Ahmanson

Developments, Inc., 86 Cal. App. 4th 1135, 1139 (Cal. Ct. App.

2001) (“Where multiple tortfeasors are responsible for an

indivisible injury suffered by the plaintiff, each tortfeasor is

jointly and severally liable to the plaintiff for those damages

and thus may be held individually liable to the injured

plaintiff for the entirety of such damages.”). Consequently, the

court orders an evidentiary hearing to determine whether

Callahan knew that the statements he made to EIMT concerning the

purchase of the CMO were false and whether Callahan intended to

defraud EIMT if it is shown that the CMO was never purchased

and/or illegitimate.

Callahan also claims that he was only a facilitator in

introducing Veritas and Tucker. As such, he claims to be

limited to return of the $125,000. That, too, is to be heard at

the evidentiary hearing.

IV. CONCLUSION

For the foregoing reasons, the court orders that Callahan’s

motion for a continuance is DENIED.

The court orders Tucker to disgorge $2.0 million received

from Veritas. The court further orders that the evidentiary

hearing is referred to Magistrate Judge Dale A. Drozd pursuant

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 The court is also ordering an evidentiary hearing on the 5

motion to order disgorgement of funds from Arcanum/Vestium, Doc.

No. 164. Arcanum Equity Fund, LLC, Vestium Equity Fund, LLC, and

Vestium Management Group, LLC opposed this motion. As here, the

court cannot resolve the motion without an evidentiary hearing. The

transactions at issue in Vestium/Arcanum are somewhat related to

those at issue here. For these reasons, Judge Drozd shall confer

with parties for both motions and determine at his discretion

whether to hold separate or combined evidentiary hearings.

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to Local Rule 302(a). Judge Drozd will confer with Callahan,

Arcanum Equity Fund, LLC, Vestium Equity Fund, LLC, and Vestium

Management Group, LLC, the Receiver, and set a date and time 5

for the hearing or hearings as well as entertain any motions

demonstrating good cause to conduct limited discovery.

IT IS SO ORDERED.

DATED: December 11, 2009.

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