Case of the Day: SEC v. Kramer
Posted on April 11, 2011
Today’s case of the day, SEC v. Kramer (M.D. Fla. 2011), is definitely outside the official Letters Blogatory scope of coverage, but I wanted to write about it for two reasons. First, it is the second case in recent days to involve people in the business of using publicly traded shell companies with no operations and no assets to take operating companies private using “reverse merger” transactions. Second, today’s case relates the Hague Evidence Convention to the rules of evidence regarding hearsay, which just goes to show that nowadays you can find international law issues wherever you look.
The SEC sued Kramer seeking to enjoin violations of the broker registration requirement of the Securities Exchange Act of 1934 and for other relief. The claim was that after a “reverse merger” involving Skyway Aircraft (Skyway merged with a publicly traded shell company and so effectively went public), Kramer illegally acted as a broker for the sale of Skyway stock without being registered as a broker under the Act. In the course of its pre-suit investigation, the SEC interviewed Baker, who was Kramer’s business associate. The government did not call Baker as a witness, but it sought to admit the statements he made to investigators in evidence. Ordinarily such statements would be inadmissible hearsay, but the government sought to bring them within the hearsay exception for “statements against interest”. But that hearsay exception applies only if the declarant—Baker—is “unavailable.”The arguments about unavailability are amusing:
As to the “unavailability” of Baker’s testimony, the Commission asserts (1) that Baker maintains a “nomadic lifestyle” and lives (the Commission says 285 days of the year) invariably in a Marriott hotel, in the United States (but often elsewhere, according to Baker); (2) that, because of Baker’s attempts to evade service, the Commission obtained permission to serve Baker by e-mail with the complaint … (5) that Baker’s bankruptcy counsel informed the Commission of Baker’s purported statement that Baker was living in “Red Communist China”; (6) that the Commission unsuccessfully mailed a package to an address in Donguan, China, and called a telephone number in China; and (8) that the Commission attempted to deliver a subpoena to Baker at an address in Las Vegas, Nevada.
The court refused to credit Baker’s statement that he was living in China as “inadmissible hearsay and highly suspect. According to the Commission, Baker has exerted himself impressively to evade service and otherwise avoid accountably. Baker’s statement to his lawyer as to his whereabouts undoubtedly (and quite obviously) possesses the lowest possible probative value.” But more to the point, the government had not sought to obtain judicial assistance in China, whether through the Hague Evidence Convention or otherwise, or to obtain the assistance of the U.S. consulates in China. Thus the court felt that the government had not made a good faith effort to find Baker,but instead “attempted to ostentatiously fail to locate” him. Ouch!
Thus Baker’s statements were excluded from evidence. And while it’s hard to know if that fact was dispositive, the court found that the government had failed to prove its case and entered judgment in favor of Kramer.
The moral of the story, at least on the international judicial assistance front, is that because judicial assistance is available, parties may have an obligation to use it before they are permitted to say that evidence they say they want to obtain is unavailable.