SEC V Kahlon Et Al Doc 51 Filed 18 Aug 14

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF TEXAS

SHERMAN DIVISION
U.S. SECURITIES AND EXCHANGE
COMMISSION,

Plaintiff,

v.

YOSSEF KAHLON and TJ
MANAGEMENT GROUP, LLC

Defendants.

CIVIL ACTION NO.

4:12-cv-517-RAS

DEFENDANTS RESPONSE TO
PLAINTIFFS MOTION FOR SUMMARY JUDGMENT

Respectfully submitted,

Jeffrey M. Tillotson (SBN 20039200)
Email: jmt@lynnllp.com
David S. Coale (SBN 00787255)
Email: dcoale@lynnllp.com
LYNN TILLOTSON PINKER & COX, LLP
2100 Ross Avenue, Suite 2700
Dallas, Texas 75201
Telephone: 214-981-3800
Facsimile: 214-981-3839

ATTORNEYS FOR DEFENDANTS
YOSSEF KAHLON and TJ MANAGEMENT
GROUP, LLC
Case 4:12-cv-00517-RAS Document 51 Filed 08/18/14 Page 1 of 22 PageID #: 718
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TABLE OF CONTENTS

TABLE OF AUTHORITIES .......................................................................................................... ii

I. INTRODUCTION ...............................................................................................................1
II. ARGUMENT AND AUTHORITIES AS TO LIABILITY .................................................5
A. THE SECS AUTHORITIES DO NOT APPLY. ...............................................................5
B. The SEC Distorts Key Words ..................................................................................7
C. The SECs Position Is Not Consistent With Due Process .....................................11
III. ARGUMENT AND AUTHORITIES AS TO REMEDY .................................................12
A. GENUINE ISSUES OF MATERIAL FACT PREVENT SUMMARY
JUDGMENT AS TO INJUNCTIONS, PENALTIES, AND INTEREST ...................................12

B. GENUINE ISSUES OF MATERIAL FACT PREVENT SUMMARY
JUDGMENT AS TO DISGORGEMENT. .........................................................................13
IV. CONCLUSION ..................................................................................................................14
CERTIFICATE OF SERVICE ......................................................................................................15

ATTACHMENT A ON UNDERWRITER STATUS ............................................................16

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TABLE OF AUTHORITIES

Cases
ABF Freight System, Inc. v. NLRB,
510 U.S. 317 (1994) .......................................................................................................... 13
Connally v. General Constr. Co.,
269 U. S. 385 (1926) ......................................................................................................... 11
Moore v. Intl Paint LLC,
547 Fed. Appx. 513 (5th Cir. Nov. 13, 2013).................................................................. 13
Roman v. Western Manufacturing,
691 F.3d 686 (5th Cir. 2012) ............................................................................................ 13
SEC v. Cavanagh,
2004 WL 1594818 No. 3:05-CV-0415-B, Mem. Op. (N.D. Tex. August 1, 2007)............ 6
SEC v. Calvo,
378 F.3d 1211 (11th Cir. 2004) ........................................................................................ 13
SEC v. Connectajet.com, Inc.,
2011WL 5509896 , No. 3:09-CV-1742-B (N.D. Tex. Nov. 9, 2011) ............................... 13
SEC v. Luna,
2014 WL 794202 (D. Nev. Feb. 6, 2014) .......................................................................... 6
SEC v. North Am. Research & Devel. Corp.,
424 F.3d 63 (2d Cir. 1970).................................................................................................. 6
SEC v. Offill,
2012 WL 246061 (N.D. Tex. 2012) .................................................................................... 6
SEC v. Premium Income Corp.,
No. 3:05-CV-0415-B, Mem. Op. (N.D. Tex. August 1, 2007) ........................................... 6
Statutes
17 C.F.R. 230.405 ........................................................................................................................ 4
17 C.F.R. 230.501 ........................................................................................................................ 3
17 C.F.R. 230.504 .................................................................................................................... 3, 4
17 C.F.R. 502 ............................................................................................................................... 5
7 Tex. Admin. Code 107.2 ........................................................................................................... 2
7 Tex. Admin. Code 109.4 ................................................................................................. 2, 9, 16
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Rules and Other Authorities
SEC Rule 144, Preliminary Note 1 ................................................................................................. 6
MARC I. STEINBERG, SECURITIES REGULATION (6th ed. 2013) ..................................................... 18
RESTATEMENT (THIRD) OF RESTITUTION & UNJUST ENRICHMENT (2011) ................................... 14
The Wreck of Regulation D: The Unintended (and Bad) Outcomes for the SECs Crown
Jewel Exemptions, 7 OHIO STATE ENTREPRENEURIAL BUS L.J. 287 (2012) ............................18

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Defendants Yossef Kahlon and TJ Management Group, LLC (TJM) respond to the
Motion for Summary Judgment filed by the Plaintiff, the United States Securities and Exchange
Commission (the Motion) and respectfully show as follows:
I. INTRODUCTION
To be clear, this is the exemption in question Federal Reg D section 504(b)(iii) and
Texas Administrative Code 107.2 and 109.4:
Texas:
(a) Availability. The exemption from securities registration provided by the
Texas Securities Act, 5.H, or this section is not available if the financial
institution or other institutional investor named therein is in fact acting
only as agent for another purchaser that is not a financial institution or
other institutional investor listed in 5.H or this section. These exemptions
are available only if the financial institution or other institutional investor
named therein is acting for its own account or as a bona fide trustee of a
trust organized and existing other than for the purpose of acquiring the
specific securities for which the seller is claiming the exemption.

(b) Sales to certain institutional investors. The State Securities Board,
pursuant to the Act, 5.T, exempts from the securities registration
requirements of the Act, 7, the offer and sale of any securities to any of
the following persons:

(1) an "institutional accredited investor," as that term is defined in
107.2 of this title (relating to Definitions), excluding, however,
any self-directed employee benefit plan with investment decisions
made solely by persons that are "individual accredited investors"
as defined in 107.2 of this title;

(2) any "qualified institutional buyer" (as that term is defined in Rule
144A(a)(1) promulgated by the SEC under the 1933 Act, as made
effective in SEC Release Number 33-6862, and amended in
Release Number 33-6963); and

(3) a corporation, partnership, trust, estate, or other entity (excluding
individuals) having net worth of not less than $5 million, or a
wholly-owned subsidiary of such entity, as long as the entity was
not formed for the purpose of acquiring the specific securities.

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7 Tex. Admin. Code 109.4. Texas law defines institutional accredited investor as follows:
(41) Individual accredited investor--Natural person as described in Rule
501(a)(5) and (6) promulgated by the SEC under the Securities Act
of 1933 as made effective in SEC Release Number 33-6389, as
amended in Release Numbers 33-6758, 33-6825, and 33-9287.

(42) Institutional accredited investor--An entity described in Rule
501(a)(1) - (4), (7) and (8) promulgated by the SEC under the
Securities Act of 1933 as made effective in SEC Release Number
33-6389, as amended in Release Numbers 33-6758 and 33-6825.

7 Tex. Admin. Code 107.2.
Federal:
SEC Rule 504 incorporates the Texas exemption into federal law:

(a) Exemption. Offers and sales of securities that satisfy the conditions in
paragraph (b) of this 230.504 by an issuer that is not:

(1) Subject to the reporting requirements of section 13 or 15(d) of the
Exchange Act;

(2) An investment company; or

(3) A development stage company that either has no specific business
plan or purpose or has indicated that its business plan is to engage
in a merger or acquisition with an unidentified company or
companies, or other entity or person, shall be exempt from the
provision of section 5 of the Act under section 3(b) of the Act.

(b) Conditions to be met

(1) General conditions. To qualify for exemption under this 230.504,
offers and sales must satisfy the terms and conditions of
230.501 and 230.502 (a), (c) and (d), except that the provisions
of 230.502 (c) and (d) will not apply to offers and sales of
securities under this 230.504 that are made:

(i) Exclusively in one or more states that provide for the
registration of the securities, and require the public filing
and delivery to investors of a substantive disclosure
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document before sale, and are made in accordance with
those state provisions;

(ii) In one or more states that have no provision for the
registration of the securities or the public filing or delivery
of a disclosure document before sale, if the securities have
been registered in at least one state that provides for such
registration, public filing and delivery before sale, offers
and sales are made in that state in accordance with such
provisions, and the disclosure document is delivered before
sale to all purchasers (including those in the states that have
no such procedure); or

(iii) Exclusively according to state law exemptions from
registration that permit general solicitation and general
advertising so long as sales are made only to accredited
investors as defined in 230.501(a).

(2) The aggregate offering price for an offering of securities under this
230.504, as defined in 230.501(c), shall not exceed $1,000,000,
less the aggregate offering price for all securities sold within the
twelve months before the start of and during the offering of
securities under this 230.504, in reliance on any exemption under
section 3(b), or in violation of section 5(a) of the Securities Act.

17 C.F.R. 230.504. The two SEC Rules referred to by Rule 504 are as follows:

(a) Accredited investor. Accredited investor shall mean any person who
comes within any of the following categories, or who the issuer reasonably
believes comes within any of the following categories, at the time of the
sale of the securities to that person:
. . .
3. Any organization described in section 501(c)(3) of the Internal
Revenue Code, corporation, Massachusetts or similar business
trust, or partnership, not formed for the specific purpose of
acquiring the securities offered, with total assets in excess of
$5,000,000;
. . .
6. Any natural person whose individual net worth, or joint net worth
with that person's spouse, at the time of his purchase exceeds
$1,000,000;
. . .
8. Any entity in which all of the equity owners are accredited
investors

17 C.F.R. 230.501.
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(a) All sales that are part of the same Regulation D offering must meet all of
the terms and conditions of Regulation D. Offers and sales that are made
more than six months before the start of a Regulation D offering or are
made more than six months after completion of a Regulation D offering
will not be considered part of that Regulation D offering, so long as during
those six month periods there are no offers or sales of securities by or for
the issuer that are of the same or a similar class as those offered or sold
under Regulation D, other than those offers or sales of securities under an
employee benefit plan as defined in rule 405 under the Act (17 C.F.R.
230.405).

. . .

(c) Limitation on manner of offering. Except as provided in 230.504(b)(1),
neither the issuer nor any person acting on its behalf shall offer or sell the
securities by any form of general solicitation or general advertising,
including, but not limited to, the following:

(1) Any advertisement, article, notice or other communication
published in any newspaper, magazine, or similar media or
broadcast over television or radio; and

(2) Any seminar or meeting whose attendees have been invited by any
general solicitation or general advertising; Provided, however, that
publication by an issuer of a notice in accordance with
230.135c or filing with the Commission by an issuer of a notice
of sales on Form D (17 CFR 239.500) in which the issuer has made
a good faith and reasonable attempt to comply with the
requirements of such form, shall not be deemed to constitute
general solicitation or general advertising for purposes of this
section; Provided further, that, if the requirements of
230.135e are satisfied, providing any journalist with access to
press conferences held outside of the United States, to meetings
with issuer or selling security holder representatives conducted
outside of the United States, or to written press-related materials
released outside the United States, at or in which a present or
proposed offering of securities is discussed, will not be deemed to
constitute general solicitation or general advertising for purposes
of this section.

(d) Limitations on resale. Except as provided in 17 C.F.R. 230.504(b)(1),
securities acquired in a transaction under Regulation D shall have the
status of securities acquired in a transaction under section 4(2) of the Act
and cannot be resold without registration under the Act or an exemption
therefrom. The issuer shall exercise reasonable care to assure that the
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purchasers of the securities are not underwriters within the meaning of
section 2(11) of the Act, which reasonable care may be demonstrated by
the following:

(1) Reasonable inquiry to determine if the purchaser is acquiring the
securities for himself or for other persons;

(2) Written disclosure to each purchaser prior to sale that the securities
have not been registered under the Act and, therefore, cannot be
resold unless they are registered under the Act or unless an
exemption from registration is available; and

(3) Placement of a legend on the certificate or other document that
evidences the securities stating that the securities have not been
registered under the Act and setting forth or referring to the
restrictions on transferability and sale of the securities.

While taking these actions will establish the requisite reasonable care, it is not the
exclusive method to demonstrate such care. Other actions by the issuer may
satisfy this provision. In addition, 230.502(b)(2)(vii) requires the delivery of
written disclosure of the limitations on resale to investors in certain instances.

17 C.F.R. 502.

To summarize the above -- these exemptions mean that an accredited institutional
investor, or investors in aggregate, may invest up to $1,000,000 per twelve month period in non-
reporting companies, which equity investment results in freely-trading shares.
II. ARGUMENT AND AUTHORITIES AS TO LIABILITY
Texas exempts shares resulting from a specific type of stock transaction from state
securities registration. Federal law in the form of rules written by the SEC incorporates that
exemption, and in turn exempts shares resulting from that type of transaction from federal
securities registration.
A. THE SECS AUTHORITIES DO NOT APPLY.
The SEC does not cite a single authority about this registration exemption and this case.
The opinions cited by the SEC involve one of three irrelevant situations: (1) parties who offered
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no evidence of any registration exemption;
1
(2) affiliate cases where the issuer either was the
alter ego of purchaser,
2
acted as counsel for the purchaser,
3
or otherwise helped the purchaser
sell stock in a pump-and-dump scheme; or (3) a distinct private offering exemption that has
neither the language nor history of the Texas exemption from registration.
4
The rules cited by
the SEC are the most general provisions available, none of which deal with this exemption and
all of which acknowledge the legitimacy of exemptions from registration.
5

The SEC puts the cart before the horse in citing precedent regarding eligibility for the
exemption, and as a result forms a baseless argument against TJM relying on misuse and abuse
where there was none. In every case relevant to this one-- only some of which are cited by the
Chicago Office in its Motion -- the SEC has argued that parties were not eligible to claim the
exemption specifically in connection with and because of allegations of serious misconduct
(fraud, pump and dump, nominee accounts, secret control, free shares etc.) which constituted
abuse and misuse of the exemption. See, e.g.:
SEC v. Luna, No. 2:10-CV-02166 (D. Nev.)
(Complaint 3, 4, 5, 27, 28, 33, 34, 35, 47, App. 19-20, 25-38);

1
See, e.g., SEC v. Premium Income Corp., No. 3:05-CV-0415-B, Mem. Op. at *10 (N.D. Tex. August
1, 2007) (Defendant has presented no evidence in support of the application of the private
placement exemption or any other exemption.); SEC v. Cavanagh, 2004 WL 1594818 No. 3:05-CV-
0415-B, Mem. Op. at *10 (N.D. Tex. August 1, 2007) (Defendant has presented no evidence in
support of the application of the private placement exemption or any other exemption.)
2
See, e.g, SEC v. North Am. Research & Devel. Corp., 424 F.3d 63, 73 (2d Cir. 1970) (North
American also was an issuer and, after April 27, 1967, was nothing but a corporate embodiment of
White. It acted solely at his discretion, and he was completely in command.)
3
SEC v. Offill, 2012 WL 246061 (N.D. Tex. 2012). On the last page, Offill suggests that resellers
under any exemption are subject to registration requirements. That statement is clearly dicta
nowhere does the Court address any of the points made in this Response, or the interplay between
Rule 504 and 502 discussed in the Attachment, or the policy reasons why that statement cannot work
in practice.
4
SEC v. Luna, 2014 WL 794202 at *8 (D. Nev. Feb. 6, 2014).
5
See, e.g., SEC Rule 144, Preliminary Note 1: If any person sells a non-exempt security to any other
person, the sale must be registered unless an exemption can be found for the transaction.
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SEC v. Reynolds, No. 3:08-CV-00438-B (N.D. Tex.)
(Complaint 1, 2, 4, 21, 28, 40, 41, 43, 44, 45, 50, 51, 53, 55, 64, 69, 70,
91, App. 35-36, 40-46, 60-51);

The specific accusations about ConnectaJet in SEC v. Reynolds
(Id. 26, 28, App. 62-63);

SEC v. Paloma, No. 1:07-CV-895 (E.D. Va.)
(Complaint 1, 2, 3, 4, 29, 32, 34, 36, 41, 53, 65, App. 119-20, 126-28,
131, 134-35, 137-38, 141);

SEC v. Seven Palm Investments, No. 1:10-cv-02755 (N.D. Ill.)
(Complaint 17, 24, 25, 27, 43, 51, 56, App. 148-50, 153-56); and

SEC v. Czarnik, No. 10:cv-745 (S.D.N.Y.)
(Complaint 1, 3, 4, 12, 14, 15, 103, App. 170-73, 176);

among others. In all of those cases, the SEC affirmed the existence and validity of the
exemption itself and presented specific reasons that disqualified the defendants in those actions
from being eligible for the otherwise lawful and valid exemption.
Furthermore in its settlement with the Mazuma entities in connection with SEC v.
Laidlaw, the SEC took issue solely with 504 transactions with one issuer -- amid the veritable
ocean of 504 issuers and transactions to which Mazuma, the most prominent and profligate
participant in the 504 space, was a party. In re Kramer, No. 3-15621 (SEC Nov. 25, 2013, App.
190-93.) The SEC's case and settlement revolved around a 504 offering that exceeded the
$1,000,000 per 12 month period cap. (See id. at 2-3.) By definition, all of the thousands of other
transactions with countless other issuers were properly exempt under the Texas 504 rule.
B. The SEC Distorts Key Words.
The SECs Motion relies upon a handful of red herring phrases that it uses incorrectly,
apparently to distract from the exemption and suggest wrongdoing where there is none. Simply
to clear the air, Defendants will address each in turn:
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Investor. Describing TJMs customers, the SEC admits: Generally, these companies
were in extreme financial distress; they could not find financing through banks, venture capital
firms or other traditional sources. (Motion at 4 [emphasis added].) Against this background,
the SEC alleges in its Complaint and its Motion that TJM received discounts of 30 to 50
percent, apparently suggesting without actually accusing -- that TJM had some inside track
with issuers. (See id.) But share prices in this space could easily move 100 percent on a daily
basis. (Kahlon Second Declaration 2, App. 1.) TJM took massive market risk in the
transactions at issue, which is essential to being an investor under the exemption.
Further, the market understood that if a purchaser in TJMs position acquired ten percent
or more of an issuers outstanding shares, it would become an affiliate and fall outside the
exemption. Everyone involved recognized this cap -- issuers, their counsel, trading houses
and knew that the only way an investor like TJM could continue to provide capital to an issuer
was to sell enough shares to allow the investor to reload. (Id. 3.) The SECs arbitrary
unwritten two-year rule of thumb has nothing to do with the reality of being an investor in
this space, and indeed the SECs own Rule 144 was amended many years ago and no such rule
of thumb exists.
Finally, recall what TJM established in its Motion that when the SECs Chicago Office
reversed field and sent its Wells notice to TJM, TJM voluntarily ceased all 504 activity in hopes
of learning what was causing a problem. As a result, it still holds millions of shares, at one point
worth millions of dollars, that are now worthless. If compliance with the exemption turns solely
on how long an investor holds stock, TJM has more than satisfied that standard.
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Underwriter. TJM never participated in a pre-arranged sale in any of the transactions at
issue.
6
That undisputed fact reinforces that TJM was an investor under the exemption TJM
took market risk, while an underwriter avoids market risk with pre-arranged sales. (While this
basic fact resolves the issue, an Attachment to this Response provides additional background for
the Court on the applicable law.)
Distribution. TJM only sold stock at arms-length in the free market.
Registration. The exemption results in free-trading shares, unless the investor becomes
an affiliate, or exceeds the 10 percent ownership threshold. TJMs Motion described how the
many sophisticated players in a transaction vetted the process of issuing shares; after all of that
review, TJM only received free-trading share within the meaning of the securities laws. An
investor simply cannot register a free-trading share. The SECs present argument to the contrary
asks TJM to have done the impossible.
Loophole. The entire exemption appears at the beginning of this Response. Its terms are
plain. They were written by the SEC. Far from a loophole, the exemption has been a well-
known part of the securities laws since 1992 and the Texas exemption is still good law today.
TJM was only one of many companies active in this space at the relevant times.
Nexus. The SECs position is not consistent. First, the SEC faults TJM for registering in
Texas to do business in accordance with Texas law, suggesting this was some sort of subterfuge.
(See Motion at 3.) Again, this suggestion has no grounding in the actual terms of the exemption
nothing about a nexus appears anywhere in it. And the SECs criticism of TJM shows that
its argument about issuers is not credible if every issuer named in its Motion had registered in

6
See Texas Rule 109.4(b), supra (These exemptions are available only if the financial institution or
other institutional investor named therein is acting for its own account or as a bona fide trustee of a
trust organized and existing other than for the purpose of acquiring the specific securities for which
the seller is claiming the exemption.)
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Texas, wouldnt the SEC simply fault those issuers for engaging in a sham as well? The SECs
position has no logical end point because it has no basis in the exemption to draw upon.
Further, where is the enforcement action against the issuers, their lawyers, and the many
other parties who reviewed these transactions? In real time, nobody inferred the nexus
requirement that the SEC now insists is obvious. The SECs selective enforcement against TJM
suggests that even now, it knows that this requirement is not obvious or apparent.
Note that TJM registered to do business in Texas during 2005 -- before it did a single
504(b) transaction -- when it acquired over 100 acres of land in Texas at a major intersection in
Dallas, which it still owns part of to this day. This acquisition required extensive involvement
with Texas, including over three years of back-and-forth travel to Texas by Mr. Kahlon to deal
with contractors, the city, and many others -- and over a million dollars in local labor and
expenses to restore the floodplain after years of neglect.
7
(Kahlon Second Declaration 4, App.
1-2.) That is far more than the plain terms of the Texas law require, and far more than enough to
establish TJ Management as a legitimate business engaged in real economic activity in Texas.

7
Specifically:
A. To release the lien of a prior owner of the Texas property, TJM paid $122,000 on June 27, 2005,
and $30,000 on January 27, 2006. (Kahlon Second Declaration 4(a), App. 2.)
B. After acquiring the property, TJM paid all property taxes assessed on it by Dallas County and
other Texas taxing authorities. (Id. 4(b), App. 2.)
C. In 2005, the City of Dallas which had an injunction against the property arising from events
before TJM became its owner required that extensive work be performed to restore the original
floodplain. (Id. 4(c) & Ex. A, App.2.) Accordingly, in 2006 and 2007, TJM hired a project
engineer (for approximately $142,000) and two general contractors (for approximately $390,000
and $360,000, respectively) to meet the citys requirements. Until the City of Dallas approved
and the injunction was lifted, Mr. Kahlon travelled between New York and Texas more than
twenty times to coordinate this work. (Id.)

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If the SEC does not like the wording of the Texas exemption, it should take its concerns
to the Texas authorities. The SEC cannot bypass the Texas lawmaking process with this
enforcement action.
C. The SECs Position Is Not Consistent With Due Process.
A law written in terms so vague that men of common intelligence must necessarily
guess at its meaning and differ as to its application, violates the first essential of due process . . .
.
8
The SEC promulgated the 504 exemption in 1992, choosing simple words of plain meaning,
and stating that those words meant what they said. The SEC considered amending the
exemption to make the resulting shares restricted in 2004-05 before TJM began doing business
under the exemption and again in 2007, and made no change. The Texas Securities
Commissioner agreed with the way TJM read the exemption. Every transfer agent and trading
house TJM dealt with agreed with the way TJM read the exemption, after thorough review by
their legal, anti-money laundering, and compliance departments. Every issuer had an attorney
who agreed with the way TJM read the exemption. TJMs many competitors approached the
exemption in the same way. And the SEC agreed as well, having no complaint with TJM after
two depositions and dozens of informal phone calls over a several-year period.
TJM is not GE or GM; if the SEC does not like the Texas exemption, it should address its
concerns with the Texas authorities rather than sue TJM. Indeed, other states with similar
exemptions (Minnesota and Delaware) have repealed them in recent years. But Texas has
chosen to maintain the identical exemption. TJM did business under this exemption transparently
and with the highest standards, complied with all relevant regulations and was the only market
participant that cooperated fully with every regulator, had no complaints from any issuers,

8
E.g., Connally v. General Constr. Co., 269 U. S. 385, 391 (1926).
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brokerage houses or other participants throughout the cited period, and conducted itself based
upon what the laws said and what the market understood them to say. The SECs attempts to
add new terms to the exemption when the SEC itself had the power to add those terms in the
first place, as well as to amend the exemption with them serve only to highlight what the
exemption actually says. TJM complied fully with it, and the SECs present attack on TJM is
unfounded and unfair.
III. ARGUMENT AND AUTHORITIES AS TO REMEDY
As shown above, the SECs case has no foundation in the relevant exemption or the facts.
But because the SEC has presumed to seek summary judgment on remedy as well as liability,
Defendants will address those topics as well and show that the SEC cannot establish the lack of a
fact issue on this record.
A. GENUINE ISSUES OF MATERIAL FACT PREVENT SUMMARY JUDGMENT
AS TO INJUNCTIONS, PENALTIES, AND INTEREST.

The SEC correctly acknowledges that this Court may consider several factors to
determine whether a permanent injunction is appropriate. (Motion at 15-16.) Similar
considerations bear on the remedies of prejudgment interest, civil penalties, and a penny stock
bar. (See Motion at 19-21.) Two facts established in the prevent summary judgment when
those factors are given due weight. First is scienter as shown above and in Defendants own
Motion for Summary Judgment, every player in the market agreed with TJMs view of the rules,
including the SEC. TJM twice previously asked the SEC if it was doing anything wrong, and
neither the Boston office of the SEC nor the Home office of the SEC suggested otherwise.
Second is the fact that TJM has voluntarily stopped Rule 504 transactions for the better part of
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four years now, at a cost of millions of dollars. TJM is entitled to an evidentiary hearing to fully
develop those matters, and summary judgment is not appropriate on this record.
9

B. GENUINE ISSUES OF MATERIAL FACT PREVENT SUMMARY JUDGMENT
AS TO DISGORGEMENT.

Genuine issues of material fact also defeat the SECs request for summary judgment on
the remedy of disgorgement. First, the SEC has not offered a reasonable approximation of
profit for this specific case. The accountant put forward by the SEC assumes that TJM
purchased shares from the Issuers at a discount price, typically a 30-50% discount from the
market price. (Motion Ex. 8 5.) As shown above, however, the securities at issue here are
extremely volatile, moving as much as 100% in a single day. See supra at 8. Her analysis thus
rests on an inapplicable and unfair assumption and ought not even be considered.
10
At the very
least, there is a genuine issue of material fact as to whether that is so.
11

Second, as the SEC acknowledges,[t]he district court has broad discretion in fashioning
the equitable remedy of a disgorgement order. (Motion at 17 [emphasis added].) As
Defendants Motion shows, the SEC has not acted equitably towards TJM and Mr. Kahlon and
thus has unclean hands that bar equitable relief entirely.
12
There are at least serious questions

9
See, e.g., SEC v. Connectajet.com, Inc., 2011WL 5509896 at *8, No. 3:09-CV-1742-B (N.D. Tex.
Nov. 9, 2011) (denying summary judgment on claims for a permanent injunction, third-tier civil
penalty, and penny bar stock bar, holding: The appropriateness of such remedies shall be determined
after a trial or evidentiary hearing.); see also SEC v. Calvo, 378 F.3d 1211, 1214, 1216 (11th Cir.
2004) (reviewing application of factors after evidentiary hearing on remedy).
10
See Moore v. Intl Paint LLC, 547 Fed. Appx. 513, 515 (5th Cir. Nov. 13, 2013) (affirming dismissal
of case that relied on experts unsubstantiated factual assertions)
11
See Roman v. Western Manufacturing, 691 F.3d 686, 696 (5th Cir. 2012) (reviewing disputes among
experts and concluding: There was certainly contrary evidence, but that was for jurors to weigh.)
12
See generally ABF Freight System, Inc. v. NLRB, 510 U.S. 317, 329-330 (1994) (reminding that the
unclean hands doctrine closes the door of a court of equity to one tainted with inequitableness or
bad faith relative to the matter in which he seeks relief, however improper may have been the
behavior of the defendant. (citation omitted)).
-14-
about the SECs conduct that this Court should consider carefully, which it cannot do on a cold
summary judgment record.
Third, the SEC offers gross profit figures, not net. In the transactions at issue, TJMs net
profit was at best 30% of the gross profit numbers put forward by the SEC. (Kahlon Second
Declaration 5.) That fact alone shows that the SEC has not proferred a reasonable
approximation of TJMs alleged gain; more basically, it is a genuine question that makes
summary judgment improper.
Finally, the SEC does not cite a case that orders disgorgement of gross profit in a strict
liability Section 5 case, without at least allegations of other intentional wrongdoing. This lack
of authority results from basic principles -- regardless of how liability may be established under
Section 5, equity does not impose strict liability at the remedy stage. Rather, it requires
consideration of the alleged wrongdoers mental state, his or her own contribution to the profit at
issue, and a host of other factors. See generally RESTATEMENT (THIRD) OF RESTITUTION &
UNJUST ENRICHMENT 51 (2011). Thus, for the same reasons that summary judgment is not
appropriate as to any other remedy sought by the SEC, it is not appropriate for the equitable
remedy of disgorgement either.
IV. CONCLUSION
For the foregoing reasons, and the reasons stated in its own Motion for Summary
Judgment, Defendants respectfully request that the SECs Motion be denied in its entirety.

-15-
Date: August 18, 2014 Respectfully submitted,

/s/David S. Coale
Jeffrey M. Tillotson (SBN 20039200)
Email: jmt@lynnllp.com
David S. Coale (SBN 00787255)
Email: dcoale@lynnllp.com
LYNN TILLOTSON PINKER & COX, LLP
2100 Ross Avenue, Suite 2700
Dallas, Texas 75201
Telephone: 214-981-3800
Facsimile: 214-981-3839

ATTORNEYS FOR DEFENDANTS
YOSSEF KAHLON and TJ MANAGEMENT
GROUP, LLC

CERTIFICATE OF SERVICE

The undersigned does hereby certify that on August 18, 2014, a true and correct copy
of the above and foregoing document has been served.

Jonathan Stephen Polish
Timothy S. Leiman
US SECURITIES & EXCHANGE COMMISSION - CHICAGO
175 W Jackson Blvd., Suite 900
Chicago, IL 60604
Fax: 312-353-7398
Email: polishj@sec.gov
Email: leimant@sec.gov

/s/David S. Coale
David S. Coale

-16-
ATTACHMENT A ON UNDERWRITER STATUS

The Court does not need to engage the details of the SECs argument about whether TJM
was an underwriter. Its cases are inapplicable and the points made in the body of the Motion
refute the SECs claims. But to clear up any confusion caused by the SECs loose citations to
authority, Defendants make these additional points for clarification:
1. The word underwriter is not in the exemption. The only remotely comparable
language is the requirement in the Texas regulation that an investor be acting for its own
account.
13
There is no dispute that TJM did this.
2. The SECs cases deal with the term underwriter in a different exemption.
Unlike that exemption, the one at issue in this case expressly carves itself out from registration
requirements, and the registration rules in turn recognize that carve-out:

SEC Rule 504(b)(1):

[T]he provisions of [SEC Rules 502(c) and
(d)] will not apply to offers and sales of
securities under this [SEC Rule 504] that
are made:
. . .
(iii) Exclusively according to state law
exemptions from registration that permit
general solicitation and general advertising so
long as sales are made only to accredited
investors as defined in 230.501(a).

SEC Rule 502(d):

Limitations on resale. Except as provided in
[SEC Rule 504(b)(1)], securities acquired in a
transaction under Regulation D shall have the
status of securities acquired in a transaction
under section 4(2) of the Act and cannot be
resold without registration under the Act or an
exemption therefrom.

3. The SEC made this carve-out deliberately and thoughtfully. It amended Rule 504
in 1992 because regulations governing capital investment were unnecessarily cumbersome,
restrictive and costly for the smallest companies. (App. ___.) When the SEC formally

13
See Texas Rule 109.4(b), supra (These exemptions are available only if the financial institution or
other institutional investor named therein is acting for its own account or as a bona fide trustee of a
trust organized and existing other than for the purpose of acquiring the specific securities for which
the seller is claiming the exemption.)
-17-
proposed the rule, it said that securities sold under this provision would be available for
immediate resale by non-affiliates of the issuer. (App. ____.) When the SEC adopted its final
rule, it repeated: Investors purchasing Rule 504 securities will receive freely transferable
securities. (App. ____). And its Chairman at the time summarized:
Seed capital offerings under Rule 504 will be permitted to use general investor
solicitation, and securities sold under the Rule would no longer be required to be
restricted securities. By making these securities more saleable by investors,
investors should be more willing to purchase these securities. Unless an exit is
available, fewer people will choose to enter an investment.

(App. ____.)
4. Third-party witnesses
14
deposed by Defendants agreed that the market considered
the securities to be unrestricted:
Mark Duncan described Citis practices: Once it was in the customers
account, then they were free and clear to trade that security. (App. ___
[emphasis added].)

Jason Young described E*Trades practices: Q. As far as you
understand, after that securities that T.J. Management deposited went
through that process, they were freely tradeable and resalable? A. That
was my understanding. (App. ___ [emphasis added].)

Noel Dalzell also described E*Trades practices: Q. And acknowledging
that you arent a lawyer, but also acknowledging that . . . you didnt fall of
the turnip truck either, to the extent youre able to speak to my question,
were the securities that TJ Management deposited with E*Trade freely
tradeable and resalable? A. In my experience, I wouldnt have been able
to sell them if they werent. (App.____ [emphasis added].)

Indeed, E*Trade made a specific investigation into the Texas registration exemption, and
continued to do business with TJM for months after that investigation concluded. (App. ___-
___.)
15

14
Defendants have deposed Jason Young, an equity sales trader in E*Trade's Institutional Services
Division, handling TJM's account at the time relevant to the Complaint; Noel Dalzell, the head of that
Division and Mr. Youngs superior at the time relevant to the complaint; and Mark Duncan, who
handled TJMs account in a similar position to Mr. Young at Citigroup at the relevant times.
-18-
5. The SECs position subverts the goal of the exemption. The 504 exemption exists
to make capital available to small businesses who could not obtain it if registration requirements
applied to their stock.
16
It makes no sense that the rule would let a small business issue
unregistered stock, only to strangle the buyers of that stock with registration requirements. The
SEC Chairman at the time of the rules enactment made exactly this point: It is a mistake to
create a legal and regulatory system that seeks to target the process of raising capital with
arbitrary investment formulae set by the government, rather than targeting those who defraud
investors. (App. ___.)
17
And in a no-action letter from that time, the SEC applied that point
to the very argument that its Chicago office makes today about underwriter status:
In 1992, the Commission amended regulation D to remove resale limitations from
securities sold in rule 504 offerings. This action, which was intended to minimize
regulatory illiquidity discounts for securities sold in the very smallest offerings,
means that no party will be found to be an underwriter based on the statutes
view-to-distribution test.

(App. ___.)

4838-6729-3468, v. 3

15
This is not an argument about reliance on counsel. It is an argument about the plain meaning of the
rules, and how every relevant party in real time interpreted them the same way contrary to the
SECs present position.
16
See Rutherford B. Campbell, Jr., The Wreck of Regulation D: The Unintended (and Bad) Outcomes
for the SECs Crown Jewel Exemptions, 7 OHIO STATE ENTREPRENEURIAL BUS L.J. 287, 290 (2012)
(With regard to capital formation, Regulation D was based on the correct assumptions that
transaction costs (offering costs) can throttle capital formation and that it is relative, not absolute,
offering costs that are important in that regard.) Regulation D offer[s] issuers a stair-step approach
through its three exemptions Rule 504, Rule 505 and Rule 506 requiring more investor
protections as the size of the offering increased. Id. Rule 504 the lowest of those three stairs
provides an exemption from registration for offerings up to one million dollars without any
purchaser sophistication requirement or disclosure requirement. Id.
17
See generally MARC I. STEINBERG, SECURITIES REGULATION 3.07(A) at 121 (6th ed. 2013) (Thus,
except for the conditions set forth above, Rule 504 may be viewed as a blanket federal exemption
from registration for offerings not exceeding $1 million. The SEC believes that the remedial
provisions of the federal securities laws, in conjunction with state regulation, are sufficient protection
in these smaller offerings.)

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