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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK ________________________________________________ : : : Plaintiff, : : 11 Civ. 07388 (JSR) v. : : ECF Case BRIAN H. STOKER, : : Defendant. : ________________________________________________: SECURITIES AND EXCHANGE COMMISSION,

PLAINTIFFS MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANT BRIAN H. STOKERS MOTION FOR SUMMARY JUDGMENT

Jeffery T. Infelise Assistant Chief Litigation Counsel Jane M. E. Peterson Assistant Chief Litigation Counsel Andrew Feller Senior Attorney U.S. Securities and Exchange Commission Enforcement Division 100 F Street, N.E. Washington, D.C. 20549 (202) 551-4904 (202) 772-9282 (fax) May 23, 2012 Attorneys for Plaintiff U.S. Securities and Exchange Commission

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TABLE OF CONTENTS

TABLE OF AUTHORITIES ............................................................................................. iii PRELIMINARY STATEMENT .........................................................................................1 STATEMENT OF FACTS ..................................................................................................2 I. Structuring The Class V III CDO .........................................................................2 II. Marketing of Class V III .....................................................................................7 III. Closing of Class V III CDO...............................................................................9 ARGUMENT.....................................................................................................................11 I. Standard For Consideration Of Motion For Summary Judgment ......................11 II. The Evidence Is Legally Sufficient To Prove That Stoker Violated Section 17(a)(2) ............................................................................................................12 A. Janus Does Not Apply To Section 17(a)(2) ..........................................12 B. Stoker Obtained Money Or Property By Means Of A False Statement14 1. Stoker Participated In The Preparation Of Marketing Materials14 2. Stoker Used Misleading Statements To Obtain Money or Property .....................................................................................16 C. The Class V III Marketing Materials Contained Material Omissions ..16 D. Stoker Obtained Money Or Property As Required By Section 17(a)(2)19 1. Stoker Deprived Victims Of Money Or Property ......................19 2. Stoker Obtained Money or Property..........................................20 III. Stoker Participated in a Scheme Under Section 17(a)(3) ................................23 A. A Violation Of Section 17(a)(3) May Be Based On Misrepresentations Or Omissions.........................................................................................23 B. Class V III Was Intended As A Means For Citigroup To Profit From The Poor Performance of Class V IIIs Assets......................................24 i

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C. Stoker Was A Key Participant In A Transaction He Knew Or Reasonably Should Have Known Was Intended As A Proprietary Trade......................................................................................................26 CONCLUSION..................................................................................................................27

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TABLE OF AUTHORITIES FEDERAL CASES Aaron v. SEC, 446 U.S. 680 (1980) ..................................................................................24 Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972).............................24 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986).............................................11 Bank of China, New York Branch v. NBM LLC, 359 F.3d 171 (2d Cir. 2004) ............................................................................................................................22 Burt Rigid Box, Inc. v. Travelers Property Cas. Corp., 302 F.3d 83 (2d Cir. 2002) .....................................................................................................................11 Donald T. Sheldon., 51 S.E.C. 59 (1992), affd, 45 F.3d 1515 (11th Cir. 1995). ...........................................................................................................................15 Dolphin and Bradbury, Inc. v. SEC., 512 F.3d 634 (D.C. Cir. 2008)................................19 Finkel v. Stratton Corp., 962 F.2d 169 (2d Cir. 1992).......................................................12 Halperin v. eBanker USA.Com, Inc., 295 F.3d 352 (2d Cir. 2002) ..................................19 Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011)...............................................................................................................12, 13, 14 Joseph v. Wiles, 223 F.3d 1155 (10th Cir. 2000) ..............................................................24 Kenneth R. Ward, Exchange Act Release No. 3-9327, 2003 WL 1447865 (Mar. 19, 2003) affd 75 Fed. Appx. 320 (5th Cir. 2003)............................................15 Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986) ........................11 Mount Vernon Fire Ins. Co. v. Belize NY, Inc., 277 F.3d 232, 236 (2d Cir. 2002) ............................................................................................................................11 Piesco v. Koch, 12 F.3d 332 (2d Cir. 1993) ......................................................................12 Porcelli v. United States, 404 F.3d 157 (2d Cir. 2005)......................................................20 Rombach v. Chang, 355 F.3d 164 (2d Cir. 2010)..............................................................18 SEC v. KPMG, LLP, 412 F. Supp. 2d 349 (S.D.N.Y. 2006) ............................................14

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SEC v. Tambone, 550 F.3d 106 (1st Cir. 2008) rehg granted en banc, opinion withdrawn, 573 F.3d 54 (2009), reinstated in relevant part (597 F.3d 436 (2010) .......................................................................................13, 14, 21 SEC v. Wolfson, 539 F.3d 1249 (10th Cir. 2008) .............................................................14 Slayton v. Am. Express Co., 604 F.3d 758 (2d Cir. 2010) ................................................18 Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87 (2d Cir. 2001) .....................................................................................................................22 TSC Indus., Inc. v. Northway, Inc.,, 426 U.S. 438 (1976) ................................................16 United States v. Beech-Nut Nutrition Corp., 871 F.2d 1181 (2d Cir. 1989) .....................15 United States v. Bilotti, 380 F.2d 649 (2d Cir. 1967)........................................................24 United States v. Crispo, 306 F.3d 71 (2d Cir. 2002) .........................................................20 United States v. Gayle., 342 F.3d 89 (2d Cir. 2003)..........................................................12 United States v. Males, 459 F.3d 154 (2d Cir. 2006) ........................................................20 United States v. Naftalin, 441 U.S. 768 (1979) .................................................................24 United States v. Shellef, 507 F.3d 82 (2d Cir. 2007).........................................................20 Williamson v. united States, 207 U.S. 425 (1908).............................................................15 Varold, LLC v. Cerami., 545 F.3d 114, 121 (2d Cir. 2008) ..............................................11

DOCKETED CASES De Jesus v. City of New York, No. 10 Civ. 9400, 2012 WL 569176 (S.D.N.Y. Feb 21, 2012) ..............................................................................................11 Redd v. New York Div. of Parole, No. 10-41410-cv, 2012 WL 1560403 (May 4, 2012)...............................................................................................................17 SEC v. Daifotis, No. C 11-00137 WHA, 2011 WL 3295139 (N.D. Cal. Aug. 1, 2011) ...............................................................................................................13 SEC v. Delphi Corp., No. 06-14891, 2008 WL 4539519 (E.D. Mich. Oct. 8, 2008) ..................................................................................................................21, 22 SEC v. Geswein, No. 5:10CV1235, 2011 WL 4565861 (N.D. Ohio Sept. iv

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29, 2011) ......................................................................................................................13 SEC v. Kelly, No. 08 Civ. 4612 (CM), 2011 WL 4431161 (S.D.N.Y. Sept. 22, 2011) ......................................................................................................................13 SEC v. Mercury Interactive, LLC, No. 5:07-cv-02822-WHA, 2011 WL 5871020 (N.D. Cal. Nov. 22, 2011).............................................................................13 SEC v. Pentagon Capital Mgmt. PLC, No. 08 Civ. 3324, 2012 WL 479576 (S.D.N.Y. Feb. 14 2012) .................................................................................13 SEC v. Radius Capital Corp., No. 2:11-cv-116-ftM-29DNF, 2012 WL 695668 (M.D. Fla. Mar. 1, 2012).................................................................................13 SEC v. Sentinel Mgmt. Grp., Inc., No. 07 C 4684, 2012 WL 1079961 (N.D. Ill. Mar. 30, 2012)..............................................................................................13 FEDERAL STATUTES Securities Act of 1933 Section 17(a).[15 U.S.C. 77q(a)] .................................................................... passim Securities Exchange Act 1934 Rule 10(b).[17 CFR 240.1b] .........................................................................12, 20 18 U.S.C. 1341................................................................................................................20 LOCAL RULES S.D.N.Y. R. 7.1 ....................................................................................................................1 MISCELLANEOUS Robert A. Prentice, Scheme Liability: Does It Have a Future After Stoneridge?, 2009 Wisc. L. Rev. 351 (2009)...............................................................20

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3UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK ________________________________________________ : : : Plaintiff, : : 11 Civ. 07388 (JSR) v. : : ECF Case BRIAN H. STOKER, : : Defendant. : ________________________________________________: SECURITIES AND EXCHANGE COMMISSION, PLAINTIFFS MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANT BRIAN H. STOKERS MOTION FOR SUMMARY JUDGMENT Pursuant to Local Civil Rule 7.1 and the Courts Case Management Plan, dated November 15, 2011, Plaintiff, the Securities and Exchange Commission (Commission), respectfully submits its Memorandum of Law in Opposition to Defendant Brian H. Stokers Motion for Summary Judgment. PRELIMINARY STATEMENT The evidence demonstrates that the defendant, Brian H. Stoker (Stoker) violated Sections 17(a)(2) and (3) of the Securities Act of 1933 (Securities Act) because of his role in the structuring and marketing of a largely synthetic collateralized debt obligation (CDO) named Class V Funding III (Class V III). As a director of the CDO structuring desk at Citigroup Global Markets, Inc. (Citigroup) and the lead structurer for Class V III, Stoker was responsible for ensuring the accuracy of the disclosure documents used to market the deal. Nevertheless, the offering circular (which Stoker personally edited) and the pitch book (which Stoker personally distributed) failed to disclose that Citigroup played a substantial role in the selection of the collateral for Class V III. Instead, those documents stated only that the collateral

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manager, Credit Suisse Alternative Capital (CSAC), had selected the assets for the Class V III portfolio without disclosing that, in fact, Citigroup had selected a substantial portion of the assets. Further, although Stoker knew or reasonably should have known that Class V III was intended as a proprietary trade to position Citigroup to profit from the poor performance of the assets it selected, neither the pitch book nor the offering circular contained any disclosure that Citigroup had taken an approximately $500 million naked short position on the assets it selected. This information clearly would have been viewed by a reasonable investor as having significantly altered the total mix of information available about Class V III. In addition, the evidence demonstrates that Stoker played an active role in the Class V III transaction that acted as a fraud upon investors. Stoker not only failed to ensure the completeness and accuracy of disclosures concerning Class V III, he also structured the CDO knowing it would be used by Citigroup to execute a proprietary trade, created models to determine what profit Citigroup would make by taking short positions on the collateral in the CDO, suggested what assets should be included and admonished his supervisor not to tell the purported asset manager for Class V III that it was intended by Citigroup as a proprietary trade. This evidence is more than sufficient for a reasonable juror could conclude that Stoker violated both Section 17(a)(2) and (3). STATEMENT OF FACTS I. Structuring The Class V III CDO During the fall of 2006, Citigroup learned of a large market demand to purchase protection on CDOs, many of them synthetic, whose assets consisted primarily of BBB-rated subprime, residential mortgage backed securities (RMBS), Facts 40, 1 particularly for

Facts __, refers to Plaintiffs Counter-Statement of Undisputed Facts. 2

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mezzanine CDOs named after constellations (the Constellation deals) and for CDOs known as President deals. Facts 41. A synthetic CDO does not hold actual assets, but merely references other assets. This is accomplished by having the CDO sell insurance against the risk of loss facing investors in the referenced RMBS. If the mortgage borrowers default on the loans in the RMBS, the investors in a synthetic CDO face the same loss as the investors in the RMBS. Facts 42. The insurance contract issued by a synthetic CDO is called a credit default swap (CDS). The investor in a CDS purchases protection from the CDO on a specific asset such as an RMBS or a tranche from another CDO. Facts 43. The demand for protection was particularly strong from James Prusko of Magnetar Capital. Facts 41. Magnetar was a hedge fund that engaged in a strategy on Constellation and President CDOs, of betting against the performance of those deals by purchasing protection on the mezzanine tranches (taking a short position). Facts 44. As a result of this increased demand, Citigroups CDO Group (CDO Group) had internal discussions about structuring and marketing a CDO squared. Facts 45. In a CDO squared, the underlying assets are themselves tranches of existing CDOs. Facts 48. As early as September 2006, Citigroup was aware that the default rate of a CDO squared could double, if as little as five or ten percent of the CDO assets included in it were weak. Facts 104. On October 19, 2006, Citigroup initiated discussions with CSAC about CSAC acting as collateral manager for the proposed CDO squared. Facts 47. Citigroup knew that representing to investors that an experienced, third-party collateral manager had selected the investment portfolio would facilitate the placement of the CDO squareds liabilities. Facts 49. During this same time, there were discussions between Donald Quintin (Quintin) a Managing Director and head of the CDO Groups secondary trading desk and other members of the CDO group,

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including Stoker, about buying protection (taking a short position) on certain assets, including Constellation and President deals. Facts 50. A naked short position is a position that has not been hedged or covered. Facts 51. During this period, Stoker was a director on the CDO Groups structuring desk. Facts 52. In October 2006, Quintin asked Stoker to begin structuring a CDO to be used by Quintin to execute a proprietary trade, Facts 53, which is a trade executed by a trading desk that is not part of a dealers market-making role. Facts 54. On October 23, 2006, Quintin sent Stoker a list of 21 assets on which he wished to purchase protection from a CDO. Facts 14(a). Twelve of the assets on this list were Constellation deals and three were President deals. Facts 55. On October 26, 2006, Stoker informed Quintin, Darius Grant (Grant), a Managing Director and head of the CDO Groups structuring desk, and Shalabh Merish (Merish), a Managing Director and head of the CDO Groups syndicate desk, he had prepared models for two structures for a CDO squared that included consideration of the profit Citigroup could make by taking short positions on the collateral. Facts 56. On November 1, 2006, Stoker forwarded the list of assets he received from Quintin, to Sohail Khan (Khan) the sales person at Citigroup who covered CSAC. Facts 14(b). This list was not in the typical format used to propose a dummy portfolio for a CDO. Facts 14(c). Stoker did not normally send a list of potential assets for inclusion in a deal to a sales person at Citigroup and he did not normally suggest specific assets for inclusion in a CDO he was structuring. Facts 14(d). Stoker learned that Khan forwarded this list along with the names of four other assets to Samir Bhatt (Bhatt) at CSAC. Facts 14(e)-(f). In Stokers experience, it was unusual for a sales person at Citigroup to send a proposed portfolio to a manager in advance of doing a deal. Facts 57.

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On November 2, 2006, Quintin told Stoker that CSAC was amenable to the portfolio that Citigroup proposed. Facts 58. That same day, Stoker distributed a draft engagement letter for a CDO squared with CSAC. Id. On November 3, 2006, in response to an inquiry from Grant concerning whether Citigroup was going forward with the proposed CSAC CDO squared, Stoker replied: I hope so. This is DQs [Donald Quintins] prop trade (dont tell CSAC). CSAC agreed to terms even though they dont get to pick the assets. Facts 59. On November 14, 2006, Stoker personally forwarded the list of 25 assets to Bhatts supervisor, Michael Shackelford. Facts 14(i). On November 22, 2006, Stoker distributed the latest structure of Class V III to the CDO Group, in which he recommended President and Constellation deals be included in a CSAC CDO squared. Facts 60. Stoker understood Magnetar purchased protection on mezzanine tranches of the Constellation deals because these CDOs were structured so that if the equity in the CDO lost value, it was because all the underlying assets performed poorly and, thus, the mezzanine tranche would also perform poorly so the protection purchaser would profit. Facts 61. On December 21, 2006, Bhatt sent a list of approximately 128 CDOs as potential candidates for inclusion in the proposed CDO to Khan, who, in turn, forwarded it to Stoker, Quintin and Mehrish. Facts 14(j). Citigroup had never previously received a list of potential candidates for inclusion in a CDO portfolio of this length. Facts 14(k). CSACs list included 20 of the 25 assets Khan sent to CSAC on November 1, 2006, including 15 Constellation deals and 3 President deals. Facts 62. On the morning of January 8, 2007, Citigroup selected 25 CDOs on which Citigroup wanted to purchase protection from CSACs list and provided those names to CSAC. Facts 14(l)-(m). Twelve of these 25 assets were Constellation deals and 3 were President deals. Facts 63. Within an hour, CSAC agreed to include all 25 assets in the

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CDO that became Class V III. Facts 14(m). The amount of protection Citigroup purchased on these 25 reference assets was $250 million. Facts 64. Stoker learned CSAC agreed to sell Citigroup $250 million of protection on 25 assets on that same day. Facts 65. In Stokers experience, there was a lot of give and take between an asset manager and an arranging bank at the beginning of a deal, but that give and take did not generally include discussions of specific assets. Facts 16. During the time Citigroup was structuring Class V III, it was aware the performance of sub-prime mortgages and CDOs containing sub-prime mortgages was deterioratingespecially those originated in 2006. Facts 103. All but one of the 25 assets Citigroup selected for Class V III was a CDO that closed in 2006. Facts 105. On January 12, 2007, Citigroup and CSAC agreed Citigroup would double the amount of protection on each of the original 25 assets that Citigroup selected for the investment portfolio. Facts 66. Ultimately, the size of the Class V III transaction was approximately $1 billion, Facts 67, and contained a total of 58 individual names, 2 49 of which were synthetic. Id. Citigroup intermediated the trades of 23 the other 24 synthetic assets. Facts 68. With one exception, Citigroup sold its position on these 23 synthetic assets before Class V III closedthe vast majority of these sales occurring on the same day Citigroup intermediated the purchase of protection from Class V IIIfor a fee of three basis points (.03%). Id. Stoker understood that if someone selects synthetic assets for inclusion in a synthetic CDO for the purpose of purchasing protection on those assets, it is likely the person would want those assets to perform poorly. Facts 69. The 25 reference assets on which Citigroup purchased protection were of a lower quality than the other candidate reference assets proposed

Because Citigroup and others purchased protection on the some assets twice, Class V III actually contained 92 assets. 6

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by CSAC, exhibited riskier structures and were more likely to default in the event of a downturn in housing prices than the other candidate assets proposed by CSAC for Class V III. Facts 70. II. Marketing of Class V III Citigroups primary materials for marketing Class V III included a pitch book and an offering circular. Facts 71. The pitch book was based on the pitch book for a CDO named Adams Square II, for which Stoker was the lead structurer. Facts 3. The pitch book for Class V III represented in its Transaction Overview that CSAC was the collateral manager and that CSAC had selected the collateral for Class V III. Facts 72. The twenty-page Manager section prepared by CSAC contained a section purporting to describe how CSAC selected each asset it included in the investment portfolio of its CDOs. Facts 73. Citigroup prepared the Risk Factors section of the pitch book that also stated CSAC had selected the collateral for Class V III. Facts 74. The pitch book did not disclose Citigroup had specifically requested 25 assets be included in Class V III and that Citigroup had taken a $500 million naked short position on those assets. Facts 75. Stoker was the lead structurer or deal manager on Class V III. Facts 1. Stoker and another individual, Keith Pinniger (Pinniger), worked on the marketing documents for the CDO, including the offering circular. Id. As lead structurer on Class V III, Stoker was responsible for reviewing the pitch book to make sure it was accurate and for approving it before it could be finalized. Id. Citigroups structuring desk reviewed the Manager section to ensure its accuracy and provided comments to the Manager about anything that needed to be corrected. Facts 2. When preparing an offering circular for a new CDO, it was standard practice at Citigroup to use the offering circular from a previous deal as a template for the new one. Id. Stoker spent a lot of time modifying deal documents used by the structuring desk so they could

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be used for any type of CDO, id., and his goal was to have his deal documents used in all new CDOs at Citigroup. Id. The offering circular for Class V III was also based upon the offering circular for Adams Square II. Facts 8. Beginning in late January 2007, Citigroup broadly marketed Class V III, providing the pitch book and offering circular to prospective investors. Facts 82. Stoker personally sent a copy of the Class V III pitch book to a prospective investor along with a representation that Class V III was a top-of-the-line CDO squared. Facts 83. The largest investor in Class V III was Ambac Financial Group (Ambac), which received multiple drafts of the offering circular, one of which was provided by Stoker. Facts 84. The participation of CSAC as the collateral manager for Class V III was an important consideration for Ambac. Facts 85. Ambac was unaware of Citigroups approximately $500 million naked short position in Class V III or the extent of Citigroups influence on the asset selection process. Facts 86. Rating agencies required Citigroup to act as the initial swap counterparty for any synthetic collateral in a CDO and, therefore, Citigroup was the intermediary for all protection purchased on the synthetic collateral in a CDO. Facts 23. Stoker viewed Citigroups normal role as initial swap counterparty as an intermediary, just an administrator moving money around. Facts 76. However, for the 25 assets in Class V III on which Citigroup purchased protection, Citigroups role was different. Facts 23. In February 2007, Stoker reviewed the preliminary offering circular for Class V III and made substantial edits to portions of it, including the Risk Factors, but, he made no changes or edits to the sections stating CSAC selected the assets or to the section describing Citigroups position as initial swap counterparty. Facts 8. Stoker made no attempt to obtain information about whether the secondary trading desk had taken a naked short position on any of the assets in

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Class V III and the size of its short position or otherwise take action to ensure the disclosures concerning Citigroups interest in Class V III were accurate. Facts 77. As deal manager for Class V III, Stoker was responsible for providing information to outside counsel for inclusion in the offering memorandum and for providing counsel with information regarding differences between Class V III and other CDOs. Facts 8. Stoker believed he should tell the attorneys reviewing a CDO if he knew something in the offering circular was inaccurate or if he was aware of something interesting about the CDO. Facts 78. On or about February 14, 2007, Quintin communicated to Citigroups Risk Management Group that the secondary trading desk intended to retain the short positions in Class V III even if Citigroup sold all the tranches of Class V III. Facts 28. Due to the excess risk this position created, a three-month exception to risk limitations was granted by the Independent Risk Group for this short position. Id. On or about February 26, 2007, Citigroup finalized the offering circular for Class V III. Facts 79. The finalized version of the Class V III offering circular stated CSAC will act as the manager for the portfolio of assets, and the body of the offering circular contained repeated references that the investment portfolio was selected by CSAC. Facts 80. Both the pitch book and the offering circular contained a disclosure concerning Citigroups role as Initial CDS Asset Counterparty. Facts 81. But, neither of these documents disclosed that Citigroup had any role in selecting 25 of the assets in Class V III or that it actually had taken a naked short positions on those 25 assets. Id. III. Closing of Class V III CDO The Class V III transaction closed on February 28, 2007. Facts 87. Effective March 16, 2007, Ambac finalized its $500 million investment in Class V IIIs super senior tranche by agreeing to assume the credit risk associated with that portion of the capital structure. Facts 88.

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Had Ambac been informed Citigroup had taken a $500 million naked short position on the 25 assets it asked Citigroup to include in Class V III, but only intermediated the protection on the other assets, it would have considered walk[ing] away from the transaction. Facts 89. Citigroup also provided the pitch book and offering circular to Subordinate Investors. Facts 90. Ultimately, approximately 15 different investors purchased or sold protection on tranches of Class V III with a face value of approximately $893 million. Facts 91. By late July 2007, 14 of the 58 names in the Class V III portfolio had been placed on negative watch by Moodys and/or Standard & Poors. Facts 92. Eleven of the 14 names placed on negative watch were names Citigroup selected. Facts 93. On November 19, 2007, Class V III was declared to be in an Event of Default, id., and, as a result, Ambac ultimately suffered losses of about $305 million. Facts 98. The 25 names Citigroup selected for Class V III performed significantly worse than other names in Class V III and significantly worse than the other names on the list that CSAC provided to Citigroup. Facts 94. On the date Class V III was declared to be in default, 6 of the 25 assets selected by Citigroup also were declared in default, while only 2 of the 102 other assets proposed by CSAC on December 21, 2006, were declared in default. Facts 95. This difference in default rates is statistically significant at the one percent level. Id. Also, while 6 of the 25 assets Citigroup selected were declared in default by November 19, 2007, none of the other 20 assets in Class V III from the list of names CSAC provided were declared in default. Facts 96. Finally, the credit ratings of the 25 assets Citigroup selected were downgraded at a much higher rate than the other 102 assets that CSAC proposed. Facts 97. Typically, when Citigroup acted as the arranging bank for a CDO, it was compensated by receiving structuring fees from the investors. Facts 99. Citigroup received approximately $34

10

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million from investors as fees for structuring Class V III. Facts 100. In addition, as a result of the short position it took on the 25 assets in Class V III, Citigroup made a profit of at least $250 million. Facts 101. Stoker was paid a salary and a bonus for his work as a structurer on CDOs, including Class V III. Facts 31. His compensation was based on both qualitative and quantitative considerations, including the revenue he generated. Id. In 2006, Stoker was paid a salary of $150,000 and a guaranteed bonus of $1.05 million, and in February 2007, Stoker negotiated a salary of $150,000 and a guaranteed bonus of $2.25 million for 2007. Facts 102. ARGUMENT I. Standard For Consideration Of Motion For Summary Judgment To prevail on a motion for summary judgment, the moving party bears the burden of demonstrating the absence of a genuine dispute of material fact. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986); Varold, LLC v. Cerami, 545 F.3d 114, 121 (2d Cir. 2008). A dispute regarding a material fact is genuine if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Mount Vernon Fire Ins. Co. v. Belize NY, Inc., 277 F. 3d 232, 236 (2d Cir. 2002) (citation omitted). When the moving party has discharged its burden, the non-moving party must come forward with specific facts showing there is a genuine issue for trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); Burt Rigid Box, Inc. v. Travelers Property Cas. Corp., 302 F.3d 83, 91 (2d Cir. 2002). The court evaluates the evidence presented in the light most favorable to the non-moving party and is required to resolve all ambiguities and draw all inferences in favor of the non-moving party. De Jesus v. City of New York, No. 10 Civ. 9400, 2012 WL 569176, at *4 (S.D.N.Y. Feb. 21, 2012). A court may grant summary judgment only if it can conclude that, with credibility assessments made against the moving party and all

11

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inferences drawn against the moving party, a reasonable juror would have been compelled to accept the view of the moving party. Piesco v. Koch, 12 F.3d 332, 343 (2d. Cir. 1993). II. The Evidence Is Legally Sufficient To Prove That Stoker Violated Section 17(a)(2) A. Janus Does Not Apply To Section 17(a)(2)

Stokers claim that the Commission must prove he had ultimate authority over misleading statements or omissions about Class V III to establish a violation of Section 17(a)(2), Def. Mem. at 6, 3 is based on a misapplication of the Supreme Courts holding in Janus Captial Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011) to Section 17(a)(2). In Janus, the Supreme Court addressed only what constitutes mak[ing] a false statement in violation of Section 10(b) and Rule 10b-5(b) thereunder. See Janus at 2302. The Court based its interpretation of that term on two primary considerations. First, the Court relied on the dictionary definition of the word make as used in the Rule 10b-5(b). Id. Second, the Court reasoned that applying a broader definition of the term make would expand the scope of liability in implied private rights of action under Rule 10b-5. Id. at 2302-03. Neither of these considerations is applicable to the interpretation of Section 17(a). Liability under Section 17(a)(2) is not based on making a false statement. Rather, Section 17(a)(2) makes it unlawful to obtain money or property by means of any untrue statement or omission of material fact. See 15 U.S.C. 77q(a)(2). Because the operative language of Section 17(a) does not contain the phrase to make, Janus is inapplicable to Section 17(a) claims. See United States v. Gayle, 342 F.3d 89, 92 (2d Cir. 2003) (Statutory construction begins with the plain text and, if that text is unambiguous, it usually ends there as well.). In addition, the policy concerns underlying Janus are absent here, as there is no implied private right of action under Section 17(a). Finkel v.
3

Def. Mem. at ___, refers to Memorandum of Points and Authorities in support of Defendant Brian H. stokers Motion for Summary Judgment. 12

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Stratton Corp., 962 F.2d 169, 174 (2d Cir. 1992). Accordingly, Janus does not apply to claims brought pursuant to Section 17(a) of the Securities Act. SEC v. Pentagon Capital Management PLC, __ F. Supp. 2d __, 2012 WL 479576, at *42 (S.D.N.Y. Feb. 14, 2012); see SEC v. Daifotis, No. C 11-00137, 2011 WL 3295139, at *5 (N.D. Cal. Aug. 1, 2011); SEC v. Mercury Interactive, LLC, No. 5:07-cv-02822-WHA, 2011 WL 5871020, at *3 (N.D. Cal. Nov. 22, 2011); SEC v. Geswein, No. 10-cv-1235, 2011 WL 4565861, at *2 (N.D. Ohio Sept. 29, 2011); SEC v. Radius Capital Corp., No. 2:11-cv-116, 2012 WL 695668 (M.D. Fla. Mar. 1, 2012). 4 Liability under Section 17(a)(2) is not limited to defendants who make a false statement. In SEC v. Tambone, 550 F.3d 106, 125 (1st Cir. 2008), rehg en banc granted and opinion withdrawn, 573 F.3d 54 (2009), and opinion reinstated in relevant part, 597 F.3d 436, 450 (2010) (en banc), the First Circuit explained that Section 17(a)(2) does not require that the seller must himself make that untrue statement. Rather, the issue is whether a defendant used the to obtain money or property, regardless of its source. Id. at 127. The court went on to state: Specifically, primary liability may attach under section 17(a)(2) even when the defendant has not himself made a false statement in connection with the offer or sale of a security. Id. at 128 (emphasis added). In short, Stokers reliance on the Supreme Courts decision in Janus in support of his motion for summary judgment is misplaced.

Contra SEC v. Kelly, No. 08-4612 (CM), 2011 WL 4431161, at *5 (S.D.N.Y. Sept. 22, 2011) (holding that SEC must prove that defendant made a materially misleading statement to support a claim pursuant to Section 17(a)(2)). The Commission believes Kelly was wrongly decided because it failed to address any of the arguments detailed above, despite the fact that they were raised in that case. Hence, Kelly is of little persuasive value on this issue. See SEC v. Sentinel Management Group, Inc., No. 07 C 4684, 2012 WL 1079961, at *15 (N.D. Ill. Mar. 30, 2012) (rejecting Kelly, because it did not address the policy reasons underlying Janus). 13

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B.

Stoker Obtained Money Or Property By Means Of A False Statement

Section 17(a)(2) requires evidence that a defendant obtained money or property, by means of a false statement. While someone who makes a false statement to solicit investments certainly violates Section 17(a)(2), see, e.g., SEC v. KPMG, LLP, 412 F. Supp. 2d 349, 375 (S.D.N.Y. 2006), such conduct is not required to violate that provision. A defendant may also be primarily liable under Section 17(a)(2) if he assists in the preparation of false statements used to offer or sell securities, see SEC v. Wolfson, 539 F.3d 1249, 1264 (10th Cir. 2008), or if he uses a false statement prepared by himself or another, see Tambone, 550 F.3d at 127. There is legally sufficient evidence that Stoker violated Section 17(a)(2) under either of these theories. 1. Stoker Participated In The Preparation Of Marketing Materials

The evidence demonstrates that, as the deal manager for Class V III, Stoker was responsible for reviewing the pitch book to make sure it was accurate and for approving it before it could be finalized. Facts 1. The offering circular for Class V III was based on an offering circular for another CDO for which Stoker was the deal manager, Facts 8, and Stoker actively sought to have his standardized deal documents used in all new CDOs. Facts 2. Further, as deal manager, Stoker was responsible for providing information to outside counsel for inclusion in the offering circular and he was responsible for providing counsel with information regarding any differences between Class V III and the CDO on which the offering circular for Class V III was based. Facts 77-78. Although Stoker substantially edited the draft offering circular, he made no changes or edits to the sections stating that CSAC selected the assets or to the section describing Citigroups position as initial swap counterparty. Facts 8. Thus, there is evidence that Stoker was responsible for both the pitch book and the offering circular, personally determined provisions that should be included in them, and edited

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those provisions he thought necessary. A reasonable juror could conclude that Stokers decision not to edit the sections of the pitch book and offering circular that contained the misleading statements and omissions about Citigroups role in selecting the assets for Class V III and the $500 million proprietary short position it took, while editing other sections is an act or omission for which he is personally responsible. Stokers claim that the drafting of the pitch book and offering circular for Class V III was shared, Def. Mem. at 8, does not absolve him of responsibility for the misleading statements and omissions in these documents. Regardless what role others had in the drafting of the Class V III marketing materials, Stoker played a central role in that process and therefore, may be held liable for violating Section 17(a)(2). Donald Sheldon, 51 S.E.C. 59, 88 n.130 (1992), affd, 45 F.3d 1515 (11th Cir. 1995) (deficiencies in supervision do not absolve individual of liability for violations of securities law); Kenneth R. Ward, Exch. Act Release No. 3-9327, WL 1447865, at *12 (Mar. 19, 2003), affd 75 Fed. Appx. 320 (5th Cir. 2003) (complicity of others does not relieve individual of liability for his acts). Further, Stokers argument that counsel were involved in the preparation of certain portions of the pitch book and offering circular, Def. Mem. at 9-12, does not absolve him of responsibility for the misstatements and omissions in that document. It is well-settled that a defendant cannot rely on advice of counsel unless he has made full disclosure of all the pertinent facts to counsel. See United States v. Beech-Nut Nutrition Corp., 871 F. 2d 1181, 1194 (2d Cir. 1989) (citing Williamson v. United States, 207 U.S. 425, 453 (1908). In this case, there is ample evidence that although Stoker knew or reasonably should have known that the pitch book and offering circular did not fully and accurately disclose Citigroups role in selecting assets for Class V III and that it made a proprietary bet against those assets, he did not disclose that information to counsel who were reviewing those documents.

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Similarly, Stokers claim that CSAC was responsible for certain portions of the pitch book and offering circular does not absolve him of responsibility because there is substantial evidence that he knew or reasonably should have known that portions of the marketing materials for Class V III were not complete and were inaccurate and, therefore, he had a duty to include complete and accurate information in the documents. Facts 1, 77-78. 2. Stoker Used Misleading Statements To Obtain Money Or Property

There also is legally sufficient evidence that Stoker violated Section 17(a)(2) by using the marketing materials for Class V III. The uncontroverted evidence establishes that on February 6, 2007, Stoker personally sent a copy of the pitch book to a prospective investor touting Class V III as a top-of-the-line CDO squared. Facts 83. There also is uncontroverted evidence that on February 7, 2007, Stoker personally provided a copy of the preliminary offering circular to Ambac, the largest investor in Class V III, which lost approximately $305 million. Facts 84, 98. These facts are legally sufficient to support a finding by a reasonable juror that Stoker used the materially misleading marketing materials for Class V III to obtain money or property. C. The Class V III Marketing Materials Contained Material Omissions

Section 17(a)(2) prohibits the obtaining of money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, . . . not misleading. 15 U.S.C. 77q(a)(2). A misstatement or omission is material if there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). There is more than sufficient evidence for a jury to conclude that Citigroups failure to disclose

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is role in selecting 25 assets for Class V III and its naked short position on those assets would have significantly altered the total mix of information about Class V III. There is no dispute that neither the pitch book nor the offering circular for Class V III disclosed the role that Citigroup played in the selection of the assets for Class V III. Stoker concedes that both those documents repeatedly stated the assets were selected by CSAC. Def. Mem. at 12-13. Stokers claim is that the disclosure that CSAC picked the assets was accurate and no further disclosure was required. Id. There is, however, substantial evidence that Citigroup played a significant role in selecting the 25 assets for Class V III that was not disclosed. Stoker admitted CSAC had agreed to act as asset manager for a CDO squared even though it didnt get to pick the assets. Facts 59. This admission is corroborated by the fact that the selection of assets for Class V was unusual and both the timing and the substance of Citigroups identification of assets for Class V III were inconsistent with Citigroups normal procedures for identifying assets for a CDO. Facts 14(c)-(d), 16, 17. The reason for this departure from normal procedures was because Citigroup wanted to use Class V III as a proprietary tradenot merely as a means of obtaining the structuring fees it normally received for acting as an arranging bank for a CDO. Further, CSACs agreement to include the 25 assets Citigroup proposed within an hour of the proposal would cause a reasonable juror to question whether CSAC actually selected these assets or merely acquiesced to Citigroups request without any independent evaluation of the assets. 5 Facts 14(m). Stokers failure to include in the marketing materials any disclosure of Citigroups significant role in the selection of 25 assets of which he knew or reasonably should have known
5

The assessment of the credibility of the witnesses upon whose testimony Stoker relies to support his argument is an issue for the jury and, therefore, their testimony is not sufficient to support a claim for summary judgment in the face of evidence to the contrary. See Redd v. New York Div. of Parole, __ F.3d __, 2012 WL 156403, at *6 (2d. Cir. May 4, 2012). 17

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is further exacerbated by the omission of any disclosure that Citigroup had taken a naked short position on those very assets. Stokers claim that the disclosure in the pitch book and offering circular that Citigroup was the initial swap counterparty for all the synthetic assets in Class V III was sufficient, Def. Mem. at 14-17, is incorrect as a matter of fact and law. First, there is substantial evidence that Citigroups naked short position on the 25 assets was not the same as its position as the initial swap counterparty. Facts 23. To the extent Citigroup purchased protection on the 25 assets as a proprietary trade, Citigroup was not acting as the intermediary or an administrator moving money around, that Stoker believed was the function of the initial swap counterparty. Facts 76. Further, there is evidence that potential investors did not understand the disclosure of Citigroups role as initial swap counterparty as disclosing that Citigroup had taken a naked short position on 25 of the assets in Class V III. Facts 23. Second, Stokers claim that the disclosure that Citigroup may provide the synthetic assets in Class V III with or without off-setting positions was sufficient to put investors on notice of its naked short position on 25 select assets ignores the actual facts. At the time Citigroup began marketing Class V III, it already had taken a naked short position on 25 assets and at least two weeks before the CDO closed, Citigroup in internal correspondence that it intended to keep those positions after Class V III closed. Facts 28. Indeed, the evidence suggests it was Citigroups intent to take a naked short position on assets in Class V III from its inception. Facts 14(a)-(h), 59, 53, 59, 61-63. Therefore, the Citigroups disclosure that it may hold a short position on some assets in Class V III and that it may have interests adverse to the investors was misleading and failed to provide full disclosure of all the risks that already existed. See Rombach v. Chang, 355 F.3d 164, 173 (2d Cir. 2004) (Cautionary words about future risk cannot insulate from liability the failure to disclose that the risk has transpired.); Slayton v. Am.

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Express Co., 604 F.3d 758, 770 (2d Cir. 2010); see also Dolphin and Bradbury, Inc. v. SEC, 512 F.3d 634, 640 (D.C. Cir. 2008) (there is a clear distinction between disclosing a future event that might occur and disclosing actual knowledge that it will occur). Third, Stokers argument fails to acknowledge that the adequacy of the disclosures cannot be based upon a consideration of each separate disclosure in isolation, but rather whether the representations or omissions, when considered together and in context, would affect the total mix of information and thereby mislead a reasonable investor . . . . Halperin v. eBanker USA.Com, Inc., 295 F.3d 352, 357 (2d Cir. 2002). Therefore, the proper consideration is not whether the failure to disclose Citigroups role in selecting assets for Class V III was material or whether the failure to disclose that Citigroup took a naked short position on assets in Class V III was material. Rather, the proper inquiry is whether the disclosure of Citigroups role in selecting assets and its decision to take a naked short position on those very assets would have been viewed by a reasonable investor as significantly altering the total mix of information about Class V III. Based on the evidence described above, a reasonable juror could conclude that Stoker knew or reasonably should have known that the disclosures included in the marketing materials for Class V III did not adequately disclose these relevant facts. D. Stoker Obtained Money Or Property As Required By Section 17(a)(2)

Stokers argument that the Commission must present evidence he personally obtained money or property as a result of any alleged misstatements to prove he violated Section 17(a)(2), Def. Mem. at 17, distorts both the language and purpose of that provision, ignores precedents interpreting other similarly-worded statutory provisions, and would lead to absurd results.

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1.

Stoker Deprived Victims Of Money Or Property

Section 17(a) which prohibits both schemes to defraud and obtaining money or property by means of false statements, was modeled after the mail fraud statute, which contains the same two prohibitions. 6 See Robert A. Prentice, Scheme Liability: Does It Have a Future After Stoneridge?, 2009 Wisc. L. Rev. 351, 365 n.77 (2009) (Rule 10b-5s scheme to defraud language was copied from section 17(a) of the 1933 Act. . . . Congress derived that language, in turn, from the mail-fraud statutes, which is currently codified at 18 U.S.C. 1341 (2006)). Interpreting the obtaining money or property language of the mail fraud statute, the Second Circuit has held that a defendant does not need to literally obtain money or property to violate the statute. United States v. Males, 459 F.3d 154, 158 (2d Cir. 2006) (quoting Porcelli v. United States, 404 F.3d 157, 162 (2d Cir. 2005)). Rather, it is sufficient that a defendants scheme was intended to deprive another of property rights, even if the defendant did not physically obtain any money or property by taking it from the victim. Id.; see also United States v. Shellef, 507 F.3d 82, 109 (2d Cir. 2007). Because Section 17(a)(2) was modeled after the mail fraud statute, it too should be read as requiring only that a defendant deprive his victims of money or property. See United States v. Crispo, 306 F.3d 71, 79 (2d Cir. 2002) (fraud statutes that use the same relevant language, should be analyzed in the same way). Here, the evidence demonstrates that as a result of Stokers failure to disclose that Citigroup played a significant role in selecting 25 assets for Class V III and then taking a naked short position on those assets, Ambac lost approximately $305 million. Facts 98. This evidence is legally sufficient to establish that Stoker obtained money or property under Section 17(a)(2).

The mail fraud statute renders it unlawful to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises. 18 U.S.C. 1341 (emphasis added). 20

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2.

Stoker Obtained Money or Property

Even if Section 17(a)(2) is read to require that a defendant literally obtain money or property (and not simply deprive his victim of such) by means of false statements, that requirement can be satisfied in a number of ways. By its terms, Section 17(a)(2) renders it unlawful to, in the offer or sale of any securities . . . , directly or indirectly . . . obtain money or property by means of any untrue statement of a material fact or any omission . . . . (Emphasis added). In Tambone, the First Circuit court read the directly or indirectly language to modify the to obtain money or property clause at the start of sub-section (2) of the statute. Tambone, 550 F.3d at 128 n.29. In other words, Section 17(a)(2) renders one liable for indirectly obtaining money by means of an untrue statement. Id. at 128 (emphasis in original). Thus, a defendant can violate Section 17(a)(2) by directly or indirectly obtaining money or property by means of a false statement. While Section 17(a)(2) requires the defendant obtain money or property as a result of a fraud, it does not specify for whom that money or property must be obtained. Section 17(a)(2) does not require that the person alleged to have made the false or misleading statement . . . obtain money or property for [him]self. SEC v. Delphi Corp., No. 06-14891, 2008 WL 4539519, at *20 (E.D. Mich. Oct. 8, 2008). Thus, where an individual is acting as an agent of a company, the obtained money or property element is satisfied when the defendant obtains the money or property for his principal or employer. Id. Citigroup directly profited from Class V III when investors paid the bank $34 million in structuring fees, Facts 100, and when Citigroup obtained at least $250 million from the naked short positions it took on the 25 assets it selected. Facts 101. Thus, there is evidence from which a reasonable juror could conclude that Stoker obtained money or property for Citigroup.

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Stokers argument that imposing liability upon him would create negligent aiding and abetting, misapprehends the doctrine of respondeat superior. Def. Mem. at 18. A corporation may only act through its officers, employees and agents. Suez Equity Investors, L.P. v. TorontoDominion Bank, 250 F.3d 87, 101 (2d Cir. 2001). Therefore, the actions of an officer that are within the scope of his authority and done for the benefit the corporation are imputed to the corporation. See Bank of China v. NBM LLC, 359 F.3d 171, 179 (2d Cir. 2004). Thus, Citigroups primary liability for violating Section 17(a)(2) is based on Stokers commission of a primary violation of that statutenot because he aided and abetted Citigroups violation. Stoker was employed by Citigroup as a director in the CDO group and he was the lead structurer for Class V III. Facts 1. Stokers preparation of the pitch book and offering circular, and his efforts to market Class V III were intended to result in a profit for the corporation that employed him. Stokers actions resulted in precisely the harm that Section 17(a)(2) was intended to remedy obtaining money from investors for Citigroup through the use of untrue statements of fact. See Delphi Corp., 2008 WL 4539519, at *20. Even assuming that the obtain money or property provision of Section 17(a)(2) were interpreted to require evidence that Stoker directly received money or property obtained as a result of the misstatements, there is evidence to support that requirement. Stoker was paid a salary and a bonus by Citigroup for his work as a structurer of CDOs. Facts 31. His compensation was based on both qualitative and quantitative considerations, including the revenue he generated. Id. In 2006, Stoker was paid a salary of $150,000 and a guaranteed bonus of $1.05 million, and in February 2007, Stoker negotiated a salary of $150,000 and a guaranteed bonus of $2.25 million for 2007. Facts 102.

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Stokers suggestion that he cannot be liable under Section 17(a)(2) unless there is evidence he received a commission directly attributable to his work on Class V III, superimposes a tracing requirement on the obtain money or property requirement that is not supported by the plain language of the statute or the principles of respondeat superior. Whether an agent/officer is paid by commission or by a salary, he receives compensation for actions taken on behalf of his principal. Whether Stoker violated Section 17(a)(2) is not dependent on how he was compensated for his work on behalf of Citigroup, but rather, whether his involvement in the structuring and marketing of Class V III was within the scope of the employment for which he was compensated. See Delphi Corp., 2008 WL 4539519, at *20. Since Stokers conduct described above occurred while he was lead structurer on Class V III, there is a factual nexus between his compensation and the misleading statements and omissions in Class V III Stoker claims is required. Def. Mem. at 18. III. Stoker Participated in a Scheme Under Section 17(a)(3) 7 A. A Violation Of Section 17(a)(3) May Be Based On Misrepresentations Or Omissions_____________________________________________________

Stokers argument there is no evidence he violated Section 17(a)(3) is predicated on the incorrect assertion that the Commission must present evidence of conduct beyond misrepresentations or omissions. Def. Mem. at 21. Section 17(a)(3) is violated when a defendant directly or indirectly: engage[s] in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser of any security. 15

In his Motion for Summary Judgment, Dkt. No. 43, Stoker only requests summary judgment on the Section 17(a)(2) claim. However, in his memorandum in support of his motion, Stoker argues he also is entitled to summary judgment on the Section 17(a)(3) claim. Therefore, the Commission has provided its opposition to summary judgment on both claims. 23

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U.S.C. 77q(a)(3). Section 17(a)(3) quite plainly focuses upon the effect of particular conduct on members of the investing public. Aaron v. SEC, 446 U.S. 680, 697 (1980). The Supreme Court has expressly rejected the notion that one subsection of Section 17(a) should be read to narrow another. See United States v. Naftalin, 441 U.S. 768, 774 (1979) ([e]ach succeeding prohibition is meant to cover additional kinds of illegalities-not to narrow the reach of prior sections.); see also United States v. Bilotti, 380 F.2d 649, (2d Cir. 1967); Joseph v. Wiles, 223 F.3d 1155, 1163 (10th Cir. 2000). Further, the Supreme Court made clear in Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972) that a defendant may be found to have engaged in a course of business or scheme that operates as a fraud upon the purchaser of a security even when the underlying conduct was primarily a failure to disclose. Id. at 153. Similarly, evidence of a plan to induce investors to purchase Class V III notes without disclosing to them material facts that could have been expected to influence their decisions to purchase is a course of business which operates . . . as a fraud, in violation of Section 17(a)(3). In this case there is ample evidence that Class V III was conceived and structured by Citigroup as a transaction to position it to profit from the downturn in the United States housing market and that Stoker played a key role in that transaction. B. Class V III Was Intended As A Means For Citigroup To Profit From The Poor Performance of Class V IIIs Assets ___________________________

The evidence demonstrates that based on the increased demand for protection on CDOs, particularly for Constellation and President deals, the CDO Group decided to structure and market a CDO squared for the express purpose of purchasing protection on specific assets, including Constellation and President deals. Facts 40-41, 45, 50, 53, 55. The evidence supports the conclusion that Citigroups proprietary trade was part of a strategy to emulate Magnetars strategy. Id. Stoker was personally involved in furthering this plan by forwarding 24

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proposed lists of assets to CSAC for inclusion in the CDO; preparing models showing the profit Citigroup could make; and recommending specific assets be included in the portfolio. Facts 14(b) & (i), 56, 60. The evidence further demonstrates Citigroup played a substantial role in selecting the assets for this CDO, which became Class V III, and was extremely successful in having the assets on which it wished to purchase protection included. Facts 19, 62-63. The assets Citigroup selected for Class V III were of a lower quality than the other candidate assets proposed by CSAC, exhibited riskier structures and were more likely to default in the event of a downturn in housing prices than the other candidate assets identified by CSAC on December 21, 2006. Facts 70. In fact, the 25 assets Citigroup selected performed much worse than the other assets CSAC proposed and the other assets in Class V III. Facts 94-97. During the time Citigroup was structuring Class V III, Citigroup also was aware that the performance of sub-mortgages and CDOs containing sub-prime mortgages was deteriorating especially those that were originated in 2006. Facts 103. Coincidentally, all but one of the 25 assets Citigroup selected were CDOs that closed in 2006. Facts 105. Also, as early as September 2006, Citigroup was aware that the default rate of a CDO squared could double, if as few as five or ten percent of the CDO assets included in it were weak. Facts 104. Even before Class V III closed, Citigroup had decided to retain the short position on the 25 assets in Class V III on which it had purchased protection. Facts 28. This evidence could lead a reasonable juror to conclude that, from its inception, Class V III was intended as a means for Citigroup to position itself to profit if there was a downturn in the housing market by allowing it to buy protection on a set of assets that had a higher likelihood of failure than other potential assets. Moreover, the evidence is legally sufficient to establish that Class V III was a transaction that operated as a fraud on investors because it was done in the

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guise of Citigroups normal role as the arranging bank for a CDO, in which it typically profited from the fees that it charged for structuring the CDO not by betting against the securities it had structured and then marketed to investors. Facts 99. Also, Citigroups decision to take a naked short position on the synthetic assets was different from its role as the initial swap counterparty for those assets, Facts 23, and investors were unaware that Citigroup had taken a naked short position on any of the synthetic assets in Class V III, let alone on the 25 assets it asked to be included in the transaction. Facts 86. C. Stoker Was A Key Participant In A Transaction He Knew Or Reasonably Should Have Known Was Intended As A Proprietary Trade___________

The evidence establishes that Stoker was aware that the CDO Group intended the Class V III as a proprietary trade to profit in the event of poor performance of the housing market. This is apparent from: (1) Stokers discussions with Quintin in October 2006, about buying protection on certain assets; (2) Quintins request that Stoker structure a CDO that could be used to execute a proprietary trade; (3) the models Stoker prepared analyzing what profit Citigroup would make by taking short positions on the collateral in the CDO squared; (4) the list of assets on which Quintin wished to purchase protection that Stoker forwarded to Khan and to CSAC; (4) Stokers suggestions concerning what assets to include in the CDO squaredassets that he knew were the type that Magnetar favored for taking short positions because of their structure; and (5) Stokers admonition to his supervisor not to tell CSAC of Quintins intent to use Class V III as a proprietary trade. Facts 14(a)-(b), 53, 56, 60-61. The evidence also establishes Stoker knew the procedures employed to select the assets for Class V III were inconsistent with the normal procedures at Citibank. Stoker admits that: (1) he did not normally send a list of potential assets for inclusion in a deal to a sales person at Citigroup; (2) he did not normally suggest specific assets for inclusion in a CDO he was 26

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structuring; (3) it was unusual for a sales person at Citigroup to send a proposed portfolio to a manager in advance of doing a deal; and (4) the give and take between an asset manager and an arranging bank at the beginning of a deal generally did not include discussions of specific assets. Facts 14(c) & (i), 16, 57. These facts, coupled with Stokers knowledge that CSAC had agreed to sell $250 million of protection directly to Citigroup could cause a reasonable juror to conclude Stoker understood Class V III was not a typical CDO by Citigroup, but proposed for a special purposeto provide a vehicle for Citigroup to profit at the expense of the investors to whom it was marketing the transaction. Also, a reasonable juror could conclude from this evidence that if Stoker did not actually know Class V IIIs true purpose was to provide Citigroup a means of profiting at the expense of the investors, he was put on notice that it was possible, if not probable, and therefore had a duty to make further inquiries of others in the CDO Group to determine if that was Citigroups intent. Further, a reasonable juror could conclude that Stoker acted negligently because he never made any further inquires or informed the attorneys who were assisting in the preparation of the offering circular that Class V III was intended as a proprietary trade. Facts 77-78. Instead, he took an active role in structuring and marketing Class V III without including in the marketing materials any disclosure that would put investors on notice of Citigroups substantial role in selecting assets for Class V III and that it had made a proprietary bet those assets would perform poorly. CONCLUSION For the reasons set forth above, the Court should deny Stokers motion for summary judgment on the Commissions claims that he violated Section 17(a)(2) and (3) of the Securities Act.

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Dated: Washington, D.C. May 23, 2012

Respectfully submitted,

/s/ Jeffery T. Infelise Jeffery T. Infelise (DC0456998) Assistant Chief Litigation Counsel Jane M. E. Peterson Assistant Chief Litigation Counsel Andrew Feller Senior Attorney U.S. Securities and Exchange Commission Enforcement Division 100 F Street, N.E. Washington, D.C. 20549 (202) 551-4481 (202) 772-9246 (fax) infelisej@sec.gov petersonjm@sec.gov fellera@sec.gov

CERTIFICATE OF SERVICE I hereby certify that this document filed through the ECF system will be sent electronically to the registered participants as identified on the Notice of Electronic Filing (NEF) and paper copies will be sent to those indicated as non registered participants on May 23, 2012.

s/Jeffery T. Infelise Jeffery T. Infelise

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SERVICE LIST John W. Keker Jan Nielsen Little Steven K. Taylor Brook Dooley Keker & Van Nest LLP 633 Battery Street San Francisco, CA94111 jkeker@kvn.com jlittle@kvn.com staylor@kvn.com bdooley@kvn.com Attorneys for Brian H. Stoker

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