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Case 4:16-cv-00246-ALM Document 69 Filed 01/12/17 Page 1 of 17 PageID #: 985

IN THE UNITED STATES DISTRICT COURT


EASTERN DISTRICT OF TEXAS
SHERMAN DIVISION
:
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
v.

:
:
:
Civ. Action No. 4:16-cv-00246

WILLIAM E. MAPP, III,


WARREN K. PAXTON, JR.,
CALEB J. WHITE, and
SERVERGY, INC.,

:
:
Defendants.

:
:

DEFENDANT WARREN K. PAXTON, JR.S MOTION FOR A PROTECTIVE ORDER


FORBIDDING THE DISCOVERY SOUGHT BY CERTAIN THIRD-PARTY
SUBPOENAS SERVED BY THE SECURITIES AND EXCHANGE COMMISSION
_________________________________________________
Pursuant to Federal Rule of Civil Procedure 26(c)(1)(A), Defendant Warren K. Paxton,
Jr. hereby moves the Court for a protective order forbidding the discovery sought by the fifteen
subpoenas served on third parties by the Securities and Exchange Commission on January 10,
2017.
As required by Local Rule CV-7(h), counsel for Mr. Paxton met and conferred with
counsel for the SEC telephonically on January 11, 2017, and were unable to obtain the SECs
concurrence in the relief sought in this motion.
Dated: January 12, 2017

Case 4:16-cv-00246-ALM Document 69 Filed 01/12/17 Page 2 of 17 PageID #: 986

Respectfully submitted,
/s/ Matthew T. Martens
Matthew T. Martens (pro hac vice)
(Lead Counsel)
D.C. Bar No. 1019099
Jaclyn N. Moyer (pro hac vice)
D.C. Bar No. 492284
Alyssa DaCunha (pro hac vice)
D.C. Bar No. 1003687
Kevin Gallagher (pro hac vice)
D.C. Bar No. 1031415
Wilmer Cutler Pickering Hale and Dorr LLP
1875 Pennsylvania Ave. NW
Washington, DC 20006
Tel: (202) 663-6000
Fax: (202) 663-6363
Matthew.Martens@wilmerhale.com
William B. Mateja
Texas Bar No. 13185350
Polsinelli LLP
2950 N. Harwood
Suite 2100
Dallas, TX 75201
Tel: (214) 754-5751
Fax: (214) 397-0033
Mateja@polsinelli.com
J. Mitchell Little
Texas Bar No. 24043788
Scheef & Stone, LLP
2600 Network Blvd., Ste. 400
Frisco, TX 75034
Tel: (214) 472-2140
Fax: (214) 472-2150
Mitch.Little@solidcounsel.com
Attorneys for Defendant Warren K. Paxton, Jr.

Case 4:16-cv-00246-ALM Document 69 Filed 01/12/17 Page 3 of 17 PageID #: 987

IN THE UNITED STATES DISTRICT COURT


EASTERN DISTRICT OF TEXAS
SHERMAN DIVISION
:
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
v.

:
:
:
Civ. Action No. 4:16-cv-00246

WILLIAM E. MAPP, III,


WARREN K. PAXTON, JR.,
CALEB J. WHITE, and
SERVERGY, INC.,

:
:
Defendants.

:
:

MEMORANDUM OF LAW IN SUPPORT OF


DEFENDANT WARREN K. PAXTON, JR.S MOTION FOR A PROTECTIVE ORDER
FORBIDDING THE DISCOVERY SOUGHT BY CERTAIN THIRD-PARTY
SUBPOENAS SERVED BY THE SECURITIES AND EXCHANGE COMMISSION

Case 4:16-cv-00246-ALM Document 69 Filed 01/12/17 Page 4 of 17 PageID #: 988

TABLE OF CONTENTS
Page
STATEMENT OF THE ISSUE PRESENTED ...............................................................................1
INTRODUCTION ...........................................................................................................................1
BACKGROUND .............................................................................................................................2
ARGUMENT ...................................................................................................................................5
I.

A Protective Order May Be Issued to Preclude Discovery Regarding Irrelevant


Matters. ................................................................................................................................6

II.

A Protective Order Should Be Entered With Regard To The SECs Fifteen


Subpoenas Seeking Irrelevant Material. ..............................................................................6

CONCLUSION ................................................................................................................................9

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TABLE OF AUTHORITIES
Page(s)
CASES
Auto-Owners Insurance Co. v. Southeast Floating Docks, Inc., 231 F.R.D. 426
(M.D. Fla. 2005) ..................................................................................................................6
Bounds v. Capital Area Family Violence Intervention Center, Inc., 314 F.R.D.
214 (M.D. La. 2016) ............................................................................................................6
In re Subpoenas for Documents Issued to ThompsonMcMullan, P.C., No. 3:16MC-1, 2016 WL 1071016 (E.D. Va. Mar. 17, 2016) ..........................................................8
Joe v. Two Thirty Nine Joint Venture, 145 S.W.3d 150 (Tex. 2004) ..............................................7
Singletary v. Sterling Transport Co., Inc., 289 F.R.D. 237 (E.D. Va. 2012) ..................................6
Southland Securities Corp. v. INSpire Insurance Solutions, Inc., 365 F.3d 353
(5th Cir. 2004)......................................................................................................................8
U.S. ex rel. Foster v. Bristol-Myers Squibb Co., 587 F. Supp. 2d 805 (E.D. Tex.
2008) ................................................................................................................................2, 9
STATUTES, RULES, AND REGULATIONS
Federal Rule of Civil Procedure 9(b) ...........................................................................................2, 8
Federal Rule of Civil Procedure 26(b) .............................................................................................6
Federal Rule of Civil Procedure 26(c) .........................................................................................2, 6
Federal Rule of Civil Procedure 45(d) .............................................................................................6

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STATEMENT OF THE ISSUE PRESENTED


Whether Mr. Paxton has shown good cause such that this Court should enter a protective
order forbidding the discovery sought by fifteen third-party subpoenas served by the Securities
and Exchange Commission (SEC)?
INTRODUCTION
Prior to the filing of this action, the SEC interviewed only two Servergy investors
purportedly solicited by Mr. PaxtonInvestors 1 and 2. Accordingly, neither of the SECs
complaints contained any particularized allegations concerning a fraud perpetrated by Mr.
Paxton on any other investors. Even the SECs Amended Complaint only vaguely refers to other
investors, but offers no particularized allegations concerning any false statements made to them
or any duty to disclose owed to them.
As for the two Servergy investors on whom the SEC has rested its complaints against Mr.
Paxton, discovery to date has already raised grave concerns about the veracity of their claims.
No sooner had Mr. Paxton identified those credibility issues in filings with this Court than the
SEC began attempting to recast its case by subpoenaing fifteen individuals or entities whom it
never interviewed and from whom it never subpoenaed documents prior to filing this lawsuit.1
But given the SECs lack of investigation, Mr. Paxtons interactions, if any, with these newlysubpoenaed investors cannot, as a matter of logic, have been the basis for the SECs complaints
against Mr. Paxton.
What is more, even the SECs Amended Complaint contains no legally adequate

The fifteen individuals and entities are: John Brochu; Gene Carr; Christopher Cowman;
Tim Curren; Steve Davis; Brad Dean; Dave Gorman; Brandon Pogue; Mark Scruggs; S3
Management Group, LLC; S3 Sleep Investments, LLC; Simple Sleep Services, LLC; Brandon
Waghorne; John Waghorne; and Jacob Watters. See Ex. 1 - Declaration of Matthew T. Martens
(Martens Decl.), Exs. A-O.
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allegations with regard to these other investors. When it comes to fraud allegations, Federal
Rule of Civil Procedure 9(b) requires that the factual basis precede the allegations. As this Court
has observed, the very purpose of Rule 9(b) is to preven[t] plaintiffs from filing a claim and
then attempting to uncover unknown wrongs through discovery. U.S. ex rel. Foster v. BristolMyers Squibb Co., 587 F. Supp. 2d 805, 819 (E.D. Tex. 2008). When during oral argument on
the original motion to dismiss the SEC pleaded for an opportunity to conduct discovery to
substantiate its allegations, the Court made clear that would not be permitted. See Sept. 2, 2016
Hearing Tr. 48:19-21 (Not that they get to go on a fishing expedition to find additional facts.
So Im not going to go down that path.). This Court should prevent the SEC from, at this late
date, using the federal discovery process to investigate potential fraud claims it never
investigated prior to filing as to investors not alleged with particularity in either complaint. Mr.
Paxton respectfully requests that the Court enter a protective order, pursuant to Federal Rule of
Civil Procedure 26(c)(1)(A), forbidding the discovery sought by these fifteen subpoenas.
BACKGROUND
On October 7, 2016, this Court conditionally granted Mr. Paxtons Motion to Dismiss all
claims brought against him by the SEC. See Memorandum Opinion and Order (Order) (Dkt.
39). The SEC has since filed an Amended Complaint, the crux of which alleges that Mr. Paxton
owed a fiduciary duty to an investment group comprised of Investors 1, 2, 3, and 4 that had
certain established purpose, policies, and practices. Amended Compl. 77-78 (Dkt. 40).
Only Investors 1 and 2 were interviewed prior to the filing of this action. Declaration of
Matthew T. Martens, Ex. C, at 2 (Dkt. 50-1).
The SEC provides little, if any, detail with regard to other Servergy investors with whom
Mr. Paxton allegedly interacted. The Amended Complaint does allege for the first time that Mr.
Paxton participated in investment opportunities with the S3 Group, including people who
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were long-time legal clients of his. Id. 83. It alleges that Mr. Paxton solicited S3 Group
members for whom he was at the time also performing legal services and with whom he was coinvesting. Id. 101. It fails to identify, however, the date, or even month, when these group
members were purportedly solicited, or any statements made to them. See id. Nor does the
Amended Complaint allege that any of the S3 Group members2 purportedly solicited by Mr.
Paxton deemed the alleged failure to disclose the compensation arrangement material.
Furthermore, the SEC has since conceded that the alleged legal services provided by Mr.
Paxton had nothing to do with Servergy. See SEC Opposition to Motion to Dismiss (SEC
Opp) at 20 (Dkt. 45).
The Amended Complaint also alleged that Mr. Paxton solicited new acquaintances and
contacts. Amended Compl. 102-04, 109-10, 114-17. The Amended Complaint provides
essentially no detail about these miscellaneous prospective investors. 3 It identifies no false
statements made to them by Mr. Paxton and it fails entirely to explain the basis for any alleged
disclosure duty to them. See id. Nor does the Amended Complaint allege that any failure to
disclose the supposed compensation arrangement was material to any of these prospective
investors. See id. Indeed, if anything, the SEC has waived its argument as to the relevance of
these investors, because, after Mr. Paxton questioned their relevance in his motion to dismiss, see
Motion to Dismiss at 7-8 (Dkt. 44), the SEC made no argument as to their relevance in its
2

Relevant to this Motion, Mr. Paxton notes that eight of the subpoenaed individuals or
entities relate to what the SEC calls the S3 Group. S3 is believed to refer to Simple Sleep
Services, and thus the three subpoenaed entities (S3 Management Group, LLC, S3 Sleep
Investments, LLC, and Simple Sleep Services, LLC) appear to be related to the so-called S3
Group. Also, five of the subpoenaed individuals (John Brochu, Gene Carr, Dave Gorman,
Mark Scruggs, and John Waghorne) are believed to have had some connection to the S3 entities.
3

Although Mr. Paxton cannot be sure because of the lack of specificity in the Amended
Complaint, it may be that the other seven subpoenaed individuals (Christopher Cowman, Tim
Curren, Steve Davis, Brad Dean, Brandon Pogue, Brandon Waghorne, and Jacob Watters) fall
into the Amended Complaints miscellaneous prospective investor category.
-3-

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opposition to that motion, see generally SEC Opp.


In an effort to learn the basis for the SECs allegations about the policies and practices of
the alleged investment group involving Investor 1, Mr. Paxton requested, and then, on December
14, 2016, moved to compel production by the SEC of interview notes from and summaries of
interviews with Byron Cook (Investor 1) and Joel Hochberg (Investor 2). See Motion to Compel
(Dkt. 50). This motion highlighted the inconsistencies in Messrs. Cooks and Hochbergs story
over time: from the barebones initial Complaint allegation that Mr. Paxton was a member of an
investment group consisting of Messrs. Cook and Hochberg, to the Amended Complaint
allegation that Mr. Paxton was a member of an investment group that had an established
purpose, policies, and practices, Amended Compl. 78, to the statement by the lawyer of
Messrs. Cook and Hochberg that [t]here was no formal group that existed but rather an ad hoc
arrangement where, from time to time, good friends might invest in the same transaction,
Declaration of Matthew T. Martens, Ex. H (Dkt. 50-1). The SEC filed an opposition to that
motion on January 3, 2017, and Mr. Paxton filed a reply brief on January 10, 2017.
Mr. Paxton also subpoenaed documents from a companyUnity Resources, LLCin
which Messrs. Cook, Hochberg, and Paxton each individually invested, but with which Messrs.
Cook and Hochberg then apparently engaged in self-dealing transactions. Unity Resources
sought to block that subpoena by means of a motion for a protective order, see Motion for
Protective Order (Dkt. 55), and, on December 30, 2016, Mr. Paxton filed a brief in opposition
explaining the apparent self-dealing by Messrs. Cook and Hochberg, see Opposition to Motion
for Protective Order (Dkt. 57).
It was only then that the SEC served subpoenas on the aforementioned fifteen thirdparties. See Martens Decl., Exs. A-O. These subpoenas are all returnable on February 10, 2017.

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Id. The twelve subpoenas directed toward individuals seek four categories of documents: 1)
documents related to, concerning, or discussing Servergy; 2) communications with or related to
Mr. Paxton concerning, discussing, or relating to Servergy; 3) communications with Mr. Paxton
related to any investment or potential investment in which Mr. Paxton solicited the investment;
and 4) communications with Mr. Paxton related to any investment or potential investment that
Mr. Paxton recommended. The three subpoenas directed toward S3-related entities seek one
category of documents: all communications with or related to Mr. Paxton.
After receiving the notices of these subpoenas, counsel for Mr. Paxton complied with this
Courts meet and confer requirement by holding a teleconference with counsel for the SEC.
Counsel for Mr. Paxton explained his position as to why the subpoenas were not seeking relevant
evidence and, in particular, noted the overbreadth of the subpoenas to the S3 entities that sought
all communications with Mr. Paxton regardless of topic. The SEC disagreed with these
arguments, but declined to explain the relevance of its subpoenas or the information it seeks.
Instead, the SEC insisted simply that counsel for Mr. Paxton inform the Court that it is opposed
to Mr. Paxtons motion for a protective order. This motion followed.
ARGUMENT
A protective order forbidding these fifteen subpoenas is proper because the subpoenaed
information is irrelevant to any viable legal theory properly pled by the SEC in this litigation.
The SEC did not investigate and thus did not plead with the required particularity any claims
against Mr. Paxton based on his interaction with the subpoenaed entities or individuals. Because
none of these third-parties form the basis of any legally cognizable claim, this Court should enter
a protective order forbidding discovery from them. Allowing this discovery to go forward would
be unnecessarily burdensome, distracting from a focus on the issues presented by the Amended
Complaint.
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I.

A Protective Order May Be Issued To Preclude Discovery Regarding Irrelevant


Matters.
Federal Rule of Civil Procedure 26(b)(1) permits discovery only of evidence that is

relevant to any partys claim or defense. To the extent a litigant exceeds these bounds, Federal
Rule of Civil Procedure 26(c)(1)(A) authorizes a party to move for a protective order forbidding
the . . . discovery sought. A party to a litigation has standing to move for a protective order
pursuant to Rule 26(c) seeking to limit the scope of discovery, even if the party does not have
standing pursuant to Rule 45(d) to bring a motion to quash a third-party subpoena. Bounds v.
Capital Area Family Violence Intervention Ctr., Inc., 314 F.R.D. 214, 218 (M.D. La. 2016).
Such a Rule 26 challenge to a third-party subpoena can be brought on relevance grounds.
See Singletary v. Sterling Transp. Co., Inc., 289 F.R.D. 237, 240 n.2 (E.D. Va. 2012); AutoOwners Ins. Co. v. Southeast Floating Docks, Inc., 231 F.R.D. 426, 429 (M.D. Fla. 2005)
(holding that a party had standing to challenge under Rule 26 the relevancy of documents sought
by a subpoena of a third party). In determining whether to issue a protective order under Rule 26
with regard to a subpoena seeking irrelevant information, courts look to Rule 26 itself for the
permissible scope of discovery. Id. at 430. Thus, if information sought is not relevant to any
partys claim or defense, a protective order can be properly issued. See id. (issuing a protective
order for certain information that was grossly overbroad and irrelevant).
II.

A Protective Order Should Be Entered With Regard To The SECs Fifteen


Subpoenas Seeking Irrelevant Material.
The subpoenas to the S3 Group and the other miscellaneous investors seek information

that is not relevant to the SECs claims, and thus a protective order should properly issue. The
Amended Complaint alleges no false statements made by Mr. Paxton to any of these individuals.
As for a fraudulent omissions theory of liability, the SEC has alleged no basis for a duty to
disclose as to any of the subpoenaed third-parties, and thus has not alleged a viable securities
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fraud claim against Mr. Paxton with regard to these fifteen subpoenaed parties. See Order at 7
(noting that the central issue in this case is whether Paxton had a duty to disclose his
compensation under federal securities laws).
First, the SEC has alleged no duty to disclose as to the S3 Group.

Although the

Amended Complaint alleges that the S3 Group members were solicited by Mr. Paxton at the
time he was performing unspecified legal services, Amended Compl. 101, it does not allege
that they were solicited by Mr. Paxton in his capacity as their attorney, see id.; see also Order at
2 n.1 (At oral argument, the Commission clarified that Paxton was not recruiting current law
firm clients in his capacity as their attorney.). In fact, in its opposition to Mr. Paxtons motion
to dismiss, the SEC conceded that these legal services were provided in connection with a
separate investment. SEC Opp. at 20. Because there is no allegation that Mr. Paxton was
serving as legal counsel to the S3 Group with regard to the Servergy investment, there is thus no
allegation that he was that Groups fiduciary with regard to the Servergy investment. See Joe v.
Two Thirty Nine Joint Venture, 145 S.W.3d 150, 159 (Tex. 2004) (Generally, a lawyers
fiduciary duties to a client, although extremely important, extend only to dealings within the
scope of the underlying relationship of the parties.). And because Mr. Paxton was not a
fiduciary to the S3 Group in relation to the Servergy investment, he owed the Group no duty to
disclose with regard to that investment that would support a securities fraud claim. See, e.g.,
Order at 13 (Since the Complaint has neither pleaded facts sufficient to support a fiduciary
relationship, nor a specific duty under the alleged relationship, the Court finds that a securities
fraud claim based on a fiduciary duty theory is not plausible.). Accordingly, the documentation
that the SEC subpoenaed from these investors regarding Mr. Paxtons interactions, if any, with
them has no relevance to the claims the SEC has alleged.

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Second, the SEC has alleged no duty to disclose as to the miscellaneous prospective
investors. The Amended Complaint provides little, if any, detail about these investors and fails
entirely to explain the basis for any disclosure duty that Mr. Paxton purportedly had to them. See
Amended Compl. 102-04, 109-10, 114-17. As this Court explained, in order for the SEC to
have a viable securities fraud claim, it must plead with particularity the nature of the fiduciarylike duty as required by the Fifth Circuit. Order at 13. Given the absence of such allegations
with regard to these miscellaneous investors, the SEC has not alleged a fiduciary duty to disclose
that would support a fraudulent omissions claim as to those investors.

Accordingly, the

documents subpoenaed from these miscellaneous investors are irrelevant to this litigation.
Federal Rule of Civil Procedure 9(b) requires the plaintiffs in securities fraud cases to
plead with particularity the circumstances constituting the alleged fraud. Southland Sec. Corp.
v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 362 (5th Cir. 2004). The SEC did not plead with
particularity anything about the S3 Group or the miscellaneous investors. This is likely because
it lacked a good faith basis to do so, having never interviewed any of the twelve individuals it
now seeks to subpoena. Indeed, other than its interviews of Investors 1 and 2, the SEC talked to
no investor witnesses relevant to Mr. Paxton and subpoenaed no documents from those investors
prior to filing its lawsuit. The Federal Rules do not allow the SEC to shoot first and investigate
later, especially with a potential fraud claim that must be pled with particularity. And it would
unduly burden Mr. Paxton to spend time addressing discovery from witnesses that is irrelevant to
any legally cognizable claim against him.

In re Subpoenas for Documents Issued to

ThompsonMcMullan, P.C., No. 3:16-MC-1, 2016 WL 1071016, at *5 (E.D. Va. Mar. 17, 2016)
(Put another way, any subpoena that seeks evidence that is neither relevant nor reasonably
calculated to lead to the discovery of admissible evidence . . . creates an undue burden because it

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necessarily imposes greater hardship than is necessary to obtain proper discovery.). The SEC
cannot now attempt to bolster its faltering casepremised entirely on Investors 1 and 2by
fishing around in discovery for information about other potential investors whom the SEC has
not pled with any particularity that Mr. Paxton defrauded. See Bristol-Myers Squibb, 587 F.
Supp. 2d at 819 (Rule 9(b) is meant to preven[t] plaintiffs from filing a claim and then
attempting to uncover unknown wrongs through discovery.).
CONCLUSION
For the foregoing reasons, Mr. Paxton respectfully requests that this Court enter a
protective order forbidding discovery of these fifteen subpoenaed third-parties.

Dated: January 12, 2017

Respectfully submitted,
/s/ Matthew T. Martens
Matthew T. Martens
(Lead Counsel)
D.C. Bar No. 1019099
Jaclyn N. Moyer (pro hac vice)
D.C. Bar No. 492284
Alyssa DaCunha (pro hac vice)
D.C. Bar No. 1003687
Kevin Gallagher (pro hac vice)
D.C. Bar No. 1031415
Wilmer Cutler Pickering Hale and Dorr LLP
1875 Pennsylvania Ave. NW
Washington, DC 20006
Tel: (202) 663-6000
Fax: (202) 663-6363
Matthew.Martens@wilmerhale.com

William B. Mateja
Texas Bar No. 13185350
Polsinelli LLP
2950 N. Harwood
Suite 2100
Dallas, TX 75201
Tel: (214) 754-5751
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Fax: (214) 397-0033


Mateja@polsinelli.com

J. Mitchell Little
Texas Bar No. 24043788
Scheef & Stone, LLP
2600 Network Blvd., Ste. 400
Frisco, TX 75034
Tel: (214) 472-2140
Fax: (214) 472-2150
Mitch.Little@solidcounsel.com
Attorneys for Defendant Warren K. Paxton, Jr.

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CERTIFICATE OF SERVICE
I hereby certify that on January 12, 2016, I electronically filed the foregoing with the
Clerk of the Court through the CM/ECF system, which will send notices of electronic filing to all
counsel of record.

/s/ Matthew T. Martens


Attorney

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CERTIFICATE OF CONFERENCE
We hereby certify that on January 11, 2017, we complied with the meet and confer
requirement in Local Rule CV-7(h) and determined that this motion will be opposed. Mr. Gulde
and counsel for Mr. Paxton conducted the personal conferences required by this rule via
telephone on January 11, 2017 and determined that no agreement could be reached because Mr.
Paxton believes that the subpoenas are seeking wholly irrelevant material, whereas the SEC
believes that the subpoenas are relevant, although it declined to explain to Mr. Paxton why they
are relevant. The discussions have conclusively ended in an impasse, leaving an open issue for
the court to resolve.

/s/ Matthew T. Martens


Lead Attorney
/s/ J. Mitchell Little
Local Counsel

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