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IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
FEDERAL TRADE COMMISSION,
Plaintiff,
v.
KEVIN TRUDEAU,
Defendant.
))
)))
)
)
))
)
))
Case No. 03-C-3904
Hon. Robert W. Gettleman
PLAINTIFFS MOTION FOR LEAVEINSTANTER
TO FILE A CONSOLIDATEDRESPONSE TO TRUDEAUS PROPOSED ORDER AND OPPOSITION TO HIS
REQUEST TO PAY HIS ATTORNEYS WITH MONEY BELONGING TO
CONSUMERS
Plaintiff Federal Trade Commission (FTC) moves the Court for leave to file a
consolidated reply to (1) Trudeaus Motion for To Release Assets for Payment of Attorneys
Fees (DE736) and (2) Trudeaus Response to the FTCs Proposed Order (DE735), both of which
Trudeau filed late Friday. Given the importance of this case and significance of these issues to
the receivership estate, good cause exists to permit the FTC to respond.
Additionally, the FTC seeks leave for its Consolidated Response to exceed the fifteen-
page limit by two pages. The Consolidated Response replies to two separate pleadings (one of
which is nine pages, and the other eight pages). Thus, the FTCs Consolidated Response is the
same length as Trudeaus two filings.
Finally, the FTC notices this motion for Tuesday at 8:30 AM, which is when the Court
scheduled a hearing regarding attorneys fees and the receiverships structure.
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Dated: August 5, 2013
David OToole ([email protected])Federal Trade Commission55 West Monroe Street, Suite 1825
Chicago, Illinois 60603-5001Phone: (312) 960-5601Fax: (312) 960-5600
Respectfully Submitted,
/s/ Jonathan CohenMichael Mora ([email protected])Jonathan Cohen ([email protected])
Amanda B. Kostner ([email protected])Federal Trade Commission600 Pennsylvania Ave., N.W. M-8102BWashington, DC 20580Phone: 202-326-3373; -2551Fax: 202-326-2558
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CERTIFICATE OF SERVICE
I, Jonathan Cohen, hereby certify that on August 5, 2013, I caused to beserved true copies of the foregoing by electronic means, by filing such documents through theCourts Electronic Case Filing System, which will send notification of such filing to:
Kimball Richard [email protected]
Thomas Lee Kirsch, [email protected]
Katherine E. [email protected]
/s/ Jonathan CohenJonathan Cohen ([email protected])
Attorney for PlaintiffFederal Trade Commission
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IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
FEDERAL TRADE COMMISSION,
Plaintiff,
v.
KEVIN TRUDEAU,
Defendant.
))
))))))))))
Case No. 03-C-3904
Hon. Robert W. Gettleman
FTCS CONSOLIDATED RESPONSE TO TRUDEAUS PROPOSED ORDER AND
OPPOSITION TO HIS REQUEST TO PAY HIS ATTORNEYS WITH MONEY
BELONGING TO CONSUMERS
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TABLE OF CONTENTS
TABLE OF AUTHORITIES ......................................................................................................... iii
I. INTRODUCTION ...............................................................................................................1
II. THE COURT HAS AUTHORITY TO CREATE A RECEIVERSHIP OVER ALL
ASSETS TRUDEAU CONTROLS, BUT IF THE COURT HAS RESERVATIONS,
THE COURT SHOULD INCARCERATE TRUDEAU .....................................................2
A. The Court Has Authority To Include Any Asset Trudeau Controls Within the
Receivership .............................................................................................................3
B. If the Court Has Reservations About Its Authority, the Solution Is To
Incarcerate Trudeau Until He Complies With the Order To Pay,
Not To Give Him a Free Pass. ..............................................................................6
III. THE COURT CANNOT ALLOW TRUDEAU TO USE CONSUMERS MONEY
TO PAY TO DEFEND AGIANST THE CIVIL AND CRIMINALCONSEQUENCES OF THE MISCONDUCT THAT INJURED THEM ........................11
A. Think AchievementAbsolutely Prohibits Trudeau From Using ConsumersMoney To Pay His Future Legal Bills ...................................................................11
B. The Court Should Not Permit Trudeau To Use Consumers Money To PayExisting Legal Bills................................................................................................13
C. The Court Should Not Release Assets from NCHI Without Substantial
Additional Evidence...............................................................................................15
IV. CONCLUSION ..................................................................................................................17
CERTIFICATE OF SERVICE ......................................................................................................18
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TABLE OF AUTHORITIES
Cases
American Freedom Train Found. v. Spurney, 747 F.2d 1069 (1st Cir. 1984) ................................ 4
Caplin & Drysdale v. United States, 491 U.S. 617 (1989) ........................................................... 12
CFTC v. Battoo, No. 12-cv-07127 (N.D. Ill. Sept. 27, 2012) ..................................................... 6, 9
CFTC v. Lake Shore Asset Management Ltd., No. 07-3598 (N.D. Ill. Aug. 19, 2011) .................. 6
CFTC v. Morse, 762 F.2d 60 (8th Cir. 1985) ............................................................................... 11
DeGuelle v. Camilli, __ F.3d __, 2013 WL 3942906 (7th Cir. Aug. 1, 2013) ............................... 7
FTC v. 2145183 Ontario Inc., No. 09-7423 (N.D. Ill. Nov. 30, 2009)........................................... 6
FTC v. Asia Pacific Telecom, Inc., No. 10-3168 (N.D. Ill. May 25, 2010) .................................... 6
FTC v. Fortune Hi-Tech Marketing, Inc., No. 13-cv-00578 (N.D. Ill. Jan. 24, 2013) ............... 6, 9
FTC v. Gill, 183 F. Supp.2d 1171 (C.D. Cal. 2001) ....................................................................... 3
FTC v. Image Sales & Consultants, No. 1:97-CV-131,1997 U.S. Dist. LEXIS 18905, (N.D. Ind. Nov. 14, 1997) ....................................................... 14
FTC v. Jordan Ashley, Inc., No. 93-2257,
1994 U.S. Dist. LEXIS 7577 (S.D. Fla. May 4, 1994) .............................................................. 14
FTC v. Leshin, No. 06-61851, 2011 WL 617500, *15 (S.D. Fla. Feb. 15, 2011) ........................ 10
FTC v. Neovi, Inc., No. 06-CV-1952, 2012 WL 2859987 (S.D. Cal. July 11, 2012) ..................... 3
FTC v. NHS Systems, 708 F. Supp. 2d 456 (E.D. Pa. 2009) ........................................................... 4
FTC v. Productive Marketing, 136 F. Supp.2d 1096, 1106 (C.D. Cal. 2001) ............................ 4, 8
FTC v. QT, Inc., 605 F. Supp.2d 999 (N.D. Ill. 2009) .................................................................. 12
FTC v. Think Achievement Corp., 312 F.3d 259 (7th Cir. 2002)......................................... 2, 11-13
In re San Vicente Med. Pners Ltd., 962 F.2d 1402 (9th Cir. 1992) ............................................... 6
Kokoraleis v. Gilmore, 131 F.3d 692 (7th Cir. 1997) ................................................................... 12
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McGregor v. Chierico, 206 F.3d 1378 (11th Cir. 2000) ................................................................. 5
SEC v. AMX, Intl, Inc., 872 F. Supp. 1541 (N.D. Tex. 1994) ..................................................... 10
SEC v. Aragon Capital Advisors, LLC, 2011 WL 3278907 (S.D.N.Y. July 26, 2011) ................ 10
SEC v. Bilzerian, 127 F. Supp. 2d 232 (D.D.C. 2000) ................................................................... 5
SEC v. Black, 163 F.3d 188, 196-97 (3rd Cir. 1998) ...................................................................... 4
SEC v. Hickey, 322 F.3d 1123 (9th Cir. 2003) ........................................................................... 3, 4
SEC v. Levine, 671 F. Supp.2d 14, 36 (D.D.C. 2009) .................................................................... 3
SEC v. Solow, 682 F.Supp.2d 1312 (S.D. Fla. 2010) ................................................................... 10
SEC v. Universal Express Inc., No. 04-2322, 2007 WL 2469452 (S.D.N.Y. Aug. 31, 2007) ....... 3
SEC v. Universal Financial, 760 F.2d 1034, 1038 (9th Cir. 1985) ................................................ 4
SEC v. Wencke, 622 F.2d 1363, 1371 (9th Cir. 1980) .................................................................... 3
Tcherepnin v. Franz, 439 F. Supp. 1340 (N.D. Ill. 1977)............................................................... 4
United States v. Messino, 181 F.3d 826 (7th Cir. 1999) ............................................................... 12
United States v. Moya-Gomez, 860 F.2d 706 (7th Cir. 1988) ....................................................... 12
United States v. Tennessee, 925 F. Supp. 1292 (W.D. Tenn. 1995) ............................................... 3
Statutes
28 U.S.C. 1651(a) ........................................................................................................................ 6
28 U.S.C. 3001 et seq................................................................................................................... 1
28 U.S.C. 3003 ......................................................................................................................... 1, 9
28 U.S.C. 3014(a)(1) .................................................................................................................. 10
28 U.S.C. 754 ........................................................................................................................... 1, 2
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I. INTRODUCTIONExactly as he has done for fifteen years, Trudeau proceeds as though this Courts orders
are meaningless. Only a few days ago, as a sanction for Trudeaus third contempt, the Court
requested that the FTC nominate a receiver for all of Trudeaus assets, including all entities,foreign or domestic, owned or controlled by Trudeau (the Trudeau Entities). DE729 (July 26,
2013) at 1 (emphasis added). The Court then specifically identified the entities Trudeau owns
and controls. Id. at 1-2; see also PXA:1, Hearing Tr. at 31:19-20 (July 26, 2013) (He controls
those entities. Im finding that.). Yet as if the Court made no findings at all Trudeau now
argues that, absent a showing that [he] controls each of the so-called Trudeau Entities or [the
Court] otherwise has proper jurisdiction over these entities, the Court should reject the FTCs
Proposed Order. DE735 (Aug. 2, 2013) at 9 (emphasis added). Through a year of protracted
litigation, the FTC has proven conclusively, and the Court has found, that these assets belong to
Trudeaus victims, not to Trudeau and his lawyers.
As discussed below, under the Courts inherent contempt power and 28 U.S.C. 754
(which governs receivership jurisdiction), because the Court has jurisdiction over Trudeau, the
Court has jurisdiction over assets Trudeau controls.1
Even so, it is very likely that Trudeau
(acting through his wife or other nominees) will attack the Courts findings through endless
litigation with the receiver although this obstacle counsels against creating a receivership as a
1 The Courts July 26, 2013 order (DE729) correctly does not refer to the Federal Debt
Collection Procedures Act (FDCPA), 28 U.S.C. 3001 et seq. The Court created the
receivership as a contempt sanction, which is permissible because the FDCPA does not
supersede or modify . . . the authority of a court . . . to exercise the power of contempt under
any Federal law. 28 U.S.C. 3003(c)(8)(C). Notwithstanding the FDCPA, the Court could
also have created a receivership under various other sources of authority as well. See 28 U.S.C.
3003(b) (providing that nothing in the FDCPA curtail[s] or limit[s] the right of the United
States under any other Federal law . . . to appoint or seek the appointment of a receiver); id. at
3003(c) (8) (providing that nothing the FDCPA supersede[s] or modif[ies] . . . the authority of a
court . . . to appoint a receiver to effectuate its order).
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practical matter, not against the Courts legal authority to act. Trudeaus inevitable challenges to
the receivership will drain the funds available for redress and delay until redress with the
remaining funds is impossible. Such a process certainly does not serve consumers interests. If
the Court has reservations about its authority to create a receivership with sufficient teeth to
give it at least a chance to help consumers, or the collateral litigation the receivership will
trigger, then the solution is to incarcerate Trudeau until he complies, not to give Trudeau a free
pass.
Amazingly, Trudeau further argues that his victims should pay for Trudeaus attorneys to
continue to protect his assets and defend him from the civil and criminal consequences of the
conduct that caused their injury. See DE736 (Aug. 2, 2013). The Seventh Circuit ruled on this
very issue, directly rejecting Trudeaus position. FTC v. Think Achievement Corp., 312 F.3d
259, 262 (7th Cir. 2002).
II. THE COURT HAS AUTHORITY TO CREATE A RECEIVERSHIP OVER ALLASSETS TRUDEAU CONTROLS, BUT IF THE COURT HAS RESERVATIONS,THE COURT SHOULD INCARCERATE TRUDEAU.
In large part, Trudeau contends that the Court mistakenly found he controls entities
through various nominees. For several reasons, in addition to the overwhelming evidence
supporting the Courts finding, the Court should summarily reject Trudeaus attempt to reargue
his entire defense and the related contentions he advances. First, through both its inherent power
and 28 U.S.C. 754 (which governs receivership jurisdiction), the Court has jurisdiction over
assets Trudeau controls including the entities Trudeau controls because it has jurisdiction
over him. Second, if the Court has reservations about its authority, or the collateral litigation the
receivership will almost certainly spawn, the solution is to incarcerate Trudeau as a coercive
contempt sanction, not to create a receivership doomed to failure. Finally, the specific objections
Trudeau raises to the FTCs Proposed Order are meritless.
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A. The Court Has Authority To Include Any Asset Trudeau Controls Withinthe Receivership.
The Courts authority to include any asset Trudeau controls within the receivership stems
from two sources. First, the court has wide latitude and a broad range of civil contempt
sanctions at its disposal, such as fines, imprisonment, receivership, and a broader category of
creative, nontraditional sanctions. FTC v. Neovi, Inc., No. 06-CV-1952, 2012 WL 2859987, *2
(S.D. Cal. July 11, 2012) (quoting United States v. Tennessee, 925 F. Supp. 1292, 1303
(W.D.Tenn.1995)) (Neovis alterations omitted) (emphasis added); see alsoSEC v. Wencke, 622
F.2d 1363, 1371 (9th Cir. 1980) (The Supreme Court has repeatedly emphasized the broad
equitable powers of the federal courts to shape equitable remedies to the necessities of particular
cases, especially where a federal agency seeks enforcement in the public interest.) (citing four
Supreme Court cases along with various other authority). Pursuant to this power, courts can
create receiverships as contempt sanctions. See, e.g., SEC v. Levine, 671 F. Supp.2d 14, 36
(D.D.C. 2009) (appointing a receiver as a contempt sanction); SEC v. Universal Express Inc.,
No. 04-2322, 2007 WL 2469452, *12 (S.D.N.Y. Aug. 31, 2007) (same); FTC v. Gill, 183 F.
Supp.2d 1171, 1186 (C.D. Cal. 2001) (same).
Furthermore, the Courts equitable power includes authority over assets the contemnor
controls. See, e.g., SEC v. Hickey, 322 F.3d 1123, 1131 (9th Cir. 2003). Hickeys facts are
remarkably similar to those here. After finding that Hickey bilked investors out of millions, the
court ordered him to disgorge his unlawful gains. Id. at 1125. Hickey paid nothing, and the
court found him in contempt. See id. The court then froze the assets at a non-party brokerage
that Hickeys elderly mother nominally owned. See id. at 1126-27. The Ninth Circuit affirmed
based on facts establishing Hickeys control over the brokerage:
The SEC demonstrated that Hickey had unfettered control of the Brokerage.Hickeys employment agreement with the Brokerage allowed him to pay
whatever personal expenses he deemed appropriate. Dorothy Hickey, the nominal
owner of the Brokerage, testified that she delegated the day-to-day operations of
the Brokerage to Hickey, to the point where Hickey used a rubber stamp with the
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owners signature. Finally, Hickey registered with the California Department of
Real Estate as the Brokerages administrative manager and designated broker.
Given Hickeys dominance of the Brokerage, freezing the Brokerages assets was
necessary for the district court to guarantee that its disgorgement order would besatisfied and that Hickey would honor the payment schedule established in the
contempt order. The district court acted within its discretion by invoking its
equitable powers to freeze the Brokerages assets.
Id. at 1132. Accordingly, the Courts inherent contempt power affords it authority over assets
that Trudeau controls, even if those assets nominally belong to entities Babenko or another
nominee ostensibly owns.2
Second, 28 U.S.C. 754 provides for the vesting of jurisdiction over property located in
different districts in the district of the appointment of a receiver. Tcherepnin v. Franz, 439 F.
Supp. 1340, 1344 (N.D. Ill. 1977); see alsoAmerican Freedom Train Found. v. Spurney, 747
F.2d 1069, 1073 (1st Cir. 1984) ([T]he purpose of the statute is to give the appointing court
jurisdiction over property in the actual or constructive possession and control of the debtor,
wherever such property may be located.) (emphasis added). Accordingly, Section 754
authorizes a court to create a receivership that includes property nominally owned by entities not
before the Court.3 See, e.g., FTC v. NHS Sys., 708 F. Supp.2d 456, 463 (E.D. Pa. 2009)
2 Trudeau cites SEC v. Black, 163 F.3d 188, 196-97 (3rd Cir. 1998), which is not
contrary. InBlack, the Third Circuit distinguished various cases the SEC cited because in no
case referenced by the SEC has it been granted a freeze ex parte of assets where those assets
were anything other than property, or deemed property, of a defendant or of a culpable third
party. See id. at 196 (emphasis added). Here, the Court found that, because Trudeau controls
the Trudeau Entities, their assets are deemed to belong to Trudeau. Furthermore, the Court made
this finding not after an ex parte proceeding (as inBlack), but after affording Trudeau extensive
due process.
3Were the rule otherwise, it would require[e] the FTC to institute a separate action
against any third party holding assets of the receivership estate, FTC v. Productive Marketing,
136 F. Supp.2d 1096, 1106 (C.D. Cal. 2001), which would result in a multiplicity of actions in
different forums, and would increase litigation costs for all parties while diminishing the size of
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(rejecting non-partys Teledrafts argument that the court does not have in personam
jurisdiction over Teledraft as a party orin remjurisdiction over Teledrafts funds, because the
court had in remjurisdiction over Receivership funds pursuant to 28 U.S.C. 754); SEC v.
Bilzerian, 127 F. Supp.2d 232, 232-33 (D.D.C. 2000) (creating receivership pursuant to, among
other things, the Courts equitable powers, 28 U.S.C. 28 U.S.C. 754, and Fed. R. Civ. P. 66 . . .
. such Receivership Estate shall be compromised of . . . the legal and/or equitable interests
(whether direct or indirect, tangible or intangible) of Defendant Bilzerian in assets, wherever
situated and by whomever held (Property), including, but not limited to, the following: the
Bilzerian Related Entities, defined to mean entities or assets in which this Court finds or has
found that Bilzerian has an interest), affd, 75 Fed. Appx. 3 (D.C. Cir. 2003).4
In short, courts have the power to authorize a receiver to assume control over whatever
assets a defendant controls, and they do so all the time.5
For instance, in CFTC v. Battoo, Judge
Chang ordered:
the receivership estate, SEC v. Universal Financial, 760 F.2d 1034, 1038 (9th Cir. 1985).
4Trudeau quotesMcGregor v. Chierico, 206 F.3d 1378 (11th Cir. 2000), in which a
District Court improperly imposed a sanction that included assets belonging to a contemnors
wife without finding that she violated the order. See id. at 1385 (noting that the court ordered
assets used for consumer redress regardless of whether they belong to Michael Chierico or Teri
Chierico, and that Teri Chierico was an innocent spouse). Regardless of whether Babenko
would qualify as an innocent spouse, nothing in the FTCs Proposed Order impairs any assets
that Babenko controls. Specifically, it provides: nothing in this order restrains, limits or
enjoins the conduct of Nataliya Babenko with respect to: (i) Assets that she did not acquire
directly or indirectly from Trudeau or the Trudeau Entities, and were not derived in any mannerfrom Trudeau or the Trudeau Entities; or (ii) Assets that she lawfully acquired after July 26,
2013. DE731 (Aug. 1, 2013) at 2.
5Notably, in many instances, the orders freezing assets the defendant controls and
placing them under receivership were issuedex parte. See, e.g.,PXA6-8. In contrast, Trudeau
had a year to prove he did not control the Trudeau Entities.
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Robb Evans & Associates is appointed Receiver, with the full powers of an equity
receiver, over Defendants and their affiliates and subsidiaries, and all of the funds,
properties, premises, accounts, businesses, partnerships and any other kinds of
assets directly or indirectly owned, beneficially or otherwise, managed or
controlled by the Defendants, whether held in their own names or in the names of
others (Receivership Assets).
PXA:5, Order, No. 12-cv-07127 (N.D. Ill. Sept. 27, 2012) at 20 (emphasis added); see also
PXA:6, Order, FTC v. Fortune Hi-Tech Marketing, Inc., No. 13-cv-00578 (N.D. Ill. Jan. 24,
2013) at 8, 15 (freezing assets [o]wned, controlled, or held by, in whole or in part, for the
benefit of, or subject to access by, or belonging to, any Defendant, and appointing a receiver to
[t]ake exclusive custody . . . of all assets . . . in the possession, custody, or under the control of,
the Receivership Defendants, wherever situated); PXA:7, Order, FTC v. Asia Pacific Telecom,
Inc., No. 10-3168 (N.D. Ill. May 25, 2010) at 9, 16 (same asset freeze and receiver appointment
language); PXA:8, Order, FTC v. 2145183 Ontario Inc., No. 09-7423 (N.D. Ill. Nov. 30, 2009)
(same language); PXA:9, Order, CFTC v. Lake Shore Asset Mgmt. Ltd., No. 07-3598 (appointing
receiver to take custody of all assets under the control of LS Common Enterprise wherever
situated).6
B. If the Court Has Reservations About Its Authority, the Solution Is ToIncarcerate Trudeau Until He Complies With the Order To Pay, Not To GiveHim a Free Pass.
Notwithstanding the authority strongly supporting the Courts July 26, 2013 order
imposing a receivership on the Trudeau Entities, Trudeau is correct that the Entities are not
formally before the Court. Although Trudeaus brief does not articulate a due process concern
with precision (see Trudeau Br. at 7-8) (discussing due process generally), Trudeau will
6 Additionally, the All Writs Act supplements the Courts inherent contempt authority and
its power under 28 U.S.C. 754. Specifically, the All Writs Act provides that federal courts may
issue all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the
usages and principles of law. 28 U.S.C. 1651(a). As such, under the All Writs Act, 28 U.S.C.
1651, because the Court has jurisdiction over Trudeau, the Court has jurisdiction over assets
Trudeau controls including the entities Trudeau controls.
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undoubtedly instruct the Trudeau Entities to challenge the Courts findings because they
(purportedly) did not receive notice of the proceedings against Trudeau or the opportunity to
participate. See, e.g.,In re San Vicente Med. Pners Ltd., 962 F.2d 1402, 1408 (9th Cir. 1992)
(rejecting non-partys challenge to order including it in a receivership over its objection;
Because [non-party] San Vicente received notice at all stages of the receivership proceedings
and had every opportunity to participate in the proceedings, the fact that San Vicente was never a
named party in the proceedings did not violate due process.). For several reasons, this position
should not prevail,7 but the fact remains that Trudeau will do everything he can behind the
scenes to thwart, impede, or derail the receivers efforts to seize assets that Trudeaus victims
should receive.
Because the Court did not incarcerate Trudeau, he has no incentive to put forth genuine
cooperation.8
Knowing that a receiver cannot monitor him twenty-four hours a day, Trudeau
will do whatever the receiver asks and then call Babenko, or some other front person, and
instruct them to battle the receiver.9 It will then take months (if not years) before the receiver
collects what little domestic assets remain, further draining resources and letting the clock tick
down on consumers. Simply put, the problem is not that the receivership is legally infirm; but
7All of the Trudeau Entities had notice through Trudeau, their control-person.
Additionally, to the extent it matters, Babenko was deposed and obviously had notice of this
litigation (in fact, several of the entities she nominally owns appeared before this Court
repeatedly). Furthermore, even if one assumed, rather incredibly, that the Trudeau Entities had
no notice of this litigation, they have sufficient privity with Trudeau to support issue preclusion,
thereby estopping them from relitigating this Courts findings. See generallyDeGuelle v.
Camilli, __ F.3d __, 2013 WL 3942906 (7th Cir. Aug. 1, 2013).
8 Trudeau likely anticipates that the probable future dispute over whether he has
genuinely cooperated will take time and afford him still further chances to stall, flee, or
otherwise impair the receivership process.
9 Trudeau waited only days after the Courts order placing his Entities in a receivership
before urging the Court to reconsider including them. This is the antithesis of cooperation.
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that Trudeau will argue it is. The receivership guarantees collateral litigation will drain the funds
available for redress; meanwhile, Trudeau will continue to live lavishly while he simply outwaits
his victims. The Court should not countenance this process.
If the Court has reservations about its authority to create a successful receivership, or if
the Court has reservations about Trudeaus probable response to a genuine receivership, the
solution is incarcerate Trudeau until he complies with the Order To Pay, not to render the
receivership impotent. Whatever chance a real receivership might have, the alternative Trudeau
proposes is designed to fail. Among many issues:
Trudeaus order purports to cover assets controlled by Trudeau, but does notinclude any entities Trudeau creates in the future, arguably leaving Trudeau tocreate Global Information Network II outside of the receivership and transfer
operations there;10
Trudeaus order does not specify the entities that the Court found him to control,which will make it extremely difficult for the receiver to obtain quick compliance
from third parties genuinely uncertain as to what the order covers;
Trudeaus order obligates persons to inform the receiver immediately about assetsand grant the receiver access to those assets, see DE735-1 at 2, but the assetsneed only be turned over to the Receiver upon the Receivers request, see id.,
which means assets can be removed from the estate at will without violating the
order as long as they are moved before the receiver asks to take possession; 11
10 Certainly the receiver would challenge this, but every issue the order leaves unclear is
another issue the Trudeau Entities will raise in their struggle with the receiver.11
For any receivership to work, third parties must be required to turn over assets
immediately, or at least not move them. Cf. Productive Marketing, 136 F. Supp.2d at 1106
(finding a preliminary injunction directing any entity holding assets of the receivership
defendants to turn those assets over to the Receiver is necessary to achieve the purposes of the
receivership).
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Trudeaus order gives the receiver no right to stand in Trudeaus shoes withrespect to privileged information regarding the location of assets, rendering the cost
of finding assets prohibitive;12
Trudeaus order does establish a method for repatriating his overseas funds that cansucceed because he has established duress clauses on his foreign accounts;
Trudeaus order does not require third parties to pay any money owed to Trudeaudirectly to the receiver, thereby assuming that he will honestly account for and
disgorge whatever he receives from third parties a proposition that Trudeau has
established time and again is patently false;
Trudeaus order does not expressly require the receiver to immediately shut downany business that cannot be operated lawfully;
Trudeaus order does not transfer the Trudeau Entities bankruptcy rights to thereceivership. Therefore, if things still are not going Trudeaus way, the Trudeau
Entities can always declare bankruptcy to halt the receivership.13
If Trudeau will not accept a receivership with teeth, or if the Court has reservations
about creating one, then the solution is to incarcerate Trudeau rather than create an anemic
receivership that, as a practical matter, ensures that consumers will never see a penny of redress.
12 The Court invalidated that privilege with respect to Lane, but not with respect to other
lawyers.
13This is why receivership orders contain standard language prohibiting receivership
entities from declaring bankruptcy. See, e.g., PXA:5, CFTC v. Battoo, No. 12-cv-7127 (N.D. Ill.
Sept. 27, 2012) at 25 (prohibiting receivership defendants from [p]etitioning, or assisting in
filing of a petition, that would cause the Defendants to be placed in bankruptcy); PXA:6, FTC v.
Fortune Hi-Tech Marketing, No. 13-cv-00578 (N.D. Ill. Jan. 24, 2013) at 21 (prohibiting
defendants from [f]iling, or causing to be filed, any petition on behalf of the Receivership
Defendants for relief under the United States Bankruptcy Code . . . without prior permission
from this Court).
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C. Trudeaus Specific Objections To the Proposed Order Are Baseless.There is no merit to any of Trudeaus specific objections to the FTCs Proposed Order,
all of which seek to undermine the contempt sanction by incorporating FDCPA exemptions.
First, as discussedinfra at 2 n.1, the Court created the receivership as a contempt sanction. In
fact, contrary to Trudeaus claim that the FDCPA provides the exclusive means for the FTC
to recover a judgment on a debt, see DE735 at 3 (Trudeaus emphasis), the FDCPA does not
supersede or modify . . . the authority of a court . . . to exercise the power of contempt under
any Federal law. 28 U.S.C. 3003(c)(8)(C). Second, statutory exemptions do not protect a
contemnors assets from contempt sanctions. See, e.g., FTC v. Leshin, No. 06-61851, 2011 WL
617500, *15 (S.D. Fla. Feb. 15, 2011) (noting that a federal court has absolute discretion to
disregard exemptions; it is clear that state exemptions cannot be used to shield satisfaction of a
disgorgement order) (mag. op.), adopted by Order Affirming Magistrate Judges Report, No.
06-61851 (S.D. Fla. Mar. 8, 2011) (DE563); SEC v. Solow, 682 F.Supp.2d 1312, 1325 (S.D. Fla.
2010) (noting that a district court can ignore state law exemptions as well as other state law
limitations on the ability to collect a judgment in fashioning a disgorgement order); SEC v.
AMX, Intl, Inc., 872 F. Supp. 1541, 154445 (N.D. Tex. 1994) (homestead exemption not taken
into account); SEC v. Aragon Capital Advisors, LLC, 2011 WL 3278907, *7-*8 (S.D.N.Y. July
26, 2011) (rejecting argument that state law and ERISA protected alleged contemnors
retirement funds).
Third, notwithstanding this authority, the FTCs Proposed Order exempts from the
receivership assets that Trudeau could exempt in bankruptcy under 11 U.S.C. 522(d). See
DE731 at 2; cf. 28 U.S.C. 3014(a)(1) (FDCPA provision allowing debtor to exempt property
that is specified in 11 U.S.C. 522(d)). This is generous, and unwarranted, given that these
assets belong to consumers; however, the FTC included this language in its Proposed Order
because the Courts July 26, 2013 order excluded from the receivership personal assets
exempted by law. Finally, there is no reason why the Court should permit Trudeau to shield
very significant assets from the Courts Order To Pay. For instance, he seeks to exempt 75% of
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his disposable earnings, see DE735 at 6, although his future disposable earnings could be
millions of dollars. The receivership is not supposed to keep Trudeau comfortable the Court
created the receivership instead of putting [Trudeau] in prison. PXA:1 at 40. Both the Courts
July 26 order and the FTCs Proposed Order afford Trudeau reasonable and necessary living
expenses, and allowing him to keep anything more both injures consumers and rewards
Trudeaus contumacy.
III. THE COURT CANNOT ALLOW TRUDEAU TO USE CONSUMERS MONEYTO PAY TO DEFEND AGAINST THE CIVIL AND CRIMINALCONSEQUENCES OF THE MISCONDUCT THAT INJURED THEM.
Consumers have no legal obligation to pay for Trudeaus lawyers, and the Court should
not force them to do so. Moreover, Winston entered this phase of the litigation with eyes
open, knowing that Trudeau might lose the ability to use his companies to pay Winston (which
has already received at least $1.7 million and likely more for its work). Finally, Trudeaus
evidence regarding NCHI is exceptionally dubious, and the Court should not release any NCHI
assets unless Trudeau proves that they are donations from genuinely independent third parties
made solely to support his defense.
A. Think Achievement Absolutely Prohibits Trudeau From Using ConsumersMoney To Pay His Future Legal Bills.
The Seventh Circuit has addressed the issue presented here, holding that once the court
determined that all the frozen assets were either a product of fraud or necessary to compensate
the victims of the fraud for their losses, [the contemnor] had no right to use any part of the frozen
money for his own purposes, purposes that included defending himself against criminal charges.
Think Achievement, 312 F.3d 259, 262 (7th Cir. 2002) (emphasis in original). As the Seventh
Circuit asked:
Why should the victims of [the contemnors] fraud be made to finance his defense
to a criminal prosecution? As there is no answer to this question, to make them
do so would have been an abuse of the district courts equitable discretion, which
though considerable is not unlimited.
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Id. (emphasis added); see alsoCFTC v. Morse, 762 F.2d 60, 63 (8th Cir. 1985) (The report of
the receiver indicates that the funds remaining in the estate will not be sufficient to pay all of the
claims of defrauded customers. . . . It would be inequitable to further deplete these funds to pay
the attorneys retained by [the defendant] in his attempt to avoid paying his customers.).
Trudeau unsuccessfully attempts to distinguish Think Achievementon several grounds.
Initially, he argues that the assets currently frozen here go far beyond any proceeds of fraud.
DE736 at 4. Conveniently, he fails to state that Think Achievements holding plainly covers
assets that are either a product of fraud or necessary to compensate the victims of the fraud for
their losses, 312 F.3d at 262 (emphasis added), and the frozen assets are necessary to
compensate Trudeaus victims.
Next, Trudeau contends that Think Achievementdid not involve an order that victims
receive the contemnors future income, see DE736 at 5, which is true but irrelevant. Just as the
Order To Pay means that, until Trudeau complies, he cannot buy luxury cars or jewelry even
with future income, he cannot buy a gold-plated defense.14 Put differently, even future income
belongs to consumers, not to Trudeau. See, e.g., Caplin & Drysdale, 491 U.S. at 626 (A
defendant has no Sixth Amendment right to spend another persons money for services rendered
by an attorney, even if those funds are the only way that that defendant will be able to retain the
attorney of his choice.). As the Seventh Circuit wrote when a defendant complained that he
could not use funds frozen under a forfeiture law for his defense: One cannot spend money one
does not have and, by virtue of the forfeiture provision and the restraining order, the funds in
question are not the defendants to spend. United States v. Moya-Gomez, 860 F.2d 706, 725
14 Trudeau has a right to counsel, but he does not have a right to the best or most
expensive counsel. See, e.g., United States v. Messino, 181 F.3d 826, 830-31 (7th Cir. 1999)
(The Sixth Amendment guarantees [a defendant] adequate counsel, not the best possible
counsel.) (citing Caplin & Drysdale v. United States, 491 U.S. 617, 624 (1989)); see also
Kokoraleis v. Gilmore, 131 F.3d 692, 696 (7th Cir. 1997) (The sixth amendment does not . . .
entitle defendants to the best available counsel.).
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(7th Cir. 1988). Whether Trudeau has money now or earns it later, it belongs to consumers until
he complies with the Order To Pay. See, e.g., FTC v. QT, Inc., 605 F. Supp.2d 999, 1007 (N.D.
Ill. 2009) (following Think Achievementand refusing to release funds the court found rightfully
belong to . . . consumers).
Finally, Trudeau incorrectly argues that this case is at a much earlier stage than Think
Achievement. See DE736 at 6. The Seventh Circuit based its decision on the District Courts
determination that the frozen assets were either the product of fraud or necessary to compensate
victims, see 312 F.3d at 262. In other words, the contemnor no longer had an equitable
entitlement to the money, see id. Likewise, when the Court created the receivership for the
purpose of paying to the FTC the sum ordered by the court on June 2, 2010, it found Trudeau
no longer had an equitable entitlement to the receivership funds until the Courts Order To Pay is
satisfied. Because Think Achievementis precisely on point, the Court should not allow Trudeau
to pay future legal bills from receivership funds.15
B. The Court Should Not Permit Trudeau To Use Consumers Money To PayExisting Legal Bills.
Although Think Achievementdid not address the use of frozen assets to pay legal
expenses already incurred, and the Seventh Circuit noted that this issue could be more
complicated, see 312 F.3d at 262, the result is the same. The more complicated hypothetical
scenario the Seventh Circuit considered, however, is inapplicable here. The Circuit Court
postulated that a district court had determined preliminarily that a certain amount of the frozen
assets lawfully belonged to the defendant, and the court further informed the defendants counsel
15 Trudeau also complains that his defense would be severely prejudiced if he cannot
pay Winston. See DE736 at 3. The fact that Trudeau might need frozen money badly at the
moment is irrelevant to whether it isnt his to spend. Nor does the possible prejudice to
Trudeaus defense make Think Achievementany less dispositive. To the extent Think
Achievementmeans Winston will ask to withdraw from the criminal matter, Judge Guzman will
evaluate that request and its implications for the criminal proceeding.
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that he could count on being able to obtain up to that amount from the [frozen] fund to pay his
fee for defending [the defendant]. Id. at 263. In this hypothetical, the lawyer would be an
innocent third party with his own equitable claim to balance against that of the victims of the
defendants fraud. Id. Here, however, the Court never informed Winston that it could count
on being able to collect its fee. Winston has no equitable claim to the frozen assets at all, let
alone one of the sort that Think Achievementcontemplates might offset consumers claim.
Additionally, Winston continued to incur fees with eyes open, which further
underscores that it has no equitable claim to receivership money. Winston argues that it entered
its appearance long before it was on notice that any assets of third parties (i.e. the Trudeau
Entities) could become subject to asset freezes and collection in this matter, DE736 at 3, but
this is incorrect and irrelevant. Winston entered the case after the FTC moved to hold Trudeau in
contempt for violating the Courts 2004 order, so Winston understood (or should have
understood) the risk that, if the FTC prevailed, it would attempt to collect assets Trudeau
controlled to compensate victims.
Moreover, whether Winston should have seen this risk when it entered its appearance is
immaterial because Winston is not attempting to collect fees for work done years ago. Rather,
based on the Winstons Court-ordered production of billing information (covering June 2010
through early March, 2013), Winston is attempting to collect fees for work performed over the
last few months: long after the Courts 2010 Order To Pay, long after the FTC alleged that
Trudeau controlled the Trudeau Entities in its July 2012 contempt motion, and long after the
Court found that FTC had established aprima facie case (on December 6, 2012, see DE535).
Because Winston incurred the fees now at issue well after it had become patently obvious that
Trudeau could lose control over assets hidden in his companies, Winston assumed the risk of
nonpayment. Cf. FTC v. Image Sales & Consultants, No. 1:97-CV-131, 1997 U.S. Dist. LEXIS
18905, at *8 (N.D. Ind. Nov. 14, 1997) (As has been observed, an attorney who knowingly
consents to represent a defendant whose assets have been frozen assumes the risk of not being
paid. This principle squarely applies here and leads to the conclusion that no additional
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withdrawals for the payment of attorney fees and costs should be allowed, thus preserving at
least some assets for potential consumer redress.) (quoting FTC v. Jordan Ashley, Inc., No. 93-
2257, 1994 U.S. Dist. LEXIS 7577, *9-*10 (S.D. Fla. May 4, 1994)). Given that Winston
assumed the risk and that it already received at least $1.7 million16 after the Order To Pay that
Trudeau could have used to compensate his victims there is no reason to lessen the funds
available to redress consumers even further.
C. The Court Should Not Release Assets from NCHI Without SubstantialAdditional Evidence.
There is every reason to be suspicious of Trudeaus request that the Court release NCHIs
assets from the receivership. First, and most remarkably, neither Trudeaus motion nor its
supporting declaration from Website Solutions USA accountant Michael Dow states what assets
NCHI holds. Particularly because there has been no accounting of the receivership estates
assets, it is unthinkable that a subset of receivership assets would be released without knowing
the amount. Second, until very recently, Trudeau argued NCHI had no net assets. According to
Trudeaus trial exhibits, as of April 7, 2013, NCHI had only $25,841 on hand, but $110,416 in
liabilities, see PXA:4, DX 11A. In a report Trudeau filed on July 1, 2013, NCHI purportedly
held only $28,116 in cash (as of June 24), but owed $108,405. PXA:10, DE704 at 15-17. Thus,
it is at least probable that Trudeau is using NCHI to hide consumers money. Third, what little
financial information Trudeau disclosed about NCHI reveals the same unexplained intercompany
transfers that typify other Trudeau Entities bookkeeping. For instance, NCHI apparently
received payments documented as loans from Natural Cures Inc. and Website Solutions USA.
PXA4 at 5; DX 11A.
Fourth, although Trudeau claims NCHI was set up to fund his defense,17
curiously the
FTC has no evidence that NCHI paid anything to Winston between June 2, 2010 and March 7,
16Winston received $1.7 million as of early March, five months ago. See PXA:2, FTCX
18E.
17 Dow states that NCHI was established for the sole purpose of helping defray Kevin
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2013. PXA:2, FTCX 18E.18 It did, however, pay Lanes firm more than $115,000 (although it is
unclear how Lane was furthering Trudeaus defense). See PXA:3, FTCX 12C (excerpts).
Finally, there is no reason to credit Dows claim that NCHI funds are never under the
control of Trudeau, DE735-1 at 2, which runs contrary to the Courts finding that Trudeau
controls NCHI. See DE729 (July 26, 2013) (incorporating FTCs proposed findings of fact).
Among other things, Lane (who created NCHI, see id.) warned both Trudeau and Suneil Sant19
that the funds trustee should have an office in a state where asset protection laws will allow us
to protect the Funds assets from the claim of any creditor of Kevins who might assert that the
Fund is merely his alter ego. PXA:11. Trudeau was one of NCHIs original Directors, and he
served as a Director until only a few weeks ago. See DE735-1, Ex. A (NCHI original corporate
filing and July 11, 2013 board resolution removing Trudeau as a Director). Tom Morter remains
an NCHI Director. See id. (board resolution). Morter is Trudeaus good friend, PXA:12, see
also PXA:13 (photo of Trudeau and Morter on Canadian fishing trip), and Trudeau chose Morter
to replace Sant as Website Solutions President, PXA:14 at 338:14-20. Morters role suggests
that Trudeau continues to control NCHI, even now.
Simply put, because Trudeau has not established that NCHIs undisclosed assets came
from genuinely independent third parties who donated money to fund his legal defense, the FTC
asks the Court not to release these assets.
Trudeaus legal expenses. DE736-1 at 1. At least according to Lanes firm, however, NCHI
was originally organized to serve as a non-for-profit entity to promote the health philosophies of
Kevin Trudeau and others, but was converted to a legal defense fund at some point later,
apparently because it did not achieve tax-exempt status. PXA:11 at 11; FTCX 12M.
18 As noted above, see infra at 3 n.3, NCHI may have paid money to Winston from
sources the FTC could not identify. Whether Winston has ever received anything from NCHI is
conspicuously absent both from its motion and Dows supporting declaration.
19 Sant also was an original NCHI Director. See DE735-1, Ex. A (NCHI original
corporate filing).
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IV. CONCLUSIONThe receivership the Court created in its July 26 order is legally sound. However, if the
Court has reservations, the answer is to incarcerate Trudeau to coerce him to comply with the
Order To Pay, not to weaken the receivership. The FTC also urges the Court to avoid theperverse scenario in which the consumers Trudeau victimized must pay for his defense.
Dated: August 5, 2013
David OToole ([email protected])Federal Trade Commission55 West Monroe Street, Suite 1825Chicago, Illinois 60603-5001Phone: (312) 960-5601Fax: (312) 960-5600
Respectfully Submitted,
/s/ Jonathan CohenMichael Mora ([email protected])Jonathan Cohen ([email protected])Amanda B. Kostner ([email protected])Federal Trade Commission600 Pennsylvania Ave., N.W. M-8102BWashington, DC 20580Phone: 202-326-3373; -2551; -2880Fax: 202-326-2551
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CERTIFICATE OF SERVICE
I, Jonathan Cohen, hereby certify that on August 5, 2013, I caused to beserved true copies of the foregoing by electronic means, by filing such documents through theCourts Electronic Case Filing System, which will send notification of such filing to:
Kimball Richard [email protected]
Thomas Lee Kirsch, [email protected]
Katherine E. [email protected]
/s/ Jonathan Cohen
Jonathan Cohen ([email protected])Attorney for PlaintiffFederal Trade Commission
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IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
FEDERAL TRADE COMMISSION,
Plaintiff,
v.
KEVIN TRUDEAU,
Defendant.
)
)
))
))
)
))
)
)
)
Case No. 03-C-3904
Hon. Robert W. Gettleman
EXHIBITS IN SUPPORT OF FTCS CONSOLIDATED RESPONSE TO TRUDEAUS
PROPOSED ORDER AND OPPOSITION TO HIS REQUEST TO PAY HIS
ATTORNEYS WITH MONEY BELONGING TO CONSUMERS
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FTC PXA:1
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UNITED STATES DISTRICT COURTNORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
FEDERAL TRADE COMMISSION, ))
Plaintiff, ))
vs. ) No. 03 C 3904) Chicago, Illinois
KEVIN TRUDEAU, ) July 26, 2013) 1:30 p.m.
Defendant. )
TRANSCRIPT OF PROCEEDINGS - ORAL ARGUMENTS AND RULING
BEFORE THE HONORABLE ROBERT W. GETTLEMAN
For the Plaintiff: FEDERAL TRADE COMMISSION600 Pennsylvania Avenue, N.W., M-8102BWashington, DC 20580BY: MR. JONATHAN COHEN
FEDERAL TRADE COMMISSION55 West Monroe Street, Suite 1825Chicago, Illinois 60603BY: MR. DAVID A. O'TOOLE
For Defendant Trudeau: WINSTON AND STRAWN LLP35 West Wacker DriveChicago, Illinois 60601BY: MR. KIMBALL ANDERSON
Official Reporter: JENNIFER S. COSTALES, CRR, RMR219 South Dearborn Street, Room 1706Chicago, Illinois 60604(312) 427-5351
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THE CLERK: 03 C 3904, FTC versus Kevin Trudeau.
MR. COHEN: Good afternoon, your Honor. Jonathan
Cohen for the FTC. With me is David O'Toole.
MR. ANDERSON: And good afternoon, your Honor.
Kimball Anderson for Mr. Trudeau. And Mr. Trudeau is here with
me in the courtroom today.
THE COURT: Good afternoon, folks.
This is here, as we all know, the FTC's motion for a
finding of contempt and incarceration of Mr. Trudeau to compel
compliance.
I have reviewed everything you have submitted -- both
parties have submitted -- which is quite extensive, as you
know. I don't see the need for any extensive argument today,
but, of course, I'm always happy to hear from both of you if
you want to add something or emphasize something. So I will
turn the floor over to you, but I don't envision an extensive
oral argument today because you have been so thorough in your
submissions.
Mr. Cohen.
MR. COHEN: We're happy to stand on our submissions.
I would like the opportunity to respond if Mr. Anderson would
like to add something.
THE COURT: That was brief.
MR. ANDERSON: Well, I had a few comments that I was
prepared to make, your Honor. I don't intend to repeat what's
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in the briefs, but I did want to highlight what I think are
some important themes.
THE COURT: Sure. Okay.
MR. ANDERSON: And thank you for this opportunity.
I wanted to comment on what I believe the factual
record reflects. I think the Court is well informed about the
law. The factual record has been somewhat -- somewhat deep.
But I think the record shows that when Mr. Trudeau was fined
$37 million, $37 million from the gross proceeds of the sale
of the weight loss cures book, he didn't receive those
proceeds. And, accordingly, he sought the advice of his long
time corporate attorney, Mr. Lane, about how to go about
dealing with the judgment.
And Mr. Lane's testimony, I think, was clear. It was
unimpeached. First, he advised Mr. Trudeau that he should try
to pay the judgment over time from his salary. Second,
Mr. Lane advised Mr. Trudeau that if he owned the entities that
were paying him a salary, the FTC would attack those entities
and likely destroy any probability of paying the judgment over
time. And third, Mr. Lane advised Mr. Trudeau not to transfer
any assets without adequate and proper consideration. And I
think Mr. Lane's testimony, as well as all of the financial
records, proved that Mr. Trudeau followed his lawyer's advice.
His wife set up some companies that then employed
Mr. Trudeau as a motivational speaker and as an author. And
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Mr. Trudeau, the evidence shows, did not use any of his own
money to set up the companies. The fact is he didn't have
startup capital. He did not provide any startup capital.
Mr. Lane so testified. The financial records reflect that.
Ms. Babenko, instead, provided the startup money and
paid Mr. Lane the legal fees to perform the legal work for the
companies. And once the companies were established, they
employed Mr. Trudeau. And Mr. Lane, by the way, disclosed all
of this to the FTC almost on a weekly basis. So there was no
withholding of any employment. There was no withholding of any
corporate relationships. There were no fraudulent transfers.
There were no transfers of Mr. Trudeau's assets to offshore
accounts. The various companies are, or at least were, until
the FTC attacked them, were real, operating companies with
dozens of employees, worldwide marketing expenses and real
creditors.
And I think the FTC's discussion of the record
reflects a misunderstanding of fundamental accounting.
Corporate as expenses are not assets of either the corporation
or Mr. Trudeau. The corporate assets were not dissipated.
That's a kind of pejorative term that the FTC uses throughout
its brief. But the corporation does have regulatory marketing,
employment overhead, and legal expenses, so I think this
pejorative term "dissipating assets" is misplaced. The
corporations were engaging in the everyday business activities.
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Another pejorative term that the FTC has thrown around a lot in
this court and its briefs is the term "asset protection
scheme." But I would respectfully suggest that there's nothing
nefarious to that corporation setting up corporations to
protect assets from creditors.
The black letter law shields every corporate
shareholder from the corporation's liability. And, similarly,
the corporation is shielded from the shareholders' liability.
And that was Mr. Lane's perfectly legitimate advice to protect
the corporations from Mr. Trudeau, who carried a substantial
judgment. And, accordingly, Mr. Lane assisted Ms. Babenko in
setting up corporations that would be protected from
Mr. Trudeau. They knew and advised Ms. Babenko that if they
were not protected, the startup company would be destroyed, and
there would be no business in which Mr. Trudeau could receive a
salary and pay off the judgment over time. Furthermore, there
was nothing nefarious about Ms. Babenko, a foreign national,
setting up companies with her own money outside of the United
States.
There has been a lot of hyperbole and a lot of
pejorative terminology to describe what I think the evidence
shows was legitimate business, legitimate legal advice, and a
legitimate plan to be able to pay a judgment over time, when
Mr. Trudeau did not have, and never received, the $37 million.
And I also think that Mr. Trudeau, through counsel,
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approached the process of paying the judgment in a responsible
way. At the outset we -- Winston and Strawn -- sent one of our
partners, a former FTC director, tried to work out a payment
plan. The FTC rebuffed it and said they were not interested in
working with us on any kind of consumer plan.
So we next obtained a proposal from Rust Consulting,
which the Court knows is a respected, national class action
administrator, to propose a remediation plan that Mr. Trudeau
would fund from his earnings as contemplated by Mr. Lane and
Mr. Trudeau; that effort was rebuffed.
And then Mr. Trudeau, stymied to work out a payment
plan, again sought Mr. Lane's advice. His testimony is that he
advised him to start sending in a substantial portion of his
salary. He did so. He did that for two months, but the FTC
refused to cash the checks. And Mr. Trudeau then decided that
that was fruitless.
We then came back into court and asked to work out a
payment plan. We suggested the appointment of a special master
or a magistrate. The FTC opposed this idea. We suggested an
accounting. The FTC, although they had asked for it in the
motion, rebuffed that idea and refused to cooperate with us.
And it's all unfortunate in my opinion because I believe
sincerely that if we had obtained even a little cooperation
from the FTC we'd have a viable consumer remediation plan in
place, or at least substantial funding to a plan accomplished.
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Instead, we have engaged in this unproductive path to
incarcerate Mr. Trudeau.
And then here's the, I think, the real nub of the
record. Despite all of these subpoena, the banks,
corporations, lawsuits, the law firms, all of the depositions,
all of the banking records, all of the credit card records, at
the end of the day the FTC, nor we, for that matter, have
identified any substantial assets available to pay the
judgment.
And the FTC's post-hearing brief illustrates this
point. There's a lot of indignation and speculation, but they
don't point to a single asset. And I think that it's
implicitly conceded that there aren't any assets because the
FTC has mounted this argument that Mr. Trudeau -- Mr. Trudeau's
lack of any present assets is self-imposed, and they argue that
self-imposed inability is no defense; however, they're wrong
about that legally. It has been pointed out the one case they
cite for that is a criminal contempt case, not a civil contempt
case. And there is overwhelming authority for the proposition
that coercive contempt is appropriate and legal only when
there's a present ability to pay. And so all of this argument
about legal fees and the past business expenses, so-called
self-induced inability to pay, is really not pertinent, your
Honor.
And even though the FTC asked for an accounting, and
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even though we offered to work with them to get an accounting,
to hire a company or an accounting firm that they were
comfortable with -- I even came to court and asked your Honor
to order an accounting -- all of those efforts were rebuffed.
So we went to -- Winston and Strawn went out and hired an
accounting firm. We hired the Sikich accounting firm, which is
one of the 50 largest accounting firms in the United States.
They are a mid-size accounting firm. And they conducted an
accounting of the companies that the FTC had identified as
so-called Trudeau affiliates, and that accounting revealed that
they essentially do not have any net assets, and that they are
all under water financially.
I think at the end of the day the record is clear that
Mr. Trudeau has done what the FTC requested. They requested an
accounting; he did that. He produced a sworn financial
statement. He produced his tax documents. He produced all of
his bank accounts, credit card statements, income statements,
balance sheets, and then we did this accounting with the
accounting firm.
I know why the FTC fought tooth and nail our efforts
to obtain an accounting, because it feared that it would show
exactly what we've been saying, namely, that there are no
significant net assets. And now the FTC is not contesting any
of that evidence. Their argument is, though, that this is
somehow incomplete. And I would suggest that that argument is
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just sophistry; no one can prove a negative under these
circumstances. Mr. Trudeau has done everything requested of
him. I think the motion, therefore, is moot.
I also think, as we have said in our brief, that there
is a path to procedure -- a path that we would recommend -- and
that is under the Federal Debt Collection Act. The FTC, I
think, frankly chose the wrong remedy. And this is not Kimball
Anderson speaking, it's -- there is substantial authority out
there that supports our thinking. We have cited in our brief
that Moore's Federal Practice states that a Federal Court
should not enforce a money judgment by contempt. And that that
proposition has also been repeated by the 11th Circuit in the
Combs vs. Ryan case, where he said -- the Court said, "It is
equally clear that when a party fails to satisfy a
court-imposed money judgment, the appropriate remedy is a writ
of execution, not a finding of contempt."
And the Courts in this Northern District of Illinois,
in particular the Robbins case, held the same. "The Federal
Debt Collection Act by statute is the exclusive means for the
government to recover a judgment on a debt." And we
acknowledge that the Act does not eviscerate a Federal District
Court judge's contempt power, but it also doesn't contemplate a
court using his contempt power to punish for past behavior or
perceived future misconduct.
It also doesn't eviscerate the debtor's statutory
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rights, statutory protection for garnishment of amounts
exceeding 25 percent, for example, of a debtor's salary and
earnings.
So there is a path here. The path is under the Act,
and allows for attachments, garnishments, even appointment of
receivership. We've endorsed that procedure with Mr. Trudeau's
blessing, and that is the proper procedure.
And I can see that the FTC in their last paper, their
latest gambit is, "Well, let's incarcerate Mr. Trudeau until he
fully cooperates with an accounting." And that request, I
respectfully suggest, is unfounded, and, in fact, unlawful.
Because as I have been saying here from day one, civil contempt
and any coercive confinement must place the keys to the
jailhouse in the defendant's hands. And the FTC wants to place
those keys in its hands, in the hands of some unnamed
accounting firm for some indefinite purpose. And that request
misapprehends the law governing coercive contempt.
And I don't think we need to look too far for guidance
on a proper remedy here. The Seventh Circuit in 2009, in one
of the appeals in this very case, FTC vs. Trudeau, held
squarely that "Civil contempt is not a proper means to punish
the defense, to vindicate the Court's authority, or to deter
future misconduct." I think that's the law of the case, and
yet, that is exactly what we see the FTC doing here.
So I think the motion is moot. I think the remedy
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sought is unlawful, and I, frankly, don't think that the FTC
picked the wrong -- I think they picked the wrong remedy. They
haven't been able to find -- because there aren't any --
substantial assets to pay the judgment. And now they should
take the statutory path, the one that Congress has said is the
exclusive path.
And just a few other side comments. You know, there
was no requirement in the Court's order or the law that
Mr. Trudeau become a lifetime indentured servant to the FTC.
He did not have to go to find work or work for other companies.
But on the advice of counsel he did try to do that. He tried
to set his business affairs so that he could work and ensure a
steady stream of earnings to pay the judgment. But I think
that that plan, although lawful and proper, has been basically
destroyed by the FTC. And now, ironically, after destroying
his ability to pay the judgment on an installment plan, the FTC
is here asking to incarcerate him. And that, I think, is truly
Orwellian and improper.
So that completes my summary of what I think the key
evidence in the record is. Again, there is no evidence of any
fraudulent transfers. There's no evidence of any dissipation
of Mr. Trudeau's assets. The evidence is that on advice of
counsel he began working for his wife's companies and tried to
work out a plan to pay the judgment. And the FTC has resisted
that at every step.
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That concludes my remarks. Thank you for your
attention.
THE COURT: Thank you, Mr. Anderson.
MR. COHEN: Your Honor, if I may.
THE COURT: Sure.
MR. COHEN: May it please the Court. I would like to
move through the remarks that Mr. Anderson made as briefly as I
can. But there is one thing from the outset that I want to
make completely clear. Toward the end counsel argued that
there was something improper about -- or that what we were
intending to do is place the keys to Mr. Trudeau's
incarceration in the hands of either the FTC or some accounting
firm; that's not what we're proposing at all. That's not what
we proposed last July when we first -- when we initially filed
this motion.
The way that an accounting would proceed in the
context of a coercive sanction is that hopefully Mr. Trudeau
would cooperate with an independent accounting firm, and then
the Court would evaluate whether he had established his
inability to pay in accordance with the law. It would not be
the accounting firm's decision. It would not be the FTC's
decision. It would be the Court's decision.
Now moving to some of the other points that
Mr. Anderson made. Mr. Anderson briefly touched upon the idea
that somehow this is just a routine money judgment. Our briefs
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discuss this at some length. There is very strong authority,
specifically the Supreme Court's decision in Jacksonville Paper
that orders of this nature are enforceable by contempt; that's
necessary to serve the public interest. In this instance, this
Court's order on June 2, 2010, was extremely clear in that it
gave specific directives both to the defendant and to the FTC,
and so it clearly is injunctive and it is clearly enforceable
by contempt.
The appropriate standard here is that it's Trudeau's
burden to establish a complete inability to pay. He hasn't met
that standard, but there's lots of ink spilled, as your Honor
mentioned, in the papers going back and forth. And actually
I'm not sure the parties are all that far apart on what
actually the standard is. It is important to think about why
that standard is what it is, why the burden of production is
placed on the defendant in a situation like this.
As the Court is aware, in civil matters, at least,
it's often the case that the law places the burden on the party
that is best able to meet it. Here Trudeau has Trudeau's
financial information. If the law were anything otherwise, no
one could ever enforce an order to pay, because defendants
could simply hide assets, which is exactly what Trudeau has
done here. It's not our burden, nor does the Court need to
find that Trudeau is able to pay some specific sum. Rather,
the question before the Court is whether Trudeau has satisfied
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his burden to clearly and unmistakably establish his present
inability to pay.
We don't need to go through the cases that are in the
papers, but there is case -- there are cases -- there are many
cases -- Commodity Futures Trading Commission vs. Wellington
Precious Metals. There was no specific finding there, but
because the defendant had hidden his assets, he was
incarcerated. We cite in our papers In Re Lawrence, the same
set of fact. We cite in our papers Affordable Media, the same
set of facts. There are another seven or eight cases that I
could go through.
Mr. Anderson -- counsel for Mr. Trudeau -- argued that
these are all his wife's companies. Your Honor has heard the
evidence. There is a mountain of evidence that Trudeau
controls these entities. I can't go through it all even if I
wanted to. Some highlights: You heard that Lane characterized
GIN as part of Trudeau's vision. You know that there is
correspondence in which Trudeau told Lane that, "I want to
start an MLL -- a company called The Global Information
Network." Trudeau instructed Lane to create the entities.
Trudeau told Lane who the owners would be. Trudeau located
these companies at 130 Quail Ridge Drive in Westmont where the
rest of his companies that he conceivably owns are located.
Trudeau ran the companies. He decided the servers
would be located in Belize. Lane testified that when he was
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giving legal advice to GIN he gave it to Trudeau because he
understood that Trudeau really speaks for GIN. Trudeau
instructed the GIN bank accounts be opened. Trudeau, according
to Lane, was able to access that cash. The GIN entity had paid
millions over the past three years in Trudeau's credit card
expenses and legal expenses. Lane testified that Trudeau
controls these companies in a layman's sense. When Trudeau was
asked whether he controlled the entities and questions related
to that subject, he took the Fifth Amendment. When Mr. Sant
was asked the same series of questions, he took the Fifth
Amendment. When Ms. Babenko, the purported successful
businesswoman who is ostensibly in control of these companies,
when asked, she also took the Fifth Amendment. The evidence is
overwhelming that Trudeau controls these entities.
It's worth briefly mentioning that there is
overwhelming evidence that Trudeau controls KMT Fiduciary
Trust. This is an entity that Lane referred to as an
indispensable part of Kevin's asset protection plan. And Lane
also admitted before this Court that Trudeau controlled KMT in
a layman's sense. With respect to these entities, both
domestic and international, there has been a complete failure
of proof -- a total failure to meet -- Trudeau can meet his
burden.
There has been no financial information submitted at
all for APC, for Website Solutions Switzerland, for NBT
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Trading, for Sovereign Trust, for NT Trading, S.A., for
Advantage Solutions. None at all. That is obviously not clear
and unmistakable evidence that this these entities don't have
assets.
With respect to GIN FDN, which is a particularly
important one because we know that $2 million came indirectly
from GIN FDN to fund the court-ordered escrow. Well, the only
evidence that the defendants submitted were 2010 statements
from an Ohio bank. There's no statements from the account at
Valartis in Liechtenstein. There are no statements from the
account at National Westminster Bank from which payments to
Lane were sent. This is not clear and unmistakable evidence.
It doesn't satisfy his burden of proof.
The O'Connor report, which counsel referenced, it's
not admissible from the FTC's perspective because we weren't
even told about it until after the evidentiary hearing. It's
hearsay. Its methodology is very suspect. But perhaps the
most important part of that report is Footnote 1, and Footnote
1 states -- and this is the accountant, Ms. O'Connor,
speaking -- who also sought accounting information from Global
Information Network Foundation, a Nevis Foundation. But
management at GINF, the foundation, declined our request.
Well, that management is under Trudeau's control. What this
shows is even at the very last minute, even after the
evidentiary portion of this hearing is concluded, the defendant
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is still not willing to cooperate and be forthcoming.
With respect to the domestic entities, the limited,
self-selected financial information is so incomplete as to be
useless. I won't make many points here, your Honor, but there
are a number of issues with what they've submitted. There are
weekly cash flow reports that show only one week in April.
They don't say anything about whether there was money there
before or money there after.
Natural Cure's Holding actually provides a
particularly poignant example. Natural Cures holding made
$557,000 in payments to the Lane firm after the Court entered
its order to pay. The only financial information that the
defendant provides regarding Natural Cures's holdings are
Defendant's Exhibits 12A and 12B. 12A is just a Westlaw
printout that gives the basic company information. 12B is a
bank account statement showing that a bank account was closed
in 2011. But we know from evidence before the Court that we
received from the Lane firm that Natural Cures Holding
continued making payments to Lane's firm in 2012. So we know
we don't have all of the information from Natural Cures
Holdings.
The same is true with International Pool Tour; it made
more than $900,000 in post-Order to pay payments to Lane's firm
and to Winston and Strawn. Trudeau produced evidence showing
that three accounts were closed in 2011 and IPT somehow managed
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to keep on making payments to the lawyers in 2012. This is not
clear and unmistakable evidence.
Trudeau has produced no evidence regarding where very
significant assets -- personal and corporate -- have gone. As
your Honor is aware KT Corporation owns Trudeau's Ojai,
California house. It's a specific asset that Trudeau controls
through the trust that he could have paid over to the FTC, but
hasn't. He doesn't explain why this hasn't happened.
GIN-USA reports 14 million in net profits since its
inception in 2011. There is no explanation as to where this
money has gone. There are millions in suspicious intercompany
transfers; they're not explained. There are transfers from
Trudeau's companies to Trudeau and Babenko specifically. For
instance, $486,000 from Website Solutions to Trudea