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Leslie J. Hughes, Colo. Bar No. 15043 HughesLJ@sec.gov Securities and Exchange Commission 1801 California Street Suite 1500 Denver, Colorado 80202 Telephone: (303) 844-1000 Facsimile: (303) 844-1068 Attorney for Plaintiff United States Securities and Exchange Commission

UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. GOLD STANDARD MINING CORP, ET AL.

CASE No: 2:12-cv-5662 PA (CWx) NOTICE OF CORRECTED MOTION TO STRIKE AFFIRMATIVE DEFENSES OF DEFENDANT KENNETH EADE

Defendants. DATE: DECEMBER 10, 2012 TIME: 1:30 P.M. COURTROOM: 15 JUDGE: HON. PERCY ANDERSON

NOTICE OF CORRECTED MOTION TO STRIKE 17 TO DEFENDANTS AND THEIR ATTORNEYS OF RECORD: 18 YOU ARE GIVEN NOTICE that on December 10, 2012, at 1:30 p.m., 19 or as soon thereafter as this motion may be heard, before the Honorable 20 Percy Anderson, in courtroom 15 of the United District Court for the Central

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District of California, Western Division, located at 312 N. Spring Street, Los Angeles, California, Plaintiff Securities and Exchange Commission (SEC) will move to strike certain of defendant Kenneth G. Eades affirmative defenses which are insufficient as a matter of law. DATED: November 9, 2012, Respectfully submitted, s/Leslie J. Hughes Leslie J. Hughes Securities and Exchange Commission Attorneys for Plaintiff

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Leslie J. Hughes, Colo. Bar No. 15043 HughesLJ@sec.gov Securities and Exchange Commission 1801 California Street Suite 1500 Denver, Colorado 80202 Telephone: (303) 844-1000 Facsimile: (303) 844-1068 Attorney for Plaintiff United States Securities and Exchange Commission

UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. GOLD STANDARD MINING CORP, ET AL.

CASE No: 2:12-cv-5662 PA (CWx) CORRECTED MOTION TO STRIKE AFFIRMATIVE DEFENSES OF DEFENDANT KENNETH EADE

DATE: DECEMBER 10, 2012 Defendants. TIME: 1:30 P.M. COURTROOM: 15 JUDGE: HON. PERCY ANDERSON

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1 TABLE OF CONTENTS 2 BACKGROUND ........................................................................................... 1 3 LEGAL STANDARD ..................................................................................... 2 4 THE PROXIMATE CAUSE DEFENSE ........................................................ 3 5 THE LACHES AND IMPROPER INVESTIGATION DEFENSES ................. 3 6 THE FAILURE TO STATE A CLAIM DEFENSES ....................................... 7 7 LEGALLY INSUFFICIENT DEFENSES ....................................................... 9 8 CONCLUSIONS ......................................................................................... 11 9 10 11 12 13 14 15 16 17 18 19 20

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TABLE OF AUTHORITIES FEDERAL CASES Buntrock v. SEC, 347 F.3d 995 (7th Cir. 2003) ....................................... 6, 7 Buntrock v. SEC, 2002 WL 31681476 (N.D. Ill., November 26, 2002) ......... 5 Costello v. United States, 365 U.S. 265 (1961) ........................................... 4 Eade v. Investorshub.com, Inc. et al., Case No. 2:11-cv-1315 .................... 6 Fantasy, Inc. v. Fogerty, 984 F.2d 1524 (9th Cir. 1993), rev'd on other grounds, 510 U.S. 517 (1994) .......................................... 2 Gebhart v. SEC, 595 F.3d 1034 (9th Cir. 2010) ........................................... 3 Heckler v. Community Health Services of Crawford Co., Inc., 467 U.S. 51 (1984) .................................................................................. 5 In re YRC Worldwide, Inc. ERISA Litigation, 2011 WL 1457288 (D. Kan., April 15, 2011) .......................................................................... 9 Lower River Marine, Inc. v. Barge USL-497, 2008 WL 859254 (E.D. La., March 28, 2008) ...................................................................... 9 Modern Creative Services, Inc. v. Dell Inc., 2008 WL 305747 (D. N.J., Jan.28, 2008) ............................................................................ 9 Ponce v. SEC, 345 F.3d 722 (9th Cir. 2003).............................................. 10 Prakash v. Pulsent Corp. Employee Long Term Disability Plan, 2008 WL 3905445 (N.D. Cal., Aug.20, 2008) .......................................... 9

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SEC v. Apuzzo, 689 F.3d 204 (2nd Cir. 2012) ............................................. 3

SEC v. Gulf & Western Industries, Inc., 502 F. Supp. 343 (D.D.C. 1980) ...................................................................................... 4, 5

SEC v. Isbrandtsen, 245 F. Supp. 518 (S.D. N.Y. 1965) ............................. 6

SEC v. Keating, 1992 WL 207918 (C.D. Cal., July 23, 1992) .............. 3, 5, 7 7 8 9 10 11 12 13 14 15 16 17 18 19 20 United States v. Reyes, 577 F.3d 1069 (9th Cir. 2009) ............................. 10 U.S. Postal Service v. Gregory, 534 U.S. 1 (2001) ...................................... 5 U.S. ex rel. Liotine v. CDW Government, Inc., 2012 WL 2807040 (S.D. Ill., July 10, 2012) ........................................................................... 9 Trustees of Local 464A United Food and Commercial, 2009 WL 4138516 (D. N.J., November 24, 2009)............................................... 8, 9 Securities & Exchange Commission v. Rosenfeld, 1997 WL 400131 (S.D.N.Y., July 16, 1997) ............................................ 5 SEC v. Morgan, Lewis & Brockius, 209 F.2d 44 (3d Cir. 1953) ................... 5

SEC v. Musella, 1983 WL 1297 (S.D. N.Y., April 4, 1983) ....................... 5, 7

SEC v. Weil, 1980 WL 1417 (M.D. Fla., February 7, 1980) ......................... 7

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1 2 3 4 5 6 FEDERAL STATUTES 7 8 9 10 11 12 13 14 15 16 17 18 19 20 SECURITIES STATUTES Securities Exchange Act (1934): Section 10(b) ........................................................................................ 1,8 Section 13(a) ........................................................................................... 1 Section 20(e) ......................................................................................... 10 Rule 10b-5(b) ...................................................................................... 1, 8 12b-20 ..................................................................................................... 1 13a-11 ..................................................................................................... 1 13a-13 ..................................................................................................... 1 Fed. R. Civ. P. 12(b)(6) ................................................................................ 1 United States v. Second Natl Bank of North Miami, 502 F.2d 535 (5th Cir. 1974), cert. denied, 421 U.S. 912 (1975) ........ 4, 5

Waste Management Holdings, Inc. v. Gilmore, 252 F.3d 316 (4th Cir. 2001) ......................................................................................... 2

Fed. R. Civ. P. 12(f) ................................................................................. 1, 2

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MOTION AND MEMORANDUM IN SUPPORT THEREOF Plaintiff, Securities and Exchange Commission, pursuant to Fed. R. Civ. P. 12(f), hereby moves to strike the second, third, fourth, fifth, sixth, seventh, eighth, tenth, thirteenth, and fourteenth affirmative defenses from the Answer of Defendant Kenneth Eade [Dckt # 32]. BACKGROUND The Commission filed its Complaint in this action on June 29, 2012. Dckt # 1. Defendant Eade was personally served on July 5, 2012. See Dckt # 6. Defendant Eade moved, pursuant to Fed. R. Civ. P. 12(b)(6) to dismiss the Commissions Complaint. Dckt # 11. That Motion was

summarily denied. Dckt # 30. Thereafter, on October 23, 2012, Defendant Eade filed his answer alleging twenty-four affirmative defenses. Dckt # 32. The Commissions Complaint alleged violations of the anti-fraud and filing provisions of the federal securities laws. As relevant for purposes of this motion, the Complaint alleges that defendants Gold Standard, Zachos, and Gruber & Co. violated, and defendant Eade aided and abetted violations of, Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5(b); and that defendant Gold Standard violated, and defendant Eade aided and abetted violations of, Section 13(a)

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of the Exchange Act and Rules 12b-20, 13a-11 and 13a-13.

See

Complaint [Dckt # 1] at 6. The Commission does not seek damages, but rather seeks the equitable relief of an injunction and disgorgement of illgotten gains and the statutory relief of statutory penalties and an officer and director bar. See Complaint at 7. LEGAL STANDARD Rule 12(f) of the Federal Rules of Civil Procedure states that a district court may strike from a pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter. The function of a 12(f) motion to strike is to avoid the expenditure of time and money that must arise from litigating spurious issues by dispensing with those issues prior to trial.... Fantasy, Inc. v. Fogerty, 984 F.2d 1524, 1527 (9th Cir. 1993), rev'd on other grounds, 510 U.S. 517 (1994). Immaterial matter is that which has no essential or important relationship to the claim for relief or the defenses being pleaded. Id. Impertinent matter consists of statements that do not pertain, and are not necessary, to the issues in question. Id. An affirmative defense is legally insufficient when it does not constitute a valid defense under the claims and facts alleged. Waste Mgmt. Holdings, Inc. v. Gilmore, 252 F.3d 316, 347 (4th Cir. 2001).

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THE PROXIMATE CAUSE DEFENSE Defendant Eades second affirmative defense alleges a lack of proximate cause:1 5. As the second and separate affirmative defense to each and every count of the Plaintiffs Complaint, Defendant avers that his actions did not proximately cause any of the alleged securities law violations or damages that Plaintiff complains of.

Loss causation is not an element of the charges brought by the Commission against Defendant Eade. See Gebhart v. SEC, 595 F.3d

1034, 1041 n. 8 (9th Cir. 2010); see also SEC v. Keating, 1992 WL 207918 at *3 (C.D. Cal., July 23, 1992); SEC v. Apuzzo, 689 F.3d 204, 213 (2nd Cir. 2012) (proximate cause not an element of aiding and abetting liability). Because the Commission is not required to prove loss causation, lack of proximate cause is not a sufficient defense to its claims. Accordingly,

Defendant Eades second affirmative defense should be stricken. THE LACHES AND IMPROPER INVESTIGATION DEFENSES Defendant Eades third defense alleges the defenses of laches: 6. As the third and separate affirmative defense to each and every count of the Plaintiffs Complaint, Defendant avers that the counts of Plaintiffs Complaint are barred by laches.

Numbered paragraphs are from Defendants Answer, Dckt # 32.

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His tenth affirmative defense alleges that the Commission conducted an unlawful and improper investigation: 13. As a thirteenth [sic] 2 and separate affirmative defense to each and every count alleged in Plaintiffs Complaint, Defendant avers that the Plaintiff is precluded from pursuing equitable relief against this answering Defendant, in that it conducted an unlawful and improper investigation, including gathering information and rumors while posing as alias fictitious investors on investor chat boards on the Internet, including investorshub.com.

Courts frequently hold that defenses of laches, unclean hands, and 8 equitable estoppel will not stand against the government when it is bringing 9 an enforcement action attempting to enforce a Congressional mandate in 10 the public interest. Courts do not allow the defense of laches to be applied 11 to a government agency when it is acting to enforce a public right or 12 interest. See Costello v. United States, 365 U.S. 265, 281, (1961); SEC v. 13 Gulf & Western Industries, Inc., 502 F. Supp. 343, 348 (D.D.C. 1980). Nor 14 do courts generally allow a defense of unclean hands to be invoked against 15 a governmental agency. See United States v. Second Natl Bank of North 16 Miami, 502 F.2d 535, 548 (5th Cir. 1974), cert. denied, 421 U.S. 912 17 18
2

19 20

The body of defendant Eades paragraph 13, under the heading TENTH AFFIRMATIVE DEFENSE, describes this defense as a thirteenth and separate affirmative defense. However, paragraph 16, under the heading THIRTEENTH AFFIRMATIVE DEFENSE, also purports to describe a thirteenth and separate affirmative defense.

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(1975); SEC v. Gulf & Western Indus., Inc., 502 F. Supp. at 348. And the defense of equitable estoppel is also generally not allowed against the government. See Heckler v. Community Health Services of Crawford Co., Inc., 467 U.S. 51, 60 (1984); see also SEC v. Morgan, Lewis & Brockius, 209 F.2d 44, 49 (3d Cir. 1953) (SEC may not waive the requirements of an Act of Congress); SEC v. Keating, 1992 WL 207918 (C.D. Cal., July 23, 1992). In order to plead a sufficient affirmative defense based on an improper investigation by the Commission, a defendant must plead specific facts demonstrating improper or unlawful conduct of the investigation that rises to the level of a violation of constitutional rights. See Securities & Exchange Commission v. Rosenfeld, 1997 WL 400131 at *2 (S.D.N.Y., July 16, 1997); SEC v. Musella, 1983 WL 1297 at *2 3 (S.D. N.Y., April 4, 1983). This is because, in the absence of clear evidence to the contrary, courts presume that government officials have properly discharged their official duties. See U.S. Postal Service v. Gregory, 534 U.S. 1, 10 (2001) ("we note that a presumption of regularity attaches to the actions of Government agencies"). And the Commission is entitled to the same

presumption. See Buntrock v. SEC, 2002 WL 31681476 at *4 (N.D. Ill., November 26, 2002) ("[I]n the absence of clear evidence to the contrary, it

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must be assumed that the Commission adhered to its own rules and exercised its discretion as Congress intended."); SEC v. Isbrandtsen, 245 F. Supp. 518, 521 (S.D. N.Y. 1965) ("In the conduct of its investigations, the SEC should be given a latitude of scope and a longitude of inquiry. Vital desiderata of public policy, Congressional purpose, and statutory interpretation require the courts to deal liberally with the SEC's inquisitorial power."). The facts Defendant Eade pleads in support of his tenth affirmative defense are conclusory in the extreme. There is no indication how or when the Commission is supposed to have engaged in this activity. Moreover, there is no indication at all that, if the Commission did engage in this activity, there is anything wrong with it, or that Defendant Eade was in any way prejudiced by such conduct.3 Even if Defendant Eade could allege facts demonstrating an unlawful or improper investigation (and he has not done so), those facts would not provide him with a valid affirmative defense. See Buntrock v. SEC, 347
3

It should be noted that Defendant Eade brought a lawsuit against Investorshub.com and numerous Doe defendants alleging defamation and seeking discovery into the identities of the Doe defendants. Eade v. Investorshub.com, Inc. et al., Case No. 2:11-cv-1315 JAK (CWx) (C.D. Cal., February 11, 2011). Judge Kronstadt struck the Complaint and sanctioned Eade. See Dckt # 53, 59 in Eade v. Investorshub.com, Inc. et al. This Court should not allow Eade to conduct the discovery in this case that he was denied in the Investorshub.com case.

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F.3d 995, 997 (7th Cir. 2003) (SEC violation of legal or ethical rules governing investigations not a defense to the resulting lawsuit); see also SEC v. Keating, 1992 WL 207918 at *4 (C. D. Cal., July 23, 1992) (striking affirmative defense based on conduct of SECs investigation); SEC v. Musella, 1983 WL 1297 at *2 3 (S.D. N.Y., April 4, 1983) (striking affirmative defense alleging misconduct of the SEC in its investigation); SEC v. Weil, 1980 WL 1417 at *1 (M.D. Fla., February 7, 1980) (striking defense alleging that the SEC conducted the underlying investigation in bad faith). Defendant Eade has not set forth any facts which would enable him to deviate from the conventional approach in which the defenses of unclean hands, laches, and estoppel are not allowed. Accordingly, Defendant

Eades third and tenth affirmative defenses should be stricken. THE FAILURE TO STATE A CLAIM DEFENSES Defendant Eades fourth, fifth, sixth, and seventh affirmative defenses allege that the Commissions Complaint fails to state a claim upon which relief can be granted: 7. As the fourth and separate affirmative defense to each and every count of the Plaintiffs Complaint, Defendant avers that that Plaintiff has failed to state in its Complaint sufficient facts to constitute a claim for which relief can be granted, within the parameters of Federal Rules of Civil Procedure Rule 9.

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1 8. 2 3 4 5 9. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 10. As a sixth and separate affirmative defense to Plaintiffs first count of Plaintiffs Complaint for Securities Fraud, Defendant avers that Plaintiff has failed to state a claim under Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder in that Plaintiff has not alleged any specific and material representations in its complaint to stand up to Rule 9(b) of the Federal Rules of Civil Procedure. As a seventh and separate affirmative defense to each and every count of Plaintiffs Complaint, Defendant alleges that the Complaint fails to state a claim upon which relief can be granted in that it fails to sufficiently allege scienter. As a fifth and separate affirmative defense to Plaintiffs first count of Plaintiffs Complaint for Securities Fraud, Defendant avers that count one does not state a federal securities law claim within the parameters of Rule 9 because it fails to state with particularity what fraudulent representations were made, who made them and why they were false or misleading.

This Court has already made a legal determination that the Commissions Complaint states a claim for relief and that its claims are adequately plead. See October 1, 2012 Order on Motion to Dismiss (Dckt # 30). Defendant Eade should not be permitted to reassert his argument that the Commissions Complaint fails to state a claim, which the Court has already deemed insufficient, in the guise of an affirmative defense. See Trustees of Local 464A United Food and Commercial, 2009 WL 4138516 at *2 (D. N.J., November 24, 2009). Courts have frequently stricken such

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redundant affirmative defenses.

See Id; U.S. ex rel. Liotine v. CDW

Government, Inc., 2012 WL 2807040 at *16 (S.D. Ill., July 10, 2012); In re YRC Worldwide, Inc. ERISA Litigation, 2011 WL 1457288 at *5 (D. Kan., April 15, 2011); Prakash v. Pulsent Corp. Employee Long Term Disability Plan, 2008 WL 3905445, at *2 (N.D. Cal., Aug.20, 2008); Lower River Marine, Inc. v. Barge USL-497, 2008 WL 859254, (E.D. La., March 28, 2008); Modern Creative Services, Inc. v. Dell Inc., 2008 WL 305747, at *3 4 (D. N.J., Jan.28, 2008). This Court has already determined that Defendant Eades failure to state a claim defense is without merit. Accordingly, his fourth, fifth sixth, and seventh affirmative defenses should be stricken. LEGALLY INSUFFICIENT DEFENSES Defendant Eades eighth, thirteenth, and fourteenth affirmative defenses are legally insufficient in that they misstate the standards relevant to this case: 11. As an eighth and separate affirmative defense to each and every count alleged in the Plaintiffs Complaint, Defendant avers that he did not intentionally misrepresent or withhold material facts from the public in order to deceive, manipulate or defraud. As a thirteenth and separate affirmative defense to each and every count alleged in Plaintiffs Complaint, Defendant avers that Defendant was unaware that any

16.

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conduct on his part constituted an alleged violation of securities laws. As a fourteenth and separate affirmative defense to each and every count alleged in Plaintiffs Complaint, Defendant avers that this answering Defendant did not act with extreme or severe recklessness necessary to constitute alleged violation of the federal securities laws.

As previously stated, the Commission is suing Defendant Eade for 6 aiding and abetting other Defendants securities laws violations. 7 Complaint [Dckt # 1] at 6. The elements for aiding and abetting charges 8 are set forth in Section 20(e) of the Exchange Act. That section provides 9 that the Commission must prove that an aider and abettor knowingly or 10 recklessly provided substantial assistance.4 Moreover the Commission is 11 not required to prove that Defendant Eade knew that the securities laws 12 were being violated. See United States v. Reyes, 577 F. 3d 1069, 1080 13 (9th Cir. 2009). Rather the provision means only that the defendant must 14 knowingly or recklessly commit the act or acts providing the substantial 15 assistance. Id. 16 17 18 19 20
4

See

Recklessness may be sufficient to prove aiding and abetting even before Section 20(e) of the Exchange Act was amended by the Dodd-Frank Act on July 22, 2010. See Ponce v. SEC, 345 F. 3d 722, 737 (9th Cir. 2003) (finding recklessness sufficient to impose aiding and abetting liability). Nonetheless, for conduct prior to July, 2010, the Commission has plead that Defendant Eade acted knowingly.

10

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Because the Commission need not prove that Defendant Eade intentionally misrepresented or withheld material facts from the public, was aware that his conduct constituted a violation of securities laws, or that he acted with extreme or severe recklessness, his eighth, thirteenth, and fourteenth affirmative defenses are legally insufficient. Accordingly, they should be stricken. CONCLUSION Because they are insufficient as a matter of law the second, third, fourth, fifth, sixth, seventh, eighth, tenth, thirteenth, and fourteenth affirmative defenses should be stricken from the Answer of Defendant Kenneth Eade [Dckt # 32]. This motion is made following the communication of counsel pursuant to L.R. 7-3 which took place on November 7, 2012. DATED: November 9, 2012, Respectfully submitted, s/Leslie J. Hughes Leslie J. Hughes Securities and Exchange Commission Attorneys for Plaintiff

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CERTIFICATE OF SERVICE I certify that on November 9, 2012, I electronically filed the MOTION TO STRIKE AFFIRMATIVE DEFENSES OF DEFENDANT KENNETH EADE with the Clerk of the Court using the ECF system, which will send notification of such filing to all parties of record herein: Kenneth G. Eade, Esq. 6699 Wilshire Blvd. Suite 507 Los Angeles, California 90048-5708 Keneade@gmail.com Appearing Pro se I certify that on November 9, 2012, I caused true and correct copies of the foregoing to be mailed: Edward Randall Gruber, CPA Gruber & Co. LLC 99 Saybridge Manor Parkway Lake Saint Louis, MO 63367 Appearing Pro se

s/Leslie J. Hughes

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