Securities and Exchange Commission v. Earle

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8                    UNITED STATES DISTRICT COURT                            
9                  SOUTHERN DISTRICT OF CALIFORNIA                           
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11  SECURITIES AND EXCHANGE              Case No.:  3:22-cv-01914-H-SBC       
   COMMISSION,                                                               
12                                                                            
                                        ORDER GRANTING PLAINTIFF             
                              Plaintiff,                                     
13                                       SECURITIES AND EXCHANGE              
   v.                                   COMMISSION’S MOTION IN               
14                                                                            
                                        LIMINE TO ADMIT RECORDED             
   JOSEPH R. EARLE, JR., BARRY D.                                            
15                                       STATEMENTS OF DEFENDANTS             
   REAGH, WILLIAM CLAYTON,                                                   
                                        JOSEPH R. EARLE, JR. AND             
16  FRANCIS T. DUDLEY, STEVEN E.                                              
                                        BARRY D. REAGH                       
   BRYANT, UPPER STREET                                                      
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   MARKETING, INC., and PROJECT                                              
18  GROWTH INTERNATIONAL, INC.,          [Doc. Nos. 106, 120.]                
19                          Defendants.                                       
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21       On June 27, 2024, Plaintiff Securities and Exchange Commission (“SEC”) filed a 
22  motion in limine to admit recorded statements of Defendants Joseph R. Earle, Jr. (“Earle”) 
23  and Barry D. Reagh (“Reagh”).  (Doc. Nos. 106, 120.)  On July 15, 2024, Defendants Earle, 
24  Reagh, and William Clayton (“Clayton”) filed an opposition to the motion in limine.  (Doc. 
25  Nos. 110, 116.)  On July 22, 2024, the SEC filed a reply.  (Doc. No. 117.)  A hearing on 
26  the SEC’s motion is currently scheduled for Monday, September 9, 2024, at 10:30 a.m. 
27  Pacific Time.  (Doc. No. 123.)  The Court, pursuant to its discretion under Civil Local Rule 
28  7.1(d)(1),  determines  the  matter  is  appropriate  for  resolution  without  oral  argument, 
1  submits the motion on the parties’ papers, and vacates the hearing.  For the reasons below, 
2  the Court grants the SEC’s motion in limine to admit recorded statements of Earle and 
3  Reagh.                                                                    
4  I.   ANALYSIS                                                             
5       The SEC seeks an order from the Court allowing the SEC to admit four undercover 
6  recordings of a confidential human source working for the Federal Bureau of Investigations 
7  (“FBI”).  (Doc. No. 106-1 at 7.)  The SEC alleges that the confidential human source 
8  consensually  recorded  his  conversations  with  Earle  and  Reagh,  where  they  made 
9  statements in person and during recorded telephone calls that the SEC intends to use against 
10  Earle, Reagh, and Clayton at trial.  (Id.)  The SEC argues that these consensually recorded 
11  statements should be admitted because: (1) the recorded statements are relevant to the 
12  SEC’s fraud claims against Earle, Reagh, and Clayton; (2) the recorded statements are not 
13  hearsay; (3) the recorded statements were not obtained in violation of federal law; and 
14  (4) the SEC can properly authenticate the recorded statements.  (Id. at 14–19.)  Defendants 
15  do not  dispute  relevancy  and that the  recorded  statements  are  not hearsay.    Instead, 
16  Defendants argue that the recorded statements should be excluded because: (1) Title III of 
17  the  Omnibus  Crime  Control  and  Safe  Streets  Act  of 1968,  18  U.S.C.  §§  2510–20 
18  (“Title III”), precludes submission of the recorded statements at trial; (2) the Court should 
19  bar  testimony  from  any  FBI  personnel  because  they  were  not  disclosed  as  potential 
20  witnesses; and (3) the recorded statements would be unduly prejudicial.  (Doc. No. 110 
21  at 6–15.)  The Court addresses each argument in turn below.               
22       A.   Relevance                                                       
23       Evidence is relevant if it has any tendency to make a fact of consequence more or 
24  less probable than it would be without the evidence.  Fed. R. Evid. 401.  The SEC argues 
25  that the consensually recorded statements are key pieces of evidence in support the SEC’s 
26  fraud claims against Earle, Reagh, and Clayton.  (Doc. No. 106-1 at 14.)  Upon review of 
27  the transcripts provided to the Court, the Court agrees with the SEC.  Because the recorded 
28  statements have a tendency to make a fact of consequence more or less probable than it 
1  would be without the evidence, they are relevant.  See Fed. R. Evid. 401.   
2       B.   Hearsay                                                         
3       “Hearsay” is defined as a declarant’s out of court statement used to prove the truth 
4  of the matter asserted. Fed. R. Evid. 801(c). Hearsay evidence is generally inadmissible, 
5  unless subject to certain exceptions. Fed. R. Evid. 802.  Here, Earle and Reagh’s own 
6  statements are admissible under Federal Rule of Evidence 802, which excludes from the 
7  definition of hearsay a party’s own statements.  See United States v. Matlock, 415 U.S. 164, 
8  172 (1974) (a party’s “own out of-court admissions . . . surmount all objections based on 
9  the hearsay”).  As for the statements made to Earle and Reagh on the recordings, Earle and 
10  Reagh participated in the calls and meetings and nothing in the transcripts provided to the 
11  Court suggests that they did not hear and agree with these statements.  Thus, these adoptive 
12  admissions are admissible under Rule 801(d)(2)(B).  Fed. R. Evid. 801(d)(2)(B); see 
13  United States v. Monks, 774 F.2d 945, 950 (9th Cir. 1985) (adoptive admissions may be 
14  presented to the jury where “sufficient foundational facts have been introduced for the jury 
15  reasonably to conclude that the defendant did actually hear, understand and accede to the 
16  statement”).  Lastly, Earle and Reagh’s statements are admissible against each other and 
17  against Clayton under Rule 801(d)(2)(E) because they were made during and in furtherance 
18  of a conspiracy or common enterprise alleged in the complaint.  See generally Bourjaily v. 
19  United States, 483 U.S. 171, 175 (1987).  Accordingly, the recorded statements are not 
20  hearsay.                                                                  
21       C.   Authenticity                                                    
22       Next,  the  SEC  argues  that  it  can  properly  authenticate  the  recordings.    (Doc. 
23  No. 106-1 at 17–19.)  “To satisfy the requirement of authenticating or identifying an item 
24  of evidence, the proponent must produce evidence sufficient to support a finding that the 
25  item is what the proponent claims it is.”  Fed. R. Evid. 901(a).  “In other words, the party 
26  offering the evidence must make a prima facie showing of authenticity ‘so that a reasonable 
27  juror could find in favor of authenticity or identification.’”  United States v. Gadson, 763 
28  F.3d 1189, 1203 (9th Cir. 2014) (quoting United States v. Black, 767 F.2d 1334, 1342 (9th 
1  Cir. 1985)).  This is not a heavy burden.  See United States v. Recio, 884 F.3d 230, 
2  236–37 (4th Cir. 2018) (Rule 901 burden “not high”); United States v. Ceballos, 789 
3  F.3d 607, 618 (5th Cir. 2015) (Rule 901 burden “low”).  In order for the SEC to meet this 
4  burden, the Court must be satisfied that the SEC will be able to demonstrate that “the 
5  recording is accurate, authentic, and generally trustworthy.”  United States v. Panaro, 266 
6  F.3d 939, 951 (9th Cir. 2001) (quotation omitted).  That foundation may be proved through 
7  extrinsic evidence, such as a witness who testifies that the recording “is what it purports to 
8  be, or is a true and accurate copy of the original.”  Gadson, 763 F.3d at 1203–04; see also 
9  United States v. Matta-Ballesteros, 71 F.3d 754, 768 (9th Cir. 1995), opinion amended on 
10  denial of reh’g, 98 F.3d 1100 (9th Cir. 1996) (foundation for admitting recording “is done 
11  by proving a connection between the evidence and the party against whom the evidence is 
12  admitted and can be done by both direct and circumstantial evidence”).  “A recorded 
13  conversation is generally admissible unless . . . unintelligible portions are so substantial 
14  that the recording as a whole is untrustworthy.”  United States v. Rrapi, 175 F.3d 742, 746 
15  (9th Cir. 1999).  Moreover, “[t]here is no requirement that the tapes be put in evidence 
16  through the person wearing the recorder, or for that matter, through a contemporaneous 
17  witness to the recorded conversations.”  United States v. Collins, 715 F.3d 1032, 1036 (7th 
18  Cir. 2013) (quoting United States v. Fuentes, 563 F.2d 527, 532 (2d Cir. 1977)).   
19       Here, the SEC argues that it can admit the recordings through either the testimony 
20  of the confidential human informant or through an FBI agent who directed and supervised 
21  the recordings and can thus lay the foundation for authentication.  (Doc. No. 106-1 at 19.)  
22  The SEC further argues that the FBI agent can equally authenticate the recorded calls on 
23  which the confidential human informant participated without the agent by explaining the 
24  systematic manner the FBI used to collect the recordings, and the confidential human 
25  informant’s  consistent  adherence  to  the  FBI’s  instructions  regarding  collecting  the 
26  recordings.  (Id.)  Accordingly, the SEC has met its prima facie showing of authenticity.  
27  See, e.g., Collins, 715 F.3d at 1035–37 (district court properly admitted recordings where 
28  informant recorded defendant on his own and then shipped tapes to the government even 
1  though the informant “did not testify at trial and . . . no government agents were present 
2  when [he] made the recordings”); United States v. Correa, 519 F. App’x 602, 603 (11th 
3  Cir.  2013)  (district  court  properly  admitted  videotape  where  FBI  agent  established 
4  foundation).                                                              
5       D.   Title III of the Omnibus Crime Control and Safe Streets Act of 1968 
6       The SEC next argues that the four recordings were lawfully obtained under federal 
7  law.  (Doc. No. 106-1 at 15–16.)  Defendants argue that the disclosure of the recordings by 
8  the FBI to the SEC violated Title III and thus, Section 2515 of Title III prohibits their use 
9  at trial.  (Doc. No. 110 at 6–11.)                                        
10       Title III established a “comprehensive scheme for the regulation of wiretapping and 
11  electronic surveillance.”  Gelbard v. United States, 408 U.S. 41, 46 (1972).  But under 
12  Section 2511(2)(c), “[i]t shall not be unlawful . . . for a person acting under color of law to 
13  intercept a wire, oral, or electronic communication, where such person is a party to the 
14  communication or one of the parties to the communication has given prior consent to such 
15  interception.”  18 U.S.C. § 2511(2)(c).  Moreover, the Ninth Circuit has also held that “one 
16  party’s consent is sufficient justification for electronic surveillance and no prior judicial 
17  authorization is required.”  United States v. Testa, 548 F.2d 847, 855 (9th Cir. 1977) (citing 
18  United States v. Ryan, 548 F.2d 782, 787 (9th Cir. 1976); Holmes v. Burr, 486 F.2d 55 (9th 
19  Cir.  1973));  see  also  United  States  v.  Luis,  537  F.  App’x  752,  753  (9th  Cir.  2013) 
20  (recordings made by a cooperating informant who was a party to the communication are 
21  “specifically permitted” under Title III); United States v. Daniel, 667 F.2d 783, 785 (9th 
22  Cir. 1982) (“no basis for excluding” information “by federal officers in violation of state 
23  law but in compliance with § 2511”).                                      
24       Section  2515  of  Title  III  precludes  the  use  of  recordings  as  evidence  “if  the 
25  disclosure of that information would be in violation of this chapter.”  18 U.S.C. § 2515.  
26  But it is clear that “the provisions of [Section 2515] do not preclude the use of intercepted 
27  communications when one of the parties thereto consented to the interception.”  United 
28  States v. Puchi, 441 F.2d 697, 700 (9th Cir. 1971).  “[I]f, as in the case of most interceptions 
1  of communications by or with the consent of a party, the interception does not require a 
2  warrant to be lawful, Title III does not restrict its use. . . . Section 2511 exempts the 
3  conversations covered by it from the entirety of Title III.”  In re High Fructose Corn Syrup 
4  Antitrust Litig., 216 F.3d 621, 626 (7th Cir. 2000); see also United States v. Hammond, 286 
5  F.3d 189, 193 (4th Cir. 2002) (“the FBI was free to use the intercepted conversations once 
6  they were excepted under either § 2510(5)(a)(1) or § 2511(2)(c)”).        
7       Here, it is undisputed that the confidential human informant was a party to the 
8  recorded conversations and gave prior consent to record them.  (Doc. No. 106-1 at 9.)  
9  Thus, the recordings are lawful under Section 2511(2)(c).  As for Defendants’ contention 
10  that the FBI’s disclosure of the recordings to the SEC violated Title III and thus, must be 
11  precluded under Section 2515, Defendants fail to identify any provision of Title III that 
12  prohibits either the FBI from providing the recordings to the SEC or that prohibits the 
13  introduction of the recordings at trial.  Indeed, Title III expressly prohibits disclosure or 
14  use  of  only  those  communications  obtained  “in  violation  of”  Section  2511(1)  or  of 
15  disclosure of recordings obtained in connection with a criminal investigation with the intent 
16  of  obstructing,  impeding,  or  interfering  with  a  criminal  investigation.    18  U.S.C. 
17  §§ 2511(1)(c)–(e).  None of Title III’s disclosure limitations apply here.   
18       Because the recordings are lawful under Section 2511(2)(c) and disclosure to the 
19  SEC was proper, Section 2515’s exclusionary rule does not apply.1         
20       E.   Failure to Disclosure Potential Witnesses                       
21       Defendants also argue that the Court should bar testimony from any FBI personnel 
22  because they were not disclosed as potential witnesses.  (Doc. No. 110 at 11–13.)  But as 
23  the  SEC  points  out  on  reply,  any  testimony  by  an  FBI  agent  would  be  limited  to 
24  authenticating the recordings.  (Doc. No. 117 at 16.)  And courts in this Circuit routinely 
25  recognize that failure to disclose an authenticating witness is harmless.  See, e.g., Lam v. 
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   1    Importantly, Defendants fail to cite to any authority in which evidence obtained in 
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1 || City & Cty. of San Francisco, 565 F. App’x 641, 643  (9th Cir. 2014); Zadoian v. Target 
2    Corp.,  19:cv-00326-DSF, 2020 WL 3203145, at *2 (C.D. Cal. Apr.  14, 2020).  Moreover, 
3   ||and contrary to Defendants’ allegations, there is no evidence in the record to suggest that 
4   ||the  SEC  has  acted  in  bad  faith.   Thus,  the  Court  declines  to  preclude  authenticating 
5 || testimony by an FBI agent. 
6         F.     Federal Rule of Evidence 403 
7         Defendants  next  argue  that the  Court  should  exclude  any reference  to  the  FBI’s 
8   |/investigation,  including  reference  to  the  recordings  as  derived  from  that  investigation, 
9 || because it would be of limited probative value while being very prejudicial, would risk 
10 || confusing the jury, and would result in the undue waste of the Court’s time.  (Doc. No.  110 
11        13-15.)  After careful consideration of Defendants’ arguments, the Court concludes that 
12          probative  value  of reference  to  the  FBI’s  investigation,  including  reference  to  the 
13    recordings as derived from that investigation, outweighs any risk of prejudice.  See Fed. R. 
14 || Evid. 403.  Thus, the Court declines to exclude such evidence under Rule 403. 
15          CONCLUSION 
16         For the foregoing reasons, the Court grants the SEC’s motion in limine and admits 
17   ||the  four recordings.   This  ruling  is  without prejudice,  and the parties  may make  valid 
18 || contemporaneous objections at trial concerning the matters discussed in this order.  The 
19 || Court reserves the right to change this ruling based on the testimony developed at trial. 
20         IT IS SO ORDERED. 
21  | DATED:  September 3, 2024                |  dus        |     JI     A 
22                                           MARILYN      HUFF,  Distri      ge 
3                                           UNITED STATES DISTRICT COURT 
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