Zi guy Lauer asks U.S. court to clarify contempt order

Canada StockWatch
by Lee M. Webb
April 26, 2006

Zi Corp.'s former booster and major shareholder Michael Lauer, who headed the allegedly fraudulent Lancer Group before it was shuttered by the U.S. Securities and Exchange Commission (SEC), is asking a Florida court to further clarify a Jan. 24 contempt order against him in the wake of a March 14 clarification of the order.

As previously reported by Stockwatch, the SEC filed a lawsuit against Mr. Lauer and his hedge funds in the U.S. District Court for the Southern District of Florida in July of 2003.

Among other things, the U.S. regulator claimed that Mr. Lauer stuffed his Lancer portfolios with scads of virtually worthless securities and then used bogus valuations and market manipulation to fraudulently inflate the value of the funds, bilking investors out of tens of millions of dollars before his purported $1-billion Lancer operation was shut down. (All amounts are in U.S. dollars unless otherwise noted.)

Mr. Lauer denies the substantive allegations.

In addition to shuttering Mr. Lauer's hedge fund operation almost three years ago, the SEC obtained a court order appointing Marty Steinberg of Hunton & Williams LLP as receiver for the Lancer Group.

As first reported by Stockwatch in August of 2003, court documents revealed that in something of a departure from his penchant for padding his portfolios with worthless pink sheet stocks, Mr. Lauer evidently took a shine to Zi, which trades on both the Nasdaq Stock Market and the prestigious Toronto Stock Exchange (TSX).

Indeed, as confirmed by the Lancer receiver several months after Stockwatch broke the news of Lancer's staggering Zi holdings, Mr. Lauer's funds sponged up 19.4 million Zi shares or almost half of the company's outstanding stock at a cost of approximately $98-million.

In addition, Mr. Lauer personally held another 2.87 million Zi shares purchased at a cost of more than $18-million, which effectively gave him majority control of the money-losing Calgary company.

Zi, which is embroiled in its own legal battles with the Lancer receiver in both the Florida court and the Court of Queen's Bench of Alberta, reportedly did not have a clue that Mr. Lauer had sponged up control of the company.

While Zi will be appearing before a Florida judge on May 9 in connection with a contempt motion against the Calgary-based company filed by the Lancer receiver, the company's former de facto controlling shareholder Mr. Lauer has already been sanctioned following a contempt hearing in the same court.

Perfect storm

In a Jan. 24 ruling, U.S. District Judge Kenneth A. Marra noted that clear and convincing evidence was presented during a Dec. 6, 2005, evidentiary hearing that Mr. Lauer had refused to comply with clear and unambiguous court orders to answer interrogatories, produce documents, appear for deposition and disclose numerous assets.

The judge also found that Mr. Lauer had diverted at least $172,258 from the asset freeze ordered by the court in July of 2003.

In a characterization that Judge Marra evidently found quite apt, the SEC described Mr. Lauer's actions in the case as a "perfect storm of discovery abuse."

According to Judge Marra, Mr. Lauer testified for several hours at the Dec. 6, 2005, hearing, but his "answers were evasive and when confronted with his alleged contemptuous behavior, his attempts to explain his actions were feeble."

"In addition, Lauer did not present evidence of any reasonable efforts made by him to comply with the court's orders compelling him to appear at the continuation of his deposition, to answer truthfully and completely interrogatories, to assist the SEC in procuring documents or to comply with the asset freeze order," Judge Marra wrote.

Among other things, Judge Marra determined that it was established "by clear and convincing evidence that Lauer stonewalled the SEC for two years by refusing to answer interrogatories fully and completely."

The Florida judge acknowledged the fact that Mr. Lauer had been representing himself, but noted that the defendant had been "warned of the consequences of noncompliance despite his pro se status."

"Lauer is a sophisticated and savvy businessman who is not timid when it comes to asserting his rights, seeking extensions of time or filing lengthy motions for reconsideration," Judge Marra wrote.

"Lauer has acted in bad faith, failed to fulfill his obligations in the discovery process, and repeatedly and blatantly ignored this court's specific orders," the judge continued.

According to Judge Marra, both the SEC and the court have been more than patient with Mr. Lauer and have given him the benefit of every doubt.

"At this stage in the case, extreme sanctions are required," Judge Marra wrote. "Without them, Lauer clearly will continue to act with impunity."

While noting that the entry of a default judgment would be justified based upon Mr. Lauer's actions, the judge stopped short of imposing that severe sanction.

Nonetheless, Mr. Lauer's perfect storm of contempt did draw extreme sanctions.

Perhaps of least consequence, Judge Marra levied some financial sanctions, ordering Mr. Lauer to return all assets that he transferred since the freeze order was issued on July 10, 2003. At a minimum, the judge ordered the former hedge fund operator to hand over $172,258.

Mr. Lauer was also ordered to reimburse the SEC for certain costs, including expenses incurred in travelling to New York for depositions that the Lancer leader skipped.

Among the undoubtedly more serious sanctions, Judge Marra ordered Mr. Lauer's affirmative defences stricken.

In addition to precluding Mr. Lauer from asserting his defences to the SEC's allegations, the judge imposed some other rather significant sanctions.

"At trial, Lauer will not be permitted to present any witness or introduce any evidence that has not already been disclosed and produced by him to the SEC," Judge Marra ordered on Jan. 24.

"Lauer shall, however, be permitted to cross-examine and attack the credibility of the evidence presented by the SEC," the judge added.

Clarification

On Feb. 7, the SEC filed a motion seeking clarification of the Jan. 24 order prohibiting Mr. Lauer from presenting any witness or introducing any evidence not already disclosed and produced to the U.S. regulator.

In particular, the SEC wanted to know whether that specific part of the court order meant that Mr. Lauer could not testify in his own defence, an interpretation favoured by the U.S. regulator.

Mr. Lauer, represented in this matter by Boca Raton lawyer Carl Schoeppl, argued that such an interpretation was a spin that strained the language beyond its reasonable meaning.

Judge Marra issued his ruling on the matter on March 14, siding with the SEC's interpretation.

"To allow Lauer to testify on his own behalf at the trial, without having been subject to a full and complete examination by the SEC at his deposition and without complying fully with his obligations to produce documents and answer interrogatories, would reward Lauer for his contemptuous behavior," Judge Marra wrote.

"The fact that Lauer sat for deposition for four days is of no moment if he did not provide all the information needed by the SEC to confront his assertions and if he failed to allow the SEC to complete the examination," the judge continued. "Therefore, the court intended from the outset to preclude Lauer from testifying at trial.

"To the extent the language of the court's contempt order did not articulate that intention clearly, the court does so now."

Judge Marra went on to remark that any suggestion by Mr. Lauer "that he is now willing to comply with his discovery obligations, as previously ordered, comes too late."

"Defendant Lauer shall not be permitted to testify at the trial on his own behalf," Judge Marra ordered.

More clarity

On April 13, Mr. Lauer's lawyer filed a motion for further clarification of the contempt order and for an extension of time to file an appeal of that order.

Notwithstanding the fact that Judge Marra remarked that the court "attempted to articulate clearly the sanctions" against Mr. Lauer in the Jan. 24 order and his comment that the March 14 clarification order clearly articulated the court's intention with respect to precluding the former Lancer leader from testifying on his own behalf, Mr. Schoeppl argues that the contempt order is ambiguous and the clarification order substantially broadens the scope of the sanction originally imposed on his client.

Mr. Lauer is evidently particularly troubled by the sanction prohibiting him from presenting any witness or evidence not already disclosed and produced to the SEC.

Given the alleged ambiguity of the contempt order and the broadened scope of the sanction articulated in the clarification order, Mr. Schoeppl says that his client wants further clarification of five specific matters.

Mr. Lauer wants clarification that the language of the contempt order does not preclude him from presenting expert witnesses identified "in a general fashion" in his disclosures.

In a Jan. 5, 2005, disclosure, Mr. Lauer reported that he would like to retain a number of expert witnesses with knowledge of securities regulations, unique characteristics of the OTC Bulletin Board, general accounting matters and the hedge fund industry.

According to Mr. Schoeppl, that should count as adequate disclosure of expert witnesses to the SEC.

The U.S. regulator disagrees with that assessment, arguing that Mr. Lauer did not properly disclose any expert witnesses and should not be allowed to present any undisclosed experts at trial.

Mr. Lauer wants the court to clarify that he is not precluded from presenting the generally identified expert witnesses at trial.

In a footnote, Mr. Schoeppl remarks that the issue "may be moot if the asset freeze is not lifted to permit Lauer to access his personal funds so that he can hire such experts."

In a similar vein, Mr. Lauer wants the court to clarify that the contempt order does not preclude him from calling a number of other witnesses identified "only by general category," such as financial professionals including Lancer traders, auditors, prime broker and so on.

The former Lancer leader also wants the court to clarify that the Jan. 24 contempt order does not prohibit him from using testimony that he gave to the SEC in deposition.

"While, because of the asset freeze, Lauer cannot afford at present to purchase a copy of the transcripts of his own deposition testimony, in the event that he is ultimately able to do so, he seeks clarification from the court that he is not precluded from using that testimony either at trial, in a motion or response to a motion, or for any other purpose," Mr. Schoeppl says on behalf of cash-strapped Mr. Lauer.

Mr. Lauer also wants the court to clarify that the contempt order does not preclude him from submitting an affidavit in support of, or in opposition to, motions that may be filed, including the SEC's motion for summary judgment.

Mr. Schoeppl says that his client also wants the court to make clear that the Jan. 24 contempt order does not prohibit him from taking further discovery at this time.

Rounding out his April 13 motion, Mr. Schoeppl asks the court for an extension of time to file a notice of appeal from the contempt order, which should have been filed by March 25.

The Boca Raton lawyer also asks for an extension, if necessary, to file an appeal from the March 14 clarification order in the event the court does not rule on the motion for further clarification of the contempt order prior to May 13, which would be the expiry date for filing an appeal of the clarification order.

While Mr. Lauer awaits the Florida court's ruling on his motion for further clarification of the contempt order, the most valuable holding in both his frozen personal assets and the once-ballyhooed $1-billion Lancer portfolios now under the control of Mr. Steinberg is languishing marginally above its 52-week low on both sides of the border.

A modest 44,200 shares changed hands in Nasdaq trading as Zi shed two cents to close at $1.58 on Tuesday.

In even lighter TSX trading, only 20,800 shares traded as Zi dropped nine Canadian cents to close at $1.76 (Canadian) on April 25.

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