Motion For Sanctions Against Epling For Fabrication of Evidence

Case 2:16-cv-01413-JAD-PAL Document 97 Filed 11/02/17 Page 1 of 24
1 Amy J. Oliver (Utah #8785) admitted pro hac vice

olivera@sec.gov
2 Daniel J. Wadley (Utah #10358) admitted pro hac vice
WadleyD@sec.gov
3 James J. Thibodeau (Utah #15473) admitted pro hac vice
ThibodeauJ@sec.gov
4 Attorneys for Plaintiff
Securities and Exchange Commission
5 Salt Lake Regional Office
351 South West Temple, Suite 6.100
6 Salt Lake City, Utah 84101
Telephone: (801) 524-5796
7 Facsimile: (801) 524-3558
8
UNITED STATES DISTRICT COURT
9
FOR THE DISTRICT OF NEVADA
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11 SECURITIES AND EXCHANGE

COMMISSION, Case No.: 2:16-cv-1413
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13 Plaintiff,
vs. PLAINTIFFS MOTION FOR IMPOSITION
14
OF SANCTIONS AGAINST DEFENDANTS
15 HEMP, INC. a Colorado Corporation; FERRIS HOLDING, INC., BARRY K.
BRUCE J. PERLOWIN, an individual; EPLING, AND HOBBES EQUITIES, INC. FOR
16 BARRY K. EPLING, an individual; JED FABRICATION OF EVIDENCE
M. PERLOWIN, an individual; FERRIS
17
HOLDING, INC., a private Nevada ORAL ARGUMENT REQUESTED
18 Corporation; HOBBES EQUITIES INC.,
a private Nevada Corporation;
19 DIVERSIFIED INVESTMENTS LLC, a
private Nevada Limited Liability
20
Company; and QUANTUM ECONOMIC
21 PROTOCOLS LLC, a private Nevada
Limited Liability Company.
22 Defendants.
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Pursuant to Federal Rule of Civil Procedure 37(c) and this Courts inherent authority,
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Plaintiff Securities and Exchange Commission (the Commission) respectfully moves this court
27 for the imposition of terminating sanctions against Defendants Ferris Holding, Inc., Barry K.
28 Epling, and Hobbes Equities, Inc. for repeated incidences of fabrication of evidence. This
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1 Motion is supported by the following memorandum of points and authorities and any oral
2
argument the Court may allow.
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DATED this 2nd day of November, 2017.
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_______________________________
9 Amy J. Oliver
Daniel J. Wadley
10 James J. Thibodeau
Securities and Exchange Commission
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II
1 PLAINTIFF SECURITIES AND EXCHANGE COMMISSIONS

2
MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF ITS
MOTION FOR SANCTIONS
3
4 INTRODUCTION
5 This is the second motion for the imposition for sanctions for fabrication of documents
6 filed by the Commission against Barry K. Epling in this case. After the filing of the previous
7 Motion for Imposition of Sanctions against Defendant Barry K. Epling for fabrication of
8 evidence and against Defendants Barry K. Epling and Bruce J. Perlowin for providing false
9
testimony (Docket No. 92), the Commission received evidence from the Internal Revenue
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Service confirming that another Defendant, Ferris Holding, Inc. which is controlled by
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Defendant Barry K. Epling had fabricated evidence.
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Where a party so damages the integrity of the discovery process that there can never be
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assurance of proceeding on the true facts, a case dispositive sanction may be appropriate. Valley
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Engineers, Inc. v. Electrical Engineering Co., 158 F.3d 1051, 1058 (9th Cir. 1998). Here, two of
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the defendants repeatedly fabricated evidence and provided false information about those
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documents on issues central to the Commissions claims against them. Such conduct cannot be
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tolerated and this Court should use its inherent authority to impose terminating sanctions against
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Barry K. Epling, Ferris Holding, Inc., and Hobbes Equities, Inc. for these discovery abuses.
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This civil enforcement action relates to Defendants involvement in an elaborate and
21 fraudulent scheme to evade the registration provisions of Sections 5(a) and 5(c) of the Securities
22 Act of 1933 (Securities Act) [15 U.S.C. 77e(a) and 77e(c)] in connection with securities
23 issued by Hemp, Inc. (Hemp). The Defendants long-running and profitable scheme resulted in
24 the sale of hundreds of millions of unregistered and purportedly unrestricted Hemp shares to
25 public investors. In the execution of this scheme, the Defendants exchanged gifts and entered
26 into consulting agreements that do not appear to have been bona fide. All told, through their
27 conduct in violation of the federal securities laws, Defendant Epling, through his two entities
28
Ferris Holding, Inc. (Ferris) and Hobbes Equities, Inc. (Hobbes), realized approximately
1
1 $9 million in proceeds, of which approximately $1.8 million was used to pay expenses on behalf
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of Bruce Perlowin and Hemp payments that Defendants now claim were personal loans from
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Eplings entity Ferris to Perlowin.
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Relevant to this motion for sanctions against Epling, Ferris, and Hobbes, the Commission
5
issued a Rule 34 discovery request to all three defendants for copies of their filed federal tax
6
returns for tax years 2011-2016, including all schedules and related tax forms. The tax returns
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particularly whether the defendants claimed the payments made to them under the consulting
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agreements as compensation are relevant to the question of whether the consulting agreements
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between Ferris and other Defendants in this case were, in fact, bona fide.
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In response to that discovery request, Ferris failed to produce responsive documents and
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misled the Commission about the existence of its tax returns over the course of many months.
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When it did finally produce responsive documents, they were unsigned and undated computer
14 printouts of his tax returns with the watermark DO NOT FILE. After the issues with Eplings
15 personal tax returns became apparent in August of this year, see Docket No. 92, Ferris produced
16 additional copies of what it claimed were as-filed tax returns for the years 2011 through 2015.
17 However, as with the first set of tax returns that were produced, none of these tax returns were
18 signed or dated.
19 After further efforts by the Commission to obtain copies of Ferris filed tax returns
20 directly from the Internal Revenue Service (IRS), the Commission learned that three of the tax
21
returns that Ferris produced to the Commission in discovery as copies of the as-filed tax
22
returns were never filed with the IRS. Additionally, one of the tax returns that Ferris produced to
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the Commission that was actually filed, does not match the data received from the IRS for that
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tax return. It is now apparent that Ferris fabricated the tax returns in response to the
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Commissions discovery request and misled the Commission about both their existence and their
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filed status.
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As a result of this continued discovery misconduct by Epling (this time through his entity
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Ferris), the Commission requests that the Court impose terminating sanctions against Epling and
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1 the two defendants he controls, Ferris and Hobbes. 1 While this is a severe sanction, the conduct
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of Epling in repeatedly misleading the Commission, providing multiple fabricated documents in
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discovery, lying about the status of those documents, and providing false testimony during his
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deposition 2 warrants such a sanction.
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STATEMENT OF FACTS IN SUPPORT OF PLAINTIFFS
6 MOTION FOR SANCTIONS
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The Commission hereby submits this Statement of Facts (SOF) in Support of Plaintiffs
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Motion for Sanctions.
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1. Defendant Ferris Holding, Inc. is company owned by Eplings two
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daughters for estate planning reasons. Deposition of Barry K. Epling (Epling Depo.) at
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10:6-19; 12:7-13:15, attached to the Declaration of Amy J. Oliver (Oliver Decl.) as
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Exhibit 1. They have no involvement with the company; Epling runs Ferris and makes all
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of the decisions on behalf of the company. Id. at 12:7-13:15.
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2. Defendant Hobbes Equities, Inc. is 100% owned by Ferris. Id. at 11:3-8;
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15:2-21. Hobbes does not file its own tax returns but files as a pass through with Ferris.
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Email from Timothy Coley to Amy J. Oliver, dated May 2, 2017, at p. 2, attached to the
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Oliver Decl. as Exhibit 2.
19 3. Plaintiffs Third Request for the Production of Documents to Defendants Barry K.
20 Epling, Ferris Holding, Inc., and Hobbes Equities, Inc., dated February 17, 2017 (Commissions
21 Discovery Request), requested copies of the filed federal income tax returns of Barry K.
22 Epling, Ferris Holding, Inc., and Hobbes Equities, Inc. for the years 2011 through 2016,
23 including all schedules and related tax forms (e.g. Forms W-2, 1099, etc.). Commissions
24 Discovery Request, Request No. 3, attached to the Oliver Decl. as Exhibit 3.
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26 1 The Commission has included Defendant Hobbes in its request for terminating sanctions because it is
wholly controlled by Epling and it reports its income and revenue through Ferris; it does not file its own
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tax returns. SOF 2.
28 2 The Commission previously filed a Motion for Imposition of Sanctions against Barry K. Epling for
providing false testimony in his deposition. Docket No. 92.
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1 4. Defendants responded on March 20, 2017 as follows, Subject to and without

2
waiving the objections above, Responding Defendants will, upon conducting a reasonable
3
search, produce copies of responsive documents relating to the transactions alleged in the
4
complaint that are within their possession, custody, or control and have not previously been
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provided to Plaintiff. Responses and Objections of Barry K. Epling, Ferris Holding, Inc. and
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Hobbes Equities to Plaintiffs Third Set of Document Requests (Epling Discovery Response),
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Response to Request No. 3, attached to the Oliver Decl. as Exhibit 4. In connection with that
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response, Defendants produced a single tax return the 2012 tax return for Ferris Holding, Inc.
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which was unsigned and undated. Letter from Timothy Coley to Amy J. Oliver, dated March 20,
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2017, attached to the Oliver Decl. as Exhibit 5.
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5. The Commission followed up by email on March 31, 2017 and asked Epling,
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Ferris, and Hobbes to supplement your discovery response and state either (1) there are
14 responsive documents, you are withholding them, and the basis upon which you are withholding
15 them, or (2) there are no responsive documents other than the 2012 tax return for Ferris Holding,
16 Inc. Email from Amy J. Oliver to Timothy Coley, dated March 31, 2017, attached to the Oliver
17 Decl. as Exhibit 6.
18 6. On April 13, 2017, Timothy Coley and Amy Oliver conducted an in-person meet
19 and confer following the conclusion of the deposition of Kim Brady in Santa Ana, California.
20 Counsel discussed Ferris response to the Commissions Discovery Request and counsel for
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Epling indicated that Ferris would amend and/or supplement their discovery responses and would
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do so by the following week. Oliver Decl. at 9.
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7. On May 2, 2017, counsel for the Epling and Ferris notified the Commission that:
24
In response to your request for further tax returns, Mr. Epling has conducted a
25 diligent search of his records, along with those of Hobbes and Ferris, pursuant
26
to which he has located additional tax returns for years 2012-15 for himself,
Ferris and Hobbes (Ferris submits a consolidated filing on behalf of itself and
27 Hobbes). Tax year 2016 is not yet complete. We are still in the process of
collecting these documents and intend to produce them later this week or next
28 week following our review. Subject to our previously-asserted objections,
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1 neither Mr. Epling, nor Hobbes, nor Ferris is aware of any other responsive
2
tax returns within his possession, custody or control.
3 Exhibit 2 at p. 2.
4 8. Ten days later, on May 12, 2017, Ferris produced tax returns for years 2012-2015
5 that all contained the watermark DO NOT FILE. No related tax forms, such as Forms W-2 or
6 1099, were included. Additionally, each tax return was undated and unsigned. Letter from
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Timothy Coley to Amy J. Oliver, dated May 12, 2017, with documents bates stamped HEMP-
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008-00006096-00006188, attached to the Oliver Decl. as Exhibit 7
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9. Each of Ferris unsigned and undated tax returns was prepared by accountant
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Michael J. Moore of Las Vegas, Nevada. Id.
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10. Having had no success obtaining the actual filed returns from the Defendants, the
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Commission requested on May 25, 2017 that Ferris consent to a Commission request made
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directly to the IRS. Email from Amy J. Oliver to Timothy Coley, dated May 25, 2017, at p. 2,
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attached as Exhibit 8. Ferris did so and the Commission submitted the requests to the IRS. Id. at
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p. 1.
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11. On August 4, 2017, the Commission received tax returns directly from the IRS for
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Epling for tax years 2012-2015 no tax return was filed for tax year 2011. Correspondence from
19 IRS, attached to the Oliver Decl. as Exhibit 9. All four years of Eplings personal tax returns had
20 been signed and filed on the same day, May 5, 2017. Id. This was nearly three months after the
21 Commission had requested them in discovery and several days after Epling stated through
22 counsel that the tax returns had been located.

23 12. Each of Eplings personal tax returns that were signed and dated on May 5, 2017
24 was prepared by accountant Michael J. Moore of Las Vegas, Nevada. Id.
25 13. Counsel for the Commission wrote a letter to counsel for Epling and Ferris
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indicating that Epling had misled the Commission regarding the status of the tax returns as they
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did not exist at the time of the discovery request or defendants written discovery response and
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also could not have been located on May 2, 2017 as indicated by counsel because the tax
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1 returns did not exist until May 5, 2017, several days later. Letter from Amy J. Oliver to Timothy
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Coley, dated August 7, 2017, attached to the Oliver Decl. as Exhibit 10.
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14. In that same letter, Counsel indicated that it now had reason to suspect that the tax
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returns produced by Ferris suffered from the same issues and, because the Commission had to-
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date been unsuccessful in receiving copies of Ferris tax returns from the IRS, requested that
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Epling execute another consent on behalf of Ferris to a request made directly to the IRS. Id.
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15. Counsel for the Epling and Ferris responded by letter and provided an executed
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request to the IRS. Letter from Thomas Sporkin to Amy J. Oliver, dated August 10, 2017,
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attached as Exhibit 11.
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16. On September 1, 2017, counsel for the Commission wrote a letter to counsel for
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Ferris informing counsel that the IRS had informed the Commission at the end of August that it
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was unable to respond to the Commissions most recent request for copies of Ferris tax returns.
14 Letter from Amy J. Oliver to Timothy Coley, dated September 1, 2017, attached to the Oliver
15 Decl. as Exhibit 12. The Commission again requested that Ferris produce signed and dated
16 copies of its filed federal tax returns as well as supplement its written response to the
17 Commissions Discovery Request. Id.
18 17. On September 14, 2017, counsel for Ferris sent the Commission an email in
19 response to its letter of September 1, 2017. In the body of the email, counsel for Ferris stated:
20 We understand that the attached are the as-filed versions of the 2011-15 tax
21
returns for Ferris Holdings. Ferris Holdings received an extension on tax year
2016, and 2016 returns have not yet been filed. We also understand that the
22 attached returns were filed on or about September 15 of each respective tax year.
23
Email from Timothy Coley to Amy J. Oliver, dated September 14, 2017, attached to the
24
Oliver Decl. as Exhibit 13.
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18. Counsel attached a supplemental response to the Commissions Discovery
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Request, which stated that Tax forms, as filed, for years 2011-2015 are being produced
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herewith, corresponding with bates ranges: HEMP-009-00006227-HEMP-009-00006275. First
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Supplemental Response of Barry K. Epling, Ferris Holding, Inc., and Hobbes Equities to
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1 Plaintiffs Third Set of Document Requests, Request No. 3, attached to the Oliver Decl. as
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Exhibit 13 at p. 6.
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19. Counsel also attached to that September 14, 2017 email copies of Ferris Holding,
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Inc.s tax returns for tax years 2011-2015. Exhibit 13 at HEMP-009-00006227-6275. None of the
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tax returns was signed or dated. Id. Each of Ferris unsigned and undated tax returns was
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prepared by accountant Michael J. Moore of Las Vegas, Nevada. Id.
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20. On September 15, 2017, at the deposition of Salli Marinov in Phoenix, Arizona,
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counsel for the Commission asked counsel for Ferris why all of the tax returns he provided were
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unsigned and undated. He responded that the tax returns were not required to be signed and
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confirmed the statements in his email that each tax return had been filed on or about September
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15 of each year. Oliver Decl. at 17.
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21. On September 28, 2017 at 1:45 Mountain Time, counsel for the parties held a
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telephonic meet and confer regarding outstanding discovery issues, including the tax returns of
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Ferris. Oliver Decl. at 18. Counsel for Ferris agreed to follow up with Epling regarding the
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Commissions request that Epling execute another consent on behalf of Ferris to the IRS. Email
16
from Amy J. Oliver to Timothy Coley, dated September 28, 2017, attached to the Oliver Decl. as
17
Exhibit 14.
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22. On October 5, 2017, counsel for Ferris provided the executed Form 4506T to the
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Commission and it was submitted to the IRS. Email from Amy J. Oliver to Timothy Coley, dated
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October 5, 2017, attached to the Oliver Decl. as Exhibit 15.
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23. On October 26, 2017, after the Commission filed its Motion for Imposition of
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Sanctions against Defendant Barry K. Epling for fabrication of evidence and against Defendants
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Barry K. Epling and Bruce J. Perlowin for providing false testimony (Docket No. 92), the
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Commission received correspondence from the IRS in response to its request for Ferris tax
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returns for tax years 2011-2016. Correspondence from IRS, attached to the Oliver Decl. as
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Exhibit 16.
27
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1 24. The IRS provided verification that no tax returns had been filed for tax years
2
2011, 2014, 2015, or 2016. Id. at SEC-E-000085. The IRS also provided a tax transcript for the
3
2013 tax return, and it did not match the copies of that return that Ferris had previously provided
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on two separate occasions. Id. at SEC-E-000075-80. The IRS also provided the dates that the
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2012 and 2013 tax returns were filed: May 12, 2014 and July 28, 2014, respectively. Id. at SEC-
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E-000082, 84.
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25. The next day, counsel for the Commission wrote a letter to counsel for Ferris
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indicating that the IRS documents confirmed that Ferris had misled the Commission regarding
9
the status of its tax returns on multiple occasions and had provided the Commission with
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fabricated documents on more than one occasion. The Commission requested an explanation for
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the discrepancies between what Ferris had produced and the verification obtained from the IRS.
13
Letter from Amy J. Oliver to Timothy Coley, dated October 27, 2017, attached to the Oliver
14 Decl. as Exhibit 17.
15 26. On October 31, 2017 at 9:00 a.m. Mountain Time, counsel for the Commission
16 held a telephonic meet and confer regarding the information obtained from the IRS regarding
17 Ferris tax returns. Timothy Coley and Thomas Sporkin participated for the defendants and Amy
18 J. Oliver, Daniel J. Wadley, and Richard R. Best (Salt Lake Regional Director) participated for
19 the Commission. Counsel discussed the concerns raised in the Commissions letter of October
20 27, 2017. Oliver Decl. at 23.
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27. Following the meet and confer, counsel for Ferris sent a letter to the Commission
22
stating, among other things, that Epling and his accountant, Michael J. Moore, provided the
23
information contained in Ferris supplemental discovery response that the copies of Ferris tax
24
returns for 2011-2015 produced on September 14, 2017 were the as-filed copies. Letter from
25
Timothy Coley to Amy J. Oliver, dated October 31, 2017, p. 4, attached to the Oliver Decl. as
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Exhibit 18.
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28. Epling and Ferris accountant, Michael J. Moore of Las Vegas, Nevada, has been
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sued by the Commission on multiple occasions, including for securities fraud. In 2009, this
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1 Court, the Honorable Lloyd D. George, entered judgment against Moore enjoining him from
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violating Sections 10(b), 10A(a)(1) and 10A(b)(1) of the Securities Exchange Act of 1934, Rule
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10b-5 thereunder, and Regulation S-X Rules 2-03(b)(1) and 2-06. Moore was ordered to pay a
4
total of $189,901.59. SEC v. Michael J. Moore and Moore & Associates Chartered, Case No.
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2:09cv01637-LDG-GWF (D. Nevada), Docket No. 9, September 25, 2009, attached to the Oliver
6
Decl. as Exhibit 19.
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29. In April of this year, this Court, the Honorable Lloyd D. George, again entered
8
judgment against Moore, this time ordering him to comply with Section 21(e) of the Securities
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Exchange Act of 1934 and Rule 102(3)(3)(i) of the SECs Rules of Practice in In the Matter of
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Michael J. Moore, CPA and Moore & Associates Chartered, SEC A.P. File No. 3-13640, File
11
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No. 3-13640, on October 6, 2009 which permanently suspended Moore from appearing or
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practicing before the SEC as an accountant. SEC v. Michael J. Moore, Case No. 2:15cv01865-
14 LDG-GWF (D. Nevada), Docket No. 25, April 18, 2017, attached to the Oliver Decl. as Exhibit
15 20.
16 30. On November 1, 2017 at 9:00 a.m. Mountain Time, counsel for the Commission
17 voluntarily held a second telephonic meet and confer regarding Ferris tax returns and this
18 motion for sanctions. Timothy Coley and Thomas Sporkin participated for the defendants and
19 Amy J. Oliver, Daniel J. Wadley, and Richard R. Best participated for the Commission. Counsel
20 discussed the issues raised in this motion, but were unable to come to a resolution. Oliver Decl.
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at 27.
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1 ARGUMENT
2
I. IT IS WITHIN THIS COURTS INHERANT POWERS TO IMPOSE
3 SANCTIONS FOR DISCOVERY ABUSES SUCH AS THOSE COMMITTED BY
DEFENDANTS FERRIS, EPLING AND HOBBES.
4
5 Federal courts have authority to sanction litigants for discovery abuses under
6 Fed.R.Civ.P. 37. Da-Silva v. Smiths Food & Drug Centers, Inc., 2013 WL 2558302, *2 (D.
7 Nevada June 8, 2013) (citing Chambers v. NASCO, Inc., 501 U.S. 32, 43 (1991)). These
8 inherent powers are governed not by rule or statute but by the control necessarily vested in courts
9 to manage their own affairs so as to achieve the orderly and expeditious disposition of cases.
10 Id. This includes the inherent power to impose a variety of sanctions, including terminating
11 sanctions (either dismissal of the case where the abuses were committed by the plaintiff or entry
12
of default judgment where the abuses were committed by the defendant). See e.g., Anheuser-
13
Busch, Inc. v. Natural Beverage Distributers, 69 F.3d 337, 348 (9th Cir. 1995); Consumer
14
Financial Protection Bureau v. Morgan Drexen, Inc., 2015 WL 12732004, *1 (C.D. Cal. July 6,
15
2015).
16
Indeed, [p]erjury and fabricated evidence are evils that can and should be exposed at
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trial, and the legal system encourages and expects litigants to root them out as early as possible.
18
Great Coastal Exp. Inc. v. Intl Bhd. of Teamsters, Chauffeurs, 675 F.2d 1349, 1357 (4th Cir.
19
1982). As explained below, the Court should enter terminating sanctions against Ferris, Epling
20
and Hobbes for repeatedly fabricating evidence.
21
22
II. FERRIS AND EPLING FABRICATED EVIDENCE AFTER RECEIVEING A
23 DISCOVERY REQUEST FOR FERRIS FEDERAL TAX RETURNS.
24 The evidence clearly demonstrates that Ferris and Epling misled the Commission
25 regarding the existence of Ferris federal tax returns for the years 2011-2015 over a period of
26
many months, culminating in the production of falsified tax returns not once, but twice. Ferris
27
repeatedly represented to the Commission that it had filed federal tax returns and provided copies
28
of those purportedly filed tax returns including in its supplemental discovery response.
10
1 However, as was the case with Eplings personal tax returns, Ferris blatantly falsified evidence
2
and then concealed this fact from . . . opposing counsel, and even [his] own counsel 3 at every
3
turn. Morgan Drexen, Inc., 2015 WL 12732004, *1.
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A. Ferris Initial Written Discovery Responses Were Misleading,
5 Deficient under the Federal Rules, and Incomplete.
6 On March 20, 2017, Ferris written discovery responses to the Commissions request for
7
copies of its filed federal tax returns stated the following: Subject to and without waiving the
8
objections above, Responding Defendants will, upon conducting a reasonable search, produce
9
copies of responsive documents relating to the transactions alleged in the complaint that are
10
within their possession, custody, or control and have not previously been provided to Plaintiff.
11
SOF 4.
12
This response was totally deficient under the Federal Rules and was also misleading as it
13
provided no indication of whether the tax returns existed. At the time Ferris provided its March
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20, 2017 discovery responses, it certainly knew that it had not filed tax returns for three of the
15
previous five years, yet its discovery response failed to provide any such information, or any
16
information at all for that matter.
17
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B. Ferris Representations Through Counsel In May 2017 Were
Affirmatively Misleading and False.
19
Counsel for the Commission notified Ferris counsel by email on March 31, 2017 that its
20
discovery response was deficient and specifically requested that Ferris supplement your
21
discovery response and state either (1) there are responsive documents, you are withholding
22
23
them, and the basis upon which you are withholding them, or (2) there are no responsive
24 documents other than the 2012 tax return for Ferris Holding, Inc.. SOF 5.
25
26
3 The Commission has no basis upon which to dispute Ferris counsels statement that they relied on
27
information provided to them by Epling and his accountant, Michael Moore, and were unaware that
28 Ferris tax returns had not been filed or that the 2013 tax return that was provided to the Commission did
not match the tax return that was filed with the IRS. See SOF 27.
11
1 Epling and Ferris again affirmatively misled the Commission and provided false
2
information about Ferris federal tax returns. Specifically, counsel for Ferris responded on May
3
2, 2017:
4
In response to your request for further tax returns, Mr. Epling has conducted
5 a diligent search of his records, along with those of Hobbes and Ferris,
pursuant to which he has located additional tax returns for years 2012-15
6 for himself, Ferris and Hobbes (Ferris submits a consolidated filing on
7
behalf of itself and Hobbes). Tax year 2016 is not yet complete. We are still
in the process of collecting these documents and intend to produce them later
8 this week or next week following our review. Subject to our previously-
asserted objections, neither Mr. Epling, nor Hobbes, nor Ferris is aware of any
9 other responsive tax returns within his possession, custody or control.
10
SOF 7 (emphasis added).
11
Multiple parts of this statement were not true. Eplings statement that he has located
12
additional tax returns for years 2012-2015 for . . . Ferris and Hobbes is false. Epling could not
13
have located tax returns that did not exist. Indeed, Ferris has never filed tax returns for two of
14
the years Epling claimed he had located. SOF 24. Eplings statement that he was still in the
15
process of collecting these documents was also not true because the documents did not exist.
16
17
And again, Epling was certainly aware on May 2, 2017 that Ferris had not filed any of its tax
18 returns for two of the prior four years. Yet Epling and Ferris failed to provide that information to
19 the Commission, instead affirmatively misleading the Commission by stating that Epling had
20 located tax returns for Ferris and would produce them.
21 C. Ferris Affirmatively Misled the Commission by Producing

Tax Returns That Were Never Filed with the IRS While Stating They
22 Were As-filed Copies.
23
On May 12, 2017, ten days after the counsel notified the Commission that Epling had
24
located tax returns for Ferris, Ferris produced copies of its tax returns to the Commission.
25
SOF 8. The documents were computer printouts with the watermark DO NOT FILE. Id.
26
Each of the returns was unsigned and undated. Id. No schedules or forms were provided. Id.
27
28
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1 Ferris production of tax returns for 2011, 2014 and 2015, when tax returns had never
2
been filed for those three years, can only be viewed as intended to mislead the Commission.
3
Indeed, by providing copies of tax returns that were never filed and at the same time representing
4
that they were as-filed copies, Ferris affirmatively misled the Commission into believing that
5
Ferris had, in fact, filed tax returns for all of these years. It was only after receiving information
6
directly from the IRS that the Commission learned the truth: Ferris had not filed tax returns for
7
2011, 2014, and 2015.
8
D. Ferris Supplemental Discovery Response and Its Representations
9 Though Counsel in September 2017 Were Affirmatively Misleading
10
and False.
11 At the end of August 2017, the IRS informed the Commission that it was unable to
12 respond to the Commissions request for copies of Ferris tax returns. SOF 16. On September
13 1, 2017, the Commission sent a letter to counsel for Ferris requesting that Ferris provide the
14 Commission with copies of signed and dated tax returns as well as a supplemental response to
15
the Commissions Discovery Request. Id.
16
On September 14, 2017, counsel for Ferris sent the Commission an email stating:
17
We understand that the attached are the as-filed versions of the 2011-15 tax
18 returns for Ferris Holdings. Ferris Holdings received an extension on tax year
2016, and 2016 returns have not yet been filed. We also understand that the
19 attached returns were filed on or about September 15 of each respective tax year.
20
SOF 17. Attached to that email was a supplemental response to the Commissions Discovery
21
Responses where Ferris stated that Tax forms, as filed, for years 2011-2015 are being produced
22
23
herewith, corresponding with bates ranges: HEMP-009-00006227-HEMP-009-00006275. Id. at
24 18-19.
25 Attached to the email were unsigned and undated copies of tax returns for Ferris for the
26
years 2011-2015. Id. at 19. The following day, counsel for the Commission made an in-person
27
inquiry of counsel for Ferris at the deposition of Salli Marinov in Phoenix, Arizona for an
28
13
1 explanation of why the tax returns were unsigned and undated. Id. at 20. Counsel for Ferris
2
stated that the tax returns did not require a signature and reaffirmed that all had been filed on or
3
about September 15 of the relevant tax year. Id.
4
5 All of the information provided by Ferris in the September 14 email from counsel and the
6 September 15 conversation was not true. First, Ferris statement through counsel that the copies
7 of the 2011, 2014, and 2015 tax returns provided on September 14 were as-filed copies is
8 false. Ferris did not file tax returns for tax years 2011, 2014, and 2015. SOF 24. Second, Ferris
9 supplemental response to the Commissions Discovery Request which stated that the Tax
10 forms, as filed, for years 2011-2015 are being produced herewith is also false for the same
11 reason. Id. Third, Ferris statement that the 2013 tax return provided on September 14 was the
12
as-filed copy is false. The tax return provided by Ferris does not match the tax information
13
provided by the IRS regarding the 2013 tax return. Id. Fourth, Ferris statement through counsel
14
that all of the returns were filed on or about September 15 of each respective tax year is false.
15
The only two returns that Ferris did file, 2012 and 2013, were not filed on or about September
16
15. They were filed in May and July of 2014, respectively. Id.
17
E. The Commission Obtained Verification from the IRS that Shows
18 Ferris Affirmatively Misled the Commission, Provided False
Information, and Fabricated Documents.
19
20 As a result of Ferris incomplete discovery responses, the Commission requested that
21 Epling sign an IRS Form allowing the Commission to obtain copies of Ferris tax returns directly
22 from the IRS. SOF 10. Epling signed the IRS form on behalf of Ferris and the Commission
23 submitted it to the IRS. Id. On September 1, 2017, the Commission requested that Epling sign an
24 additional IRS Form on behalf of Ferris because it had been unsuccessful in obtaining copies of
25 Ferris tax returns from the IRS in response to the first form Epling had signed and, more
26
importantly, because the Commission had received copies of Eplings personal tax returns
27
directly from the IRS showing that the returns previously provided by Epling in discovery were
28
14
1 fabrications and now had reason to suspect the veracity of Ferris tax returns that had been
2
produced to the Commission. Id. at 14.
3
Epling signed that form on behalf of Ferris in September 2017 (Id. at 15), but the IRS
4
was unable to respond to the request. Id. at 16. Therefore, the Commission wrote a letter to
5
counsel for Ferris requesting that Ferris produce signed and dated copies of its tax returns and
6
also supplement its discovery responses. Id. As set forth above, on September 14, 2017 counsel
7
for Ferris provided a supplemental discovery response along with Tax forms, as filed, for years
8
2011-2015. Id. at 17. None of the tax returns were signed or dated. Id. at 19.
9
The parties subsequently held a meet and confer regarding the unsigned and undated tax
10
returns that Ferris produced where the Commission requested that Epling execute an additional
11
12
IRS form on behalf of Ferris. Id. at 21. Epling provided that signed form on behalf of Ferris on
13
October 5, 2017 and the Commission submitted the form to the IRS. Id. at 22.
14 On October 26, 2017, the Commission received documents from the IRS in response to
15 its request for Ferris tax returns for the years 2011-2016. Id. at 23. The IRS provided
16 verification that Ferris had not filed any tax returns for the years 2011, 2014, and 2015. Id.at
17 24. Moreover, the information provided by the IRS regarding Ferris filed 2013 return, did not
18 match the 2013 tax return produced to the Commission by Ferris. Id. And the actual filing dates
19 for Ferris 2012 and 2013 tax returns did not match the information provided by counsel to
20 Ferris. Id.
21
The evidence is clear that Ferris affirmatively misled the Commission about its tax
22
returns by delay, by repeatedly making false statements, and by repeatedly providing fabricated
23
documents. These efforts certainly call into question the veracity of not just the tax returns
24
produced by Ferris, but the veracity of all of the documents and information produced by Ferris
25
in connection with this litigation.
26
27
28
15
1 III. THIS COURT SHOULD IMPOSE TERMINATING SANCTIONS AGAINST

2
EPLING, FERRIS, AND HOBBES FOR MULTIPLE INSTANCES OF
FABRICATING EVIDENCE.
3
As this court has recognized,
4
5 Dismissal is particularly warranted where one party submits falsified

evidence. The submission of falsified evidence substantially prejudices an
6 opposing party by casting doubt on the veracity of all of the culpable
partys submissions through this litigation. The prejudiced party is forced
7
either to attempt independent corroboration of each submission, at
8 substantial expense of time and money, or to accept the real possibility
that those discovery documents submitted by the opposing party are
9 inaccurate. Nor is the exclusion of the fabricated evidence always enough
to deter discovery misconduct. Litigants would infer that they have
10
everything to gain, and nothing to lose, if manufactured evidence merely
11 is excluded while their lawsuit continues.
12 Da-Silva v. Smiths Food & Drug Center, Inc., 2013 WL 2558302, *2 (D. Nevada June 8, 2013)
13 (quoting Pope v. Fed. Express Corp., 138 F.R.D. 675, 683 (W.D. Mo. 1990)(affd in part,
14
vacated on other grounds, 974 F.2d 982 (8th Cir. 1992)).
15
Here, Ferris engaged in a series of affirmative acts to mislead the Commission in
16
response to its discovery requests. First, Ferris provided misleading and incomplete answers to
17
discovery on two separate occasions. Second, Ferris provided false information about locating its
18
tax returns, when they did not exist. Third, when Ferris finally did provide documents to the
19
Commission, Ferris provided incomplete and misleading documents on two separate occasions in
20
order to hide the fact that it had never filed three years-worth of tax returns and provided
21
falsified documents with respect to one of the returns it actually filed. Such egregious conduct
22
clearly warrants the imposition of significant sanctions.
23
Additionally, this discovery misconduct by Ferris is not an isolated incident (see Docket
24
25
No. 92). Epling is the sole person in control of Ferris and is responsible for all of Ferris
26 discovery conduct addressed in this motion. Because this same Defendant has engaged in
27 multiple instances of delay, false statements, and fabricating documents, the Commission is
28
16
1 compelled to request that this Court impose terminating sanctions. As set forth below, such
2
sanctions are appropriate given the egregious nature of Eplings conduct.
3
A. Terminating Sanctions Are Appropriate.
4
In the Ninth Circuit, district courts consider a five-part test when determining whether
5
terminating sanctions are appropriate. Specifically, the district court must weigh the following
6
factors:
7
(1) The publics interest in expeditious resolution of litigation; (2) the
8 courts need to manage its dockets; (3) the risk of prejudice to the party
seeking sanctions; (4) the public policy favoring disposition of cases on
9
their merits; and (5) the availability of less drastic sanctions.
10
Anheuser-Busch, Inc. v. Natural Beverage Distributors, 69 F.3d 337, 348 (9th Cir. 1995)
11
(citation omitted).
12
This test is not mechanical. It provides the district court with a way to think about what
13
to do, not a set of conditions precedent for sanctions or a script that the district court must
14
15
follow. Connecticut General Life Ins. Co. v. New Images of Beverly Hills, 482 F.3d 1091, 1096
16 (9th Cir. 2007). For dismissal to be proper, the conduct to be sanctioned must be due to
17 willfulness, fault, or bad faith and there must be a relationship between the sanctioned partys
18 misconduct and the matters in controversy such that the transgression threatens to interfere with
19 the rightful decision of the case. Id. (citations omitted). Considering all of the above, the
20 conduct of Epling and Ferris warrants terminating sanctions.
21 1. The Factors Weigh In Favor of Terminating Sanctions.
22 The factors set forth by the Ninth Circuit weigh in favor of terminating sanctions.
23
With respect to factors (1) and (2), the efforts by Epling to continually delay and repeatedly
24
mislead the Commission through false statements and fabricated documents has caused the
25
Commission (and now the Court) to expend time and resources to investigate and seek out
26
independent third-party sources in order to discover the truth about Eplings and Ferris tax
27
returns. Moreover, [i]n deciding whether to impose case-dispositive sanctions, the most critical
28
factor is not merely delay or docket management concerns, but truth. Connecticut General Life
17
1 Ins. Co., 482 F.3d at 1097. It is clear that through his delay and deception Epling endeavored to
2
prevent the Commission from discovering the truth.
3
With respect to factor (3), the Commission has been prejudiced by the conduct of Epling.
4
Because Epling and Ferris fabricated a total of seven years of tax returns, it is impossible for the
5
Commission or the Court to have an accurate picture of how Epling and Ferris
6
contemporaneously treated the alleged compensation received from their co-defendants for
7
consulting services. See e.g., Morgan Drexen, Inc., 2015 WL 12732004, *4 (C.D. Cal. July 6,
8
2015) (defendants fabrication of evidence destroyed the snapshot of what the [documents]
9
would have actually looked like . . . and called into question the authenticity of defendants
10
underlying conduct related to the issue). What would have been critical contemporaneous
11
12
evidence of how the defendants treated the claimed compensation can now never be known. And
13
the veracity of all statements made by Epling and Ferris and the veracity of all documents
14 produced by Epling and Ferris are likewise called into question.
15 Factor (4), which considers the public policy favoring disposition of cases on their merits,
16 will always weigh against the imposition of terminating sanctions. However, this factor alone is
17 not sufficient to outweigh the other four factors. Leon v. IDX Systems Corp., 464 F.3d 951, 961
18 (9th Cir. 2006).
19 Factor (5) assesses the availability of lesser sanctions. The Ninth Circuit has said that
20 factor 5 involves consideration of three subparts: whether the court explicitly discussed
21
alternative sanctions, whether it tried them, and whether it warned the recalcitrant party about the
22
possibility of dismissal. But despite all this elaboration of factors, [the Ninth Circuit] ha[s] said
23
that it is not always necessary for the court to impose less serious sanctions first, or to give any
24
explicit warning. Valley Engineers, Inc. v. Electrical Engineering Co., 158 F.3d 1051, 1057
25
(9th Cir. 1998). Indeed, [d]ismissal is appropriate where a pattern of deception and discovery
26
abuse made it impossible for the district court to conduct a trial with any reasonable assurance
27
that the truth would be available. Id. (citing AnheuserBusch, Inc. v. Natural Beverage
28
Distributors, 69 F.3d 337, 352 (9th Cir.1995)). Such is the case here.
18
1 Epling has engaged in an ongoing pattern of deceiving the Commission regarding both
2
his and Ferris tax returns, as well as providing false testimony about the existence of
3
documentation of his claimed loan agreement with co-defendant Bruce Perlowin. See Docket No.
4
92. Given Eplings repeated deceptive conduct with respect to multiple discovery issues over the
5
course of more than six months, [i]t is appropriate to reject lesser sanctions where the court
6
anticipates continued deceptive misconduct. Connecticut General Life Ins. Co., 482 F.3d at
7
1096.
8
2. Eplings conduct was the result of willfulness, fault or bad faith.
9
Throughout the course of discovery in this case, Epling intentionally, and repeatedly,
10
misled the Commission through delay, providing fabricated documents, withholding documents,
11
12
and making false statements. This is particularly true with respect to the as-filed status of
13
Eplings personal tax returns and Ferris tax returns.
14 As the individual taxpayer and the sole person in control of Ferris, Epling was in position
15 to know whether he and Ferris had filed tax returns with the IRS. While the Commission
16 anticipates that Epling will claim ignorance and attempt to blame others 4, it is not credible that
17 Epling did not know that he had failed to file five years-worth of personal tax returns and that
18 Ferris had failed to file three years-worth of tax returns. And Epling certainly knew this fact with
19 respect to his personal tax returns on May 5, 2017, when he simultaneously filed four years-
20 worth of personal tax returns. Yet Epling failed to ever provide this information to the
21
Commission or produce those signed and dated copies in response to the Commissions
22
Discovery Request.
23
24
25
4Counsel for Epling and Ferris indicated that the information provided in Ferris Supplemental Discovery
26 Response and copies of what were purported to be as-filed copies of Ferris tax returns came from
Epling and his accountant. SOF 27 at p. 4. Eplings and Ferris accountant, Michael Moore, has been
27 sued by the Commission in the District of Nevada on multiple occasions, including for securities fraud.
The Commission obtained judgment against Moore for the securities fraud violations and, more recently,
28 obtained judgement against Moore for violating the Commissions permanent bar prohibiting him from
practicing before the Commission. Id. at 28-29.
19
1 Additionally, after the Commission obtained evidence that Epling had misled the
2
Commission with respect to his personal tax returns and brought that evidence to the attention of
3
Epling through his counsel, Epling continued his pattern of deception. He stated in Ferris
4
supplemental discovery response that the documents produced by Ferris therewith were the as-
5
filed tax returns, when that was not true.
6
However, even if Epling were to be given the benefit of the doubt that he was unware
7
until May 2017 that four years-worth of his personal tax returns had not been filed, at that point
8
it was incumbent on Epling to confirm that Ferris tax returns had actually been filed prior to
9
making such statements to the Commission in discovery and providing copies of the tax returns
10
that Epling stated were as-filed copies. It is not credible that Epling was unaware throughout
11
12
this entire time, and in the face of four years-worth of unfiled personal tax returns, that Ferris had
13
failed to file three years-worth of tax returns. Moreover, there is no credible explanation for why
14 Ferris 2013 tax return provided to the Commission by Epling does not match the 2013 tax return
15 filed with the IRS or why the filing dates Epling provided to the Commission for Ferris 2012
16 and 2013 tax returns do not match the information provided by the IRS.
17 Such conduct by Epling demonstrates that he acted willfully, was at fault for the
18 production of fabricated documents and the false statements regarding those documents, and
19 acted in bad faith.
20 3. The tax returns are directly related to the matters at issue in this case.
21
The information contained in the tax returns of Epling and Ferris is directly related to a
22
key issue in this case whether the consulting agreements between co-defendants and the
23
compensation paid among co-defendants under those agreements was bona fide. Whether the
24
defendants contemporaneously claimed the payments made to them under the consulting
25
agreements as compensation on their tax returns goes directly to the question of whether the
26
consulting agreements were, in fact, bona fide. Because Epling fabricated four years of his
27
personal tax returns and three years of Ferris tax returns, it is impossible to know the truth with
28
respect to that issue.
20
1
CONCLUSION
2
As the Ninth Circuit has stated, [t]here is no point to a lawsuit, if it merely applies law to
3
lies. Valley Engineers, Inc., 158 F.3d at 1058. The conduct of Epling and Ferris in repeatedly
4
misleading the Commission by producing multiple fabricated documents and continually making
5
false statements constitutes egregious discovery abuses. Therefore, the court should grant the
6
Commissions Motion and enter judgment against Defendants Barry K. Epling, Ferris Holding,
7
Inc., and Hobbes Equites, Inc.
8
10
DATED this 2nd day of November 2017.
11
12
13
_______________________________
14
Amy J. Oliver
15 Daniel J. Wadley
James J. Thibodeau
16 Securities and Exchange Commission
17
18
19
20
21
22
23
24
25
26
27
28
21
1 CERTIFICATE OF SERVICE
2 I hereby certify that on the 2nd day of November, 2017, I served PLAINTIFFS
3
MOTION FOR IMPOSITION OF SANCTIONS AGAINST DEFENDANTS FERRIS
4
HOLDING, INC., BARRY K. EPLING, AND HOBBES EQUITIES, INC. FOR
5
FABRICATION OF EVIDENCE to the following parties entitled to service by via email to the
6
counsel indicated below:
7
Thomas A. Sporkin
8 Timothy J. Coley
Buckley Sandler LLP
9 1250 24th Street NW, Suite 700
Washington, D.C.20037
10 tsporkin@buckleysandler.com
tcoley@buckleysandler.com
11
Robert J. Cassity
12
David J. Freeman
13
Holland & Hart, LLP
9555 Hillwood Drive, 2nd Floor
14
Las Vegas, Nevada
bcassity@hollandhart.com
15 dfreeman@hollandhart.com
16 Brent R. Baker
Jonathan D. Bletzacker
17 ClydeSnow
One Utah Center
18 Thirteenth Floor
201 South Main Street
19 Salt Lake City, Utah 84111
brb@clydesnow.com
20 jdb@clydesnow.com
21 Jacob L. Fonnesbeck
Smith Correll, LLP
22
3960 Howard Hughes Pkwy, Suite 500
23
Las Vegas, Nevada 89169
jfonnesbeck@smithcorrell.com
24
25
26
27 _______________________________
Amy J. Oliver
28

Motion For Sanctions Against Epling For Fabrication of Evidence

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Case 2:16-cv-01413-JAD-PAL Document 97 Filed 11/02/17 Page 1 of 24

1 Amy J. Oliver (Utah #8785) admitted pro hac vice

11 SECURITIES AND EXCHANGE

1 PLAINTIFF SECURITIES AND EXCHANGE COMMISSIONS

19 3. Plaintiffs Third Request for the Production of Documents to Defendants Barry K.

1 4. Defendants responded on March 20, 2017 as follows, Subject to and without

22 counsel that the tax returns had been located.

14 Decl. as Exhibit 17.

20 located tax returns for Ferris and would produce them.

21 C. Ferris Affirmatively Misled the Commission by Producing

20 As a result of Ferris incomplete discovery responses, the Commission requested that

1 III. THIS COURT SHOULD IMPOSE TERMINATING SANCTIONS AGAINST

5 Dismissal is particularly warranted where one party submits falsified

14 produced by Epling and Ferris are likewise called into question.

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